[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
ENSURING THE AVAILABILITY OF FEDERAL STUDENT LOANS
=======================================================================
HEARING
before the
COMMITTEE ON
EDUCATION AND LABOR
U.S. House of Representatives
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, MARCH 14, 2008
__________
Serial No. 110-84
__________
Printed for the use of the Committee on Education and Labor
Available on the Internet:
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COMMITTEE ON EDUCATION AND LABOR
GEORGE MILLER, California, Chairman
Dale E. Kildee, Michigan, Vice Howard P. ``Buck'' McKeon,
Chairman California,
Donald M. Payne, New Jersey Senior Republican Member
Robert E. Andrews, New Jersey Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia Peter Hoekstra, Michigan
Lynn C. Woolsey, California Michael N. Castle, Delaware
Ruben Hinojosa, Texas Mark E. Souder, Indiana
Carolyn McCarthy, New York Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts Judy Biggert, Illinois
Dennis J. Kucinich, Ohio Todd Russell Platts, Pennsylvania
David Wu, Oregon Ric Keller, Florida
Rush D. Holt, New Jersey Joe Wilson, South Carolina
Susan A. Davis, California John Kline, Minnesota
Danny K. Davis, Illinois Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona Kenny Marchant, Texas
Timothy H. Bishop, New York Tom Price, Georgia
Linda T. Sanchez, California Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland Charles W. Boustany, Jr.,
Joe Sestak, Pennsylvania Louisiana
David Loebsack, Iowa Virginia Foxx, North Carolina
Mazie Hirono, Hawaii John R. ``Randy'' Kuhl, Jr., New
Jason Altmire, Pennsylvania York
John A. Yarmuth, Kentucky Rob Bishop, Utah
Phil Hare, Illinois David Davis, Tennessee
Yvette D. Clarke, New York Timothy Walberg, Michigan
Joe Courtney, Connecticut [Vacancy]
Carol Shea-Porter, New Hampshire
Mark Zuckerman, Staff Director
Vic Klatt, Minority Staff Director
C O N T E N T S
----------
Page
Hearing held on March 14, 2008................................... 1
Statement of Members:
Bishop, Hon. Timothy H., a Representative in Congress from
the State of New York:
Prepared statement of Dr. Phillip Day, president,
National Association of Student Financial Aid
Administrators......................................... 27
McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member,
Committee on Education and Labor........................... 4
Prepared statement of.................................... 6
Miller, Hon. George, Chairman, Committee on Education and
Labor...................................................... 1
Prepared statement of.................................... 3
Questions submitted to witnesses on behalf of Mr. Scott.. 84
Petri, Hon. Thomas E., a Representative in Congress from the
State of Wisconsin, prepared statement of.................. 83
Statement of Witnesses:
Bauder, Sarah, director of student financial aid, University
of Maryland................................................ 56
Prepared statement of.................................... 58
Johnson, Roberta, director of financial aid, Iowa State
University................................................. 53
Prepared statement of.................................... 55
Responses to questions for the record.................... 85
Muilenburg, Terry L., senior vice president, government and
industry relations, United Student Aid Funds, Inc.......... 48
Prepared statement of.................................... 50
Responses to questions for the record.................... 87
Sanders, Chuck, president and CEO, South Carolina Student
Loan Corp.................................................. 61
Prepared statement of.................................... 62
Responses to questions for the record.................... 89
Spellings, Hon. Margaret, Secretary, U.S. Department of
Education.................................................. 7
Prepared statement of.................................... 9
Talbert, Kent D., general counsel, U.S. Department of
Education.................................................. 12
Warder, Lawrence A., chief financial officer, U.S. Department
of Education............................................... 11
Wozniak, Paul W., managing director, UBS Securities LLC...... 45
Prepared statement of.................................... 47
Responses to questions for the record.................... 91
ENSURING THE AVAILABILITY OF FEDERAL STUDENT LOANS
----------
Friday, March 14, 2008
U.S. House of Representatives
Committee on Education and Labor
Washington, DC
----------
The committee met, pursuant to call, at 9:00 a.m., in room
2175, Rayburn House Office Building, Hon. George Miller
[chairman of the committee] presiding.
Present: Representatives Miller, Kildee, Payne, Andrews,
Scott, McCarthy, Tierney, Kucinich, Holt, Grijalva, Timothy
Bishop of New York, Sanchez, Sarbanes, Loebsack, Altmire,
Yarmuth, Hare, Clarke, Courtney, Shea-Porter, McKeon, Petri,
Souder, Ehlers, Platts, Keller, Wilson, Kline, Price, Kuhl,
Bishop of Utah, Davis of Tennessee, and Walberg.
Staff Present: Tylease Alli, Hearing Clerk; Jeff Appel,
Senior Education Policy Advisor/Investigator; Sarah Dyson,
Administrative Assistant, Oversight; Carlos Fenwick, Policy
Advisor, Subcommittee on Health, Employment, Labor and
Pensions; Patrick Findlay, Investigative Counsel; Denise Forte,
Director of Education Policy; Gabriella Gomez, Senior Education
Policy Advisor; Lloyd Horwich, Policy Advisor, Subcommittee on
Early Childhood, Elementary and Secondary Education; Lamont
Ivey, Staff Assistant, Education; Thomas Kiley, Communications
Director; Ann-Frances Lambert, Administrative Assistant to
Director of Education Policy; Danielle Lee, Press/Outreach
Assistant; Stephanie Moore, General Counsel; Alex Nock, Deputy
Staff Director; Joe Novotny, Chief Clerk; Rachel Racusen,
Deputy Communications Director; Julie Radocchia, Education
Policy Advisor; Dray Thorne, Senior Systems Administrator;
Michele Varnhagen, Labor Policy Director; Margaret Young, Staff
Assistant, Education; Mark Zuckerman, Staff Director; Julia
Martin, Intern; Stephanie Arras, Minority Legislative
Assistant; James Bergeron, Minority Deputy Director of
Education and Human Services Policy; Robert Borden, Minority
General Counsel; Amy Raaf Jones, Minority Professional Staff
Member; Alexa Marrero, Minority Communications Director; Susan
Ross, Minority Director of Education and Human Services Policy;
Linda Stevens, Minority Chief Clerk/Assistant to the General
Counsel; Sally Stroup, Minority Staff Director.
Chairman Miller. The Committee on Education and Labor will
come to order for the purposes of conducting this hearing on
ensuring the availability of student loans. The purpose of this
hearing is to provide information to the committee and to
students, their families and their schools about our ability to
assure them that student loans will continue to be made
available to them and the development of contingency plans in
the unlikely event that some lenders are unable to continue
lending in this market.
In some cases, we have been forewarned that some lenders
will not lend or will reduce their lending, and in other cases,
we have been told by some lenders that they will expand their
lending, and we are trying to balance that information. This is
really about us making the proper preparations so that in the
upcoming lending season for students in their school year and
for their families, we will be able to make sure that there is
a seamless system in place so that we can use already existing
legal authority and programs that are on the books, whether
that is the Lender of Last Resort provisions in the law or
whether that is the Direct Lending program.
Senator Kennedy and I sent the Secretary a letter outlining
why we thought it was necessary to have plans in place so that
we can deal with these contingencies. Under the existing laws,
some 35 guarantee agencies around the country are obligated to
serve as lenders of last resort to avert any possible problem
in access to student loans and thereby provide a nationwide
network of back-stop lenders. The Education Department
established a Lender of Last Resort plan back in 1998 when some
lenders were indicating they might withdraw from the Government
Guaranteed Loan program. But the Department did not need to
have that program implemented at that time because of a change
in the law. Our interest this morning is whether or not that
plan has been updated, whether or not meetings have been held
with the guaranty agencies, whether or not the agreements that
were arrived at at that time have again been updated for
today's contingencies, and whether or not all lines of
operations are in fact clear should the Secretary need to
impose that authority to continue access to loans for students
and families.
In addition, the Federal Direct Loan program is available
to schools that wish to temporarily or permanently use the
program to ensure that students can have access to student
loans. The Direct Loan program does not rely on private credit
markets for raising capital to originate these new loans. One
of the questions we asked the Secretary and will ask again this
morning is whether or not efforts have been made to have
schools preregister should they decide to use the Direct
Lending program. Apparently, it is a very small difference from
the information they provide for the FFELP program and then
whether or not they are certified, so that they can use that
program should they decide to use that as an alternative. And I
would hope that what we would see is that we are not waiting
for a problem to develop because we have been forewarned. This
committee's staff and the chairman have held a number of
meetings with lenders from all sectors of the student loan
community. The Democratic leadership has held a series of
meetings over the last several months with economists and the
investment community from Wall Street. And all of them are
talking about the unprecedented nature of the credit markets
that we have seen and that has spilled over into the municipal
bond market, that has spilled over obviously into both the
commercial and residential real estate market and to some
extent in the student loan market as institutions have tried to
recapitalize their ability to make future loans.
That is why we are here today, to make sure that if that
recapitalization does not take place in the volume that is
necessary, that we have the ability to step in and to make sure
that these students do not miss classes that are necessary for
their graduation or for their majors; that they do not miss
semesters or quarters that will then cause them to have to
borrow more money to go on and finish their degrees. In today's
loan-dependent educational environment, it turns out that time
is money for families and for students. And we should be in the
position of being able to assure those students and their
families that they will not have to spend additional time
because we failed to make the preparations to provide those
loans in the event that the private markets are unable to do
so.
Having said that, again, we have received many assurances,
both privately and publicly, that the private markets believe
they will be able to continue to do that. Some have raised the
issue that they think there may very well be a gap. They do not
suggest that it is a terribly sizable gap, but it is a gap that
must be filled in a seamless fashion so that students and
families are not required to go into deeper debt because we
couldn't sort out the bureaucratic operations between our
institutions of higher education, students and families, and
the Federal programs that are designed essentially for this
exact situation, whatever that cause may be.
And with that, I would like to recognize the senior
Republican on the committee, Mr. McKeon, for his opening
statement.
[The statement of Mr. Miller follows:]
Prepared Statement of Hon. George Miller, Chairman, House Committee on
Education and Labor
Good Morning. Welcome to today's hearing on ``Ensuring the
Availability of Federal Student Loans.''
For months now, the worsening economic downturn has made life more
difficult for America's workers and their families.
First the foreclosure signs began sprouting up in front yards.
Then, in increasing numbers, the pink slips started arriving. Many
American workers are wondering if they will be able to hold onto their
homes and their jobs in the months ahead.
In Congress, our priority has been to help get the economy back on
track, help workers keep their jobs, and help families keep their
homes.
Last month, Democrats and Republicans in Congress acted to give the
economy a shot in the arm and deliver relief to families in need right
now.
By putting money into the hands of low- and middle-income families
who will spend it quickly, the bipartisan stimulus package we enacted
will inject demand back into the economy.
This downturn had its roots in the subprime mortgage crisis, which
has led to a significant tightening in the credit markets. As a result,
what began as a challenge for home loan borrowers has also become a
challenge for other borrowers, like those with credit card debt.
Recognizing that the financial markets are not functioning well,
the Federal Reserve has recently announced that it has made $400
billion available to financial institutions to help provide liquidity
for, and restore confidence in, the general credit markets.
Recently, some federal student loan lenders have encountered
difficulties in accessing the capital market to finance their lending
activity. While these disruptions have had an impact on some lenders,
they so far have not negatively affected students' ability to access
federal loans.
Some lenders have expressed concern about their ability to continue
to make loans through the Federal Family Education Loan Program, but
others are anticipating increasing their student loan business in
response to changes in the FFELP marketplace, in particular depository
institutions like JP Morgan Chase who have publicly indicated their
desire to increase market share.
While I am hopeful that overall credit market conditions will soon
improve, it is only prudent to prepare now to ensure that stress in the
credit markets does not prevent students and parents from continuing to
have uninterrupted, timely access to federal college loans.
As we have seen far too often, shocks in the credit and financial
markets come as a surprise, leaving those affected little time to
react.
In the unlikely event that stress in the credit market leads a
significant number of lenders to substantially reduce their activity in
FFELP, federal law already includes tools that the U.S. Education
Secretary can use to ensure that all eligible students continue to have
uninterrupted and timely access to federal student loans. We will
examine these tools in today's hearing.
Specifically, the Higher Education Act allows the Secretary to
designate the 35 guaranty agencies around the country as ``lenders of
last resort''.
Under existing law, these guaranty agencies are obligated to serve
as lenders of last resort to avert any possible problem in access to
student loans, thereby providing a nationwide network of backstop
lenders.
The Education Department had established a lender-of-last-resort
plan in 1998, when some lenders were indicating that they might
withdraw from the guaranteed loan program. The Department never needed
to implement the plan.
In addition, the federal Direct Loan program is available to
schools that wish to temporarily or permanently use the program to
ensure students can access federal student loans. The Direct Loan
program does not rely on private credit markets for raising capital to
originate new loans.
I look forward to hearing from Secretary Spellings about her
Department's preparations for implementing a lender-of-last-resort plan
and for helping schools enroll in the Direct Loan program in the
unlikely event that such steps are necessary.
Having plans in place and operational now will help ensure that all
stakeholders, including colleges and the federal government, can
respond to any potential loan access problems with the least possible
delay for students, families, and schools.
And knowing that the Education Department is fully prepared to act
if necessary will reassure students and families that they will
continue to have uninterrupted access to federal student loans.
One of the key priorities for this Committee has been to make
college more affordable and accessible for every qualified student who
wants to attend.
Last year, we took a truly historic step towards this goal by
providing more than $20 billion in financial assistance to low- and
middle-income students and families over the next five years.
Among other things, this legislation will reduce the cost of
federal college loans for student and parent borrowers.
I am confident that, with proper planning by the federal
government, students and parents will continue to be able to access
these low-cost loans.
I'd like to thank all of our witnesses for joining us today, and I
look forward to your testimony.
Thank you.
______
Mr. McKeon. Thank you, Mr. Chairman.
Good morning. Good morning, Madam Secretary.
Thank you, Mr. Chairman, for holding this hearing to
examine a looming challenge for our Nation's higher education
system. We are here today to examine how to ensure the
availability of Federal student loans. By virtue of holding
this hearing, we are acknowledging the potential risk to loan
availability that has developed in recent months. I consider it
a positive sign that Members on both sides of the aisle
recognize these challenges. I only hope we can come together in
the same way to find solutions.
There are several factors that have contributed to the
current student loan uncertainty: deteriorating confidence and
reduced investor demand in the capital markets due to the
subprime mortgage meltdown; increased financing costs; the
possibility of higher defaults because of overall economic
weakness; and the real and perceived impact of the subsidy cuts
imposed just a few months ago.
I want to be clear on this point, while the program cuts
imposed last fall are not the cause of the current market
instability, they are certainly playing a role. There are real
questions about whether loan providers will continue to
participate in the Federal loan program as a result of the cuts
enacted in the College Cost Reduction and Access Act. Those
cuts, when coupled with the current instability in the current
markets, may create the perfect storm where loan providers may
find themselves unable to finance student loans.
The Federal Family Education Loan program has used
innovation to absorb various program cuts and policy changes
over the years. However, there is a point at which no further
cuts can be absorbed, and in all likelihood, we will not know
with certainty that we have reached that point until it is too
late. Our intention today is not to sound a false alarm. Each
of us hopes that the predictions of a loan crisis never come to
pass.
Part of our purpose today is to identify solutions so that
we are prepared whether or not the situation grows worse.
Members on both sides of the aisle have joined together in an
effort to engage Federal regulators immediately. Letters have
been sent to the Secretary of Education, who we will hear from
shortly. They have been sent to the Secretary of the Treasury.
And a letter will soon be sent to the Chairman of the Federal
Reserve.
Our goal in engaging the various Federal agencies now is to
try to prevent any harm to the Nation's college students before
it occurs. We are trying to avoid a situation similar to the
current mortgage crisis by intervening before students are left
without options. Concerns have been raised by members on and
off this Committee because the problem is much larger than just
this Committee. Any real solution needs to be a result of
extensive discussion with parties who are experts in the
financial market arena, and I am glad we have an expert from
Wall Street here today.
I offered an amendment during the recent consideration of
reforms to the Higher Education Act. With that amendment, I
proposed a Sense of Congress that these same Federal agencies
should be closely monitoring the situation in the student loan
credit markets and that they should act quickly to notify
Congress in the event of a problem so that we could act
quickly. It was disappointing that my amendment was not made in
order. I am afraid we sent a signal then that we do not care.
However, by holding this hearing today we are sending a
powerful signal of our commitment to a robust and healthy
student loan system that continues to deliver tens of billions
in federally backed loans that help students achieve their
college dreams.
Today's hearing is on a topic of utmost importance, and so
I will keep my remarks brief. I simply want to note that our
purpose here is not partisan. It should not be an effort to
favor one loan program over another. Nor should it be used to
point the finger of blame. We must look to the future and keep
our focus squarely on what will be best for students and
families who are pursuing higher education and the benefits and
personal enrichment that come with it.
Once again, I want to thank Chairman Miller for holding
this hearing. I want to thank Secretary Spellings for being
here, as well as our panel of expert witnesses, and I yield
back.
[The statement of Mr. McKeon follows:]
Prepared Statement of Hon. Howard P. ``Buck'' McKeon, Senior
Republican, Committee on Education and Labor
Good morning. I want to begin by thanking you, Chairman Miller, for
holding this hearing to examine a looming challenge for our nation's
higher education system.
We are here today to examine how to ensure the availability of
federal student loans. By virtue of holding this hearing, we are
acknowledging the potential risk to loan availability that has
developed in recent months. I consider it a positive sign that members
on both sides of the aisle recognize these challenges. I only hope we
can come together in the same way to find solutions.
There are several factors that have contributed to the current
student loan uncertainty--deteriorating confidence and reduced investor
demand in the capital markets due to the subprime mortgage meltdown;
increased financing costs; the possibility of higher defaults because
of overall economic weakness; and the real and perceived impact of the
subsidy cuts imposed just a few months ago.
I want to be clear on this point. While the program cuts imposed
last fall are not the cause of the current market instability, they are
certainly playing a role. There are real questions about whether loan
providers will continue to participate in the federal loan program as a
result of the cuts enacted in the College Cost Reduction And Access
Act. Those cuts, when coupled with the current instability in the
credit markets, may create the perfect storm where loan providers may
find themselves unable to finance student loans.
The Federal Family Education Loan Program has used innovation to
absorb various program cuts and policy changes over the years. However,
there is a point at which no further cuts can be absorbed and in all
likelihood, we will not know with certainty that we have reached that
point until it is too late.
Our intention today is not to sound a false alarm. Each of us hopes
that the predictions of a loan crisis never come to pass. Part of our
purpose today is to identify solutions so that we are prepared whether
or not the situation grows worse.
Members on both sides of the aisle have joined together in an
effort to engage federal regulators immediately. Letters have been sent
to the Secretary of Education, who we will hear from shortly; they have
been sent to the Secretary of the Treasury; and a letter will soon be
sent to the Chairman of the Federal Reserve. Our goal in engaging the
various federal agencies now is to try to prevent any harm to the
nation's college students before it occurs. We are trying to avoid a
situation similar to the current mortgage crisis by intervening before
students are left without options.
Concerns have been raised by members on and off this committee
because the problem is much larger than just this committee. Any real
solution needs to be a result of extensive discussion with parties who
are experts in the financial market arena and I am glad we have an
expert from Wall Street here today.
I offered an amendment during the recent consideration of reforms
to the Higher Education Act. With that amendment, I proposed a Sense of
Congress that these same federal agencies should be closely monitoring
the situation in the student loan credit markets and that they should
act quickly to notify Congress in the event of a problem so that we
could act quickly. It was disappointing that my amendment was not made
in order--I'm afraid we sent a signal then that we did not care.
However, by holding this hearing today we are sending a powerful signal
of our commitment to a robust and healthy student loan system that
continues to deliver tens of billions in federally-backed loans that
help students achieve their college dreams.
Today's hearing is on a topic of the utmost importance and so I
will keep my remarks brief. I simply want to note that our purpose here
is not partisan. It should not be an effort to favor one loan program
or the other, nor should it be used to point the finger of blame. We
must look to the future and keep our focus squarely on what will be
best for students and families who are pursuing higher education and
the benefits and personal enrichment that come with it.
Once again, I want to thank Chairman Miller for holding this
hearing. I want to thank Secretary Spellings for being here, as well as
our panel of expert witnesses. I yield back.
______
Chairman Miller. Thank you.
Madam Secretary, welcome to the Committee. You are no
stranger to this committee. But just for our audience, I would
say that Margaret Spellings is the U.S. Secretary of Education.
And we welcome your appearance this morning.
Prior to being Secretary of Education she was Assistant for
Domestic Policy to President George W. Bush. And prior to that
she was a Senior Advisor to then Governor George W. Bush with
responsibilities for education reform in the State of Texas.
We look forward to your testimony and thank you for your
cooperation and our conversations and your making your staff
available to our Committee to talk about how we put this in
place.
STATEMENT OF HON. MARGARET SPELLINGS, SECRETARY, U.S.
DEPARTMENT OF EDUCATION
Secretary Spellings. Thank you very much, Mr. Chairman.
Thank you for inviting me here today.
Thank you, Congressman McKeon, as well.
I welcome the opportunity to discuss what the Department is
doing to ensure that students and families can access and
afford higher education. I share your concern and I appreciate
your vigilance on this issue. Many of you have written to me
regarding your concerns. Today I am responding to you in a
letter. Much of my response will also be captured in my
remarks.
First of all, let me assure you and especially students and
families that Federal student aid will continue to be
available. As your recent letter noted, Mr. Chairman,
disruptions in the private lending market have so far not
negatively affected students' ability to access student loans.
That is what we are seeing also.
Student loans constitute a more than $400 billion
enterprise involving multiple Federal agencies, guaranty
agencies and secondary markets. Federal loans and other Federal
aid comprise one piece of this sector, about 26 percent in
dollar terms. In student terms, more than 10 million of 18
million college students receive financial aid from my
Department. The two sources of Stafford loans are the Direct
Loan program and the Federal Family Education Loan program,
what we all called FFELP. More than 2,000 originating lenders
participate in FFELP.
As recent media reports have noted a small number of these
lenders have reduced their participation or stopped originating
new loans. As you know, these actions are largely a result of
broader stress across credit markets and the economy as a
whole. Even in the limited cases where lenders have reduced
participation in FFELP, other lenders have stepped in to meet
student needs.
My Department is in regular contact with schools. In our
extensive outreach, no institutions have indicated that any
eligible student has been denied access to Federal loans. And
earlier this week, the Consumer Bankers Association reaffirmed
that banks plan to continue making both guaranteed and private
loans in the coming school year.
Of course, we all understand the anxiety that students and
families experience when they hear news accounts suggesting
that Federal student loans could be at risk. We also understand
that credit markets are under stress and conditions may change
rapidly. For that reason, the Department of Education, in
consultation with other offices and agencies across the
executive branch, including the Domestic Policy Council, the
National Economic Council at the White House and the Treasury
Department, is taking the following steps.
First, we are monitoring the situation closely, just as you
are doing. We are examining market conditions on a daily basis
and working with the lending community, including the many
stakeholders involved in Federal aid to assess any potential
impact on students. This monitoring will provide us with
information on how best to proceed. For example, we are
tracking the volume of loan originations for both FFELP and the
Direct Loan program against previous years. We know that
originations will peak, as they always do, in July and August
before the school year starts. If origination trends shift, we
will be prepared to act. We are also tracking inquiries daily
into the Direct Loan program to be prepared for any significant
shift in loan volume between the programs. Again, rest assured
that we will be ready should such a shift occur.
Second, we are engaging our customers, students, families
and institutions, by helping them understand all of their
options. Recently we sent letters to college presidents and
financial aid officers to assure them of the continued
availability of Federal loans and to ask for their help
tracking developments, including any reduction of lender
participation. In cases where the institutions are relying
heavily on a single lender that chooses to reduce participation
in FFELP, we will help identify other lending options.
Third, we are reviewing the options and tools available
should the situation warrant their use. For example, some have
suggested shifting more of the Federal aid volume to the Direct
Loan program. Whether to participate in the FFELP or Direct
Loan programs is a choice that schools make. The administration
continues to support having two strong Federal student loan
programs. Currently 850 schools already authorized to make
direct loans have chosen to remain with FFELP as their primary
program. We stand ready to support them in whatever choices
they make now and in the future. We are also reviewing Lender
of Last Resort provisions that ensure eligible students in the
FFELP program can access loans if they are turned down by
lenders. Currently, the FFELP and Direct Loan programs continue
to meet student needs. Lender of Last Resort provisions remain
available, and we are closely reviewing the readiness of
guaranty agencies to play their role. Private loans can also be
an important resource for students and families. However, many
who use private loans haven't fully exhausted their Federal aid
options. To inform them about these, we have created materials
like this Federal Aid First brochure, a user-friendly guidance
on how to apply for and receive aid.
It is also worth noting that concerns about the
availability of student loans are related to anxiety about the
growing cost of attendance. To pay for higher education
families must rely upon numerous funding sources while
navigating a Byzantine and often burdensome financial aid
system. It is like a family having to buy a new car every year
for each student in the family with different terms and
conditions for each one each year. Working together we can help
ease these families' burdens.
Already we have worked together to dramatically increase
Pell Grants. We have achieved the largest increase in budget
authority in 30 years, and the President has once again asked
to increase the maximum annual award in his 2009 budget to
$4,800 per year. As early as 2006, my Commission on the Future
of Higher Education called for streamlining the financial aid
system by addressing the interrelated issues of cost, financing
and consumer information. As you work to reauthorize the Higher
Education Act, I hope we can take this opportunity to simplify
the system and make it more responsive to students and
families. Postsecondary education grows more important by the
day in our global knowledge economy. Times of economic
uncertainty are all the more reason that Americans will look to
higher education to acquire new skills and knowledge. Together
we can help more of them do so.
Federal student loans are an important part of this effort,
and the steps my Department is taking will help ensure that
they remain available. Market conditions are dynamic, not
static. As you said in your letter, Mr. Chairman, while we
expect that overall credit market conditions will soon improve,
it is only prudent to prepare now to ensure that these
conditions do not negatively impact students. In the coming
weeks and months I look forward to working with you to help
students continue to access and afford the invaluable
opportunities of higher education.
And Mr. Chairman, here today with me is Larry Warder, who
leads our Federal student aid operation, as well as my General
Counsel, Kent Talbert.
[The statement of Secretary Spellings follows:]
Prepared Statement of Hon. Margaret Spellings, Secretary, U.S.
Department of Education
Thank you for inviting me here today. I welcome the opportunity to
discuss what the Department is doing to ensure that students and
families can access and afford higher education. I share your concern
and appreciate your vigilance on this issue.
First of all, let me assure you, and especially students and
families, that Federal student aid will continue to be available. As
your recent letter noted, Mr. Chairman, disruptions in the private
lending market have ``so far not negatively affected students' ability
to access federal loans.'' That's what we're seeing also.
Student loans are more than a 400 billion dollar enterprise,
involving multiple federal agencies, guaranty agencies, and secondary
markets.
Federal loans and other federal aid comprise one piece of this
sector. Of eighteen million college students, more than ten million
receive financial aid from my Department.
The two sources of Stafford loans are the Direct Loan program and
the Federal Family Education Loan program--what we call FFEL. More than
2,000 originating lenders participate in FFEL. As recent media reports
have noted, a small number of these lenders have reduced their
participation or stopped originating new loans.
As you know, these actions are largely a result of broader stress
across credit markets and the economy as a whole. Even in the cases
where lenders have reduced participation in FFEL, other lenders have
stepped in to meet student needs. My Department is in regular contact
with schools. In our extensive outreach, no institutions have notified
us that any eligible student has been denied access to federal loans.
And earlier this week, the Consumer Bankers Association reaffirmed that
banks plan to continue making both guaranteed and private loans.
Of course, we all understand the anxiety that students and families
experience when they hear news accounts suggesting that federal student
loans could be at risk. We also understand that credit markets are
under stress, and conditions may change rapidly.
For that reason the Department of Education--in consultation with
other offices and agencies across the executive branch such as the
Domestic Policy Council, the National Economic Council, and the
Treasury--is taking the following steps:
First, we are monitoring the situation closely--just as you are
doing. We're examining market conditions on a daily basis and working
with the lending community, including the many stakeholders involved in
federal aid, to assess any potential impact on students.
