[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
DEPARTMENT OF EDUCATION'S STUDENT LOAN PROGRAMS: ARE TAX DOLLARS AT
RISK?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CRIMINAL JUSTICE,
DRUG POLICY, AND HUMAN RESOURCES
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JUNE 17, 1999
__________
Serial No. 106-103
__________
Printed for the use of the Committee on Government Reform
__________
U.S. GOVERNMENT PRINTING OFFICE
63-517 WASHINGTON : 2000
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
JOHN T. DOOLITTLE, California (Independent)
HELEN CHENOWETH, Idaho
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Carla J. Martin, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Criminal Justice, Drug Policy, and Human Resources
JOHN L. MICA, Florida, Chairman
BOB BARR, Georgia PATSY T. MINK, Hawaii
BENJAMIN A. GILMAN, New York EDOLPHUS TOWNS, New York
CHRISTOPHER SHAYS, Connecticut ELIJAH E. CUMMINGS, Maryland
ILEANA ROS-LEHTINEN, Florida DENNIS J. KUCINICH, Ohio
MARK E. SOUDER, Indiana ROD R. BLAGOJEVICH, Illinois
STEVEN C. LaTOURETTE, Ohio JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
DOUG OSE, California
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Sharon Pinkerton, Deputy Staff Director
Mason Alinger, Professional Staff Member
Andrew Greeley, Clerk
Cherri Branson, Minority Counsel
C O N T E N T S
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Page
Hearing held on June 17, 1999.................................... 1
Statement of:
Berthoud, John, president, National Taxpayers Union; Thomas
A. Butts, National Direct Student Loan Coalition; Fred J.
Galloway, former director, direct loan program evaluation,
Macro International, Inc.; and Steven A. McNamara,
Assistant Inspector General for Audit, Office of Inspector
General, Department of Education........................... 12
Smith, Marshall S., Acting Deputy Secretary, Department of
Education; and Greg Woods, Chief Operating Officer, Office
of Student Financial Assistance Programs, Department of
Education.................................................. 126
Letters, statements, et cetera, submitted for the record by:
Berthoud, John, president, National Taxpayers Union, prepared
statement of............................................... 15
Butts, Thomas A., National Direct Student Loan Coalition:
Information concerning loan reconciliations.............. 113
Prepared statement of.................................... 23
Cummings, Hon. Elijah E., a Representative in Congress from
the State of Maryland, prepared statement of............... 9
Galloway, Fred J., former director, direct loan program
evaluation, Macro International, Inc., prepared statement
of......................................................... 37
Gilman, Hon. Benjamin A., a Representative in Congress from
the State of New York, prepared statement of............... 47
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio, prepared statement of................... 161
McNamara, Steven A., Assistant Inspector General for Audit,
Office of Inspector General, Department of Education,
prepared statement of...................................... 52
Mica, Hon. John L., a Representative in Congress from the
State of Florida:
Prepared statement of.................................... 5
U.S. Department of Education's Study of Cost Issues...... 60
Mink, Hon. Patsy T., a Representative in Congress from the
State of Hawaii, letter dated September 20, 1991........... 119
Smith, Marshall S., Acting Deputy Secretary, Department of
Education, prepared statement of........................... 129
Woods, Greg, Chief Operating Officer, Office of Student
Financial Assistance Programs, Department of Education,
prepared statement of...................................... 141
DEPARTMENT OF EDUCATION'S STUDENT LOAN PROGRAMS: ARE TAX DOLLARS AT
RISK?
----------
THURSDAY, JUNE 17, 1999
House of Representatives,
Subcommittee on Criminal Justice, Drug Policy, and
Human Resources,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:10 a.m., in
room 2154, Rayburn House Office Building, Hon. John L. Mica
(chairman of the subcommittee) presiding.
Present: Representatives Mica, Gilman, Souder, Ose, Mink,
Cummings, Kucinich, and Tierney.
Staff present: Sharon Pinkerton, deputy staff director;
Steve Dilingham, special counsel; Andrew Greeley, clerk; Mason
Alinger, professional staff member; Cherri Branson, minority
counsel; and Jean Gosa, minority staff assistant.
Mr. Mica. I'd like to call this meeting of the Subcommittee
on Criminal Justice, Drug Policy, and Human Resources to order.
We'll have other Members joining shortly, and with the consent
of the minority, we're going to proceed because we have several
full panels, and we don't want to keep our witnesses. We'll be
able, I think, to proceed in good order as the Members arrive.
I will read my opening statement, and then we'll submit
others for the record, or, if the Members arrive, we will
recognize them.
This morning's hearing is entitled, The Department of
Education's student loan programs, and it asks a question: Are
Tax Dollars at Risk? Faced with staggering college costs, the
American family is increasingly dependent on student aid to
finance higher education. The cost of a 4-year public education
has escalated to almost $12,000 annually, and private schools
can cost almost twice as much, now averaging $21,000 a year.
Today, more than ever, the Federal Government's role in this
process must be examined to ensure that both the student and
the taxpayer are being well served.
As a subcommittee with oversight jurisdiction of the
Department of Education, we have an important responsibility to
see that the Office of Student Financial Assistance is
operating with fiscal and managerial integrity. For almost 10
successive years, the General Accounting Office has labeled the
Education Department's student financial aid programs as, ``a
high risk for fraud, waste, abuse, and mismanagement.'' The GAO
tells us that the Department lacks the ability to provide basic
information about whether a student is enrolled, even after a
student loan is awarded and thousands of dollars in student aid
have been given. In other words, many students who are not
eligible could be, and often are, receiving funds.