This first step will provide us with information on how best to
proceed. For example, we are tracking the volume of loan originations
for both FFEL and the Direct Loan program against previous years. We
know that originations will peak, as they always do, in July and August
before the school year starts. If origination trends shift, we will be
prepared to act.
We are also tracking inquiries daily into the Direct Loan program
to be prepared for any significant shift in loan volume between the
programs. Again, rest assured that we will be ready should such a shift
occur.
Second, we're engaging our customers--students, families, and
institutions--by helping them understand all their options. Recently,
we sent letters to college presidents and financial aid officers to
assure them of the continued availability of federal loans, and to ask
for their help tracking developments, including any reduction of lender
participation at their schools.
In cases where the institutions are relying heavily on a single
lender that chooses to reduce participation in FFEL, we have actually
communicated with these institutions to ensure that their students will
continue to be served, be this either a single lender or other new
lenders.
Third, we're reviewing the options and tools available should the
situation warrant their use. For example, some are suggesting that we
shift more of the federal aid volume to the Direct Loan program.
Whether to participate in the FFEL or Direct Loan programs are choices
that schools make. The Administration continues to support having two
strong Federal student loan programs. Currently, 850 schools already
authorized to make Direct Loans have chosen to remain with FFEL as
their primary program. We stand ready to support them in whatever
choices they make, now and in the future.
Congress included the Lender of Last Resort provisions in the
Higher Education Act to provide a way for the Federal Government to
ensure, should the need arise, that students and families can continue
to access FFEL loans. These provisions are called ``last resort'' for a
good reason--they're the final option for eligible students unable to
access federal loans. At present, the FFEL and Direct Loan programs
continue to meet student needs. Lender of Last Resort provisions remain
available, and guarantee agencies are already using their authorities
as needed.
Private loans can also be an important resource for students and
families. However, many who use private loans haven't exhausted their
federal aid. To inform them of the more affordable Federal options,
we've created materials like this Federal Aid First brochure--user-
friendly guides on how to apply for and receive Federal aid.
As early as 2006, my Commission on the Future of Higher Education
called for streamlining the entire financial aid system by addressing
the interrelated issues of cost, financing and consumer information. As
you work to reauthorize the Higher Education Act, I hope you will take
this opportunity to simplify the current system, which is burdensome
and complex, and make it more responsive to students and families.
Already, we've worked together to dramatically increase Pell
Grants, to address the needs of 5.8 million low-income students. We
achieved the largest increase in budget authority in 30 years, and the
President has once again asked to increase the maximum annual award in
his 2009 budget, to $4,800 per year.
Postsecondary education grows more important by the day, and ever
more necessary in our global knowledge economy. Times of economic
uncertainty are all the more reason that Americans will look to higher
education to acquire new skills and knowledge. Together, we can help
more of them do so.
Federal student loans are an important part of this effort, and the
steps my Department is taking will help ensure that they remain
available. Market conditions are dynamic, not static. As you said in
your letter, Mr. Chairman, while ``we expect that overall credit market
conditions will soon improve * * * it is only prudent to prepare now to
ensure that these conditions do not negatively impact students * * *''
I look forward to working with you to ensure that students can continue
to access and afford the invaluable opportunities of higher education.
______
Chairman Miller. Thank you very much.
Welcome, Mr. Warder, also.
Under a previous agreement, Mr. McKeon and I will both be
allowed to exceed our initial 5 minutes but not by more than 10
minutes. So hopefully it will be somewhere between 7 and 8
minutes to ask more extensive questions on these two programs.
I think we all agree that we hope that the FFELP program
stays in place and it meets the demand and it sorts out the
difficulties that have been imposed upon the various lenders by
the rather dramatic shift in the credit markets. But I would
like to run through the Lender of Last Resort program with you
because that is where we have had some experience in the sense
of preparation back in 1998 when we thought that some lenders
might leave the field. Then-Secretary Riley put in place a
program and an agreement with the guaranty agencies for those
loans to be made if necessary.
And maybe, Mr. Warder, you can tell me, has that agreement
been reviewed, and has that agreement been updated with the
guaranty agencies?
STATEMENT OF LAWRENCE A. WARDER, CHIEF FINANCIAL OFFICER, U.S.
DEPARTMENT OF EDUCATION
Mr. Warder. Yes. We have asked all of the agencies--we have
gone out to all of the 35 guaranty agencies and asked them to
submit to us what their current plans are. We have reviewed
those, and we are in the process of issuing guidelines on how
you would implement Lender of Last Resort in the instance that
it is needed. So those guidelines will be going out in the
coming week, along with any suggestions on how to improve the
agreements that they currently have. Again, this has been a
rarely used program over the last few years, so what we are
doing is updating it, making sure they are consistent, in the
best interest of both the tax payers and the students.
Chairman Miller. And you expect those guidelines to be in
place when?
Mr. Warder. We are sending them out next week, so we would
expect them to be in place in the near future.
Chairman Miller. And then how will you determine whether
they are operational or not?
Mr. Warder. We will go out and meet with the GAs either
collectively or individually to review the program and make
sure that they have the financing capability to in fact act as
Lender of Last Resort or have another lender who can do that.
Chairman Miller. Well, Lender of Last Resort, as I
understand the program, is the Secretary in that case?
Mr. Warder. Actually, the Lender of Last Resort in the
current environment, since there is no longer a national, the
Lender of Last Resort is the guaranty agency. Our relationship
is with them.
Chairman Miller. But they turn to you to be capitalized?
Mr. Warder. Generally, no. That would be only in an
absolute last resort.
Chairman Miller. That is what I want to talk about.
Mr. Warder. Their obligation is to have the financing
capability in place and use it.
Chairman Miller. As I understand the 1998 agreement, that
agreement was in place, so then the Secretary, if necessary,
turned to the Treasury to fund them so that they could make
those loans. That is not your understanding?
Mr. Warder. Let me ask our general counsel who can probably
respond to that better than I.
STATEMENT OF KENT D. TALBERT, GENERAL COUNSEL, U.S. DEPARTMENT
OF EDUCATION
Mr. Talbert. Mr. Chairman, as I understand the 1998 plan
that the prior administration had, it had a list of eligible
lenders, entities that would be able to make loans of last
resort should the need arise. But, again, it is the guaranty
agencies and then eligible lenders if the guaranty agencies are
not providing Lender of Last Resort loans who make the loans
available.
Chairman Miller. But the guaranty agencies, as I understand
the 1998 agreement, turn to, if necessary for capitalization to
make those loans, turn to the Secretary of Education who then
turns to the Treasury.
Mr. Talbert. Certainly the Lender of Last Resort statute
provides for advances, that advances can be made should the
need arise when certain criteria are met.
Chairman Miller. We are working on the scenario where the
need arises. What I want to know from you is if you understand
that that is your legal authority and you have the ability to
do that?
Mr. Talbert. Yes, we understand the statute, yes.
Chairman Miller. And you have the ability to do that?
Mr. Talbert. Certainly, the administration has the ability
to make----
Chairman Miller. Have you road tested it? Have you turned
to the Treasury and said, if we have to make a demand on you
for $100 million or for $5 billion, will we be able to have
that demand met so that we can give it to the guaranty agencies
to make these loans if that is the shortfall that exists at
that time?
Mr. Talbert. Certainly, again, the authority is----
Chairman Miller. I know the authority exists, sir. I am
asking whether or not if you have asked the operational
question? We had a lot of authority going into Katrina, but
nobody asked whether or not we could do it, whether we could do
it in the sense--could we physically get people out of there,
people there, water, all the rest of it? I am asking you,
operationally, have you sat down with the Treasury Department
and asked them, if we turn to you and make a demand on short
notice, because most of the things that have taken place around
the credit markets have come to a surprise to everyone,
including those involved, could you do this?
Mr. Talbert. We are having ongoing discussions within the
administration, including----
Chairman Miller. So you have not received an answer to that
question of whether or not, if you make a demand, that demand
can be met?
Mr. Talbert. Again, Mr. Chairman, we are having ongoing
discussions in the administration about this particular matter.
Chairman Miller. Well, I hope you are not standing in 8
feet of water and a lot of students around you looking for
relief and you are having ongoing discussions. The purpose of
this hearing is to push those discussions so an agreement and
an operational plan is arrived at.
Mr. Talbert. Well, again, our position now is that, again,
no borrower has been unable to obtain loans.
Chairman Miller. I understand that. This isn't about the
environment.
Madam Secretary, we have been through this. This isn't
about a well operated system. We hope that the FFELP program is
in place. We have been notified by lenders that they will not
participate. We have been notified by lenders that they hope
they will be able to continue to participate. We have been
notified by lenders they expect to participate but are not
quite sure how long. And all of them have said they suggested
there would be a gap. Rather than operating on the theory that
nobody has notified you, what will you do in July and August if
in fact the gap appears, and how seamless will it be?
Secretary Spellings. As you know, Mr. Chairman, the 35
guaranty agencies exist. We have reached out to them. We are
looking at their plans. They have been uneven. They need to be
made current. That is the guidance that is going to them next
week. We will evaluate their capacity to seek financing should
that case occur, and obviously, if not, we are the lender of
very last resort.
Chairman Miller. Have you spoken to the Treasury about
that?
Secretary Spellings. We have; my staff has. I have spoken
with Secretary Paulson once, and I will be meeting with him
next week. I can assure you I will be asking him that very
question, very specifically. I think at the moment, we are
getting a beat on the capacity of the guaranty agencies who are
now updating their plans accordingly. Yes, I will ask him that.
Chairman Miller. And do you need to arrive at an agreement
with those agencies?
Mr. Talbert. Well, the agencies have their plans and
procedures in place now. Again, we are reviewing those to make
sure that they are adequate and good to go.
Chairman Miller. Let me just suggest that if you look at
the 1998 agreement, there was just a modest little modification
for that agreement with the law. Today a borrower has to run
around and find out that two lenders have turned that borrower
down. A suggestion was made in 1998 that an institution could
stand in the shoes of that borrower and make that decision and
turn to the Federal Government and therefore be able to invoke
the Lender of Last Resort. A modest change, but could be very
important in terms of being able to answer the question from a
student or family, will the money be here so I can start school
this coming semester? It is those kinds--you know, a number of
these agencies, they prepared for this. A number of the people
who were there in 1998 are still here today. And somehow, I
think, rather than sort of this arms distance length, you ought
to get in the same room and say, what are the agreements we
need so this plan will be operational if you pick up that phone
at 3:00 in the morning and have to call one of them. That is
the best I can come up with. I want to know they say, we are
ready to go.
Secretary Spellings. As you know, none of that was needed
in 1998.
Chairman Miller. I know that. That was because it was
solved by a change in the law. We can change the law until hell
comes home, and it is not going to unfreeze the credit markets
from this Committee.
Secretary Spellings. We will be ready.
Chairman Miller. And then with respect to the direct lender
program. My understanding is that essentially, if you are
making--if you are eligible for Pell Grants as an institution,
you are eligible for the DL program, but you still have to sort
of make application and be certified?
Secretary Spellings. That's correct. And 850 institutions,
if you will, sort of have that franchise.
Chairman Miller. Right. And they sort of leave it over
there in reserve, and they continue in the FFELP program?
Secretary Spellings. That is correct.
Chairman Miller. I am just asking whether it would be
prudent or not to suggest that other institutions may want to
be precertified. Again, if they don't need it, they can leave
it over there, continue in the FFELP program and go on about
their business. Because, again, you know, schools have
deadlines for applications, for receiving funds and all the
rest of this and very small glitches can be leveraged into
major disruptions in students' lives. I have suggested to the
institutions in my area that is what they may want to consider;
that, one, they clearly understand what the arrangement is with
their guaranty agency, and they clearly understand if they
want, how they get certified and eligible for the Direct
Lending program, and then we hope that this gap will not exist.
Secretary Spellings. I think they do understand that. There
is, and frankly the private sector has led the way on
establishing inoperability and protocols. We are updating our
system in the Department so that those transitions can be made
if necessary. I would also say, and I know you are well aware,
that institutions, were they to turn to Direct Loan, obviously
that places additional sort of an administrative burden on them
that now you know lives in the marketplace. And so I think they
are evaluating those issues now. They make those choices, and
we are ready to support them in whatever choice they make.
Chairman Miller. Also in our discussions with some of the
guaranty agencies they are very concerned about whether or not
this system will--they believe this should be prepared on an
electronic basis; that if the Lender of Last Resort programs
are necessary, that they reflect an electronic processing
environment. And, again, I don't know if you have run the
traps, operationally, whether or not you can do that or not,
because you may have to handle a significant volume of loans in
a very short period of time, and that is not going to work
absent an electronic environment.
Secretary Spellings. As I understand it, there is
increasing interoperability across this sector, including our
work at the Department of Education.
Chairman Miller. Mr. Warder, is that your understanding?
Mr. Warder. Yes, it is. The institutions that are FFELP
institutions generally can switch from lender to lender very
easily. We are in the process of putting in place, and this
will take a few months, the ability to tap into that same
network so we can look like a lender just like the other FFELP
lenders. Currently, today, we have a process that can get
somebody ready and certified within one to two weeks. Then it
is how long, how sophisticated is the institution in
implementing whatever changes they need to make in order to
access direct loans.
Chairman Miller. So, again, if they make that demand in
July, you say it takes about two weeks?
Mr. Warder. It is two weeks to get the authorization. Then
it is whatever their implementation time frame is to get their
own procedures and processes in place.
Chairman Miller. I think I will stick with my advice to my
institutions; they ought to consider doing that now since you
are talking about several months to be electronically able to
do this. That sounds like June. And if they make a demand, it
is two weeks for the application and then for whatever
negotiations. I would suggest they may want to do it now.
I thank you, and my time has expired.
Mr. McKeon.
Mr. McKeon. Thank you, Mr. Chairman.
Chairman Miller. Could we just have the counsel state your
full name for the record? I am sorry.
Mr. Talbert. Kent Talbert.
Chairman Miller. Thank you.
Mr. McKeon. Thank you, Mr. Chairman.
I came to Congress in 1992, the same time as President
Clinton. One of the things he campaigned on was Direct Lending,
and that was quickly put into place. And a lot of the schools
jumped into Direct Lending, and I think they got up to 30, 35
percent of the loan volume. And then, over the years, we did
the reauthorization in 1998, and one of the things we did was
adjust the interest rate. And one of the concerns I had was
that FFELP lenders would be dropping out of the program, and
that has happened. And then we tried to have a level playing
field. I know Mr. Kildee and I agreed on that. The Secretary at
the time, the administration, didn't, and there were things
done during that administration that pushed people into Direct
Lending.
But over the years, the market has reacted, and FFELP had
about 80 percent of the business and Direct Lending about 20.
We had problems with Direct Lending back when they had to shut
the program down because they couldn't keep up with demand. And
we have seen this kind of a problem over the years. In 1995, we
cut the FFELP lenders $18 billion out of their subsidies. More
lenders dropped out of the program. And then, last year, the
same thing was done, another $18 billion. And now we are
looking at, gee, maybe we have a problem. I think it doesn't
take a lot to realize that if you cut the subsidies to the
point where lenders no longer can make a profit, why should
they stay in the business. There are other things they can
lend.
One thing that is helping us right now ironically is,
because of the problem in the housing market and the lack of
funds, there is less interest for the banks to move in to
making home loans, and so there is still some interest in
staying with making student loans. But the loan consolidation
companies have gone out of that business. FFELP lenders I know
have laid off a lot of people because they are getting out of
the business. I am hearing from schools, it is like there is a
disconnect.
Madam Secretary, you say that you are not hearing from
schools that there is a problem. I am hearing from schools that
there is a problem. And I am hearing from schools that they
have been told that lenders will not make loans to their
students, especially in the proprietary area; that the cost of
direct or of private loans is a lot more to students than the
federally backed loans. And so, where we passed this bill to
cut the cost of college, we have actually increased what
students are going to be paying in interest for their loans.
Have you heard from any proprietary schools that they have been
told that their students will not be able to get loans?
Secretary Spellings. Well, as I said, Congressman, we have
reached out to every institution. We have heard some limited
cases of contraction where they have been able to readily find
another lender in those cases to date.
Mr. McKeon. Well, okay. I am glad we are having this
hearing because I think a few months from now, we are going to
look back on it and say, you know, where did all this stuff
come from? I think the question that the chairman just asked,
can you come up with $1 million or $5 million, we are talking
$60 billion that we are expecting the FFELP lenders to make
this year this summer and fall for students to get into school.
And if that has to all of a sudden be found, I just see a very
serious problem coming down the pike. And I hope this hearing
is soon enough that there is a wake-up call that you are able
to work together with the Treasury and are able to come up with
substantial funds that students that don't have a clue what is
coming down the pike when they go in to meet with their Federal
financial aid officer, that you are able to make sure that
there is sufficient money in the pipeline that either through
FFELP or through Direct Lending, they will not have a glitch
and that the interest rate will not be such that it drives up
the cost of their education. Do you feel confident that this
will be the case?
Secretary Spellings. We are taking every step possible to
ensure that that is the case. As I said, we have reached out.
We have plans. We are meeting regularly with Treasury. As I
said, I am going to be meeting with Secretary Paulson next week
and, you know, will provide additional assurances and ask them
those very questions. We are still in the fact-finding mode
about what the capacity, what the potential gaps might be. As
you are also aware, lenders have likewise stepped forward and
said that they do intend to and will make FFELP loans this
year.
Mr. McKeon. It is my understanding that you are talking and
have talked to Secretary Paulson and other officials within the
administration to help you monitor the credit markets. Can you
tell me about those conversations and whether officials outside
of the Department of Education are concerned about students'
access to lending?
Secretary Spellings. Well, clearly, Congressman, we are
talking very regularly, daily with our colleagues within the
administration, obviously, about all these provisions. And
likewise, as you are reaching out to the community more
broadly; guaranty agencies, institutions, banks, lenders, all
of those affected. So, yes, we are monitoring regularly.
Mr. McKeon. Mr. Chairman, thank you.
I will yield.
Chairman Miller. Thank you.
Mr. Andrews.
Mr. Andrews. Thank you, Mr. Chairman.
Thank you, Madam Secretary, for working with us to solve
what I hope is a hypothetical problem that never comes. But the
virus that spread throughout the credit markets in this country
counsels us to pay attention. And I know you are. And I wanted
to walk through with you some of the Chairman's questions about
the Lender of Last Resort program. I hope we don't need it. But
if we do, there is a couple of mechanical steps that I want to
see if you would be willing to be supportive of. I know you
have the authority. I think we have established that. The
question is whether you would be willing to embrace certain
principles to get this up and running, should it be needed.
First, how about school-based qualification rather than
student-based? The existing procedure is that a student has to
demonstrate that he or she has been turned down by at least two
lenders. What do you think of the idea of having some
threshold, or if we hit that threshold, that the whole school
is eligible and every student at that school is eligible for a
loan under the Lender of Last Resort program; do you support
that?
Secretary Spellings. Well, again, we are engaging with the
guaranty agencies about those sorts of thing. As you may or may
not know, various lenders and schools have different types of
approaches for different types of students. So, for
undergraduates, they may seek one route; for graduate students,
they may seek another. And so I don't think we know enough yet
to answer that question.
Mr. Andrews. When do you think you might know? Because here
is what I am worried about, you get a student from--a first in
a family to go to college, and it is July 15th, and she goes to
a bank and fills out these papers and the bank says, sorry, we
are not making any more student loans. There is a very high
probability she just stops, because she is not someone who is
used to dealing with bureaucracy and these kind of things, she
just stops and doesn't go to school. I just think, as happened
in 1998, that some metric ought to be established that says, if
this happens to a certain critical mass of people, then let us
switch to a deal where the school can apply for LLR
participation and everybody at the school is eligible if they
fit the other criteria. I would urge you to do that and think
that through. Second is, how about electronic loan processing?
If we are mailing documents back and forth on August 25th,
there is going to be a lot of people who don't go to school.
Not to mention, by the way, the technical and career schools
which have a revolving calendar. This is already happening at
some of the schools that are trying to enroll people for
courses that start April 1st or March 25th. It isn't just with
courses with a traditional calendar that starts up around Labor
Day. How many of the guaranty agencies and schools are ready to
process these loans in an electronic processing context? Do we
know? How many of the agencies are ready to do that?
Mr. Warder. Are you asking about the GAs, are they prepared
to do it?
Mr. Andrews. The guaranty agencies, yes.
Mr. Warder. I don't know. We are looking at their
capabilities around Lender of Last Resort as we speak.
Mr. Andrews. When do you think we would know? I think there
are 36 guaranty agencies, you said, right? I think the optimal
situation would be that all 36 could originate, process and
fund loans electronically to the extent possible. If that--do
you agree that that is a standard?
Mr. Warder. I would agree that is an objective. In fact,
the schools through their normal FFELP program or DL program do
process them electronically. However, we do need to look and
see how well prepared the GAs are on the LLR----
Mr. Andrews. That is right, because, frankly, the schools
being able to do it is only half the battle, and that is 20
percent of the schools, right, that are in the Direct Lending
program? So, again, if we are using 1965 technology to send
these documents back and forth, and we have a huge spike in
loan volume, it isn't going to happen.
The third thing I would urge you to consider is permission
for the guaranty agencies to sell these loans, these LLR loans,
if a marketplace exists, to be able to sell those loans in that
marketplace to be liquid again. My sense is they already have
the legal authority to do that and for purposes of keeping them
viable. What is your position on that, that if they have a
bundle of LLR loans, we think they have the legal authority to
turn around and sell them to cash them out? Do you, and if so,
would you support that?
Mr. Talbert. There is no prohibition on selling the loans.
Now, if advances are made, the guaranty agency would need to
hold onto the loans because the Department can demand that they
be assigned back to the Department.
Mr. Andrews. I would urge you to rethink that, because as
long as the Federal taxpayer interest is protected I think
increasing liquidity in the system is a huge value. The
following thing, I would say, is I would urge you to take a
look at the testimony from the witness from the University of
Maryland who is about to come up, the financial aid director.
And she lays out the case of a first-year residential student
that falls $3,600 short of what she is going to need, even
after she maxes out on the Federal programs. I would urge you
to think about how we are going to capitalize PLUS and private
gap loans in this environment should that eventuality occur as
I think it already is.
Secretary Spellings. Clearly that is the sort of thing that
we are describing in the new materials that we are making
available. Congressman, one thing that strikes me about your
various questions is the need for us to, and certainly I commit
this to Chairman Miller, to communicate regularly with you
about what we find as we survey guaranty agencies as to their
electronic capacity or lack thereof.
Mr. Andrews. I see my time is up. I certainly hope that is
the case. I think you heard from both the Chairman and Mr.
McKeon a bipartisan interest in working this problem through,
not assigning blame, but avoiding the problem and trying to
solve whatever comes along. Thank you very much.
Chairman Miller. Mr. Keller.
Mr. Keller. Thank you, Mr. Chairman.
And I am very concerned about the impact of the credit
market on the student loan programs and on the ability of
students to gain access to college.
Madam Secretary, let me ask you a couple of questions
relating to the FFELP and the direct loan program. As you know,
four out of five schools use the FFELP program rather than the
direct loan program, I believe, because there are many
advantages that the FFELP program has in terms of the ability
of these lenders to offer low origination fees, lower rates,
better repayment benefits, if they so choose. On the other
hand, there are many good advocates in government for the
direct loan program as well.
In your testimony, you said that you have been tracking
inquiries daily into the direct loan program. Have you seen any
increase in the number of inquiries from schools considering
switching to the direct loan program?
Secretary Spellings. A small number, Congressman.
Mr. Keller. You mention that there are 850 schools
authorized to make direct loans, but they have chose to remain
with the FFELP program. You are not suggesting, are you, that
those schools who are authorized to be in the direct loan
program but currently use FFELP should switch to the direct
loan program are you?
Secretary Spellings. Absolutely not. And I do think it is
important to--you know, obviously, financing is not the core
mission of higher ed institutions. And they enjoy having the
capacity of service and other features that benefit students,
you know, live in the private sector as opposed to having to
create those structures internally themselves.
Mr. Keller. We have heard about the Lender of Last Resort
program. Just by the way that that is set up with the Federal
Government having to turn around and pay the guarantors to make
the loans, while there certainly seems to be a benefit of
having that last safety net there, isn't it also true that if
we were to go to the Lender of Last Resort model, it would in
fact be even more costlier for the taxpayers than either the
FFELP program or the Direct Lending program?
Secretary Spellings. That is correct, as we would be liable
for 100 percent of the default. We are also working with OMB to
calculate the potential costs of those issues at various levels
should that occur, and we will share that with you as we do.
Mr. Keller. Now, as we look at this potential crisis there
doesn't seem to be yet a crisis from your testimony, it seemed
that there are different levels of exposure right now in the
student lending world. For example, and I want to ask your
opinion, if you were at a school that has the FFELP program or
direct loan program, pretty good graduation rates, low default
rates, chances are you are going to be in good shape in getting
your federally backed student loan this year; correct?
Secretary Spellings. I would think that would generally be
true, yes. Large public institutions, that sort of thing.
Mr. Keller. Now, let us go to the other extreme. Let us say
that you were at a private career college that has a pretty
high tuition and your federally backed student loan doesn't
cover everything, so you have to go out and get a private loan
to cover the difference. If you have----
Secretary Spellings. As is currently the case, of course.
Mr. Keller. Right. And obviously, in that scenario, they
look at your credit score, or your mom and dad's credit score;
there is no Federal backing. And if you happen to be at a
school with a high default rate and a low graduation rate and
you or your parents don't have a pretty good credit score, you
are exposed in terms of your ability to get a competitive low
interest loan; is that right?
Secretary Spellings. Well, obviously, there is a guaranty
agency that surrounds that type of institution. And as you
know, there is no credit check when that Lender of Last Resort
provision is invoked. So, ultimately, that student gets
financing.
Mr. Keller. Right. But at a higher rate just because the
market determines the financing. And if money is tight and your
credit score is low, inevitably those students in this type of
credit crunch are going to be faced with higher student loan
interest rates?
Secretary Spellings. In the private sector, in the private
market, yes.
Mr. Keller. Correct. From your conversations with the
Treasury, Secretary Paulson, and other officials within the
administration, what is your level of optimism that, at least
with respect to the next 12 months, the existing federally
student backed program will be sound moving forward for young
people in America?
Secretary Spellings. My level of optimism is high, and my
level of hope is higher, obviously. But even notwithstanding
that we are going to be fully prepared to react to whatever
situation confronts us. Obviously, it is completely in the
context of the overall economic picture. And you know, as such,
student loans will be implicated if situations worsen
generally. But you know, I think we are taking all necessary
steps, not only in this arena but in the administration more
broadly, to stem that.
Mr. Keller. Thank you, Madam Secretary.
My time is expired.
Chairman Miller. Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
Madam Secretary, let me follow up on that because I was a
little confused by the answer. Whatever school you go to, if
you apply for a loan, I thought you indicated that no one so
far has been denied a loan that is looking for a loan. Is that
right?
Secretary Spellings. To our knowledge, that is correct.
Mr. Scott. And wherever you go, the interest rate you will
pay on that guaranteed loan will be the same whether it is a
fancy school or not?
Secretary Spellings. What Congressman Keller was asking
about, I believe, was loans in the private sector. Certainly
that is true up to the limits within the Federal financial aid
system. Obviously, private loans, interest rates, can and do
vary.
Mr. Scott. But up to that limit, credit worthiness is not a
factor?
Secretary Spellings. That is correct.
Mr. Scott. Traditionally student college assistance has
been in the form of loans, Pell Grants and work study. It seems
to me that we are leaning much more heavily on loans than we
traditionally have. Can you comment on the direction we are
going in and whether that is a healthy direction?
Secretary Spellings. Well, as you know, together we have
worked hard to raise that Pell Grant. And I agree with you; I
mean, with tuition rising as rapidly as it is, we are having a
hard time keeping up with those increases. And I think the
system, while we are obviously talking about a critical symptom
today and certainly at this time, there are certainly bigger
issues throughout the entirety of the system about
affordability and transparency and levels of aid and so on and
so forth. But, yes, I think we have to continue to work to
increase need-based aid, and we have.
Mr. Scott. How many students are participating in the
income contingent repayment plan?
Secretary Spellings. How many students?
Mr. Warder. I don't know. We will have to get you that. I
am not sure how many are.
Mr. Scott. Many?
Mr. Warder. It is a reasonable number, but I couldn't even
give you an estimated percentage.
Mr. Scott. What about the loan forgiveness plan which
passed, several bills that allow loan forgiveness if you go
into certain professions? Have those plans shown any evidence
of encouraging students to get into those fields?
Secretary Spellings. We are in the process of implementing
those. As you know, they are fairly recently passed and are in
the rule-writing process. And we can certainly get you the
numbers of people who get teacher loan forgiveness and some of
the things that are on the books. I don't have that off the top
of my head, but we can get that for you.
Mr. Scott. I yield.
Mr. McKeon. Back to the question you were asking and the
question Mr. Keller was asking. If a student has used all their
help, the Pell grant, and they get the full Federal financial
aid loan, and they still need a gap loan, the Lender of Last
Resort doesn't kick in there. That is a private loan, and they
would be--and if they can't get that loan, they are out. And
that is one of the students that I am really concerned about.
Mr. Scott. I reclaim my time. If you have used up all your
Pell grant, all your loan eligibility, you are on your own to
find the rest of the money. Your credit worthiness and
everything else comes into play.
Secretary Spellings. That's right.
Mr. Scott. That is why we need to make sure that the Pell
grants cover more of a portion and work study covers more of a
portion so that the loan amount will in fact cover their full
education.
Secretary Spellings. What we are engaged in today is a
discussion around 26 percent of the full financing of
education. That is our discussion. The other 24 percent of
those resources come from States, from families, from home
equity loans, often credit cards, on and on. We are talking
about this slice of the pie that we have jurisdiction over.
Mr. Scott. We measure the school's effectiveness in loan
repayment on a default rate. If a school has a high default
rate, they may become ineligible for participation in the
student loan program; is that right? If you exceed the default
rate, is that right?
Mr. Warder. Well, there is a threshold on default rates on
the 2-year cohort default rate that if they exceed it, the
schools are out of the program.
Mr. Scott. It seems to me that that is a poor measure of
how well a school is doing in having the payments repaid,
because it seems to be more a function of who you admitted than
how hard you are working to get the payments back. If you had a
first generation college student, low income, someone with
marginal grades, you are discouraging colleges from opening
their doors and giving people a second chance and limiting them
to those who are credit worthy when they walk in. Is there some
other measure that we could use other than a default rate?
Mr. Warder. Well, we do use a number of measures, that
being one of them. Certainly they need to be accredited and
have an appropriate amount of their financing coming from other
than Federal sources. So there are multiple measures.
Mr. Scott. But the default rate, if you exceed the default
rate, you are out, period?
Mr. Warder. But very few have exceeded the default rate.
With a change to a 3-year default rate, that may be different.
But currently, there has been very few suspended for default
rate.
Secretary Spellings. Congressman also, as you know, through
the accreditation process, issues of financial management,
financial solvency, are absolutely part of that gateway. That
is what gets you a proxy of eligibility for Title IV aid in the
first place. And so I think that is probably more appropriate
for the accreditation discussion or is implicated more in the
accreditation discussion than in this arena.
Chairman Miller. The gentleman's time has expired.
Mr. Hare?
Mr. Hare. Thank you, Mr. Chairman.
Welcome, Madam Secretary.
You stated in your testimony that you and your department
are monitoring the situation, the student loan industry, and
you are in contact with schools and students, et cetera. By
these actions, you say you will be prepared to act, should
there be a shift in the origination trends.
Could you maybe explain a little bit more about what you
mean here? In other words, what would be the first steps you
would take if you see a shift?
Secretary Spellings. Well, as you know, it would be largely
fact-specific. But I think the tools that are available to us I
have described as support for the Direct Loan program should it
become necessary, use of the Lender of Last Resort provisions
should that become necessary. Those are obviously the main two
tools that are available to us, the Department of Education,
should such a situation arise.
Mr. Hare. Are there any other resources or authority that
we, the Congress, can provide you to yield quicker and more
aggressive responses should we find ourselves in a major-league
crisis here?
Secretary Spellings. We believe that the statute that you
all have described is adequate to respond to this situation.
But I reserve the right to come back and tell you otherwise in
the near term if it is not. But we believe, as you indicated in
your opening statement, Mr. Miller, that it is, that we do have
the tools available.
Mr. Hare. And then just lastly, you said, in addition to
the Lender of Last Resort in the Higher Ed Act, are there other
measures that you are aware of, that are authorized in the law,
that allow you to respond to a certain crisis that you may
encounter in the student loan industry?
Secretary Spellings. Are there other tools available
besides the ones I described?
Mr. Hare. Right.
Secretary Spellings. Well, I know some have suggested
things that reflect in the credit market more broadly that are
issues that Treasury would have jurisdiction over with respect
to the Federal Home Loan Bank or the Federal Reserve or other
mechanisms like that, but not that are within the discrete
discretion of the Department of Education.
Mr. Hare. And lastly, my colleague Mr. Andrews's
suggestions that he laid out--I thought every one of them made
perfect sense. And I think they would go a long way toward
helping, should we have a problem here. And who knows whether
we are going to have one or not, but I think it is better--you
know, the old adage is, better to be safe than sorry.
So I would hope that you take those into consideration,
because I think Mr. Andrews is right on point with each one of
these three that he brought up specifically, you know, to you
as recommendations. And I would hope that you take a look at
them and maybe get back with us and see if those can't be
implemented. I think they make a lot of sense and go a long way
toward helping if we have a problem here.
Secretary Spellings. May I say--and I fully expect to do
this--that, as we gather information about capacity and gaps
and so forth as we interface with these guaranty agencies and
the like, this guidance we are issuing next week and so forth,
I look forward to sharing this. This is very much an iterative,
organic, dynamic situation. And we will be in close
communication between now and August, I assure you, Mr.
Chairman.
Mr. Hare. If I could, I would like to yield the balance of
my time to my friend, Mr. Andrews.
Mr. Andrews. I appreciate it. I just wanted to ask one
quick follow-up question. I thank my friend for his compliment
and appreciate his help.
Madam Secretary, do you think some sort of Federal
guarantee facility is necessary for the gap loan situation that
Mr. McKeon talked about, that others have raised? The person
who is $2,000 or $3,000 short under the Federal programs, has
read your brochure, but is maxed out? How do we attract capital
into the system to help that person who is in the subprime
market borrow money?
Secretary Spellings. You mean essentially a guarantee of
private loans that would work like that? You could certainly--
--
Mr. Andrews. I am asking what you think the strategy would
be to help attract capital to that market for those gap loans.
What would work?
Secretary Spellings. Well, I would say, you know, I think
that we have a great deal of work to do, frankly, on the cost
side before we talk about, you know, additional supports for
private lenders. I think we have not done enough to make
transparency about cost, to make information available about
how to maximize Federal aid. I mean, lots of kids with private
loans still have money on the table federally. So I think we
have some work to do.
Mr. Andrews. But many do not. But many do not. I
appreciate----
Chairman Miller. If the gentleman would yield just for a
second?
Mr. Andrews. Yes.
Chairman Miller. Just to the last point the Secretary made,
I think we have looked at one and maybe a couple of studies
that have suggested about 50 percent of the students have not
maximized their access----
Mr. Andrews. Right.
Chairman Miller [continuing]. To government loans, but they
are under intense marketing pressure sometimes, and they turn
to the private loans prematurely.
Mr. Andrews. Right.
Chairman Miller. And, of course, then they find out that
they could be in trouble.
So we are not quite clear yet. I mean, clearly there are
students who need that private loan to fill that gap, to make
that tuition and cost. But there is a good number of students
and families who have turned to private loans without
maximizing the Federal program. And that is a matter of
educating people, to make sure that they do that.
Secretary Spellings. And simplification. I mean, I think
one of the things that you can see from this chart----
Chairman Miller. That is in the conference committee.
Secretary Spellings [continuing]. Is this is a very
difficult system to interface with. And I think we could do a
lot on the simplification side that would help students
maximize the rate.
Chairman Miller. It has been suggested it is easier if
these students and families went to the World Bank, they would
be more likely to get a loan, than if they accessed this system
of banking.
Secretary Spellings. I sometimes say it is like we are
trying to keep them out.
Chairman Miller. With Mr. McKeon's help, we are going to
sort that out in the conference committee.
Mr. Davis?
Mr. Davis of Tennessee. Thank you, Madam Secretary, and
thank you for understanding the pressure that students and
families are under.
One of the things that we need to do, as they are looking
for money to pay for higher education, is understand that we
need to do everything we can to lower the cost of higher
education. Because one of the things I see is, as we put more
money in, the cost of higher education goes up. And then there
is a need to put more money in, and then the cost of higher
education goes up. And that's where families are really feeling
it, back in my district in east Tennessee. And thank you for
understanding that.
And, with that, I would like to yield the remainder of my
time to Mr. McKeon.
Mr. McKeon. I thank the gentleman for yielding.
Madam Secretary, can you describe how you plan to monitor
the market beyond waiting for responses from college presidents
and their financial aid offices?
Secretary Spellings. Larry can speak to that, as well.
But, as I said, we have written every single one of them
and asked for a response if they saw any problems. We have
heard from about 60 to date.
Mr. McKeon. You have heard from 60?
Mr. Warder. Yes.
Mr. McKeon. Out of?
Secretary Spellings. More than 4,100.
Mr. Warder. We are doing some other monitoring, as well.
Obviously, we read the newspapers, as you do, and when we hear
of a lender discussing either withdrawing, reducing or whatever
their FFEL support, we immediately contact all of those schools
that have 50 percent or more of their volume with that lender.
And every time we have run into one of those, we have contacted
them and they have been able to line up another FFEL lender. So
we continue to monitor those situations. Any wind we get, we
are on the phone with the schools to see what their intent is.
Also, we monitor every month the originations that occur,
both in FFEL and in DL. And so far there has been--I mean, it
looks just like every other year. But we are watching our data,
as well.
Mr. McKeon. In your statement, you state that the
Department supports both the FFEL program and the Direct Loan
program. Haven't we already failed the FFEL program if you find
that the Lender of Last Resort provision needs to be
implemented?
Secretary Spellings. Well, I don't believe so, Congressman.
I think that this industry is--and, obviously, people with far
greater expertise, like Chairman Bernanke, have asserted this
also--this is a viable sector of the financial market.
Obviously, it is impacted by, you know, broader things in the
credit market. But we look forward to that being, sort of,
stabilized over time and that it will continue to be and has
been a very financially viable sector.
Mr. McKeon. Do you have any reports or information as to
how many people have been laid off as a result of the--you
know, working in the FFEL program, that have been laid off
because of companies pulling back?
Secretary Spellings. I don't have a total number. I, too,
have seen anecdotal reports of that, but I do not a have a
total number in the industry.
Mr. McKeon. The last report we have is it is over 2,000
people. And those people were working in making those loans.
And if they are not now working in that, I am sure there has
been a pull-back that--you know, where you are monitoring loans
being made right now. We are not in the season of loans being
made. It would be interesting to see----
Secretary Spellings. Right.
Mr. McKeon [continuing]. What starts happening by June,
July. And then if we find out there is a serious problem in
August, it is too late.
It is my understanding that the Pennsylvania Higher
Education Assistance Authority, PHEAA, has stopped making loans
in Pennsylvania.
Secretary Spellings. Originating.
Mr. McKeon. Originating. And do you know of an example of
how the Department is assisting institutions within the State
to find other lenders? Do you know how successful they are
being?
Secretary Spellings. There are about 40-some-odd or so that
have--17 institutions are new entrants. In other words, they
are just now becoming eligible for Title IV aid and so forth;
they are new to the program. There are some other double-digit
number, 40 or so, I believe--do you want to speak to that,
Larry?
Mr. Warder. Again, PHEAA being another lender, we have
contacted all of the schools that have 50 percent or more of
their origination volume with PHEAA. And, so far, they have
continued to be able to find another FFEL lender, or, in the
case of one large institution, they switched to DL. They
already had the DL authorization, and they have announced that
they are going to switch to DL. And that will be a fairly large
increase for DL.
Mr. McKeon. I guess that is the ultimate goal anyway, for
some of us.
Chairman Miller. Not for you.
Mr. McKeon. Not for me. I am not included in that ``us.''
Secretary Spellings. Neither am I.
Mr. McKeon. Thank you very much.
Secretary Spellings. Thank you, Congressman.
Chairman Miller. Thank you.
Mr. Bishop?
Mr. Bishop of New York. Thank you, Mr. Chairman.
First, let me ask unanimous consent that I can enter into
the record a statement on this subject from Dr. Phillip Day,
the president of NASFAA.
Chairman Miller. Without objection.
Mr. Bishop of New York. Thank you.
[The information follows:]
------
Mr. Bishop of New York. Madam Secretary, thank you very
much for coming this morning and for working with us to try to
address this issue.
I can't escape the feeling that we are working at cross-
purposes with this issue. And let me be specific. We are
concerned about some difficulty in accessing student loans,
which is just a piece, as you said, of the overall student
financial aid delivery system. And yet, while we are concerned
about that, the administration's budget proposal to Congress
eliminates SEOG and recalls the Perkins Student Loan Revolving
Fund. SEOG is about $750 million a year; Perkins Loan Revolving
Fund is around $700 million a year.
And so I am perplexed as to why, when we have this concern
that students will be able to access funds to finance their
education, that we are taking things away from them that they
have relied upon for years and have worked reasonably well.
And so, whenever I have asked this question before, the
response is, ``Well, we want to put our resources into Pell.''
But when you come to an individual student, that just doesn't
work. I mean, the Pell grant maximum is $4,731. We are going to
increase it to $4,800. So a fully needy student will get $69
more from Pell, but could easily lose $1,500 in SEOG, could
easily lose $1,500 in Perkins. We are going to drive that
student more to private loans, which we all agree are something
that we need to shape up.
So just tell me what the logic is of an elimination of
round numbers, a billion and a half, of campus-based money that
we have relied upon for years and students have relied upon for
years, and we are replacing it with $69 in Pell. So explain to
me how that helps the student access his or her educational
school of choice.
Secretary Spellings. Part of this, Congressman, as you
said, is an effort to strive to increase Pell.
However, the other part of this is that we must simplify
the system. To have 16 different programs with different types
of eligibilities for students, for institutions, and to try to
navigate that kind of system makes it very difficult for
students to interface--in fact, so difficult, that many do not
access.
Mr. Bishop of New York. Respectfully, respectfully, let me
just say the campus-based system is a very straightforward
system that requires no separate application on the part of the
student. The student submits one form, the very same form that
they need to file to get Pell, the very same form that they
need to file to get other forms of financial aid. But the
financial aid officer at their school has available to them a
pool of resources that they can then use.
So it seems to me that if the goal is to simplify, what we
are really doing is erecting obstacles. And I just don't
understand--and I know you share the goal of helping students
realize their dreams. But how is it, if we are going to take a
billion and a half dollars out of the system, even if we think
the system is complicated, how does that help students access
their dreams?
Secretary Spellings. Well, as you said, you know, by
increasing Pell--now, obviously there is not a one-to-one
correlation about particular students who may lose aid and so
forth. But I think in a general construct that Pell ought to be
greatly enhanced--we have asked for it to be again this year--
and that we ought to simplify the system.
Mr. Bishop of New York. And we are enhancing Pell. And we
are on a path to get us to $5,400.
Let me focus just on Perkins, if I may. Clearly, we are
having this hearing because we are concerned about whether or
not FFEL program will remain as available for students as has
historically been the case.
If, in fact, FFEL does become less available, would the
Department rethink its position on Perkins? Would you say, here
is a perfectly reasonable alternative, low-cost alternative,
infrastructure is in place to deliver it, all we need to do is
allow schools to continue to maintain and administer and award
from the revolving loan fund? Would the Department rethink
their position on their desire to eliminate Perkins?
Secretary Spellings. Well, Congressman, obviously, these
all have budgetary implications. And, you know, obviously, we
work with OMB as we take positions over time. That is a
theoretical question that is not before us and, obviously, not
mine alone to make.
Mr. Bishop of New York. I understand that, and I thank you.
I see my time has expired. Thank you, Mr. Chairman.
Chairman Miller. Mr. Loebsack?
Mr. Loebsack. Thank you, Mr. Chairman.
I don't have any questions as such. I just want to make a
couple of comments, following up, at least in one case, on Mr.
Davis's comment.
First, I was a long-time college teacher at a small college
in Iowa, at Cornell College. And also I am someone who came
from pretty humble backgrounds, grew up in poverty, and was
able to access what was then the National Defense Student Loan
Program--3 percent interest, had grants, that sort of thing as
well. And without all that financial aid, I clearly wouldn't be
here, sitting in Congress, as a freshman member from Iowa.
So I am very concerned about some of the issues also that
were just brought up by my friend from New York. But as someone
who was on an institution's faculty, I want to caution everyone
that, while I am very concerned, obviously, about student
access to college and achieving the American dream, I also want
to make sure that we don't go too far in terms of, sort of,
blaming the institutions themselves too. And I realize that is
not what you are doing. But, being on this committee, I have
heard a number of comments since I have been here about
institutions. Obviously, some institutions have raised their
costs pretty exorbitantly beyond inflation, what have you, but
I am not at all convinced that in every instance they are to
blame, necessarily, for that, because I think they have very
good reasons for increasing their costs.
So I just want to, sort of, lay that on the table now for
the public record, that I think sometimes some members of this
committee, and perhaps both sides of the aisle, have unfairly
bashed institutions since I have been here. And I hope no one
here takes any offense at that comment. But at any rate, I
think that is important to keep in mind.
On the other side, as far as the students are concerned at
least, I have great concerns also about the administration's
budget. I just want to echo what my friend from New York has
said. I simply don't understand how it is the case that, in the
name of simplification, that reducing assistance for
potentially millions of students makes any sense. It makes
absolutely no sense to me.
I realize that is sort of a broader issue that is not
directly related to what we are talking about today, but I do
think it is really important to keep that in mind, sort of, the
bigger picture here. You know, we are talking about loans
today, but I think we need always to keep in mind, sort of, the
larger goal, which is for students to have access to higher
education so they can achieve the American dream, so they can
do things that I have been able to do, fortunate enough to do
in this country.
And I just want to caution the administration when it comes
to making cuts in the Perkins program or any other cuts in the
name of simplification or whatever the case may be, especially
if it is, in fact, going to reduce access to higher education,
which I think, in fact, is what will happen.
So I don't really have any questions as such. If you want
to comment on the comments I just made, that is fine.
Thank you.
Secretary Spellings. I would like to react to the first
part of your observation. And that is, I agree with you, I
think we do have sort of a mixed bag of understanding of what
the costs, you know--why do we have such rapidly rising tuition
costs. And I think this area begs out for more information and
more transparency and more understanding by our publics.
And, again, I think, as you all debate the Higher Education
Act, that is certainly something that can be, I think, really
addressed in that context.
Mr. Loebsack. I yield back the rest of my time, Mr.
Chairman. Thank you.
Chairman Miller. Thank you.
Mr. Tierney?
Mr. Tierney. Thank you, Mr. Chairman.
Thank you, Madam Secretary, for being here with us this
morning.
I would like to just clarify a couple of points, if I
could. One is you talked a little bit earlier about the Lender
of Last Resort situation and the possible need of going to the
Secretary of the Treasury to discuss with them, in the ultimate
last resort, whether there would be resources available for the
Department of Education to work with guarantors.
Have you had that conversation with the Secretary? And if
you have, in what detail?
Secretary Spellings. We are having conversations about all
available options.
Mr. Tierney. Specifically that option have you discussed
with the Secretary?
Secretary Spellings. About specific levels of resources?
Mr. Tierney. Whether you have had any at all, whether he
makes them available, and levels.
Secretary Spellings. I certainly intend to.
Mr. Tierney. But you have not yet?
Secretary Spellings. I have not yet. We are in the process
of finding out what are our resources, how much do they cost,
what is the order of magnitude--fact-gathering before we sit
down and reach conclusions.
Mr. Tierney. Okay. But you expect to have that conversation
with him in the relatively near future?
Secretary Spellings. I do.
Mr. Tierney. The other clarification I wish to ask was, in
the plan, in 1998, it provided for a school--Mr. Andrews
mentioned this earlier--a school that was unable to locate a
lender willing to lend to its students to be able to notify the
guaranty agencies, certify its students that have been unable
to obtain loans, and then being able to work on behalf of the
students through the institution, as opposed to requiring each
student to run around and get two lenders to refuse them.
Is that something you are actively entertaining?
Secretary Spellings. Issues as it relates to the Lender of
Last Resort being implicated?
Mr. Tierney. Right.
Secretary Spellings. Well, as I have said, we are looking
at, through the guaranty agencies, the various procedures that
they have in place and whether they are adequate to be able to
respond timely to situations such as that.
Mr. Tierney. Okay. And have you contemplated what
Representative Andrews mentioned, the fact that instead of
having the student, individual students going around and
getting two rejections, that it might be something we consider
having the institution be able to make a certification to the
guarantor and then get the loans for all the students at that
school?
Mr. Talbert. Certainly, Congressman, we are looking at that
issue, particularly with respect to the letter that goes out
next week to the guaranty agencies. The statute speaks in terms
of individual borrowers. But I understand, administratively and
so forth, the issues. And we are looking at that for purposes
of the guaranty agency letter that goes out next week.
Mr. Tierney. And so, are you seriously contemplating this
may be a path you want to take?
Mr. Talbert. We are discussing it. We are having
consideration of it. And no final decision has been made yet.
Mr. Tierney. All right. Thank you.
Chairman Miller. Would the gentleman yield?
Mr. Tierney. Yes, I will yield.
Chairman Miller. Just on that point, my understanding was
that, in 1998, that arrangement was made. Do you differ with
the legal ability to do that?
I know what the statute says, but apparently they reached
an agreement where----
Mr. Talbert. Yes, I mean, we certainly have the letters
that you do that went out in 1998, and we also are aware of
what the statute says now, which legally seems to say it is a
borrower-by-borrower consideration. But, again, looking at the
administrative issues and so forth, we certainly have that
under consideration.
Chairman Miller. Okay. Thank you.
Mr. Tierney. Yield back.
Chairman Miller. Thank you.
Mr. Sarbanes?
Mr. Sarbanes. Thank you, Mr. Chairman. Thanks for having
the hearing.
Thank you to the panel.
Mr. Warder, can you just tell me again, you said, I think,
that you have some communication or notice to institutions in
instances where 50 percent of the loans are coming from one
lender. Can you just go back through that?
Mr. Warder. Yes. One of the things when we get notification
that a lender is either reducing their origination in FFEL or
saying they will not participate in the next year, we have the
information in our system that lets us know what percentage of
loans are made through a FFEL lender at a school. So if they
have 50 percent or more of their volume, we immediately reach
out to them to assure that they are able to replace that
volume.
Mr. Sarbanes. And how does the reach-out work? What is it
you are----
Mr. Warder. We call the aid office.
Mr. Sarbanes. And what is the discussion?
Mr. Warder. The discussion is around, ``We have heard that
your lender is not originating. Is that true with you? And what
have you done to replace it? And what other lenders have you
gone to?'' And they have all said they have been able to
replace that volume with another lender.
Mr. Sarbanes. I guess I am curious why you would only
initiate that with respect to institutions where 50 percent of
the loans originate with that lender as opposed to, say, 25. I
mean, 50 percent is a pretty high threshold to establish before
you reach out to the institutions to make sure that everything
is okay.
I am wondering, why is it 50? Is 50 percent an internal
protocol that is established? Does it originate someplace in
particular?
And could it be moved to, say--I mean, this whole hearing
is about trying to get ahead of the curve and see the trends
coming early and take preventative steps. So, I guess, I would
just imagine that you could move that to, say, 25 percent,
again, just to get a little bit ahead of the curve. Maybe you
could respond to that.
Mr. Warder. We could do that. The reason we haven't is that
if you picked a 25 percent, for example, it says that the
school already has lenders lined up for the other 75 percent or
less and that they generally have enough relationships with
other lenders that they are probably okay.
We have also asked them, if they are concerned about their
capacity, their FFEL capacity, to get in touch with us. So we
have also asked all of them to get back to us with any concerns
they have about their FFEL origination capacity.
Mr. Sarbanes. Fair enough. I guess I would just----
Mr. Warder. But we are not waiting when it is 50 percent or
more.
Mr. Sarbanes. Again, I would urge you to have a trigger
system or a tickler system that might make you reach out
earlier than that. You know, even, again, if 75 percent is in
the okay category, the way we have seen this credit tightening
happen is it can accelerate very, very quickly. And in light of
that, I would think you would want to be getting some trends
identified faster and be having those conversations even
earlier.
In other words, I guess what I am saying is the 75 percent
that are, quote, ``okay'' might--you might wake up tomorrow and
find out that there are three lenders in there that yesterday
thought they were fine or were going to stay in the business,
today have decided to get out of it, and they represent 50
percent, between them, of what that institution is relying on.
And now, all of a sudden, you are at 75 percent that are in a
precarious position. So I would just urge you to find an
earlier trigger point for having the conversations.
Thank you.
Chairman Miller. Thank you.
Mr. Ehlers?
Mr. Ehlers. Thank you, Mr. Chairman.
I would like to zero in on a specific problem and get away
from some of the global issues that have been discussed. The
specific problem is that of medical students, particularly
medical residents.
I have a communication here from the American Medical
Association and from others, and I have a major medical center
in my district. It is a major problem for the medical students,
particularly the residents who had a certain process for
keeping their payments very low while they were residents,
because, as you know, they get paid very small amounts and have
substantial debts at that point, particularly if they are
facing a 7-year residency.
The College Cost Reduction Act of 2007 will, I think,
eventually help solve this, but there is a bridging problem.
There was a debt-to-income pathway, the so-called 20/220
pathway, which has sort of disappeared. And we need something
to bridge that.
I just wonder, is the Department working on this, or do you
have an answer prepared?
Secretary Spellings. Yes, Congressman, we have retained
this test by regulation through November of this year as a
bridge until the new provision becomes fully implementable. At
that time I know you are well aware that those payments will be
much less than the normal full amount. But we do have a bridge
to segue, which is essentially the previous system.
Mr. Ehlers. I hope it is not the bridge to nowhere.
Secretary Spellings. No, sir.
Mr. Ehlers. Is this in effect already?
Secretary Spellings. Yes, we have retained that test by
regulation.
Mr. Ehlers. And will that stay in place until----
Secretary Spellings. Until the transition is made, yes.
Mr. Ehlers. So everything is solved, it is all in place?
Secretary Spellings. Yes, sir.
Mr. Ehlers. That is a refreshing answer. Very seldom do I
get that answer from the Federal Government.
Thank you very much.
Secretary Spellings. Thank you, Congressman.
Chairman Miller. Thank you.
Mr. Altmire?
Mr. Altmire. Thank you, Mr. Chairman.
Madam Secretary, nobody, certainly on this committee or
even in this Congress, is looking forward to the scenario in
the fall where we have hundreds of parents and students calling
our office every day who didn't realize that they weren't going
to be able to qualify for loans and now can't seek higher
education at this time as a result. And we appreciate the fact
that you have come in the spirit of helping us avert this
problem from the beginning and avoid that happening. So we
appreciate you being here.
And then, trying to work through it--I am from
Pennsylvania. We have the situation with PHEAA, which Mr.
McKeon touched on earlier. And you know what has happened
there. We have Penn State University, which has now gone to the
Direct Loan program in response to that situation. And in the
second panel we are going to have somebody who is going to talk
about their experiences from, I believe, Iowa State, and they
made the switch.
I am just curious if you had any advice to people in
Pennsylvania, specifically. You know, with the largest dominant
loan agency now unable to participate, you know, the largest
university in the State making the decision to go to the Direct
Loan program, I would assume there are going to be others to
follow. It really appears that it is pretty unstable ground
right now, with regard to student loans in that State.
What advice would you have to students and parents, as far
as the stability of the program moving forward and what the
expectations will be for parents who have children that are
about to go into the higher education system?
Secretary Spellings. Well, as I said, Congressman, we have
new material that is timely for the situation that we are in
that encourages them to maximize their aid. I would suggest to
students and families, particularly as we approach April 1,
which is the timing that institutions make acceptances known to
students, that they look at these issues early and that they
seek those resources as early as they possibly can; don't wait.
Mr. Altmire. Thank you.
And do you think that what has happened in Pennsylvania
because of PHEAA being so big and Penn State being a big
school, that that is unique compared to what other States in
the country are facing? Or would you expect that those problems
are going to be similar across the country?
Secretary Spellings. I think it is somewhat unique. I think
with Penn State, as you know, they had previously been a Direct
Loan institution. They had familiarity with it. And so I think
they may have had an acceptance and adapting process that might
be more streamlined than others.
Mr. Altmire. Okay. Thank you.
Chairman Miller. Thank you.
Mr. Payne?
Mr. Payne. Thank you very much.
I just have a question regarding--of course we all talk
about the high cost of college and loans that students have to
take out.
Two questions. One, basically we have a tremendous amount
of interest today on the part of young people--there seems to
be a new esprit de corps of volunteerism, sort of, a new spirit
of wanting to help in areas that are underserved and in Third
World countries.
And one of the big areas that we have is the lack of
medical personnel in developing countries, where we have the
PEPFAR program that President Bush is very proud of, and we
support it tremendously. It works on AIDS and TB and malaria
and things of that nature.
And we find that there are students graduating from our
medical schools who would like to immediately go to Africa,
parts of Asia, or where tuberculosis is very tremendous in
Eastern Europe, the new strain of TB, but they have these
tremendous loans that they have to be responsible for and,
therefore, cannot participate--and even in some of the
underserved areas in the United States.
Have you thought in terms of any serious programs that
could either defer or offset the immediate loan repayments that
are due from these students, in order for them to be able to do
programs that are in no-paying or low-paying areas, to help
offset the loans?
Secretary Spellings. Well, not internationally,
Congressman. As you know, we are in the process of implementing
the provisions of CCRAA that speak to loan forgiveness in
public service areas here domestically. But I am not aware of
discussions about forbearance for people doing international
aid work.
Mr. Payne. I just spoke to former President of the Senate
Frist, who, as you know, does a tremendous amount of that type
of work. Yesterday, as a matter of fact, he testified before a
committee on child survival and global health. And he, too,
probably would think something like that would be helpful.
Sometime I would like to talk to people in your department
about that, and also about even expanding what we have
available domestically. Because I think that they could do a
tremendous amount of good, and for a small amount.
The other question, on a totally different area, we had a
hearing of the Historically Black Colleges and Universities
yesterday here, and there is a goal with the Department of
Defense of a 5 percent set-aside goal for HBCUs. However,
believe it or not, there is no mechanism to evaluate or
quantify whether the goal is being reached. And I would like to
also discuss with your staff about some method. It could be 1
percent, it could be zero, it could be 7 percent--I would doubt
the 7 percent--but if there was some mechanism that could be
imposed, so that we have some idea.
It is great to have a goal. And, of course, you know, we
have to be careful, it is goals; they are not quotas. We never
did quotas, even though people took goals and tried to switch
it around to say they were quotas. We have goals, but it would
be good to see whether there is some way to evaluate whether we
have been coming close to the goals.
So I would like to be in touch with your staff on that,
too.
Secretary Spellings. Certainly. Thank you.
Mr. Payne. Thank you.
Chairman Miller. Mr. Price?
Mr. Price. Thank you, Mr. Chairman. I appreciate the
opportunity to ask a few questions.
I want to thank you so much for coming. I apologize for not
being here earlier. I know you had an extensive discussion
about the issue of Federal student loans. As I say to my son,
``I resemble that remark'' now. We have one child who is a
senior in high school, and so we are looking at--we have been
accepted, thank the Lord, and now we are trying to figure out
how to go from there.
I have been able to listen to some of the testimony and
some of the questions, and I think that the fundamentals are
clear about different philosophies about where the
responsibility ought to lie, how much role the Federal
Government ought to play. Obviously, the majority party
believes the Federal Government ought to play a much greater
role. And I think it is important, as we review that
philosophy, that there are some consequences, both intended and
unintended. And I would like to explore one or two of those.
The FFEL program comprises about 80 percent of loans now.
Would you agree that it works relatively well----
Secretary Spellings. Absolutely.
Mr. Price [continuing]. And is an appropriate and helpful
adjunct for probably millions of students to gain access to
higher education?
Secretary Spellings. Absolutely. It is the primary way they
do within Federal support.
Mr. Price. And I would agree and commend the wonderful work
that they are doing to allow for greater opportunity for higher
education for so many young people across our Nation. There are
those who would say that the Direct Loan program ought to be
the only program. And I would ask you, if we were to move
rapidly in that direction, how quickly can the Education
Department add servicing capacity of the DL program if the
volume is increased by 30 or 40 or 50 percent?
Secretary Spellings. We can respond quickly. That level--
essentially, we could double our current capacity. But, you
know, obviously, as it scales up, we would have to come to you
for additional resources, should that materialize. But, at this
point, we can approximately double the capacity in the program,
should we need to.
But, as you know and as you said, we are strong supporters
of both programs. Institutions make those decisions. You know,
one of the things I think institutions like best about the FFEL
program is, inasmuch as financing is not their core mission,
they are able to have those services live in the private
sector. Institutions will have to create those services
internally, were they to join the Direct Loan program.
Mr. Price. I think you would agree, Madam Secretary, that
having the FFEL program in place allows for greater choices and
opportunities for, again, millions of students.
Secretary Spellings. It does.
Mr. Price. If we were to move to a significantly greater
degree to the Direct Loan program, that would, of necessity, I
suspect, increase the debt. The House and Senate adopted a
budget yesterday that has significant increase in deficit and
increasing the debt.
Do you have any sense about the implications on the
national debt if the DL program were to increase to a large
degree?
Secretary Spellings. We are looking at cost implications,
not only there but also if we need to invoke the Lender of Last
Resort and these 100 percent guarantees. There are cost
implications for the various tools that might be implicated.
And certainly, as we develop those figures, we will share them
with you.
Mr. Price. So, as the Nation clamors for some fiscal
responsibility and not increasing deficit and debt, it would be
appropriate to continue to hold up the FFEL program as one that
is a good option and opportunity for, again, millions of young
people across this Nation to gain an education without
significantly harming the fiscal----
Secretary Spellings. I believe it is.
Mr. Price [continuing]. Status of our Nation. I appreciate
that.
As a physician, I also want to tell my good friend that we
are working diligently to try to make certain that students can
have their loans forgiven if they serve domestically in
underserved areas.
Secretary Spellings. Right.
Mr. Price. And we have large numbers of those, as you well
know.
With my remaining time, I am pleased to yield to my good
friend, Mr. Ehlers.
Mr. Ehlers. I thank the gentleman for yielding.
I just wanted to follow up with my earlier question. My
always-competent and ever-ready assistant assures me that the
income-contingent repayment program that you are setting up is
a substantial disadvantage for medical residents compared to
the 20/220 pathway.
And, as you know, we worry about having enough physicians
in this country. Also there is another factor, and that is,
there is very little chance that they are going to default on
their loans once they begin producing income. But they are in
danger of going into forbearance before they start earning more
money under the new system.
I would very much--if you have an answer for that now,
fine. Otherwise, I would very much appreciate you looking at
this, seeing what can be done to basically restore something
close to the 20/220 pathway.
Secretary Spellings. My understanding, as I said,
Congressman, is that we have retained that as a transition to
the new system that you all enacted as part of the CCRA. Now,
whether there are specific, you know, anecdotal and individual
cases, you know, we will have to just look into those.
Mr. Ehlers. I think they are more than anecdotal and small
numbers. I would appreciate you checking into that, and will be
happy to work with you in that.
Thank you. Yield back.
Chairman Miller. Thank you, Madam Secretary.
Mr. McKeon, did you have a question?
Okay.
Thank you very much for your appearance and for the
information that you have imparted to us.
I think you can tell from the questions and sometimes the
sense of urgency in my colleagues' voices, this is a problem--
as one of them said, they are not looking forward to having
hundreds of people calling their office if there is a breach in
the system.
Secretary Spellings. Nor am I.
Chairman Miller. And I think it really is a question of
whether or not, having been warned and having seen serious
problems in other parts of the credit markets, the question is
whether or not we will be able to put together that seamless
system for those families and for those students.
And, you know, when I was in the Merchant Marines a number
of years ago, first they would brief you on what a lifeboat
drill was, and then you would have the lifeboat drill, and then
eventually you would have to get in the lifeboats to make sure
that everything worked, that the pulleys worked, that the
winches worked, and everything would work, and that you could
launch the lifeboats. Never had to use them, but we ran through
it several times.
And when I was in the Department of Forestry, you
constantly had fire drills. And you had to show that you could
hook up all of the hoses, that you could put water onto a fire,
whether it was residential or whether it was a forest fire.
Never had to use the residential, but we knew how to do it.
When I was in the refinery, we constantly had preparation
for explosions, for accidents. Fortunately, when I was there,
never had to use them, but we were constantly prepared, and we
had constant walk-throughs to make sure that everybody knew
exactly what they were going to do.
You know, the great heavyweight champion of the world,
Rocky Marciano, once said that everybody has a plan right up
until the time they get hit. And we find out, more often than
not, in Government, that is the case when the incident comes
along.
And I think this hearing really is about whether or not we
have the confidence--if we can handle the worst, we can handle
the best. What we are really talking about here, as I keep
saying, is making operational a standby plan.
Every member of this committee would prefer that the FFEL
program will continue to operate. But we want to make sure
that, in the event that we have a serious gap in the
availability of loans under the FFEL program, that you will
have the ability to make a choice, or the institutions will
have the choice, of going to the Lender of Last Resort, as was
envisioned under the law, and/or the Direct Loan program.
I consider these standby authorities. And because they are
standby authorities, we have the time to put in place the
procedures and the operational protocols. I think that means
that we have to move from monitoring to sit-down meetings with
the impacted parties, the guaranty agencies, to hear their
concerns and to work out an agreement, so, again, if necessary,
we will be able to take the preparation and make it
operational.
I think, again, the schools need to know whether they
want--how and how long it will take them to create a standby
authority on the Direct Loan program, should they choose to do
that.
Apparently it was fairly seamless, or appears for the
moment, for Penn State to make this switch. They were in the
FFEL program. That program apparently not able to meet their
needs, they were able to make the switch seamlessly for those
parents and students.
That is the goal of this committee. We need your
cooperation. You need the Secretary of Treasury's cooperation.
And I think we need some face-to-face discussions between the
guaranty agencies who may have to stand in stead of these other
organizations that might find themselves in a position that
they can't meet their historical demand for student loans if
the credit markets continue in the state of dysfunction that
they currently are.
We all hope that that will cease also. And, obviously, the
Secretary of the Treasury and the Chairman of the Fed and this
Congress are working hard to try to make that reality come to
pass, where we go back to both liquid and stable credit
markets. But this is only in anticipation.
So thank you for your time.
And I don't know if you want to make a comment, but clearly
this is an opportunity to demonstrate that, with some notice,
we can properly plan to mitigate the anxiety and maybe the harm
to students and families in additional costs to them if plans
are not in place.
Thank you.
Secretary Spellings. Yes, Mr. Chairman, thank you for those
comments. And I can assure you we are doing those things and
will continue to.
Two things strike me today.
One is that this is highly organic. We are learning, as you
are, every day the various dimensions of this. And I think
regularized communications between us, maybe not in this formal
of a setting, are certainly in order as we go through what will
be the busy season, the high season of this industry.
And I would also say, particularly since I have heard many
of you talk about specific institutional stories or anecdotes,
please let us know those things, and we will run those to
ground and do everything we can to make sure that there is
capacity in the system.
Chairman Miller. Yes.
Mr. Platts? You are now on the Secretary's time, so you do
whatever you want. [Laughter.]
Thank you, Madam Secretary.
Mr. Platts. Thank you, Mr. Chairman and Madam Secretary,
for yielding time to me. So I will be very brief. And I don't
want to be repetitive, but I do want to associate myself with
Mr. Altmire's comments and questions earlier in Pennsylvania's
situation.
And I know you are very familiar--and Senator Specter,
Senator Casey and most of us House members have written to you,
as well as Secretary Paulson and the Federal Reserve. My
understanding thus far, the Fed has responded saying they defer
to you and Secretary Paulson on how to address the specific
challenge across the country and then specific to us in
Pennsylvania.
And so I just want to, I guess, reaffirm Mr. Altmire's
emphasis on how critical this is to students, as we know best
in Pennsylvania, and that survival and strengthening of the
FFEL program to allow PHEAA and other agencies like it to be
re-engaged is critical to students getting access to the
assistance they need.
And as one who, you know, paid off my last student loans as
a Member of Congress from undergrad and law school, I
personally understand the importance of these programs and, you
know, just look forward to working with you and the Department
to make sure that that competition is there and the choice is
there and, bottom line, the access is there for the students
across the country, and, obviously, especially focused on
Pennsylvania.
So thank you, Mr. Chairman.
And, Madam Secretary, thank you.
Secretary Spellings. Thank you, Congressman.
Chairman Miller. Thank you.
Thank you, Madam Secretary. We will continue to be in touch
with you. Thank you.
The next panel to come before the committee will be made up
of Mr. Paul Wozniak, who is the managing director of the
Education Loan Group of UBS Securities. Mr. Wozniak is the
managing director of UBS Educational Loan Group, and is now in
his 26th year in the field of education lending. Mr. Wozniak is
also involved in all aspects of investment banking, both
Federal and private education loans, including assistance on
structural economic credit program matters, and an active
participant in the education loan community.
Terry Muilenburg is the Senior Vice President of USA Funds,
and whose function is to help administer the FFEL program. And
in this position, she is responsible for representing USA
Funds' interests in the Federal Government and works closely
with other student loan organizations in the development of
legislative and regulatory agenda.
Roberta Johnson is the Director of the Office of Student
Financial Aid at Iowa State University in Ames, Iowa. And prior
to assuming that role as director of student aid at Iowa
University, Johnson served 18 years as the assistant director
and associate director positions at Iowa State, where she was
responsible for student loan operations.
Sarah Bauder is the Director of Student Financial Aid at
the University of Maryland, College Park, Maryland. And she
began her career in financial aid in 1990 as a financial aid
counselor at St. Mary's College in Maryland. After 6 years, she
accepted the position at the University of Maryland-College
Park campus as assistant director for loan processing. She then
moved to the position of associate director for operations and
assistance, where she managed a $100 million student loan
program, scholarships, athletic verification, and quality
assurance.
Charles C. Sanders--oh, excuse me, Mr. Wilson, did you want
to introduce Mr. Sanders?
Mr. Wilson. Yes, thank you.
Chairman Miller. Yes, thank you.
I yield to Mr. Wilson.
Mr. Wilson. Thank you, Mr. Chairman.
It is an honor for me to welcome Mr. Chuck Sanders here
today. He is a neighbor. He is from my home State of South
Carolina and on the panel today.
Mr. Sanders currently serves as president and CEO of the
South Carolina Student Loan Corporation. In that position, he
is responsible for the day-to-day management and coordination
of all corporate business activities. Prior to this position,
Mr. Sanders served as director of investments and debt
management for the South Carolina State Treasurer's Office for
13 years.
Mr. Sanders currently serves on the board of directors of
Anderson University, the South Carolina Independent Colleges
and Universities, the Greater Columbia Educational Advancement
Foundation, the executive board of the South Carolina
Association of Student Financial Aid Administrators, and is a
board member and vice chairman of the Education Finance
Council.
He received his bachelor of science degree in banking from
the University of South Carolina.
I know from touring his office last month that he and his
very capable and dedicated staff are student-friendly, giving
opportunity for the young people of South Carolina. And I
welcome Mr. Sanders here today.
And I yield back the balance of my time. Thank you, Mr.
Chairman.
Chairman Miller. Thank you.
Mr. Wozniak, we are going to begin with you.
There will be a light. A green light will go on when you
begin to testify--you are familiar with this--and then an
orange light when you have a minute left, at which point we
hope you will be able to wrap up your remarks. But, again, we
want you to complete your thoughts. And then a red light.
Let me say this to the panel. To the extent you feel a need
to comment on something that you heard in the exchanges that
took place in the previous panel with the Secretary, please
feel free to do so. That would be helpful to us.
Your entire statements will be placed in the record in
their written form, and so you proceed in the manner in which
you are most comfortable.
Mr. Wozniak, welcome. Thank you.
STATEMENT OF PAUL WOZNIAK, MANAGING DIRECTOR AND MANAGER,
EDUCATION LOAN GROUP, UBS SECURITIES, LLC
Mr. Wozniak. Chairman Miller, Ranking Member McKeon,
members of the committee, thank you very much for inviting me
today.
I am Paul Wozniak, managing director and group manager of
the UBS Securities, LLC. The group is one of the largest of its
kind on Wall Street, and we are mandated to coordinate all
education-related financing activity in the fixed-income
department, which includes both asset-backed finance as well as
municipal securities.
I am currently in my 26th year of financing postsecondary
loans, following my borrowing under the FFEL program as well.
$54 billion of Stafford and PLUS FFELP loans were
originated in 2007-2008 academic year, primarily by banks,
private and public nonbank corporations, State agencies, and
not-for-profit corporations. If patterns held as in past years,
because the information is the latest available, banks probably
accounted for about 60 percent of loan originations.
However, when one observes the holders of loans, after the
fact in the long-term markets, the market share of outstanding
loans falls to less than 24 percent. And this is important in
trying to understand how ultimately the student loan program is
financed. Just like Fannie Mae and Freddie Mac provide
secondary market support to the mortgage market, that is, in
many regards, what many of the corporations and not-for-profit
operations do for the student loan marketplace.
Banks, as deposit-taking institutions, have a general cost
advantage to entities that are required to access the capital
markets through securitizations or other means. They must also
allocate costs of capital and reserves, but, on the margin,
they should maintain a funding advantage over those raising
money in the capital markets.
Further, for those banks who originate and sell their loans
to other holders in the secondary market--and that appears to
be the majority of the 2,000-some banks in the program--funding
needs are both modest in size and short-term in nature.
The remaining participants in the FFELP program, those who
are holders of more than three-quarters of all FFELP loans
outstanding, rely on the capital markets for their funding
source. This generally takes several forms. Most of these
entities use some type of warehousing program initially--
commercial paper, a line of credit--and then those are usually
less-than-364-day facilities. They do that to accumulate enough
assets to have an efficient financing program that will meet
both rating agency and investor acceptance. These facilities
generally must be cleaned out once a year.
As Secretary Paulson said yesterday, the securitization of
student loans actually has led to greater availability and
lower costs. And, in fact, the most common form of refinancing
or take-out is securitization.
And this has taken the form of floating rate notes.
Securitization is merely the creation of a trust which issues
securities to investors. The trust uses the proceeds to acquire
a pool of loans, usually from a warehouse facility, and that
line of credit is paid down.
The trust is structured to allow investors to solely look
at the underlying loan collateral for repayment of the
investment. And this is important, because it insulates the
investor from any negative credit event that may befall the
sponsor of the trust. As a result, the trust receives a higher
rating than it could if corporate-issuer risk were also a
continued possibility. And, therefore, it offers a lower rate
of return to the investor, given those protections.
Alternatively, the trust is required to perform on its own with
no additional support from the lender.
It should be known also that banks also make themselves
available to the Floating Rate Note securitization market.
Indeed, while banks are holders of less than one-quarter of all
FFELP loans, banks who also securitize include about three-
quarters of those institutions, of those deposit-making
institutions. So, said another way, you might assume that about
only 10 percent of the loans outstanding are funded by
deposits.
Another option has been the auction rate market. The FRN
market has been growing much faster than the auction rate
market. The auction rate market is about one-third the size of
the FRN market outstanding.
Auctions certainly have been in the headlines recently. And
as issuers have looked out over their funding options, given
the low margins available on the loan product, they weighed the
advantages of using an FRN versus the advantages of an auction
structure. Auctions permit a high degree of financing
efficiency, and they act in combination as a warehouse
facility, term financing at a reasonable and variable rate cost
of funds. Their ability to be redeemed and converted to other
structures is also a very positive feature.
For 15 years they performed exceptionally well. There were
150,000 auctions, I would estimate, without a single failure.
Recently, however, that has ended. That has created additional
problems. And I will just say that the cost of financing has
risen both on the FRN side and the auction rate by
approximately 100 basis points. The burden on this marketplace
is significant and real, and it is unlikely to be able to
correct itself and avoid having an impact on access to loans.
[The statement of Mr. Wozniak follows:]
Prepared Statement of Paul W. Wozniak, Managing Director, UBS
Securities LLC
Good Morning. I am Paul Wozniak, a Managing Director and Group
Manager of UBS Securities LLC. The group is one of the largest of its
kind on Wall Street, and we are mandated to coordinate all education
loan related finance activities in the Fixed Income department, which
includes asset-backed finance and municipal securities. I am currently
in my 26th year of financing postsecondary education loans.
$54 billion of Stafford and PLUS FFELP loans were originated in the
2007-2008 academic year, primarily by banks, private and public non-
bank corporations, state agencies and not-for- profit corporations. If
patterns held as in years past, banks probably accounted for
approximately 60% of loan originations--as they did in the prior year
which is the last year for which data were available. However, when one
observes holders of loans, banks' market share of outstanding loans
falls to less than 24%. This is important when trying to understand how
entities finance themselves.
Banks, as deposit taking institutions have a general cost advantage
to entities that are required to access the capital markets through
securitizations or other means. They must also allocate costs of
capital and reserves, but on the margin, they should maintain a funding
advantage over those raising money in the capital markets. Further, for
those banks that originate and sell their loans to other holders in the
secondary market, which appears to be the majority of banks, their
funding needs are both modest in size and short-term in nature.
The remaining participants in the FFELP program, those who are
holders of more than three-quarters of all FFELP loans outstanding,
rely on the capital markets for their funding source. This generally
takes several forms. Most of these entities will use some type of
warehousing program or line of credit--a commercial paper conduit or
bank loan--with terms that are generally renegotiated every 364-days
and permit the FFELP lender to accumulate a sufficient amount of loans
to accomplish an efficient financing program that will meet rating
agency and investor acceptance. These credit lines must generally be
cleaned out into some other financing program at least once per year.
The most common form of refinancing or 'take-out' is a
securitization. Primarily this has taken the form of the issuance of
Floating Rate Notes or FRN's. A securitization is merely the creation
of a trust which issues securities to investors. The trust uses the
proceeds to acquire a pool of loans from the warehouse facility, and
the warehouse line of credit is paid down. The securitization trust is
structured to allow the investor to solely look to the underlying loan
collateral for repayment of the investment. This is important because
this insulates the investor from any negative credit event that may
befall the sponsor of the trust. As a result, the trust receives a
higher rating than it would if corporate issuer risk continued as a
possibility, and therefore the FRN's bear a lower interest rate spread
than it would if it were not so insulated. Alternatively, the trust is
required to perform on its own with no additional support from the
lender.
It should also be noted that banks also avail themselves of the
Floating Rate Note securitization market. Indeed, while banks are
holders of less than one-quarter of all outstanding FFELP loans, banks
accounting for about 75% of these holdings use or are prepared to use
FRN securitizations to finance their portfolios to some extent. Banks
do this because it diversifies the funding sources of their assets.
While it may be a more expensive cost of funds than deposits, the
diversification of funds and the potential for off-balance sheet
funding requires its consideration.
Another option that has been used extensively, and more so among
state agencies and not-for-profit corporations, has been the auction
rate securities market. The education loan backed auction market is now
only about \1/3\ of the size of the education loan FRN securitization
market. In recent years, issuance of FRNs has greatly exceeded the
issuance of taxable auction rate securities, especially to finance pre-
10/1/2007 originated consolidation loans during the heavy origination
era of those loans. Issuers had to weigh the advantages of a fixed
spread FRN against the advantages of the auction structure. Auctions
permitted a high degree of financing efficiency, in that they acted as
a combination warehouse facility and term financing at a reasonable and
variable rate cost of funds. Their ability to be redeemed or converted
to other structures without significant cost was also a very positive
feature. Given the relatively narrow spread on FFELP student loans, it
is important to have a highly efficient, flexible financing vehicle.
For 15 years the auction product performed exceptionally well. It
was able to withstand numerous market shocks such as the 1994 bond
market which at the time was described as the worst since the great
depression, the 1998 Russian debt crises, Y2K and an accounting
reclassification event in 2004. These tests of the product seemed to
show its resilience. Interest rate spreads would widen, and then return
to previous levels. For, what I would estimate as 150,000 auctions of
education loan backed collateral; the market had never experienced a
failed auction (where auction sales exceeded purchases and holds). That
ended recently. As a consequence, the ensuing days resulted in
significant auction sales resulting in a complete and total failure of
the auction market. This was compounded by the problems facing the
monoline insurance companies, encouraging sales and reducing
restructuring options.
As a result of the continuing liquidity crisis, the deleveraging of
investor balance sheets and the failure of the education loan backed
auction market, the cost of funds to holders of loans has risen
significantly. Those with auction rate securities are incurring a
penalty interest rate. Those with warehouse facilities, to the extent
that renewals are available, are incurring a much higher rate as well
as the requirement of posting significantly more equity than had
previously been required. There are approximately $150 billion of
education loans currently financed via these two methods. For those who
would refinance these loans into a fixed spread FRN structure, they
face (i) interest rate spreads that may be a full 1% (100 basis points)
higher, (ii) the inability to currently finance certain loans with long
average lives (consolidation loans) due to lack of investor demand, and
(iii) the need to add significant and costly equity into a structure
based on new rating agency assumptions borne of the current market
environment. The burden on this marketplace is significant and real and
is unlikely to correct itself to avoid having an impact on access to
loans.
______
Chairman Miller. Thank you.
STATEMENT OF TERRY MUILENBURG, SENIOR VICE PRESIDENT, USA FUNDS
Ms. Muilenburg. Chairman Miller, Ranking Member McKeon,
members of the Committee, all of us here today share a strong
commitment to ensuring that every eligible student----
Chairman Miller. I would ask you to pull the microphone a
little bit closer to you.
Ms. Muilenburg. All of us here today share a strong
commitment to ensuring that every eligible student seeking
Federal Family Education Loans will have an uninterrupted
source of loan capital to pursue higher education. I am here on
behalf of United Student Aid Funds, a 48-year-old nonprofit
organization that works to enhance higher education
preparedness, access and success. Last year we guaranteed $25.8
billion in FFEL loans, or about one-fourth of all such loans
issued.
USA Funds and the other 34 guarantors, all of whom are
either State agencies or nonprofit organizations, perform a
critical role in the delivery of student aid. Together we
administer every loan made under the FFEL program with an
outstanding portfolio of over $400 billion. Through our efforts
we protect the Federal investment in our students through
delinquency prevention, default diversion and debt management
programs.
Consistent with guarantor's public purpose mission, we
provide an extensive range of services and programs to increase
awareness of the importance of higher education, the
opportunities available and the financial support offered. We
believe the more borrowers know about personal finance and
borrowing wisely, the better prepared and more likely they are
to successfully meet their financial obligations.
We strongly emphasize the need for students to exhaust all
eligibility for free money and grants and scholarships before
turning to Federal loans, and advise against turning to more
expensive private loans unless absolutely necessary, and then
only to cover essential educational costs.
Guarantors primary focus is default prevention. We begin
this effort through financial literacy programs that begin
early on and include intensive counseling on the options
available to avoid default if the borrower falls behind on
their loan payments. Thanks in part to these comprehensive
efforts, the most recent national student loan default rate is
4.6 percent, one of the lowest rates in the history of the
program.
Turning to the topic of this hearing, we first of all very
much appreciate the remarks of members of the committee to the
Secretary and Larry Warder with respect to the need for a
school-based certification program, the need to ensure that we
can use electronic processes on these loans, that we are able
to sell these loans and that it would be very important for us
to be able to sit down with the Department prior to their
issuing guidance with respect to implementation of an LLR
program.
We first and foremost urge the administration, with support
from Congress, to examine and pursue all available alternatives
to address the liquidity issues in the credit markets as the
preferred means of addressing the challenges many educational
lenders are currently facing.
At the same time, guarantors are required under the Higher
Education Act to arrange for or serve as a Lender of Last
Resort. The LLR program is just that, a safety net to assure
uninterrupted access to needed loan funds. The act has provided
this authority for decades, but LLR loans have been used in
only limited circumstances. Using nonFederal monies, these
narrowly focused programs were not intended to address broad-
scale disruption in the lending market. They have largely
relied on the capacity of lenders to make loans which carry 100
percent insurance in order to encourage lenders to participate.
In the event of a more serious or widespread loan access
problem, the Higher Education Act authorizes the Secretary of
Education to advance funds to guarantors to make LLR loans. As
we have discussed earlier, the Department last considered using
this authority in 1998. The Department at that time asked three
guarantors, including USA Funds, to be prepared to administer
LLR programs using Federal advances, based on an agreement
developed by the guarantors and the Department. It is my
understanding that these same arrangements would have been
offered to the other guarantors desiring to participate and
willing to abide by the same terms and conditions.
Of course these agreements were never implemented due to
congressional action to modify the interest rate formula and
ensure continued FFEL participation by lenders well before any
problems would have developed. Those agreements provided for
the Department to make advances, for guarantors to make LLR
loans, a determination by the Secretary as to where each
guaranty agency could issue such loans, and a school-based
rather than a borrower-based process so that borrowers would
not individually have to prove that they had been turned down
by two lenders.
Given the current situation with the credit markets it is
essential that all parties be prepared to step in quickly and
effectively so that every eligible student has access to
Federal student loan funds. For this reason USA Funds urges the
Department to sit down promptly with guarantors and develop
specific plans that could be quickly implemented should it
become necessary to activate an LLR program using Federal
advances.
I offer a few suggestions regarding how the Department
might proceed. First, again as we have discussed, it should be
a school-based rather than a borrower-based process. Clearly
the Department in 1998 felt that it had the legal authority to
implement a school-based rather than a borrower-based program.
And I don't see why that should be any different today than it
was then. The Department, upon the request of the school,
should determine whether students attending that school are
able to secure loans. The school should check with its existing
lenders before making such a request. A school-based
certification would both simplify and expedite it. From the
borrower perspective it would be the same as it is today,
consistent with the school's application process, with no
additional hoops.
Mr. Chairman, the bottom line is we hope the phone won't
ring at 3:00 a.m. but if it does, we will answer the call.
Thank you very much.
[The statement of Ms. Muilenburg follows:]
Prepared Statement of Terry L. Muilenburg, Senior Vice President,
Government and Industry Relations, United Student Aid Funds, Inc.
Chairman Miller, Ranking Member McKeon, Members of the Committee, I
am pleased to have the opportunity to testify this morning. All of us
here today share a strong commitment to ensuring that every eligible
student seeking federal student loans will have an uninterrupted source
of loan capital to pursue postsecondary education.
I am here today on behalf of United Student Aid Funds, a 48-year
old nonprofit organization that works to enhance postsecondary-
education preparedness, access and success. Last year, USA Funds
guaranteed $25.8 billion in Stafford, PLUS and Consolidation loans, or
about one-fourth of all Federal Family Education Loans issued in fiscal
year 2007.
USA Funds and the other 34 guarantors, all of whom are either state
agencies or nonprofit organizations, perform a critical role in the
delivery of student financial aid. Together, we administer every
student loan made under the Federal Family Education Loan Program, with
an outstanding loan portfolio of over $400 billion. Through our
efforts, we protect the Federal Government's investment in our students
through delinquency prevention, default aversion and debt management
programs. We also work with students, families, colleges, universities,
career schools, secondary schools and higher education finance
colleagues to provide information on educational opportunities and
financial literacy programs that help students realize their higher
education dreams.
As you will note in this testimony, guarantors are involved with
students over the long term: Our work with students begins as early as
elementary school, through early awareness and outreach programs, and
does not end until they have repaid their loans. Many guarantors,
including USA Funds, provide early awareness, financial literacy and
debt management materials in Spanish, as well as English, to ensure
that Hispanic students and families, the fastest growing demographic
segment of the population, are able to fully benefit from these
services.
Guarantors are also committed to accountability. In addition to
serving students, families and schools, we are resolute in fulfilling
our responsibilities to the Congress, the Department of Education and
the American taxpayer.
Promoting College Access
Consistent with our public service mission, guarantors provide an
extensive range of services and programs to increase awareness of the
importance of higher education, the opportunities available and the
financial support offered. The College Access Initiative, established
by the Deficit Reduction Act of 2005, formalized a fundamental role for
student loan guarantors in promoting access to postsecondary education.
We appreciate your recognition of this work by codifying our
responsibility to do so.
Through our college access efforts, guarantors are filling a local
need that often cannot be met by the secondary school counselor.
According to a survey by the National Association for College Admission
Counseling, the national student-to-counselor ratio for public high
schools is 315-to-1. Thus, despite diligent efforts on the part of
school personnel, too many students still struggle to understand their
options for postsecondary education and how to obtain financial aid.
Throughout the country, guarantors step in to help prevent students
from falling through the cracks. For example, last year guarantors:
Distributed millions of college awareness, financial aid
and financial literacy brochures, guides and toolkits to schools,
students and families. USA Funds alone distributed over 4 million
publications to help families plan and pay for college. These materials
provide in-depth information on: saving and paying for college,
planning for a career, money management, applying for financial aid,
and available scholarships and grants.
Organized and participated in more than 8,400 financial
aid workshops and events that reached more than 900,000 students and
families and more than 7,800 school guidance counselors. These
workshops provide hands-on training for completing the Free Application
for Federal Student Aid, and understanding the types of financial aid
available, as well as the college application process.
Improving Financial Literacy and Preserving Low Default Rates
Guarantors focus significant efforts on improving the financial
literacy of students and families. For example, USA Funds' financial
literacy program, Life Skills, is in use at over 500 postsecondary
institutions nationwide. We believe that the more borrowers know about
personal finance, money management, and borrowing wisely, the better
prepared and more likely they are to meet their financial obligations.
To accomplish that goal, guarantors provide detailed financial literacy
materials, training sessions and interactive tools to assist all
students and schools in understanding prudent borrowing and repayment
and successful money management. Guarantors, including USA Funds,
emphasize the need for students to exhaust all eligibility for ``free''
money in grants and scholarships before turning to federal loans, and
advise against turning to more expensive private loans unless
absolutely necessary, and then only to cover essential educational
costs. Below are examples of financial literacy activities:
Developing Web sites and distributing materials designed
for students and families to understand how to handle their finances as
they prepare for college and beyond
Working with local education centers to implement early
financial literacy programs with area high schools
Developing financial-literacy materials for graduate and
professional students and adult learners to teach students about time-
and money-management practices that will permit them to graduate on
time, with minimal education debt, and prepared to repay the student
loans that financed their education.
In addition to improving financial literacy, intensive efforts are
involved in counseling borrowers on their repayment obligations and
options to prevent defaults. These efforts include:
Creating comprehensive, state-of-the-art default aversion
programs, including tools schools can use to contact their former
students;
Counseling the delinquent borrower on the consequences of
default and the options available to avoid default; and
Assisting the borrower in obtaining the most reasonable
repayment terms possible, a deferment, or a forbearance.
In USA Funds' case, we successfully resolve more than nine out of
ten past-due accounts, and as a result, last year we prevented $16.7
billion in potential loan defaults.
Thanks in part to these comprehensive efforts, the national student
loan default rate is 4.6 percent, one of the lowest rates in the
history of the program, with USA Funds below the national average at
4.0 percent. I would like to thank the Committee for specifically
recognizing these financial literacy, delinquency and default
prevention activities as essential roles for guarantors in the College
Opportunity and Affordability Act (H.R. 4137) and encourage you to
include these provisions in the final conference agreement on the
Higher Education Act reauthorization bill.
Lender of Last Resort Programs
Turning to the topic of today's hearing, guarantors are statutorily
required under the Higher Education Act to serve as, or arrange for, a
backstop Lender of Last Resort (LLR) to address situations where
eligible students and parents are unable to obtain Federal Family
Education Loans. The statute requires guarantors to provide, or arrange
with an eligible lender to provide, LLR loans in each state where it
serves as the designated guarantor. Guarantors are required to have
policies and operating procedures in place to address LLR situations.
USA Funds has such procedures and, to my knowledge, so do all other
guarantors.
Lenders of last resort programs are just that: a safety net to
assure uninterrupted access to needed loan funds. The Act has provided
this authority for decades, but lender of last resort loans have been
made in only limited situations. Using nonfederal monies, these
narrowly-focused programs were not intended to address broad scale
disruption in the lending market. They have largely relied on the
capacity of lenders to step up and make loans, which carry 100 percent
insurance to encourage lenders to participate.
In the event of a more serious or widespread loan access problem,
the Higher Education Act authorizes the Secretary of Education to
advance funds to guarantors to make LLR loans. The availability of
federal capital assures that loan funds will be available. The
Department last considered using this authority in 1998 when, due to an
impending change in the interest rate formula, there was concern that
lenders might not make loans. The Department then asked three
guarantors, USA Funds, Great Lakes Higher Education Corporation, and
the Pennsylvania Higher Education Assistance Agency, to be prepared to
administer lender of last resort programs using federal funds, based on
an agreement developed by the guarantors and the Department. It is my
understanding that the same arrangements would have been offered to
other guarantors desiring to participate and willing to abide by the
terms and conditions included in these agreements.
These agreements, which were never implemented due to Congressional
action to modify the interest rate formula and ensure continued FFELP
participation by lenders--well before a crisis could have occurred--
provided for:
Authority for the Department to make advances to
guarantors for the purpose of making LLR loans;
A determination by the Secretary as to where each
guarantor could issue LLR loans;
A school-based, rather than a borrower-based LLR process
so that borrowers would not individually have to prove that they were
turned down by two lenders;
Insurance on LLR loans at 100 percent;
Fees to guarantors making LLR loans with federal advances,
intended to cover the costs of issuing and maintaining the loans, in
lieu of the special allowance payments normally paid to lenders;
Guarantor repayment of advances upon request of the
Department, with the Department able to require assignment of LLR loans
to the Secretary, and upon assignment, the portion of any advances
represented by the loans would be considered repaid; and
Eligibility for interest benefits and special allowance
payments for a purchasing lender in the event an LLR loan was sold.
The Lender of Last Resort provisions in the HEA are truly a last
resort to ensure student access to loans for higher education. Given
the current situation with the credit markets, it is essential that all
parties be prepared to step in to address a situation where students
are unable to obtain federal student loans. It is critical that all
stakeholders are prepared to act quickly and effectively, so that every
student at every Title IV eligible institution has access to Federal
student loan funds. For this reason, USA Funds strongly encourages the
Department to promptly work with guarantors to develop specific plans
that could be quickly implemented should it become necessary to
activate an LLR program.
I offer a few suggestions regarding how the Department might
proceed as it considers the need for lenders of last resort.
First, USA Funds and our guarantor colleagues believe
eligibility for lender of last resort loans should be school-based,
rather than borrower-based. That is, the Department, upon request from
a school, should determine whether students attending the school are
able to secure loans. The school should check with its existing lenders
before making such a request. Once the Department is satisfied as to
the need for last resort lending, all students at the school should be
eligible for the program. Students should not have to qualify
individually. A school-based determination of eligibility would both
simplify and expedite the process. From a borrower perspective, the
application process would be the same as it normally would be,
consistent with the school's loan application process flow. When the
loan reaches USA Funds for guarantee, the loan would be ``flagged'' in
our guarantee and servicing system as an LLR loan and tracked
throughout its lifecycle as such.
Second, I would also recommend that the Department work
with guarantors to ensure that the operational processes involved in
funding and making LLR loans reflect an electronic loan processing
environment.
Third, as in the 1998 agreements, guarantors should be
permitted to sell LLR loans made with federal advances, with the
proceeds used to repay such advances.
At the same time, we urge the Administration, with support from
Congress, to examine all available alternatives to address the
liquidity issues in the credit markets as a preferred means of
addressing the challenges many education lenders are currently facing.
These are challenging times in the student loan marketplace, but
with foresight and prudent planning, we can ensure uninterrupted access
to student loans. We stand ready to work with the Department, Congress,
lenders and our school colleagues to ensure that every eligible student
and parent receives the federal student loans to which they are
entitled.
Thank you.
______
Chairman Miller. Ms. Johnson.
STATEMENT OF ROBERTA JOHNSON, DIRECTOR OF STUDENT FINANCIAL
AID, IOWA STATE UNIVERSITY
Ms. Johnson. Thank you, Mr. Chairman and members of the
committee. I am from Iowa State University located in Ames,
Iowa, and proudly celebrating our 150th anniversary this year.
Iowa State University is a land grant institution with an
enrollment of 26,160 students. Prior to assuming the role of
Director of Student Financial Aid, I served for 18 years in the
Assistant Director and Associate Director positions at Iowa
State where I was responsible for student loan operations. I
have experience in the administration of loans through both the
Federal Family Education Loan program and the Federal Direct
Loan program.
Iowa State University did enter the Federal Direct Loan
program as a year-one school in 1994. Iowa State University's
loan volume in the Federal Direct, Stafford, and PLUS loan for
2006-2007 was $97.6 million. It encompassed over 20,000
separate awards for 14,645 students. Yet we were able to
accomplish this with only two full-time staff members. One of
those staff members also administers the Federal Pell Grant
program, Academic Competitiveness Grant, National SMART Grant,
and will assume duties for the TEACH Grant program in July when
that program becomes operational.
There were a number of reasons why we moved to Direct
lending in 1994 and why we remain there today. Most notably, we
are able to provide better customer services to our students
and their parents, minimize the amount of staff time spent
dealing tracking down loan funds or changes, and maximize the
predictability of receiving funds both for our students and our
institution.
Our students and their parents frequently comment on how
easy it is to understand the process; that they appreciate
always knowing who holds their loan; and that Iowa State
University provides prompt, courteous service when they have
questions about any financial aid program. Before direct
lending at my institution, that was not the case.
In my further testimony that I have provided, which I am
not going to comment on directly, I have included some slides,
including one which is a GAO slide which quite accurately
depicts what Iowa State University experienced as a participant
in the FFEL program dealing with multiple student loan players
and the contrasting graphic that shows how the process works
today in the Direct Loan program.
The Direct Loan program has been described as Pell with a
prom note. In fact any school, FFEL or DL, that is currently
administering the Federal Pell Grant, ACG or National SMART
Grant programs is already interfacing with the Department of
Education's system for disbursing direct loans and other
student aid. This system is called the common origination and
disbursement system.
To participate in the Direct Loan program, as has been
mentioned earlier, requires only that a school sign up to
participate with the Department of Education and that they then
just add loan information to the files that they are already
sending to the Department via this common origination and
disbursement system.
In the midst of the current credit crunch and with daily
media reports about student loan instability, I think it is
very important that we help students and their families
differentiate between Federal and private loans and to reassure
them that Stafford loans, PLUS loans, and Grad PLUS loans are
available.
While we have heard that there have been reports of certain
FFEL lenders leaving the program, temporarily suspending
operations, or redlining certain schools due to graduation or
default rates, this is not the case in the Federal Direct Loan
program. The Direct Loans are funded as a student entitlement
from funds borrowed wholesale from the private sector through
the sale of Treasury securities, and there is never a question
of capital availability in the Direct Loan program. This is
different than FFEL in that in that program the lenders are
entitled to subsidy and default payments if they choose to make
loans to students.
The Direct Loan program also is administered by private
sector contractors through competitively led contracts by the
Department of Education. These contractors have years of
experience administering Direct Loans, and indeed many of them
are also services for the FFEL lenders. Like the FFEL program
the Department's responsibilities are to oversee and govern the
administration of both programs.
In 1994 the Direct Loan program was entirely new. In 3
years it had one-third of the market and the program worked
smoothly. Today it has 20 percent of the market, thanks to
marketing and taxpayer-provided discounts that were offered to
schools to induce them into the FFEL program and the
prohibition against marketing of Direct Loans by the
Department.
The Department of Education already does have the
infrastructure to handle an influx of schools into the Direct
Loan program, as we heard Secretary Spellings indicate earlier.
Mr. Chairman, I thank you for the opportunity to appear
before you today and for your support and the support of others
on the committee for direct lending.
I would be happy to respond to any questions that you might
have later.
Chairman Miller. Thank you very much.
[The statement of Ms. Johnson follows:]
Prepared Statement of Roberta Johnson, Director of Financial Aid, Iowa
State University
Mr. Chairman and Members of the Committee: My name is Roberta
Johnson and I am the Director of Student Financial Aid at Iowa State
University in Ames, Iowa. Iowa State University is a land-grant
institution with an enrollment of 26,160. Prior to assuming the role of
Director of Student Financial Aid at Iowa State University, I served
for eighteen years in the assistant director and associate director
positions at Iowa State where I was responsible for student loan
operations. I have experience in the administration of loans through
both the Federal Family Education Loan Program and the Federal Direct
Loan Program. Iowa State University entered the Federal Direct Loan
Program as a Year One school in 1994.
Iowa State University's loan Federal Direct Stafford and PLUS
volume in 2006-07 was $97.6 million dollars and encompassed over 20,000
separate awards for 14,645 students. Yet we were able to accomplish
this with only 2 full-time staff members. One of those staff members
also administers the Federal Pell Grant program, Academic
Competitiveness Grant, National SMART Grant, and will assume duties for
the TEACH Grant program in July.
There were a number of reasons why we moved to Direct Lending in
1994 and why we remain there today--most notably, we are able to
provide better customer service to our students and their parents;
minimize the amount of staff time spent dealing with tracking down loan
funds or changes; and maximize the predictability of receiving funds
both for our students and our institution. Our students and their
parents frequently comment on how easy it is to understand the process,
that they appreciate always knowing who holds their loan, and that Iowa
State University provides prompt courteous service when they have
questions about any financial aid program. Before Direct Lending, that
was not the case.
I have included in the attached slides a GAO slide that quite
accurately depicts what Iowa State University experienced as a
participant in the FFEL program, dealing with multiple student loan
players and the contrasting graphic showing how the process works
today. The Direct Loan Program has been described as Pell with a Prom
Note. In fact, any school that is currently administering the Federal
Pell Grant, ACG, or National SMART Grant programs is already
interfacing the with Department of Education's system for disbursing
Direct Loans and other student aid, the Common Origination and
Disbursement (COD) system. To participate in the Direct Loan program
would require only that they sign up to participate with the Department
of Education and that they attach loan information to the files they
are already sending to the Department via COD.
In the midst of the current credit crunch and with daily media
reports about student loan instability, it is important to help
students and their families differentiate between federal and private
loans and to reassure them that Stafford Loans, PLUS loans and Grad
PLUS loans are available. While there have been reports of certain FFEL
lenders leaving the program, temporarily suspending operations, or
redlining certain schools due to graduation or default rates, this is
not the case in the Federal Direct Loan Program. Direct Loans are
funded as a student entitlement from funds borrowed wholesale from the
private sector through the sale of Treasury Securities. There is never
a question of capital availability in the Direct Loan Program. This
differs from FFEL. In that program lenders are entitled to subsidy and
default payments if they choose to make loans to students.
The Direct Loan Program is administered by private sector
contractors through competitively let contracts by the Department of
Education. These contractors have years of experience administering
Direct Loans, and indeed many of them also are servicers for FFLEP
lenders. Like the FFEL program, the Department's responsibilities are
to oversee and govern the administration of both programs.
In 1994, the Direct Loan program was entirely new. In three years
it had one third of the market and the program worked smoothly. Today
it has 20% of the market thanks to the marketing and taxpayer provided
discounts FFEL participants offered and the prohibition against
marketing of Direct Loans by the Department. The Department of
Education already has the infrastructure to handle an influx of schools
into the Direct Loan program.
Mr. Chairman, thank you for the opportunity to appear before you
today and for your support, and the support of others on the committee,
for Direct Lending. I would be happy to respond to any questions you or
the Members of the Committee might have.
______
Chairman Miller. Ms. Bauder.
STATEMENT OF SARAH BAUDER, DIRECTOR OF STUDENT FINANCIAL AID,
UNIVERSITY OF MARYLAND
Ms. Bauder. Good morning and thank you for having me here.
Is this on?
Chairman Miller. You are on.
Ms. Bauder. Good. I would like to take a quick moment first
and say thank you on behalf of all the 6,000 financial aid
administrators out there for increasing the Pell Grant. That
$400 difference really does pay for books for a high need
student in Pell Grants. We really have been fighting to get
that increase, so thank you to have the opportunity to do that.
I am the Director of Student Financial Aid at the
University of Maryland, just a hop, skip, and jump up the road
here. We have about 35,000 students on campus. And let me break
that down for you. We have about 75 percent of those students
file the FAFSA form. Of those students who file the FAFSA form,
about 90 percent accept their student loan.
We have about $120 million loan volume. And let me break
that down further, because loans are a key component to how we
package financial aid. So about $85 million is the Stafford
loan, and those are broken out pretty equally between
subsidized and unsubsidized loans. We have about $30 million in
the Federal PLUS loans for dependent students, and then about
$20 million for the Grad PLUS; and then the other $20 million
is private loans, bridging that gap between the cost of
education, what we have awarded and what the student can afford
to pay.
So, student loans, I give you those statistics to show that
student loans truly are a large component of what we do in
financial aid.
The timing of this hearing actually couldn't be better. For
the last 3 weeks, and nationally this is happening, we have
been simulating our packaging, trying to figure out how we are
going to spend our money for the upcoming freshman class. And
so what we do is we create algorithms and we put all of our
pots of money together and we say, okay, here is what we are
going to do.
My job as director is to retain and graduate our students.
Admissions brings in the students. And we have a little bit of
recruitment responsibility in terms of how we package our aid.
But the bulk of the responsibility is to make sure we retain
and graduate. And so that is a large responsibility on any
director.
And so what we are doing, and so as we are simulating here,
here are some events. And I want to give you these events
because each one is a brick in and of its own. And we are
building a brick wall against inclusion or accessing to
education. In and of themselves they are probably
inconsequential and we can work around them. But as you build
them together, it creates a wall.
The first one we noticed is that consolidation loans are
down. Very simplistically, from a director's perspective, is
that is a result of having a fixed loan interest rate, not as
attractive to students. And then also it is not as attractive
to lenders to actually provide that loan because of the cuts in
subsidies. That, in and of itself, again is not problematic
except that since students aren't consolidating our Perkins
loan revolving fund, the loans aren't coming back in to repay
that. And so where historically for the last 5 or 6 years we
have had approximately between $2.5 million and $3 million to
reimburse in new Perkins loan funding, we have less than
$200,000. So pretty much it is off the books for Perkins for
our upcoming class. That is one brick.
Another one we have is the Work Study and SEOG funds were
cut nationally $20 million. That is kind of nickel and dime.
And that results in about a $200,000 reduction in those funds
for us. Again, very minimal, but when you add it, it becomes
problematic.
The third one then is--you know, I read the Wall Street
Journal every day and headline news are the subprime mortgage
crunch that we are experiencing. And so you couple that then
with the cuts in subsidies to lenders and they are scrambling.
They are trying to figure out how it is they are going to pay
their portfolio.
I am blessed. I am at an institution where lenders want to
lend to my students. And I really, truly appreciate the FFEL
process and how it has made our institution attractive in terms
of its default rate. And I say that because not all
institutions have that benefit. We work well with FFEL.
The concerns that I have--and there are two indices in
behavior that we are tracking right now that go along with
these bricks. And the two of them are the number of appeals
that we have from parents and students. And so if we put just
for a second our hat on as a parent and say, okay, I am now
caught in this subprime mortgage crisis, I am not sure how I am
going to pay my mortgage, or I may be facing foreclosure. So
here I have that, and yet Johnny and Susie want to go to
college. I know my credit score is not quite what it should be.
Now, the lenders don't want to lend high-risk loans or even
medium-risk loans. And so if my credit is not pristine in high-
credit worthiness I am not going get that PLUS loan, or I am
not going to get that private loan. So mom and dad now are
appealing to our institution.
So typically what would be what I call ``noise'' in any one
behavior is now we are paying attention to it. So our appeal
rate is up about 12 percent while our application rate is up 20
percent. If none of this were happening I could justify it. I
am paying attention to it. And I don't have enough longitudinal
data to sit here and tell you this is a problem in and of that
one data element.
The second data element that we are watching is the
percentage of denials in loans. And historically we just put
loans together for the creditworthy loans and said here is the
denial rate. What we are doing now is we are breaking it out,
looking at PLUS loans, private loans and Grad PLUS loans, and
what is the percentage. We are starting to see that tilt up.
And so that is problematic and it is concerning, because I have
to figure out, come August, when those bills are due, and the
students are appealing to us, saying I have this delta or I
have this gap that needs to be fed--oh, I am overtime, I am
sorry, I will hurry up here--how is it that I am going to pay
this? Do I get a female handicap because I can talk?
Chairman Miller. Go ahead.
Ms. Bauder. Okay. Thank you.
Let me quickly sum up that we are in the FFEL program. I
truly appreciate the FFEL program. I don't see it as just a
program of getting the check to the student, but more a
holistic program. From the moment the master promissory note is
signed to the moment the last payment is made, our FFEL lenders
and guarantors are watching our students. And so they exit our
campus, those lenders are making sure that loan gets repaid.
And I have a chart that shows our default rate and how we are
coordinating that. Thank you. I am sorry for taking more time.
[The statement of Ms. Bauder follows:]
Prepared Statement of Sarah Bauder, Director of Student Financial Aid,
University of Maryland
Mr. Chairman and members of the Committee, thank you for providing
me the opportunity to meet with you today about such an important
topic. First, I would like to applaud the leadership for increasing the
Federal Pell grant program to an historic high. As you know, Federal
Pell Grants provide access and affordability to our highest need
students. These funds are critical to the retention and graduation
goals of our students. Thank you so very much.
As a quick background, I began my career in financial aid in 1990
as a student employee, advancing to Associate Director of Loan
Processing at St. Mary's College of Maryland. I then accepted a
position at the University of Maryland, College Park campus as an
Assistant Director for Loan Processing, was promoted to Associate
Director for Operations in 1997 and to Director of Student Financial
Aid in January 2005.
Three years ago I had the opportunity to speak with you about the
federal loan program and am excited to be here today to provide an
historic perspective of what has happened over that time span. It is
evident that we are in the calm before the financial storm and I am so
encouraged that we are here to plan for what may be hard times ahead.
Current economic conditions threaten the overall health of the federal
student loan programs. Access, affordability and choice are in
jeopardy. We need to assure students and parents that loans are still a
viable source for payment of educational expenses. We need to maintain
the public confidence in the financial aid programs so that access to
education is attainable for all students.
The University of Maryland--a mere eight miles away from the
Capitol--is home to over 24,000 undergraduate students and 9000
graduate students. Approximately 75% of all students file the Free
Application for Federal Student Aid (FAFSA). Of those students, 90%
receive a federal loan, for a total annual loan volume of about $90
million. In addition, we have 3400 Federal Pell Grant recipients. We
have a very diverse population with almost 45% being non-white. As the
Director of Financial Aid, my job is to provide aid packages which
assist in the retention and graduation of our student population, with
an effort to reduce debt burden. Given the broad range of students who
attend our campus, a 'one-size-fits-all' aid package does not advance
those goals. Four years ago, we created the Maryland Pathways program
as a means to provide a debt free education to our highest need,
Maryland resident students. We currently have over 400 students who
benefit from this unique program. In 2005, we added to this program by
implementing a Pell Pathways program. This is the only program of its
kind nationwide. In this program, we provide additional grant funding
to students who come from socio-economic disadvantaged backgrounds who
did not receive the Pell Grant because the student earned too much
money. Last year, we implemented the Senior Debt Cap, which provides a
University of Maryland grant instead of loan for those students who
borrowed more than $15,900 in need-based federal loans. We were able to
implement these programs without new monies by coordinating funding
strategies with the State of Maryland and shifting our packaging
algorithms for the awarding of federal and institutional funding. As
you can see by the chart below, our loan indebtedness has decreased due
to these programs.
LOAN GUARANTEES BY PROGRAM
----------------------------------------------------------------------------------------------------------------
Loan Program Total 2005-06 Total 2006-07 Difference
----------------------------------------------------------------------------------------------------------------
Stafford Subsidized............................................. $45,287,075 $43,641,028 ($1,646,047)
Stafford Subsidized............................................. $34,670,529 $33,230,596 ($1,439,933)
PLUS............................................................ $28,887,088 $26,322,797 ($2,564,291)
----------------------------------------------------------------------------------------------------------------
So how does this impact student loans? Over the last year we've
witnessed an array of events that has jeopardized the future of student
loans and subsequently our ability to meet the needs of our students.
Independently, the events probably would have only caused a ripple;
however, when coupled together, the sting is felt in all aspects of
financial aid. The financial markets are challenged by the sub-prime
mortgage crisis, which has caused investors to back away from asset
based securities, which are a source of capital for student lenders.
Couple this with the cuts in subsidies to lenders by Congress and we
have a formula that equates to lenders scrambling to find funding for
their student loan portfolios. Consequently, the ability to lend money
to students and parents is negatively impacted.
As we enter our peak packaging season, I am concerned about our
ability to meet the needs of our students for a variety of reasons.
First, consolidation loans which have historically been a financially
attractive solution for students have almost disappeared. This in turn
has significantly reduced the amount of Perkin's loan repayment. Last
year we disbursed $2.3 million in Perkins loan funding. This year
(2008-2009), we have less than $200,000 to award to our students.
Second, the Federal Work Study Program and the SEOG programs were cut
by 20 million dollars nationally. That translates to a $120,000
reduction in SEOG and a $50,000 reduction in Federal Work Study for the
University of Maryland. Overall, we have almost 2.5 million dollars
less in need based financial assistance to award to our neediest
students in the Campus Based Programs. Third, due to the sub-prime
mortgage crisis, home equity is less of a resource for families to
utilize to pay for the cost of education, as are retirement funds. I
have concerns as to the availability of funding options for our
families. Couple these events with lenders having to tighten their
lending standards, and there are fewer resources available to families
to pay for college. Our parents borrow, on average, about $30 million
in Federal PLUS loans, while graduate students borrow about $20 million
in Graduate PLUS loans. With the overall economic condition, our
families and students who typically borrow credit worthy loans will
experience increased denial rates.
Since we just completed the packaging of our incoming freshman
class, I think it may be helpful to see the impact of these events on
an average student. For example, if we superimpose the reduction in aid
on a packaging scenario for a typical Maryland resident freshman
student, with a zero dollar ($0) expected family contribution (EFC)
attending the University of Maryland in academic year 2008-2009, we
find that students/families may need to borrow an additional $2770 in
loans (see chart below) as compared to the 2007-2008 academic year.
------------------------------------------------------------------------
2007-2008 2008-2009
------------------------------------------------------------------------
Direct Cost of Attendance............... $17,848 $18,139
(tuition, fees, room, board, and
books)
Types of Aid:
Pell Grant.......................... $4,310 $4,731
SEOG................................ $1,000 $500
Federal Work-Study.................. $2,400 $1,800
Perkins Loan Funds.................. $2,000 $0
Stafford Loan....................... $3,500 $3,500
UM Grant Funding.................... $3,800 $3,800
-------------------------------
TOTAL funding................... $17,010 $14,031
===============================
Potential PLUS/Private loan............. $838 $3,608
------------------------------------------------------------------------
With reduced financing options, families inevitably will need to
borrow more funds to pay for college. Further there are fewer lenders
providing student loans. One concern circulating among my colleagues is
the disruption in the student loan industry as lenders withdraw from
the FFEL program. This creates an administrative burden as lender lists
need to be revised and students need to be informed to choose another
lender. In addition, lender policies are changing. For schools serving
high risk students, this may impact their ability to borrow a student
loan. As of today, lenders representing 10% of Stafford and PLUS loan
origination volume and 30% of consolidation loan volume have either
suspended or discontinued their participation in the student loan
programs. The University of Maryland never denies choice of lender to a
student, which is why we work with over 80 different lenders. As
lenders leave the FFEL program, we feel the administrative impact. I am
somewhat nervous about the dilemma we are facing in the student loan
industry and the availability of funds for our students and the
potential disruption this could cause our families.
We review our lender lists every year. As a historical perspective,
we've chosen lenders who have quality customer service, advanced
technology, excellent pricing, and who advance the mission of our
University. Due to the cuts in subsidies, the zero fee loans our
students benefited from are disappearing. However, FFEL lenders do
advance our mission. One of the missions of our campus is to provide
educational services in every aspect of campus, not just in the
classroom. The University of Maryland has thoughtfully chosen to
provide Stafford and PLUS Loans through the FFEL program because of the
value added services provided to our students. Our guarantee agencies
provide educational information to our students on default prevention,
debt management, identity theft, and financial planning, to name a few.
With continual and consistent communication, students understand the
impact of borrowing, and the consequences for non payment. This
knowledge gives our students life skills they will utilize long after
they receive their diploma. Because of our partnerships with FFEL
lenders and guarantors, our default rate has dropped consistently over
the last seven years. In 2000, our default rate was 2.6%; in 2006 it
was 1.2%. For University of Maryland students who borrow utilizing
American Student Assistance, the default rate is .6%.
The University of Maryland could not have provided those incredible
repayment percentages without the assistance and knowledge of the
lending experts. Since schools may face sanctions if their cohort
default rates exceed certain levels, a lender and guarantor's
effectiveness in working with borrowers to ensure that loans are repaid
is a viable consideration when an institution chooses a loan program.
Further, last year I decided we should conduct one-on-one counseling
for students who reached a specific threshold of indebtedness per grade
level. Our lenders very quickly were able to run reports for us to
assess the indebtedness of our students. By profiling our students and
providing them with individual counseling, we are able to further
advance the mission of the University in educating our students.
In summation, we need to take steps now to prevent the disruption
to the FFEL student loan program. We need to assure our students and
families that student loans have been, and will continue to be, a
resource for them. I thank you for having me speak with you today.
______
STATEMENT OF CHARLIE C. SANDERS, JR., PRESIDENT AND CEO, SOUTH
CAROLINA STUDENT LOAN CORPORATION
Mr. Sanders. Mr. Chairman and Ranking Member McKeon and
committee Members, thank you for inviting me to come before you
and for holding a hearing to discuss this very important issue.
Prior to my role at South Carolina Student Loan, I was a
municipal bond trader in the securities industry as well as
director of investments and debt for our State Treasurer.
South Carolina Student Loan was created by our general
assembly in 1973 as a nonprofit private entity. And since our
inception we have provided nearly $7 billion in higher
education loans to over 423,000 families throughout our State.
Our nonprofit mission is to provide programs of financial
assistance to enable students to pursue and achieve their
educational goals. Without this financial assistance, families
in South Carolina would not have been able to pursue their
education dreams.
For the current academic year alone, we have provided over
$600 million in loans, of which $63 million are private loans.
I can tell you the current market situation has had an impact
on our ability and that of my colleagues in other States in
securing the necessary financing to provide student loans. The
problems in this market are not due to credit risk but, rather,
liquidity concerns. To repair the marketplace it is necessary
to inject liquidity and restore confidence, and our Federal
Government has this ability.
In South Carolina we have almost $3 billion in outstanding
student loan bonds. And of that, approximately 60 percent are
in auction rate bonds. In February the auction rate market
collapsed. And in South Carolina alone, we have had 28 failed
auctions just over the past several weeks. And we are now
having to pay rates of more than 7 percent as compared to 3 to
4 percent just a short time ago. Some of my colleagues in this
market are paying rates as high as 18 percent at a time when
the statutory yields we earn on FFEL loans are roughly 4-\1/2\
to 5 percent. Therefore, most lenders are experiencing a
negative return on their funds.
Because of this situation, we in South Carolina have been
attempting to refinance our auction rate bonds into some other
form of financing vehicle since October, and it usually takes
about 2 months to do a financing. But we have experienced
difficulties in securing this financing due to the apprehensive
position of rating agencies, liquidity providers and investors.
The uncertainty of financing creates a situation where my
organization and many of my peers are unable to commit to
funding the same volume of loans we have in the past, if any
loans at all. It has been reported that several lenders have
suspended new loans, and I expect to see more announcements
unless the financing situation improves substantially. This
will certainly create access issues. The current market
situation directly affects what we can do to serve students and
families in our States. The FFEL public-private partnership has
served students and families well for over 40 years and
provided critical services.
If my organization ceases to be a partner in the FFEL
program, services provided by our 230 dedicated and service-
minded employees would be unavailable to our citizens. These
programs include financial literacy, college and career
planning, debt management, as well as teacher and military
forgiveness programs.
We are also partnering with our State Department of
Education and several other State agencies in sponsoring an
education and workforce development Web site serving over
600,000 students and a drop-out prevention program at 16 of our
secondary schools.
Much has been discussed about a Lender of Last Resort
program being the solution. It is not in my view the answer to
this issue, as it is a capital markets problem and the Lender
of Last Resort does not solve these issues. Instead I believe
the most seamless solution for students, families and schools
is limited and timely Federal financing to help restore
confidence in this market.
The Federal Reserve took action just this week for the
purpose of injecting both liquidity and confidence into the
mortgage market. It is also appropriate for the Federal
Government to take necessary steps to restore stability in this
market. Therefore, I respectfully ask the Secretary of
Education to continue to monitor the situation and review
access issues using authority currently available.
At the same time it would be prudent for the Secretary of
Treasury to take action as requested by many Members of
Congress, including my Representative, Congressman Wilson, and
others on this committee, to serve as the backstop for auction
rate bonds and provide financings which would restore stability
and confidence in this market. If action is taken immediately
to address these issues, we may be able to avoid the possible
shortage of funds for this next academic year.
Thank you for this opportunity to address you and I will be
happy to answer any questions.
Chairman Miller. Thank you very much.
[The statement of Mr. Sanders follows:]
Prepared Statement of Chuck Sanders, President and CEO, South Carolina
Student Loan Corporation
Introduction: Mr. Chairman, Ranking Member McKeon, my name is Chuck
Sanders and I am the President and CEO of the South Carolina Student
Loan Corporation. Thank you for inviting me to come before you and for
holding a hearing to discuss this very important issue--ensuring the
availability of Federal student loans for students and families both
near and long term.
Prior to my role at South Carolina Student Loan, I was a municipal
bond trader in the securities industry as well as Director of
Investments and Debt Management for the South Carolina State
Treasurer's Office. Thus, I have long term experience in both student
loans and municipal financing. I would like to tell you a bit about our
student loan program in South Carolina.
The South Carolina Student Loan Corporation was created by the
South Carolina General Assembly in 1973 as a private, non-profit entity
to administer the Federal Family Education Loan (FFEL) program in South
Carolina. Since our inception, we have provided nearly $7 billion in
higher education loans to over 423,000 families throughout the state of
South Carolina. Our non-profit mission remains unchanged--to provide
quality programs of financial assistance that enable eligible students
and parents to pursue and achieve their educational goals. Without such
financial assistance, families in South Carolina would not have been
able to pursue their postsecondary education dreams. For the current
academic year (2007-08), we have provided over $600 million in
educational loans.
As a not for profit student loan provider and issuer of student
loan bonds, I can tell you first hand the impact the current market
situation has had on our ability, and that of our peers in other
states, in securing the necessary financing to provide access to
student loans. While the immediate issue is that of a skittish credit
market and the need for liquidity and confidence to return to the
market, the implications go beyond direct financings. It is important
to note that the situation we find ourselves in is a collateral affect
of a much broader credit market disturbance instigated by activities in
the sub-prime mortgage market. It is not because student loans were
poorly underwritten or issued to ineligible or undeserving borrowers.
Furthermore, the credit quality of this asset remains high. The
problems in this market are not due to credit risk, but rather
liquidity concerns. To repair the marketplace, then, it is necessary to
inject liquidity and restore confidence. The Federal Government has the
ability to help stabilize this irrational marketplace.
As you know, we provide a myriad of programs and services for
students in a holistic approach to assisting students and families.
Much of this is also at risk if the current market situation does not
turn around. I will discuss that more directly later in my testimony.
Issues in the current market: In South Carolina, we have about $3
billion in outstanding student loan bonds and of that approximately 60%
percent are in auction rate bonds, with the remainder in longer term
variable rate securities. Currently, across the broader student loan
market, industry reports indicate that of the roughly $350 billion in
outstanding FFEL program loans, about $80 billion are financed via
outstanding auction rate securities. Most of this auction rate debt was
issued by non-profit lenders, because this mode of financing was our
best option to keep borrowing costs low. It worked well for 15 years in
providing us with a consistent and predictable source of low-cost
capital.
Late last year, it became clear that the problems in the sub-prime
mortgage market were having a negative ripple effect on the student
loan capital markets. Initially, this meant a significant increase in
financing costs, but the market remained intact. In the second week of
February, however, the auction rate market collapsed when broker-
dealers--who have their own balance sheet issues--were no longer able
to sustain the market by buying all the student loan securities that
investors wanted to liquidate. Consequently, a raft of auction failures
occurred, as sell orders vastly outpaced buy orders. This meant that
some buyers had to hold the asset and were unable to sell for cash.
This was a crushing blow, since the investor base for these securities
existed because the asset has always been viewed as highly liquid. Once
liquidity was no longer assured, many of these historic investors no
longer saw a reason to be in the market. That investor base has yet to
be replaced, and may never be replaced. Thus, the student loan auction
rate securities failure rate has in a relatively short time gone from
zero percent to nearly 100 percent.
In South Carolina, we have had 28 failed auctions over the past
several weeks and are now having to pay rates of more than 7 percent as
compared to 3 to 4 percent just a short time ago. Some of my colleagues
in this market are paying rates as high as 18 percent, at a time when
the statutory yields we earn on FFEL program loans are roughly 4.5 to 5
percent. Several news reports have described how individual nonprofit
lenders are losing millions of dollars on their loan portfolios each
month. The point here is that many lenders are seeing a negative return
on funds and they do not have other sources of capital to draw upon.
This means that they can only continue under current market conditions
for a circumscribed period of time. While this time period will vary
for each lender, the basic dynamic is the same.
Because of this situation, we at South Carolina have been
attempting to refinance our auction rate debt into another financing
vehicle since October. We are experiencing difficulties in securing
this financing, however, due to the apprehension of rating agencies,
liquidity providers and investors.
In the meantime, the uncertainty concerning whether these
refinancings can be accomplished--and at what price--creates a
situation where my organization, and many of my peers, are unable to
commit to funding the volume of loans we have in the past--or in some
cases, any loans at all. Recently, of course, it was reported that the
Pennsylvania Higher Education Assistance Agency and others have
suspended new FFEL program loan originations, and I expect to see more
such announcements in the coming months, unless the financing situation
improves substantially.
Impact on Students and Families: Without some relief to this
situation, I believe you will see additional loan providers
reevaluating their participation in both the Federal and non-federal
loan programs. This will undoubtedly create access issues for some in
both the FFEL program and non-federal lending. The South Carolina
Student Loan Corporation provides both FFEL and non-federal loans. For
many students, borrowing to finance their education is something they
must do and we want to provide low cost loans to assist those students
and families that need this assistance. We always encourage Federal and
State grants and scholarships first. For some students, however, the
non-federal loan is necessary to bridge the gap between federal loan
limits and their cost of attendance. Both FFEL and non-federal loans
are at risk due to this current market situation. While private lending
has received some criticism, it often makes the difference between the
dream and the reality of a higher education.
While disruption may not be widespread initially, the potential is
there for many more students to soon be without their provider of
choice. To this point, students and their families have benefited
greatly from being able to shop around and find the best deal possible
to them for financing their education. There are also genuine access
concerns. Many students may soon be without access to non-federal loans
that they need to fill the gap left by federal loan limits. And access
to even FFEL program loans will become a greater concern with each
passing month that the market remains in its current state.
The current market situation directly affects what we can do to
serve students and families in our states. The FFEL program has served
students and families well for over 40 years. The public-private
partnership has led to innovation and commitment by loan providers to
supply low cost loans and critical services that help students pursue
and complete a higher education. While we can do little or nothing
about college costs, we can ensure students have efficient and low cost
financing alternatives, and many other services to meet their needs. If
my organization ceased to be a partner in the FFEL program, not only
would a local mission-based organization vanish and 235 dedicated and
service-minded employees be out of a job, but critical services would
also be unavailable to our citizens. These include financial literacy
programs, college planning, career planning, outreach, debt management
programs, teacher and military loan forgiveness programs, and training
opportunities for higher education professionals, to name a few. Our
organization in South Carolina is both required and honored to serve
students at every school in our state. Our absence would likely produce
a disparate impact on different institutions within the state, with
students at some schools facing a greater restriction of choice than
their peers at other schools.
Much has been discussed about the Lender of Last Resort Program
being the solution. It is not, in my view, the answer to the issue
before us. This is a capital markets problem and the Lender of Last
Resort does not solve the market problem to ensure students continue to
have choice in financing their education. The situation in which we
find ourselves is not loan providers being unwilling to provide funds
to students, it is loan providers being unable to provide loan funds
due to the liquidity issues in the market place. While it is prudent
for the Department of Education to review current law and its
administrative processes, it is far more prudent for us all to work
together to do all we can to make sure such a drastic measure is not
needed. Students should be able to continue to choose the loan provider
of their choice, as choice is a fundamental tenet of the FFEL program.
We want to work with the Congress and with Treasury and other Federal
agencies to avoid a widespread disruption in both the federal and non-
federal student loan programs.
Ensure Choice: The title of this hearing is ensuring the
availability of Federal Student Loans. Along with availability, it is
important that schools and students continue to have choice in meeting
their higher education financing needs. These programs have become more
effective overall by allowing choice. Colleges and universities are in
the process now of packaging financial aid for the upcoming academic
year. We should not ask institutions that have selected the program
that best fits the needs of their students to completely change
midstream. It is both necessary and possible to do what is necessary to
find a common solution to the market issues before us. FFEL program
borrowers may have already chosen their loan provider and requiring a
move to the Direct Lending Program will be thwarting that choice.
Students, parents and institutions are better off with the ability to
work with the local, community-based or national organization they
desire. If the Direct Loan program is indeed their choice, it should be
for reasons other than having no other option at all. While Direct
Lending may be the choice of some, it is not for all and we should be
putting students first and shoring up their ability to finance their
education in a manner that best meets their needs. We want to continue
to work with our partners in the higher education financing community
to provide the means for students and their families to pursue their
education without concerns regarding student loan availability.
Conclusion and Recommendation: It is clear that this situation is
not a byproduct of poor credit quality or flawed underwriting. Issuers
are in this position due to no fault of their own, but rather as an
unintended consequence of a larger market issue. I believe strongly
that timely and limited federal intervention is warranted in this case
to restore confidence in this quality asset and the student loan
marketplace. The Federal Reserve took action just this week to inject
both liquidity and confidence into the mortgage market. It is similarly
appropriate and justified for the Federal Government to take the
necessary steps to restore stability in this market. Such measures
would have positive, immediate and far-reaching implications for
students, families and our country.
Therefore, I respectfully ask that the Secretary of Education
continue to monitor this situation, utilize her existing authorities,
and review access issues facing students across the country. At the
same time, it would be prudent for the Secretary of Treasury to take
action, as requested by many members of Congress, including
Representative Wilson and others on this committee, to serve as a
backstop for auction-rate bonds, making clear the Government's
commitment to students across the United States. Finally, I ask that
members of this committee work with their colleagues on other
committees of jurisdiction.
We need to restore not only confidence in the markets, but also the
confidence of students, institutions of higher education and student
lending partners. In the spirit of cooperation, we can work together
during this unexpected and extraordinary time to do what is necessary
and what is right. Action taken immediately to address these market
issues could prevent a potential shortfall of loan funds to students
for the upcoming academic year.
I thank you again for the opportunity to address the Committee and
appreciate the willingness of each of you to be here to take the time
to hear from me and my colleagues about this most important issue. I am
happy to address any questions you may have.
______
Chairman Miller. Thank you to all of you. You have all
raised I think very important issues and from an array of
perspectives. I think it is helpful to the committee.
Ms. Muilenburg, let me, if I might begin with you, thank
you for your testimony and certainly for your written testimony
as it is laid out. A number of us asked the Secretary about
what she has been doing with respect to the guaranty agencies.
Apparently there has not been a face-to-face meeting; is that
correct?
Ms. Muilenburg. That is correct.
Chairman Miller. Your contact with the Department has been
what? I don't mean you, I mean the agencies.
Ms. Muilenburg. The agencies individually have contacted
the Department to offer to come in and sit down. The President
of our trade association, the National Council of Higher
Education Loan Programs, has repeatedly offered to the
Department to bring in a group of guarantors. We would bring in
the chief financial officers, the operational folks, that would
be able to sit down and talk about how to implement a program.
The response thus far is they have appreciated the offer of
assistance, they are monitoring the situation, and they will be
in touch.
Chairman Miller. As I understand it, in 1998, what was done
is the agencies and the Department were brought together and
they worked out essentially a legal agreement for how they
would then proceed if necessary, and it turned out not to be
necessary. But no such agreement has been suggested here to
date?
Ms. Muilenburg. Not thus far, sir.
Chairman Miller. Is that agreement--or maybe your attorneys
want to answer for the record--but I mean, is that agreement
essential to proceeding?
Ms. Muilenburg. It is essential if we are going to have to
proceed using Federal advances. That was the--the key
difference between the way the Lender of Last Resort program
has worked to the extent it has been utilized in the past is it
has been on an individual basis where there are students at a
particular school in isolated circumstances who have not been
able to get loans. In each of those cases guarantors have been
able to find lenders to make those loans which would be
considered----
Chairman Miller. Those were very small. Mr. Wozniak and Mr.
Sanders suggest that this problem is not one of isolated
individual cases.
Ms. Muilenburg. That is right. I mean, in USA Funds' case,
we have guaranteed $1.8 million in Lender of Last Resort loans,
the last being in 1998. And in all of those cases we were able
to find lenders that would actually make those loans and we
stood behind them as the guarantor.
But if we are talking about a much more widespread access
problem, clearly Federal advances will be necessary, because
the lending partners to whom we turned in the past to make
these loans are obviously the ones that are potentially having
the problem accessing the capital markets.
Chairman Miller. Well, it is very disappointing to hear
that that outreach by the agencies is essentially--I don't know
if it has been rebuffed or ignored, but it hasn't happened. And
I think we heard here, from members on both sides of the aisle,
we are trying to have confidence that this system will be
operational, if necessary. So I appreciate your testimony. I
will come back to you.
Mr. Wozniak, Mr. Sanders outlined his living with--and I
have two sons who are University of South Carolina Gamecocks by
the way--he is living with what you described in the auction
market. He has also suggested that if the Fed thought this was
good for home mortgages, why wouldn't they consider it for
student loans? He describes that as--and I think you did also--
that this is a liquidity problem. People who thought they were
going to be able to go and sell these assets and become
recapitalized, liquid, to make additional student loans have
now found out that that market has been closed to them, as
apparently it was closed to municipal markets and utilities and
the Port of New York and New Jersey and others. So this is
spread across good paper, so to speak.
Do you want to comment on what Mr. Sanders said?
Mr. Wozniak. I think that is correct. And that is one thing
over the--one thing to recall as we look through this is that
the underlying collateral, the students themselves and parents,
have actually--there has not been a material difference in how
the payment has been coming in. So it is not a widespread
subprime issue. It is actually the case that the collateral has
been there performing in a very reasonable fashion.
So it is more of a liquidity and confidence issue in this
process, which would hopefully be easier to work ourselves out
of because we have collateral that is favorable collateral. It
is just that in this type of market scenario it is more
difficult.
Chairman Miller. But in this market, I mean that
collateral, 97 percent guaranteed, is treated----
Mr. Wozniak. Well, you know, there is the guarantee side
and there is the spread side. And the situation is that because
interest rates have risen so high that is the difficulty.
Chairman Miller. That is the 100 basis points that you
talked about?
Mr. Wozniak. That is correct. It would require far too much
collateral. It is kind of like the old joke of how do you get
$1 million from the stock market.
Chairman Miller. Mr. Sanders has suggested what we have
been talking about to date is that we are preparing a standby
authority so that we have, as we understand it, we have access,
or the Secretary would have access to the Treasury. He is
suggesting that if you went out and purchased some of those
loans, that these entities that have traditionally provided the
loans for FFEL would be able to recapitalize some portion of
that.
Mr. Wozniak. If there is some means, right. If there is
some type of means providing some type of liquidity process--
and that could happen in a variety of ways--that would help
free up the market; that is correct.
Chairman Miller. Does that have an impact on the timetable
in which the credit markets might come back to something that
we saw as normal, or is the auction market gone?
Mr. Wozniak. The auction market has--at this point it can--
the auction market has always operated in a tremendous way on
confidence. And from a confidence standpoint I would say that
when you look at all the auctions that have gone before, and
they had all gone fine, and the fact that--and it has even gone
through some very difficult times and was able to be resilient.
At this point it would be, I think, each of the issuers--
virtually every issuer that I know wants to get out of them,
and they are not necessarily looking at using that as a
financing tool.
Chairman Miller. Okay. We will come back to that in the
next round.
Mr. McKeon. We have a vote on, but we are going to take Mr.
McKeon's line of questioning and then I think we will see what
time it is.
Mr. McKeon. Thank you, Mr. Chairman.
Mr. Wozniak, do you believe that we have a crisis on our
hands when it comes to ensuring that all students will be able
to obtain enough loans through the Federal and nonFederal bank-
based programs to pay for college next year, and why or why
not?
Mr. Wozniak. I would say yes, we have $80 billion of
outstanding auction securities that issuers are trying to
refinance. There is probably another $70 billion of loans that
are sitting in the short-term facilities I was talking about.
That is $150 billion backlog. And it is one of those situations
that if your house is on fire you need to kind of fix that
before talking about the addition.
So as you look in the current process of how to provide, it
would seem that there is likely to be, when you look at the,
facts some type of access issue if everything stays where we
are.
Mr. McKeon. Thank you.
Mr. Sanders, have you had to scale back any of your
borrower benefit programs or value-added services that you
provide to students or schools, and can you describe what has
been scaled back and what led you to that point?
Mr. Sanders. Yes, sir. We have actually already changed our
borrower benefits related to our consolidation loans. We are
making very few consolidation loans at this point. Also in the
private loan part, we actually are having to increase our
credit standards to have higher-quality loans which actually
will reduce our volume roughly 20 percent. And we are also
raising the interest rates on those private loans.
The reason for doing that is if the markets do recover at
some point in the future, we are going to have to have higher
credit standards in our portfolio in order to finance it. So,
yes, sir.
Mr. McKeon. Thank you very much.
Ms. Bauder, in your testimony you had mentioned the
administrative costs associated with updating your preferred
lender arrangements and staying on top of what lenders are
still in the program. Given those additional costs, why will
you choose to stay in the FFEL program rather than switch to
the DL program?
Ms. Bauder. Two main reasons. One is the mission of the
university is about education. Our president continually says
regardless of whether you are in the classroom or whether you
sit in an office, you educate students. And so to that end, we
partner with vendors and guaranty agencies that have that same
mission in mind.
You know, student loans are usually the first time a
student has an introduction to debt. And so when you are
thinking about debt, you have to think about it in terms of a
life skill. What are we teaching them from the moment they
borrow to the moment they are actually done repaying? And so if
we think about student loans only as receiving a check, then we
minimize the entire program. It is important we want to get our
money.
I think Roberta was talking about the ease of the direct
lending program. I will mirror that with FFEL. It is an
incredibly good culture to be in. We have 1\1/2\ employees that
operate the FFEL program. To switch into direct lending is not
an easy switch. We are talking about a culture here. We are
talking about system changes. It would take us probably a year
so that it would be transparent to the student to move over
into direct lending. We would have to notify our software
providers what we are doing. We do do PELLs and we do have COD,
Common Origination and Disbursement, as Roberta was talking
about, but it is not an easy switch. Communication on the Web.
I mean I could go into my--put my operational hat on and give
you the numerous amounts of if we didn't do it correctly, the
disruptions that would fall onto the student. But the main
thing is we really want to educate our students.
Our default rate has gone down significantly because I am
able to pick up the phone and call a guaranty agency or a
lender and say, I want to profile my students; could you tell
me for all of our sophomores if they are at a $15,000
indebtedness, I would like to know their names. I don't have
that capability on campus right now to do that. So they can do
that.
We can call them in on a one-on-one basis and start
counseling them and say, Do you understand this is the
repayment you are going to end up with? Do you understand the
difference between a want and a need? Are you really borrowing
what you need or are you borrowing for something else? That is
important. That is a life skill that we are training our
students on so that when they exit, you know, when they get a
car, a mortgage, or a credit card or whatnot they are actually
planning for their future.
Mr. McKeon. That brings up a point that I have been very
concerned about. The Secretary said that she could probably
double their capacity. So if they are doing 20 percent of the
loans now, they could probably double that. I don't know if
they meant they could do that by next summer or fall, or if it
will take a year or two. The problem is right now. It may fix
itself next year.
I mean, liquidity confidence could come back in maybe.
Sometimes an election gives people new change, new start. It
builds up confidence. But I am concerned about next summer and
fall. And if it takes a year to switch to direct lending and if
you have a lot of schools trying to do that all at one time, I
am very concerned about the Department's capability of handling
that.
So thank you all for being here and for your testimony. I
think this has been a very good hearing and I think it is very
timely, very important, and I hope it causes some real focus on
the potential problem at hand.
Thank you Mr. Chairman.
Chairman Miller. Thank you. I think--I mean, we will go
back and look at the Secretary's testimony. I think it was she
could double it relatively quickly, I mean like overnight.
Beyond that was a longer time.
Mr. McKeon. She didn't say a time.
Chairman Miller. Well, we will ask the Secretary for
clarification, because it is very important to this hearing
whether or not she has the capacity to do that, to go from 30
percent to 60 percent or whatever, and in what time frame.
Again, that is what we are trying to sort out in this hearing.
We are going to go vote and we are going to recess here for
a few minutes, and then we will come back. Members expressed
interest in asking questions and I have another round. And the
challenge is, can I get to the floor in 36 seconds?
[Recess.]
Mr. Kildee [presiding]. The committee will reconvene, and
the Chair recognizes the gentleman from New Jersey, Mr.
Andrews.
Mr. Andrews. Thank you, Mr. Chairman. Thanks to the panel
for your outstanding presentations and for your patience in
waiting for us to get back. Thank you very much.
I have heard some points of consensus here this morning.
One is that we want students to borrow less and get more
scholarships. I think we all start from that. The second is
that we want a healthy FFEL program and a healthy Direct Loan
program. And the health of the FFEL program I do think depends
upon a ready and willing and able Lender of Last Resort. We
have got to get that in gear if it is needed on a large scale.
And then I think it is also a consensus that students who
have not yet exhausted their Federal resources to go to school,
and have a gap, should exhaust their Federal resources. We
should educate them about that and let them know before they go
into the private loan markets.
But we do have a situation where a significant number of
students after they have exhausted those Federal resources,
after they have gotten all the scholarship aid they can, have a
significant gap.
And, Ms. Bauder, I think you have given us a great example
of that in your written testimony where you hypothesize a
first-year student at the University of Maryland, State
resident, no parental contribution, and he or she would be
$3,608 short of the package that they need.
I think you can tell that story about a student at a NAICU
private college or university where the tuition is probably
twice as high. You can tell that story about a student at a
career school or technical program where you have high tuitions
very often as well.
What ideas do the members of the panel have as to how we
should approach that problem? And, again, I am hypothesizing,
the student who has exhausted their scholarship aid, exhausted
their Federal resources, has a gap between the money they need
and the money they have and has to turn somewhere. My sense is
that they are the classic subprime borrower, that the prospect
of attracting private capital for them is a very difficult
prospect indeed.
And also, I think I have this right, and I think the
Secretary may have inadvertently stated this, we can get the
Lender of Last Resort program 100 percent right, but it doesn't
change the loan limits, right? You can go as high as you go,
and that is it? So what ideas do the members of the panel have
for us as to how we can address the needs of that student.
Ms. Johnson. I think one of the issues was one that Sarah
alluded to in her testimony. And that is the fact that with the
Federal Perkins loan program we are seeing some drastic
reductions on our campuses as a result of a couple of different
things. One is that the influx of cash that we experienced into
our revolving fund as a result of consolidations is dried up,
because there is really no need for students to do a
consolidation anymore when the interest rate on the Stafford
loans is higher than what it is on their Perkins loan.
Mr. Andrews. I completely embrace that. If I were writing
the budget myself, I would have a much higher level of Perkins
number than we do. I think the reality is, there is a
likelihood we will operate on a CR around here until there is a
new President. I am not saying that is going to happen, but I
bet it does. And that means we are going to be at something
like the present level in Perkins, so it is not going to be a
whole lot of new money in Perkins. I wish that weren't true but
I think it is. So what else do we do?
Ms. Muilenburg. I think you probably have to think at this
point about increasing loan limits. It has been under
discussion in previous higher ed bills, and it hasn't been done
I think largely due to cost considerations.
Mr. Andrews. How do we pay for that?
Ms. Muilenburg. Well, you could add unsubsidized loan
eligibility, which my understanding is not a cost item in
either FFEL or direct lending, and to provide some additional
capacity.
Mr. Andrews. I am not sure about that. I think that it is
not subsidized in terms of the outlays, but if there is a
guarantee attached to it. Are you proposing a guarantee be
attached to it?
Ms. Muilenburg. That it would be available in both
programs.
Mr. Andrews. Well, I think CBO would attach a number to
that. So assuming it did, where do we look for resources to pay
for an extension of loan limits? Welcome to the Congress.
Ms. Muilenburg. I fully understand. We are well aware of
the cost constraints that you all face.
Mr. Andrews. And you do understand one sort of arcane
technical point, but it is a very big deal. The way things work
around here is if we look for offsets, we need to find them
within our own little universe here of programs. And we really
only have three things. We have the Pension Benefit Guaranty
Corporation, we have the School Nutrition program and we have
student loans and that is it. And we can't take the money out
of the Iraqi budget surplus. They have a budget surplus in
Iraq. We can't take it out of agriculture. We have to find it
within the four walls of our own jurisdiction, which is not
easy.
Ms. Bauder. Could we talk about ACG, SMART and TEACH?
Mr. Andrews. I'm sorry, could you put your microphone on?
And my time is expired.
Ms. Bauder. So I can't?
Mr. Andrews. Well, I am sure the Chairman will let you
quickly answer the question; not to speak for him, but may she
answer my question?
Chairman Miller [presiding]. Sure.
Ms. Bauder. Okay. Thank you. ACG, SMART and TEACH are very
cumbersome and costly to administer. I don't know if there is
any--and I am totally brainstorming--I don't know the back end
of how all the financing works, but taking those funds and
putting them back into a program that is very easy to
administer.
Mr. Andrews. Which programs are you saying?
Ms. Bauder. Academic Competitiveness grant, SMART and now
the new TEACH program.
Mr. Andrews. If I can just bore you one more time with
details. But I think most of those fall into what we call the
discretionary spending world. I don't think they are mandatory.
Am I right about that? Okay, well, that gives us something.
Although, you understand, one of the great glories of governing
in tight fiscal times is that anytime you take a dollar away
from one thing, you generate opposition to it.
But listen, we would welcome your ideas. It is a tough
problem, but we welcome your ideas. So I think we all agree, as
the Secretary said, we want to educate students to get every
last Federal dollar for which they are eligible so they don't
have to go to the private market if they don't have to.
Chairman Miller. I think Mr. Sanders wanted to comment.
Mr. Sanders. Mr. Chairman, I was going to say that if the
Federal Financing Bank was to come in and do some kind of
financing--currently they invest in Treasurys which are below 2
percent--but if they were to provide some type of financing
based off, say, 3-month LIBOR plus a spread, they would be
earning somewhere in the 3\1/2\ percent range. So it would not
be a cost, it would be actually an earnings to the Federal
Government.
Mr. Andrews. What default rate are you factoring in on
that?
Mr. Sanders. Those are with Federal loans I am talking
about.
Mr. Andrews. Okay. I appreciate that thank you.
Chairman Miller. Mr. Souder.
Mr. Souder. Thank you Mr. Chairman. I apologize for being
late to the hearing. I was able to hear the original opening
statements of Secretary Spellings, and all this panel's
testimony, as well as your and Mr. McKeon's questions due to
the wonders of C-Span. But in between there, I had the mayor of
Fort Wayne, the newly elected mayor who was here for his first
visit to D.C. since being elected mayor, and we had a few
things we needed to do that were local in addition to national.
But one of the things that came up that I wanted to ask Ms.
Muilenburg--and if anybody else has any comment with this--
there were some references made, but I missed some of the more
intense discussion on this, in the first panel, of the
difference in trying to account by university or college if
they run into shortage of funds as opposed to systemwide.
As the Chairman knows and as most of you who follow the
issue, I am a strong advocate for nondirect lending. I believe
the private sector has gotten the loan rates down. I believe
that they service the students better.
I thought Ms. Bauder did a terrific job in laying that out
in hers, in trying to make sure that people and our students
have access to education even with the uncertainties. And if we
start to get in a pickle here, I don't want to have to throw
out the baby with the bath water, so to speak, and have the
Federal Government wind up at the end expanding their powers,
to the disservice of students and the disservice of the
taxpayers, because this system has worked better. At the same
time, clearly the Federal Government may have to step in. And I
was trying to sort through what did it mean precisely if they
do it by college or university as opposed to systemwide?
Ms. Muilenburg. What we were recommending, Congressman, is
a system whereby a school would be able to be certified as a
Lender of Last Resort school and that we would not have, as
guarantors, to force students to go through the hoop of going
to two lenders and being turned down by two lenders before
being able to access an LLR loan.
So the concept would be an institution-wide eligibility for
Lender of Last Resort services. And, clearly, in the situation
where there would be a widespread access, we would need Federal
advances in order to make those loans available. Does that
answer your question?
Mr. Souder. I believe so. I want to do a follow-up with Ms.
Bauder. When you were talking, you said about the difficulty,
and then it came up, the question of if all of a sudden people
switched. Would the doing it school by school resolve some of
that question? In other words, at least it wouldn't force
everybody into that type of system. How do you see that playing
through in regards to your concern of the difficulty in making
a fast switch?
Ms. Bauder. I like the option of Lender of Last Resort
being an umbrella over the school. Is that what you are--yeah,
I think that is a good option in terms of--rather than having
the students jump through so many hoops on an individual basis.
Going into direct lending is somewhat cumbersome. It is a
culture.
It would be an easy switch if we didn't care about the
impact on the student. We can transmit anything and create
systems. But what it does is, there is a disruption to the
student in terms of process, having to do another MPN, just the
entire culture of student loans. And so in order to make that
transparent and seamless for the student, it is somewhat
cumbersome.
Mr. Souder. Ms. Muilenburg, if it went by school, would
that make it easier for the private lenders to step back in
after the credit crunch occurred? What would the transition
back out of that be?
Ms. Muilenburg. The situation that we would envision
working, and obviously we would have to sit down with the
Department to figure out all of the operational details, but
the notion would be that for as long a period as was necessary
for the school to participate in a Lender of Last Resort
program, that they would be able to do so, where the guarantors
would essentially be the lenders as well as the guarantors of
those loans.
But certainly if the credit crisis begins to resolve
itself, then there would no longer necessarily be a need for
that school to participate in a Lender of Last Resort program.
If the lenders with whom they have worked over the years
reenter the marketplace and are able to make loans, we would
certainly anticipate those schools returning to a normal FFEL
loan processing environment.
Mr. Souder. There seems to be a general concern in both
parties that the administration wasn't doing a lot of advance
planning regarding if the situation really turns bad. I know a
number of members were asking questions, but I didn't get to
hear Secretary Spellings' response. Have they talked to you
much about this? Are they very far along in this plan? Do they
seem locked into a different alternative?
Ms. Muilenburg. The Secretary indicated this morning that
they intend to issue guidance to the guarantors, I believe,
next week. And that is both heartening and disappointing news.
I am heartened that she is going to issue guidance about the
program and how they would anticipate it working. It is
disappointing that she didn't have her staff sit down and
consult with us beforehand in order to make sure that
operationally it can work.
Hopefully it will be, as she indicated, an iterative
process where we can work back and forth to figure out what the
best way is to make sure that it works operationally smoothly
for schools and students.
Mr. Souder. ``Disappointing'' is a rather understatement.
Chairman Miller. Mr. Kildee.
Mr. Kildee. Thank you, Mr. Chairman.
Ms. Johnson, you talked about the importance of helping
students and families understand their options for Federal
student aid and the differences between Federal and private
loans. How do you do that and how are you helped by the
Department of Education in doing that?
Ms. Johnson. Well, one of the things that we do is we
encourage all of our students, obviously, to complete the free
application for Federal student aid, and we do that
relentlessly and through a variety of mechanisms: sending e-
mails to currently enrolled students; sending correspondence to
prospective students; sending postcards home that their parents
might read, because we really want everyone to complete the
free application for Federal student aid.
Our profile is very similar to Ms. Bauder's in terms of the
number of students who do complete the FAFSA form and how many
are ultimately packaged with student loans and how many of them
ultimately will go about securing those student loans.
The other thing that in our environment has been very
helpful is that because we are a Direct Loan school, my staff
is freed up to spend time with those students. Our experience
has been that students who are having questions about how to
fund their education come first to the financial aid office.
And when we would previously have to say well, you need to
contact your lender about that, the response that we were
getting from our students was, You are just giving me the
runaround, you can't handle my question. You have to go
someplace else.
And my staff is trained now and they know with certainty
when those dollars are going to come in and we spend time--we
have the time to spend with those students to counsel them
about the difference between a subsidized and an unsubsidized
loan, about taking a Federal loan versus taking a private loan.
And parents are always asking us, if they are looking at a
private loan, they are looking for us to give them
recommendations as to which private loan they should even take.
And ultimately that cannot be our decision to make for them.
They need to make that choice based on what is best for that
particular family.
But it has afforded us the opportunity to be able to sit
down with those students and their parents and say, here are
your options, here are things that you need to think about as a
student and as a family, but you will need to make the
selection, if you are particularly needing to use a private
loan, because you need to choose a product that is going to
meet your circumstances.
Mr. Kildee. Do you think that the Department of Education
could do much better itself in trying to assist these students
in making these decisions?
Ms. Johnson. My experience with working with the
literature--and they do put out some very fine pieces with
literature--is that students and their parents, and maybe it is
a culture of students that are used to instantaneous and video
and multimedia ways of getting their information--but that many
of our students are not utilizing the written documentation
that the Department of Education is providing.
So that the opportunity to sit down one on one or provide
information to them in other formats is very helpful.
Mr. Kildee. Thank you very much, Ms. Johnson.
Chairman Miller. Mr. Payne.
Mr. Payne. Thank you very much.
A question. Two questions. But the first one is even if the
Federal Family Education Loan, the FFEL, or the Direct Loans
are available, how will students be able to finance a gap
between what the Federal student aid covers and the total cost
of education today?
In other words, saying that the Federal Family Education
Loans or Direct Loans are available does not mean that access
to higher education is ensured particularly for lower-income
students who want to attend private institutions. And I just
wonder if any of you have any thoughts on that.
Ms. Bauder. Well, I can look historically and say that the
gap has been met through multiple resources. One is, most
institutions have a payment plan. We have a Terp payment plan
where you can pay out of your operational home budget once a
month to make up for that delta. Credit cards, home equity,
retirement plans. There are multifaceted resources.
The home equity now. I mean, a lot of the homes where last
year parents had equity to borrow from, obviously that is no
longer there for a lot of families, and so that resource is
dried up. And in turn sometimes retirement as well.
So now we are stuck with, probably, credit cards. We
actually are looking in terms of how are we going to advance
our Terp payment plan, can we move it around a little bit to
make it more advantageous for our families?
Mr. Payne. I hope they don't have to use credit cards, not
the credit cards that I see interest rates floating around of
32 percent. Unbelievable.
Just a question in general. For example, there are some
kind of unique programs that have been created by States for
different purposes, perhaps. I know that Georgia started the
HOPE loan, the HOPE scholarship. And I understand that the
purpose was supposedly to keep top Georgia students in Georgia.
In other words, they didn't want them to go out of state, they
wanted them to stay in State. They needed an incentive to keep
them in State, so that they would stay in State.
And the program is funded through the lottery, where mostly
low-income people, unfortunately, are hoping--maybe that is why
they call it the HOPE scholarship--they are hoping to hit the
lottery, and many times don't. The ones who can least afford it
are doing the lottery.
What happens is that minority students you get in, if you
have a certain grade level at your high school. However, when
you are thrown into the mix, in many instances because of the
inequity in the educational level at the various high schools,
those minority students in many instances--because you have to
maintain a certain grade average--can no longer be allowed to
have the HOPE scholarship and therefore have to drop out of
school or go somewhere else.
Of course, the brighter students that they want to keep in
are doing well because they would have done well anyway. Also
students of wealthy people and people who could afford to pay
are now getting a free pass. And those who need it the most are
really losing out.
Now, I know none of you are from Georgia, but how do we
kind of structure things so that they sound good--but, once
again, it seems like the people that need help the most, even
with these newly created programs, really tend to end up still
at the bottom?
Do you think a program conceived like the HOPE program, you
are in South Carolina, maybe do you have something similar to
that, you are right next door, and how do you in your opinion--
I am not knocking any of you because you are not from Georgia,
and I wouldn't even knock a person if you were from Georgia,
``Georgia on my Mind,'' you know, I like that song. But could
you----
Mr. Sanders. We do have a program in South Carolina that is
funded by the lottery. And I will tell you, though, with North
Carolina having created their lottery, just in the last year
our revenues are down 100 million in our lottery program. So
they are scrambling as well. We are facing similar situations
to what you are.
Mr. Payne. One thing I do find disheartening is that too
many States have decided to use the lottery for funding. In New
Jersey the senior citizens PAAD $2 prescription drug benefits
was paid for by casino gambling, because we have that in the
State. Now Pennsylvania has casino gambling, Delaware has
casino gambling, New York has casino gambling. And, of course,
the revenues in casino gambling in Atlantic City are down,
therefore challenging those programs.
So I just wanted to throw that out, because we really need
to figure out a way to try to see that those students who have
the ability to make it can. I won't get into endowments because
we may be--I hope the Chairman has a hearing on that in the
future to talk about universities that are sitting on hundreds
of millions of dollars and students are unable to afford it.
Thank you. I will yield back.
Chairman Miller. Thank you.
Terry, we talked quickly with the Secretary about the
question of whether the Lender of Last Resort would be up and
running so it could be done on an electronic loan processing
arrangement. Mr. Warder suggested that that could be done. What
do you know?
Mr. Muilenburg. Well, we would certainly want to do it in
an electronic loan environment, just the way we do all of our
FFEL loans today. Back when the last Lender of Last Resort loan
was guaranteed by USA Funds we could handle those on a manual
basis, loan by loan. But certainly in a big situation, we would
want to be able to use an electronic loan process. We are now
going into our systems to identify the systems changes that
need to be made to administer an LLR program and beginning to
make those system changes today. The challenge, of course, is
we don't know what the parameters of that program are going to
be, whether there are going to be Federal advances made and how
we need to set up operationally if we are going to be able to
draw down funds to actually originate the loans. But we are
doing everything we can to do the systems modifications today,
to enable us to meet that need if it arises.
Chairman Miller. Ms. Johnson and Ms. Bauder, Ms. Johnson,
you are in the Direct Loan program----
Ms. Johnson. Correct.
Chairman Miller [continuing]. So this is all interesting, I
guess to you, but it is not urgent in the sense of your
institution. Ms. Bauder, what is your sense here when you look
down the road and you listen to this conversation? Will you
wait for the Lender of Last Resort and just work through your
guaranty agency, or would you apply for Direct Loans or not?
What would you use as your standby if you think that we could
go into July and August with a market in turmoil and lenders
having trouble becoming liquid enough to meet that demand?
Ms. Bauder. Well, I guess I would start by saying I would
hope we would put more options on the table. I didn't come with
any, but I would certainly try to think of other options
besides direct lending and Lender of Last Resort. I
unfortunately have only heard about Lender of Last Resort--I
think yesterday is the first time I heard about it. And being
in financial aid almost 20 years, it is a little nerve-wracking
in terms of saying, hey, we are going to rest our laurels on
something that sounds as if it is not tried and true. And if I
don't know about it, I am sure that other administrators are in
the same boat that I am in. So I am not----
Chairman Miller. That is why we are trying to encourage
some communication here.
Ms. Bauder. Exactly. So I don't have enough information to
talk intelligently about it. Direct lending, again, I think we
signed--I wasn't at University of Maryland when they originally
thought about getting into direct lending. They did sign up for
it, but I believe processed a few loans, but really just
dabbled in it. And I certainly wouldn't want to go in that
direction.
I do see, if you look historically that, you know, the FFEL
program, our students really benefited from the subsidies in
terms of having zero fees, having a lot of back-end benefits,
having a lot of brochures and one-on-one hand-holding in terms
of going through the process up through repayment. And so now I
think those fees are going to have to--the student is going to
take the brunt, eventually, of the pricing advantages that they
had before, they are going to be charged those fees.
And so that is a concern of mine as I look down the road of
saying--in fact, I think I have in my testimony the three
things we look at when we look at our lender list is pricing,
technology and customer service, and then mission with the
university. This year I am not looking at pricing. I think we
live in an unstable environment right now in terms of
financing, and so we are looking at technology, customer
service, and then mission with the university as we are looking
forward.
Chairman Miller. I understand that. And that is everybody's
preference. We are talking about here, if in fact these lenders
cannot get liquid enough--I mean, cannot recapitalize to get
liquid, again that is all interesting, but they will not be
available to make the loans. So I think what we are suggesting
is people ought to start thinking about some standby, hoping
they won't have to use it.
Clearly, the preference of this administration, and
properly so, is the marketplace here. But so far that
marketplace, as Mr. Wozniak has suggested, has not been able to
untangle itself with respect to a whole range of credit
instruments, whether it is municipal bonds or utilities or
special local agencies, all of which have substantial streams
of revenue, and highly rated and all the rest; when they come
to the auction market they are treated as Mr. Sanders is, who
never thought he would be treated in this fashion and has never
been treated in this fashion by the auction market.
So this is about what happens in the event that--and then
how you complete that sentence. I can't argue with your
statement that probably most loan officers have not heard about
it. There would be no reason to think about it in the
historical performance over the last several years. Why would
you think of Lender of Last Resort? But the mortgage lenders
didn't think about the Lender of Last Resort, and the municipal
bond people haven't thought about Lender of Last Resort. Nobody
has thought about this until they get hit.
Mr. Bauder. Right.
Chairman Miller. And they have all been hit now. And it has
turned out to be a rather dysfunctional market. And I don't
want to put words in your mouth--I want you to comment--but you
don't seem, Mr. Wozniak, to be confident that this is going to
sort itself out anytime soon. Again, we are all open to we get
a surprise every day here. Sometimes they are positive and
sometimes they are negative.
Mr. Wozniak. No, from a standpoint the municipal market is
certainly working its way through, and they have various
streams. In the student loan market, we of course deal with a
specialized asset that has a particular return. We don't get to
establish what the interest rate is. And there is a tremendous
amount of assets that have to be refinanced. So it is going to
take some time. And even if rates come back tomorrow, they are
not going to move back to where they were last summer in a
straight downward pattern. So it is going to take some time as
the market has to regain confidence.
Chairman Miller. Do we have any way of inferring that if
the infusion that we saw--was it $200 billion that the--was it
$200 billion?
Mr. Wozniak. $200 billion, yes.
Chairman Miller [continuing]. $200 billion that the
chairman of the Fed put into the system, that that would have
any spillover in a positive sense on those same institutions
that are also lenders to the student loan market?
Mr. Wozniak. It may be too early to tell. The facility is a
28-day facility with extensions. Part of it, and what we are
looking at in the current case with the auctions and others are
much longer assets than that. Obviously, the mortgage assets
are long-term assets, too. It is an attempt to put some
liquidity in the system. It isn't going to be helpful directly
to the auction market. I think that has a different component
to it, different type of issue that is surrounding it, outside
the overall securities markets in general.
Chairman Miller. Mr. Sanders, if you can't go--you
mentioned you had seen 28 failed auctions. If you can't go to
the auction market, what is your anticipation of your
situation?
Mr. Sanders. Well, the situation we have with our failed
auctions is existing debt.
Chairman Miller. Right.
Mr. Sanders. We are certainly not trying to issue more
auction rate bonds at this point. But I think Paul is right;
the situation with the Fed injecting money into the mortgage-
backed system, certainly it is going to help in that market a
little bit. But I guess the best thing that can be said about
that is it wasn't bad news.
In our industry, pretty much every day has been bad news,
so at least it wasn't that.
Chairman Miller. What do you look to in terms of your
ability to make these loans?
Mr. Sanders. Currently, we are looking at trying to
refinance into what are called variable rate demand bonds,
which requires a credit facility, banks that would be standby
in order to buy the bonds. You also have to have the rating
agencies to rate the bonds. The process we have been going
through for the last 4 to 5 months has just been a give-and-
take. The rating agencies as well as the credit facility banks
are just nervous at this point. They continue to want more and
more, and it is making it very difficult for us to get that
issue accomplished.
Chairman Miller. Okay. Ms. Johnson, Ms. Bauder talked about
the consolidators who aren't available at the moment. Is your
situation the same as hers or----
Ms. Johnson. Well, our students primarily will consolidate
to the Federal direct consolidation program----
Chairman Miller. Back through the program.
Ms. Johnson [continuing]. Directly into that program. So we
have always suggested to our students that they do have choice
on the back end with their student loans. And if they find a
FFEL lender who would consolidate and offer them benefits that
they find agreeable to them, particularly at the point of
graduation when they know where they are going to be living and
what their salary is going to be and what makes sense for them,
that they should be looking at consolidation. But primarily our
students have been consolidating into the Federal Direct Loan
program.
Chairman Miller. Has that changed? You were talking to a
couple of other members, both of you, about the impact that has
had on the Perkins, on the repayment. Is your outlook different
than Ms. Bauder's?
Ms. Johnson. Our outlook is exactly the same as Ms.
Bauder's, and primarily that is because of the interest rate
change in the Stafford loan program. When it was variable with
the cap and it was very low interest rates for a number of
years, students who had large volumes in the Direct Loan
program at very low interest rates were very eager to
consolidate their loans and their Perkins loans with those,
because it would draw down their overall interest rate on those
loans.
Since that has moved to a fixed rate loan, those students
are less likely to consolidate those loans. They would rather
leave their Perkins where they are, at a 5 percent rate, so we
are not seeing that infusion of capital.
I would like to also just address something that Sarah had
talked about, and that was a little bit about the conversion
into the Direct Loan program. And I hope I am not reading
between the lines, but I thought I heard the Secretary this
morning say something that they were looking at all options,
one of which was looking at something with the transmission of
information in the FFEL. And I believe that FFEL lenders are
using a format that is called Common Line.
Several years ago, I think every school that was in the
Pell Grant program was trying to convert over to a new schema
called XML formatting. And many of us were not there yet in
terms of doing that. And so for at least 3 or 4 years, the
Department of Education had a conversion program that was
available for us so we could transmit our Pells in our current
school format. They would do the conversion into what the
common origination and disbursement needed and then pass it
back through the conversion box so that we could receive it
back in a format that we could utilize on our campuses.
As I brainstorm about ways that perhaps some schools may
find it easier to transition into the Direct Loan program, if
such a conversion box were available so that schools that are
currently using Common Line could pass their current
information through the conversion box that could be translated
by the Department of Education to process those loans and then
convert them back, I think that the up-front conversion time
for the schools would be mitigated to some extent. Yes,
students would have to sign a new promissory note, but for some
students who are already possibly looking for a new lender they
would be having to sign a new promissory note anyway. So it is
something I think that they should consider.
Chairman Miller. Thank you. That is why we are trying to
encourage these conversations. Mr. Keller.
Mr. Keller. Thank you, Mr. Chairman.
Twice during this hearing, a reference has been made to
calling the red phone at 3 in the morning. If you are a student
lender and you are calling the White House red phone at 3 in
the morning, no matter who the occupant is, you are going to be
in trouble. McCain is going to snap at you for making him talk
about something other than national security. Hillary is going
to hang up on you because she wants to put you out of business.
Obama is going to politely call for change and hope, changing
his phone number and hoping you don't get the new one.
The 80 percent of students who rely on the FFEL program for
the Federal student loan program, I hope we have something
better than a red phone strategy at the end of these hearings.
My biggest concern, frankly, is outside the FFEL program for
the students who utilize their FFEL loans as best they can, but
the tuition gap is so huge they have no choice but to get the
private loan.
And let me start with you, Mr. Wozniak. What impact on the
students who are relying on these nonFederal private loans is
the current credit situation likely to have?
Mr. Wozniak. Okay. Multiple issues are occurring I would
say. One is that the cost of funds is higher, dramatically
higher, no question about that. That means that that cost has
to be passed on.
Number two, again, I think generally speaking again, the
student loans process with regard to private loans performance
has not had significant deterioration relative to over time. So
it is a situation where it was not a big subprime type of
activity. But nevertheless, the rating agencies in the current
environment are restressing and adding more assumptions within
their assumptions. So what is going to happen there is, there
will be more protection that needs to be built into structures.
Both of those items will tend to protect the bondholders more
going forward, and will also result in a higher cost of funds
to a smaller segment of students.
Mr. Keller. Let me follow up your line of answer there.
When you say higher cost to students, do you mean potentially
higher interest rates and higher origination fees?
Mr. Wozniak. Yes to both.
Mr. Keller. When you say the credit situation, you are
going to have lenders requiring a better credit score from the
students and/or their parents in order to qualify for a loan?
Mr. Wozniak. The cut-off rate, so to speak, will be at a
higher credit score than previously.
Mr. Keller. Is it possible that they may even start
requiring some sort of collateral for these loans?
Mr. Wozniak. I don't--I would say no. That type of
borrowing can be done--and again, I suppose through a home
equity or other line to the extent that that was an option. But
no, I would say no.
Mr. Keller. Okay. And for the students who are from low-
income families, 18-year old kid trying to go to college. And
his mom, single mom, is a waitress, probably is not going to
have a great credit score. What is their option going to be?
Mr. Wozniak. That again, from the private loan marketplace
itself, is not for everybody. In part it is--in many regards
that part of the market is hoped for, and I know there is only
a limited amount of scholarship grant money and other types of
funds. But the process is not to give somebody a loan if it is
believed that they would have difficulty paying it back.
Mr. Keller. Okay. Ms. Bauder, let me ask you a similar
question to the last question I asked. What options do students
have to pay for college if they have maxed out their Federal
aid and are not eligible for a private nonFederal loan?
Ms. Bauder. Well, we actually have students on campus like
that today. Typically, we work with them on a case-by-case
basis. Usually, we do some type of payment plan for them over
time. Right now our payment plan is 8 months or 10 months. We
will extend it through the summer and see what they can come up
with. We also work with our development office to see what
funds they have that are for need-based funding. But it is
really on a case-by-case basis.
Mr. Keller. All right. Mr. Sanders, you are a FFEL lender
and you also provide private loans, is that right?
Mr. Sanders. That is correct.
Mr. Keller. Tell us what the current credit situation has
done in terms of student options both under the FFEL--under the
FFEL and the private lending. How has that affected students in
a real world basis?
Mr. Sanders. Well, I think as was mentioned earlier, we are
really not into the loan season yet. We are probably about a
month away. I think schools are probably in the process of
packaging loans now. But as I mentioned earlier, we are
actually tightening our credit standards. We are having to. We
are also increasing the interest rate. And again, we are doing
that because when we do exhaust the funds that we currently
have, which will be sometime in the late fall, we will have to
have better credit standards if we want to access the financial
markets in the future.
Mr. Keller. When you say you are increasing the interest
rates, are you talking about on the private loans?
Mr. Sanders. That is correct. Private loans only. On the
Federal loans there has been no effect, and I am still hopeful
there won't be any effect.
Mr. Keller. All right. Thank you.
Mr. Chairman, my time has expired, so I yield back.
Chairman Miller. Thank you. Mr. Souder?
Mr. Souder. I am kind of baffled about something here. This
sounds like a one-way market. Normally, if you would have a
tightening of the credit and inability to buy, somebody would
start to adjust the price. Are you suggesting universities
aren't going to respond at all in trying to adjust tuitions? Is
it just an inertia that in this country they can raise tuition
indefinitely, regardless of whether students can afford to go
there? If students start to drop off and not be able to go to
school, Mr. Sanders, is one possibility that people will price-
shop more for where they go to school?
Mr. Sanders. You know, that is a good question. I don't
think we have reached that point yet. Certainly I think that is
a possibility. We obviously have a very good technical college
system in South Carolina that a number of students are now
starting to enter there for their first year to get their
general courses out of the way, and then transferring later to
our 4-year schools. So that is already occurring in my opinion.
Mr. Souder. My family didn't have enough money not to
price-shop. We didn't have some kind of protection behind it.
My dad had X amount. He said if I went to the regional campus
and lived at home, he would work with grad school.
Are we trying to build a system that anybody can go
anywhere they want at any time, the universities never have to
adjust any tuition? I mean, I don't view it as a bad thing that
there is some element of risk assessment here and repayment
assessment.
Another concern I kind of had when I was listening to the
discussion is that it doesn't seem--let me ask this question to
Mr. Wozniak. Has the market so bundled--because there is a big
frustration in the housing market of people who feel that their
credit is being stressed when they weren't the people who took
the balloon payments. Is there any kind of market mechanism
that adjusts for those lenders who actually have the ability to
get their loans repaid, did a wise job of estimating and
balancing that, or are they just being bundled with high-risk
loans and the market is going to dry up and change everybody's
rates because there has been no risk assessment?
Mr. Wozniak. No. Again, the marketplace on the education
loan side, again, has not seen any particular big jump up in
any type of performance status. So the students are continuing
to make their payments, lenders continue to work with students
to make sure that they give them every opportunity that they
can with forbearances and other issues. We have not seen a big
jump up. Bundling doesn't occur. People generally have been
putting pools of loans together and taking the whole pool and
putting them into the marketplace.
Mr. Souder. Taking the other side of it, because part of my
concern by schools and universities in the Higher Ed bill, one
of my concerns was that by doing too rigid a standard on
schools that were falling out, of having too many students
default, if we didn't average that we were in fact going to
dramatically impact low-income students, universities that
reached out to a higher percentage of minorities, those in
urban areas.
And I appreciate that the Chairman has worked with that.
There, clearly the government may need to step in. But if we
are going to just kind of average this, there is no incentive
of the private sector or of the market to try to do any kind of
responsible loan assessment. If all this stuff just gets
bundled and averaged, the credit tightens up on everybody.
To me, where the government should be looking at stepping
in is where we have high-risk cases. The people who have the
least ability to pay can't maybe even make an adjustment for a
technical school or others, and then the market can't meet it.
And that is where the government comes in.
My concern in some of this discussion is that we are broad-
brushing everybody, taking any accountability out of the
universities, any accountability out of the individuals to
adjust where they go, the number of years they go, the number
of what decisions they make on career. And I was just a little
concerned about the tone. I yield back.
Chairman Miller. I thank the gentleman. And he raises a
number of serious questions. And on top of that, of course,
many of the States are sending the signal to their State
institutions that they may have to raise fees or make cuts
because State budgets are in trouble because of the same
economic problems created by all the other actions in the
credit market and in the economy.
Thank you very much for your time and your expertise this
morning. I think you will probably be hearing from us. But more
importantly, I hope you hear from the Secretary. I am I little
dismayed at the end of this hearing, after this panel. You are
out there a consumers of these services and as agents for the
retail consumers of these services, and the fact that you have
not had access to more concrete and better information is
distressing. And it really does start to raise concerns.
I sent the Secretary a letter 2 weeks ago, but after
listening to this, I just wonder whether or not they have a
sense of urgency. Urgency and panic are two different things.
Urgency about creating the standby system so that families and
students will be able to continue to have access to this
education on a timely basis I think should be a prime concern
right now within the Department of Education.
As I said at the outset of the hearing, a course delayed, a
semester delayed, or a quarter delayed can mean even greater
financial hardships for these students and for these families.
And that is what we seek to avoid.
I hope the markets correct. I hope there is a market
answer. But we do have these two provisions on the books that
at least we ought to run all of the traps, make them
operational, make sure everybody understands them and has the
options and they can make their choices. And hopefully that
will work.
You will be hearing some more from us. Thank you very much
for all of your time. Thank you to all the members of the
committee for their attendance and their questions.
And I want to insert a statement into the record. Mr. Petri
has asked to have a statement put in the record. And without
objection, so ordered.
[The statement of Mr. Petri follows:]
Prepared Statement of Hon. Thomas E. Petri, a Representative in
Congress From the State of Wisconsin
I want to thank Chairman Miller and Ranking Member McKeon for
holding this important hearing today. I hope that after today's hearing
students and parents will be confident that anyone who qualifies for
federal students loans will be able to get them.
Numerous stories have been popping up in newspapers and other media
warning that the current turmoil in the financial markets, fueled by
subprime mortgages and the resulting credit crunch, will affect the
availability of student loans. Most of these stories have failed to
make the distinction between private and federal student loans.
The majority of students finance their education through federal
loans. By law, students get those loans without credit checks and at
virtually zero risk to the lenders because the government reimburses
the lenders for any loan defaults. Currently, there are over two
thousand lenders participating in the Federal Family Education Loan
(FFEL) program. Should serious disruptions develop in the FFEL, by law
the Department of Education is required to take up the slack.
Furthermore, students can get federal loans directly from the
government through the Direct Loan Program. I look forward to hearing
from the Education Department on the measures it has taken to ensure
that the Direct Loan Program is prepared to take on any increase in
loan volume.
In the mid-1990s, one third of the federal student loan market
transitioned to the Direct Loan Program through a smooth operation
created by the Department.
One would expect that after nearly fifteen years and improved
technology the Direct Loan program could rapidly and smoothly expand
from its present market share of 20%.
In fact, the Direct Loan Program is now delivered through the
Common Origination and Disbursement System (COD) which is the same
system that successfully delivers Pell Grants. Thus, any school which
participates in the Pell Grant program should be able to easily switch
to the Direct Loan Program.
Congress has a responsibility to ensure students' access to federal
aid--and there are measures in place to do so. It is important today
that we make sure that those measures are working properly.
Thank you, and I look forward to an informative hearing today.
______
[Questions to witnesses from Mr. Scott follow:]
Questions for the Record Sent to Witnesses Bauder, Johnson, Muilenburg,
Sanders, and Wozniak
Thank you for testifying at the March 14, 2008 hearing of the
Committee on Education and Labor on ``Ensuring the Availability of
Federal Student Loans.''
Representative Robert C. Scott (D-VA), a member of the Early
Childhood, Elementary and Secondary Education Subcommittee and the
Higher Education, Lifelong Learning and Competitiveness Subcommittee,
has asked that you respond in writing to the following questions:
1. On the issue of income-contingent repayment, how many students
participate? What is the cost, and who pays the cost, of writing off
the remaining balance of those loans?
2. Is there any evidence that students purposefully select courses
of study that lead to professions for which student loan write-offs may
be available?
3. If we increased the amount of money available for student loans,
how would the cost of these additional loans be scored for the purpose
of ``PAY-GO''?
4. How much of the cohort default rate is a function of credit
worthiness of students (and their parents) before they attend school,
as opposed to the effort the school makes to obtain repayment? Is there
a better measure of the school's effort to obtain repayment than the
cohort default rate? Does the cohort default rate unfairly punish those
schools that admit low income and first generation students?
5. Testimony before the committee suggests that the major advantage
to schools of the FFELP over the Direct Loan program is the fact that
under FFELP, the private lender, not the school, shoulders the
administrative expenses. The private lenders get a subsidy; would the
schools be willing to take on the administrative expenses, if they
received a smaller subsidy than the one we are now paying to the
private lenders?
6. What would be the problems with treating student loans like
mortgages in terms of going back and forth between fixed rates and
variable rates at the discretion of the borrower depending on the
interest rate conditions at the time?
7. What has the historical mix been between Pell grants, student
loans and work-study? Are we providing enough assistance in the form of
grants and work opportunities?
Please send an electronic version of your written response to the
questions to the Committee staff by close of business on Friday, March
28, 2008--the date on which the hearing record will close. If you have
any questions, please do not hesitate to contact the Committee.
Sincerely,
George Miller,
Chairman.
______
[Responses to questions from witnesses follow:]
Iowa State University,
March 28, 2008.
Hon. George Miller, Chairman,
Committee on Education and Labor, U.S. House of Representatives,
Washington, DC.
Dear Chairman Miller: In response to your inquiry of March 25,
2008, I offer the following:
1. On the issue of income-contingent repayment, how many students
participate? What is the cost, and who pays the cost, of writing off
the remaining balance of those loans?
The answer to this question is best directed to the U.S. Department
of Education. It is my understanding that the taxpayer cost of
cancellations is incorporated into the cost of each annual cohort of
loans by both OMB and CBO. Those entities would best be able to answer
the question about taxpayer costs.
From the standpoint of a student aid director and the students I
represent, the income-contingent repayment (ICR) plan is an invaluable
tool to support graduates who choose rewarding, but low-paying,
employment. Also, in difficult economic times similar to those we are
now seeing, the ICR plan provides families with a lifeline to avoid
default. Because students can change repayment plans as frequently as
necessary in the Federal Direct Loan Program, students can move into
ICR to avert a default and return to a standard, graduated, or extended
repayment plan when financial stability is regained.
2. Is there any evidence that students purposefully select courses
of study that lead to professions for which student loan write-offs may
be available?
I am not aware of any evidence to this effect. However, many aid
directors work closely with faculty advisors and colleges/departments
that are more likely to have students heading toward these careers. As
an example, my staff work closely with our education department to make
students aware of loan forgiveness options should they ultimately teach
in an area that qualifies. Because there are narrow service
requirements in the loan forgiveness programs, particularly in the out
years, it can be difficult for students to take advantage of loan
forgiveness options. For instance, an individual who qualifies for
teacher loan forgiveness in the early years may find within several
years that the employing school no longer qualifies as a high need area
and loan forgiveness is no longer available.
3. If we increased the amount of money available for student loans,
how would the cost of these additional loans be scored for the purpose
of ``PAY-GO''?
The additional cost related to increased loan limits would be
affected by such things as whether the loans were subsidized or
unsubsidized. As I understand the process, the Congress would determine
any required ``PAY-GO'' offsets.
That being said, the amount of borrowing that is occurring within
the private loan arena is a direct result of limits on federal student
loans. Unfortunately for many undergraduates, their parents cannot (due
to credit reasons) or will not seek funding through the PLUS loan
program. These students have no other option except to borrow through a
private loan. While the first recommendation would be for these
undergraduate students to have higher loan limits available to them
through the Stafford Loan program, if appropriate offsets are not
available to make this feasible, expansion of the unsubsidized loan
program to allow undergraduate students to borrow the cost of
attendance less other financial aid (and available only via completion
of the Free Application for Federal Student Aid) is an idea worth
exploring. As a point of reference, with the introduction of the
Graduate PLUS program in 2006, private loan borrowing by graduate
students at my institution is now zero.
4. How much of the cohort default rate is a function of credit
worthiness of students (and their parents) before they attend school,
as opposed to the effort the school makes to obtain repayment? Is there
a better measure of the school's effort to obtain repayment than the
cohort default rate? Does the cohort default rate unfairly punish those
schools that admit low income and first generation students?
Unlike the Federal Perkins Loan program, Federal Direct Loans are
serviced by Department of Education contractors. At my institution, we
take advantage of an option within the Direct Loan program called Late-
Stage Delinquency reports. This allows my staff to make contact with
students at various stages of delinquency to remind them of their loan
obligation and to assist them in seeking deferment/forbearance/
repayment options that might help avert a default. We find that
students are very receptive to working with us because we built a
relationship with them during their tenure at our institution.
In my opinion, the creditworthiness of the student upon entering
school is less a factor in default as is program completion and job
opportunities after leaving school. I am concerned that because of the
use of the cohort rate, some schools may choose not to participate in
the federal loan programs, leaving their students no options but to
borrow through more expensive private loans.
5. Testimony before the committee suggests that the major advantage
to schools of the FFELP over the Direct Loan program is the fact that
under FFELP, the private lender, not the school, shoulders the
administrative expenses. The private lenders get a subsidy; would the
schools be willing to take on the administrative expenses, if they
received a smaller subsidy than the one we are now paying to the
private lender?
That testimony, in my opinion, is not correct. Schools in both
programs have some administrative expense such as certifying loan
amounts, evaluating the place of loans in the entire aid package, and
assisting students with speedy access to loan funds. These functions
are the same in both programs. The additional expense for operating the
direct loan program is minimal. Except for the addition of a promissory
note, schools that administer Federal Pell Grants, the Academic
Competitiveness Grant, National SMART Grant, and the impending TEACH
Grant are already doing most of the things necessary to administer
direct loans. The notion that Direct Lending is more difficult to
administer than FFELP is a myth. In fact, I would argue that Direct
Lending is significantly simpler because the aid officer, student, and
parents always know exactly where to go to resolve loan issues--there
is only one lender rather than the multiple players of lender,
guarantor, and service agency that exist in FFELP. The simplicity of
the Direct Loan program frees me and my staff to spend additional time
with students counseling them on aid, assisting them in locating
scholarship sources, help with debt management skills, and identifying
other resources in the event of a detrimental financial event in the
student's family.
6. What would be the problems with treating student loans like
mortgages in terms of going back and forth between fixed rates and
variable rates at the discretion of the borrower depending on the
interest rate conditions at the time?
I believe that student borrowers should have as much flexibility as
possible to refinance their loans at the best rates and terms available
to them. The current structure does not support the best interests of
students.
7. What has the historical mix been between Pell grants, student
loans, and work-study? Are we providing enough assistance in the form
of grants and work opportunities?
In the early 1980's when I began my career in financial aid, 75% of
the typical student aid package was in the form of grant aid and family
contribution. Today, the maximum Federal Pell Grant covers only 25% of
the total cost of attendance at Iowa State University. Today, students
at my institution are encumbered with debt--72.6% of the undergraduates
borrowed to help meet their costs and the average debt upon graduation
is $30,475 (which includes private loan borrowing).
As a result of stagnant or falling federal support, Iowa State
University and many other institutions, have committed increasing gift
aid to students. Some of these dollars are available as a result of
fund-raising efforts while others are apportioned from tuition dollars
collected from all students.
Work-study is a key funding source for students that often assist
them in the out-of-pocket costs of college such as books, supplies,
travel, etc. Work-study allocations have been flat for nearly a decade.
This next year will be a particularly hard year to stretch these
critical work-study dollars--while we support the increase in minimum
wage for all workers, funds are exhausted more quickly as student are
earning more. Also, due to the weakened economy, students who
previously worked off-campus are returning to look for employment
opportunities on-campus either because the cost of commuting to an off-
campus job is prohibitive or because the community job market has
tightened.
Thank you for the opportunity to provide follow-up to the hearing.
If you or any other members of the committee have further questions,
please contact me.
Sincerely,
Roberta Johnson,
Director.
______
Answers for the Record Submitted by Ms. Muilenburg
1. On the issue of income-contingent repayment, how many students
participate? What is the cost, and who pays the cost, of writing off
the remaining balance of those loans?
As a guarantor in the Federal Family Education Loan Program, USA
Funds does not have recent, first-hand information about participation
in the Income Contingent Repayment Program, which is only available
under the Federal Direct Loan Program. Looking back at FY 2004 (the
latest year for which the Education Department's budget appendix
included this information), it appears that few borrowers with
unconsolidated loans appear to be using the program. For example, for
FY 2004, ED projected that only 3.2 percent of FDLP Stafford loan
borrowers would opt for ICRP. In contrast, 45 percent of Direct Loan
consolidation borrowers were expected to repay via income contingent
repayment. For more recent data on the ICR program, I suggest you
contact the Department of Education.
If a loan made under the ICR program is ultimately forgiven, there
would be a cost to the federal government, and the amount forgiven is a
tax liability for the student loan borrower. Since ICRP loans can only
be written off after 25 years and the program has not yet been in
effect for 25 years, we do not know the actual federal cost of the
write-off provision.
2. Is there any evidence that students purposefully select courses
of study that lead to professions for which student loan write-offs
maybe available?
We do not have data on the fields of study of student loan
borrowers, and are not aware of any research that confirms the notion
that borrowers pursue particular fields of study in order to take
advantage of loan forgiveness options. It is too early to assess
whether the new loan public service loan forgiveness provisions of the
College Cost Reduction and Access Act, which will not take effect until
2009, will have such an impact.
3. If we increased the amount of money available for student loans,
how would the cost of these additional loans be scored for the purpose
of ``PAY-GO''?
There are federal costs associated with increasing loan limits, and
because the FFEL and FDL programs are entitlements, costs associated
with increasing loan limits would be subject to ``PAY-GO''. However,
increasing Unsubsidized Stafford loan limits would not appear to result
in federal costs, according to the OMB Budget for fiscal year 2009.
While USA Funds strongly believes increasing federal loan limits is
appropriate in order to reduce reliance on more expensive private
loans, the current challenges FFELP lenders are facing in the capital
markets will not be resolved by increasing loan limits.
4. How much of the cohort default rate is a function of credit
worthiness of students (and their parents) before they attend school,
as opposed to the effort the school makes to obtain repayment? Is there
a better measure of the school's effort to obtain repayment than the
cohort default rate? Does the cohort default rate unfairly punish those
schools that admit low income and first generation students?
Federal Stafford loans are available to students without regard to
credit worthiness, and parent PLUS loans are not counted in an
institution's cohort default rate. Schools participating in the federal
student loan programs are not formally charged with ensuring that their
former students repay their loan obligations, but rather to perform
entrance and exit counseling to ensure students understand their rights
and responsibilities. Guarantors such as USA Funds, also work closely
with student loan borrowers to avert defaults, and assist schools with
debt management services they can use to contact their former students
to help in the default prevention effort.
With respect to schools' cohort default rates, the cohort default
rate is an imperfect measure of a school's educational quality. Schools
that do admit significant percentages of low-income, first-generation
students can be unfairly stigmatized by the use of the default rate as
a proxy for the quality of instruction as well as continued
participation in the Title IV program. The reasons for the higher
default rates at these schools are several including: (1) low income
students tend to be at higher risk; (2) higher risk students tend not
to graduate on the same time schedule as students not in that category;
(3) higher drop out rates are strongly correlated to higher default
rates; and (4) adverse economic conditions/increased unemployment rates
lead to increased inability to repay student loans, which
disproportionately affect low income students and the institutions they
attend.
The factor most closely linked to student loan defaults is the
borrower's failure to complete his or her academic program. Dropouts
are at much higher risk for loan default because, even though they may
have less college debt than graduates, they lack the diploma necessary
to obtain the better paying positions that graduates receive. Therefore
initatives the promote student retention and completion also contribute
to lower loan default rates.
5. Testimony before the committee suggests that the major advantage
to schools of the FFELP over the Direct Loan program is the fact that
under FFELP, the private lender, not the school, shoulders the
administrative expenses. The private lenders get a subsidy; would the
schools be willing to take on the administrative expenses, if they
received a smaller subsidy than the one we are now paying to the
private lenders?
As a student loan guarantor in the FFELP, and not an educational
institution, USA Funds cannot speak to the issue of whether schools
would prefer to participate in the Direct Loan program if they were
provided administrative fees. I would note, however, that many of the
services we provide, such as financial literacy materials and training,
as well as customized debt-management services that institutions can
use to work with their former students to help prevent defaults--all of
which are provided free of charge--are simply not available to schools
under the Direct Loan program.
6. What would be the problems with treating student loans like
mortgages in terms of going back and forth between fixed rates and
variable rates at the discretion of the borrower depending on the
interest rate conditions at the time?
Federal student loans are subsidized and backed by the federal
government, with no fees paid by borrowers who choose, for example, to
consolidate their loans. This is in contrast to home mortgages, where
homeowners who choose to refinance their mortgages to get a better
interest rate or loan terms, generally pay significant fees in order to
do so. In addition, the terms of a promissory note signed by a borrower
contain the specific terms of the loan, including the interest rate, so
it would not be possible to simply switch from a fixed to a variable
rate loan and vice versa without a new promissory note. Finally, the
cost of the federal student loan subsidies under such a scenario could
increase dramatically.
7. What has the historical mix been between Pell grants, student
loans and work-study? Are we providing enough assistance in the form of
grants and work opportunities?
According to the College Board's ``Trends in Student Aid 2007'',
federal grant aid to undergraduate and graduate students increased 83
percent in inflation-adjusted dollars over the past decade, and federal
student loans increased by 61 percent over the same time period. Today,
nearly $86 billion in federal grant aid is provided to undergraduate
and graduate students, compared with $38 billion a decade earlier.
However, because of increases in the cost of postsecondary
education, growth of enrollments in higher education over time, and
changes in the structure of aid programs, these increases do not
necessarily make college more affordable for individual students. For
instance, the economic impact of Pell Grants has diminished
considerably over the past 20 years. In 1987-88, the $2,100 maximum
Pell Grant, covered 50 percent of tuition and fees and room and board
charges at the average four-year public college or university and 20
percent of average total charges at private four-year institutions.
However, in 2007-08, the $4,310 maximum Pell Grant equals only 32
percent of the average total charges at public colleges and
universities and 13 percent for private, four-year institutions.
Moreover, federal work-study funds and other campus based aid
continue to account for only a small percentage of all student aid,
about 1 percent. A total of $776 million was provided for work-study a
decade ago, compared with nearly $1.2 billion today, an increase of
only 18 percent.
As a result, students are increasingly turning to loans to help
finance their higher education. In the 1996-97 academic year, the
average amount borrowed under the Stafford and PLUS programs for
undergraduate students was $8,069, compared with $11,179 today (a 39
percent increase).
Clearly, federal student loans are and will remain a vital
component of federal financial aid. However, USA Funds strongly
supports increasing need-based grant aid to ensure that a postsecondary
education continues to be an attainable goal for all American families.
______
------
Municipal Securities Group,
UBS Securities LLC,
Purple Sage Park City, Utah, March 28, 2008.
Hon. George Miller, Chairman,
Committee on Education and Labor, U.S. House of Representatives,
Washington, DC.
Dear Chairman Miller: Thank you for your follow up questions to my
testimony of March 14, 2008. I would first like to remind the Committee
that my expertise is primarily in the capital markets, asset-backed and
municipal securities areas with a specialty in education loans. My
background gives me access to reports and studies dealing with loan
performance data, government cost scoring and other data solely
regarding loan repayment. I have limited knowledge of the social
implications of the loan programs on borrower decision making
processes, the financial aid process with regard to grants or work
study, or the manner in which individual schools approach these issues
with their matriculating students. With that stated here are my
responses.
1. The income-contingent loan program is administered by the US
Department of Education. They would be the party with access to data on
the number of students enrolled and the cost of the program. As the
income-contingent loan program is a program under the federal direct
loan program, and the loan is an asset of the United States, the
writing off of the remaining balance of these loans is a cost to the
federal government.
2. This question is outside my area of expertise.
3. This question is also outside my area of expertise.
4. Federal Stafford loans do not permit credit assessments to be
performed for the purpose of securing a loan. Hence, a comprehensive
database may not be available to determine this. It is possible that
studies of this nature may have been done that I am not aware. Sandy
Baum of Skidmore College and a Senior Policy Analyst of the College
Board may be someone who may be able to provide insight into these
issues.
5. It is my understanding that schools have selected the FFELP
program by a factor of 4 to 1 by dollar volume for a variety of
reasons, not limited to administrative expenses. As my practice does
not involve direct communications with school financial aid offices and
their business officers, I cannot make an assessment as to the
importance or willingness of schools to accept the additional
administrative costs in return for remuneration.
6. The federal student loan program, both FFELP and Direct Loans,
offer loans to students and parents at identical interest rates. Over
the years, Congress has amended the Higher Education Act of 1965 on
numerous occasions to change the interest rate or manner in calculation
of the interest rate on student and parent loans. These changes in rate
have a dramatic impact on the cost of the program to the federal
government. When Congress increases rates to borrowers, the cost of the
program to the federal government falls as it is the beneficiary of the
higher rates in the Direct Loan Program and reduces the cost of
subsidies to holders of loans in the FFELP program. Reducing rates to
borrowers therefore, increases federal costs due to lower rates and
higher subsidies.
Were the federal government to allow borrowers a choice of fixed or
variable interest rates, the cost of such a program to the federal
government would depend on the actual level of interest rates that
occurred over the borrowing period. From a budget scoring perspective,
this would depend on the assumptions used by CBO. CBO would also have
to assume how many borrowers would select various options.
Because these loans are virtually always originated at below market
interest rates, especially for unsecured, non-credit tested borrowers,
it may be better for Congress to settle upon a single reasonable fixed
interest rate that could remain in effect over long periods of time.
This reduces the angst that might be created among borrowers over who
got a better rate, or should I pick variable or fixed, and who is going
to provide advice on such a decision which frankly is a subjective
decision that the best minds in finance could not provide an absolute
answer.
7. The College Board publishes a comprehensive study on this in its
publication ``Trends in Student Aid 2007''. You may access it here:
http://www.collegeboard.com/prod--downloads/about/news--info/trends/
trends--aid--07.pdf
The remainder of the question is beyond my area of expertise.
If you have any further questions, please do not hesitate to
contact me.
Sincerely,
Paul W. Wozniak.
______
Chairman Miller. And the committee will stand adjourned.
[Whereupon, at 12:45 p.m., the committee was adjourned.]