This kind of poor management not only hurts the taxpayer,
but it ultimately takes away from funding from other eligible
students. In an attempt to remedy some of these problems, the
1998 Higher Education Act reauthorized a bipartisan agreement
that included some much-needed reforms for managing our student
aid programs. Congress created the first Federal sector
performance-based organization [PBO], this was in the 1998 law,
to accomplish some clear goals and try to make the operations
of the student loan program more efficient. The goals outlined
in that statute are clear, let me cite some of them: to improve
service, reduce costs, integrate systems, and improve data
accuracy and program integrity.
We're here today to assess the PBO's progress to date. It's
my understanding that we have some 1,200 plus people employed,
and we're not sure how many contractors. We'd like to find out
how many additional folks are involved in that process, in
addition to full-time employees; how many contractors. We
created these PBOs to initiate some of these changes, and
today, we'll hear a little bit about what's taken place.
By improving service, we mean we do not want a repeat
performance of the 3-month shutdown of the loan consolidation
program. Systems can be integrated and reliably enhanced by
consolidating the existing 12 stovepipe systems into one system
with accurate and immediately retrievable data. What progress
has been made on this issue? I hope we can find answers to that
question today.
Now, I understand that the National Student Loan Data
System [NSLDS], was created to improve the quality of student
financial aid data and minimize fraud and abuse in these
programs. However, according to a September 1998 GAO report,
almost half of the schools are not using NSLDS's on-line
functions. Is this data base working effectively? We also hope
to find answers to that question.
We'll hear today from the Inspector General's office that
the administrative costs in the Department of Education's
direct loan program are 31 percent higher than private sector
costs. This is bad news for the taxpayers. I'm very concerned
that spending for student loan administration has jumped from
$137 million a year to $401 million a year from 1992 to 2000.
This is a 193 percent increase despite the fact that the
Department's award workload has only increased some 28 percent.
This is even more bad news for the taxpayer.
Qualified personnel should be in place to ensure that the
programs are not subject to waste, fraud, and abuse. Since the
Department has been repeatedly criticized for a lack of systems
integration, are competent people in place to fix this problem?
That's another question we hope to find an answer to today.
In addition to examining the Student Financial Assistance
Office's progress in achieving those goals, I have some other
very specific concerns. It's absolutely astounding to me that
over $109 million in Pell grant over-awards were made in 1996
to students who fraudulently stated their income in order to be
eligible for loans. The Higher Education Act of 1998 was
supposed to fix this problem by authorizing the Department of
Education to verify a student's income with the IRS. What has
the Department done to implement this solution? Another
question we hope to find an answer to today.
As we delve into a recently released audit by the Inspector
General's Office, even the most blase supporter of government
bureaucracy has to be shocked by the fact that the Department
has forgiven millions of dollars in loans to students on the
basis of death or disability despite the fact that these
students were neither dead nor disabled. In fact, in just one
program that was examined, students went on to earn significant
salaries after over $73 million in loans were forgiven for
their supposed total and permanent disability. Some of the
students, after having their loans forgiven, simply returned to
school and received additional loans and grants.
Perhaps the most astounding thing about this report is that
over $3.8 million in loans was forgiven for students who
claimed to be dead but were alive and well. In fact, some
forgiven disabled and so-called deceased borrowers were
discovered to be doing quite well and enjoying salaries of over
$50,000 a year. But what's so unbelievable is that the
Department does not even require presentation of a certified
copy of a death certificate before a loan is forgiven, just a
simple act like that.
Once again, the taxpayer is fleeced by a loan program out
of control. It really shocks, I think should shock, the
conscience of every Member of Congress when we see this type of
abuse within a system, particularly when there's so many of our
students who are in need of financial assistance, and we have
so many demands on education today.
I'm also concerned about reports that there are a rapidly
growing number of loans going to students who attend foreign
universities and misuse the loan money. In 1998, $200 million
in loans were awarded for tuition at foreign schools, and the
Inspector General has been after the Department for several
years to do something about these students who get their checks
but never show up for school.
I have a quote here from a former Assistant Inspector
General in which she asserts that the Department had not moved
aggressively to combat this fraud and that, in her opinion,
``the Department could do more to deal with this problem if
they just made it a priority,'' and that's taken from the
Chronicle of Higher Education, January 15 of this year.
In addition, while I understand that the default rate has
come down slightly in recent years, I'm frankly troubled that
there are still about $20 billion of loans that are in default.
I'm also concerned that the default rate terminology and
calculation can, in fact, be very misleading. It is defined
generally by the Department to refer to the repayment of loans
for a 2-year period, not whether the loan goes into actual
default at a later date.
Congress, for the first time in history, provided a
performance-based organization. It now has some 1,200 employees
and contract personnel. We provided the PBO with personnel and
also gave them contracting flexibility to facilitate operation
of the PBO's hoped-for achievement of important educational
financing goals.
Today, we'll ask many questions. We'll ask in particular
how the Department has used those tools to do more, and
efficiently, an effective management of our student loan
programs. In a time when Congress is struggling to provide
funds for students who are very much alive and classrooms and
teachers who don't have adequate resources, it's absolutely
outrageous that our Federal education bureaucracy would waste
such an incredible amount of money.
[The prepared statement of Hon. John L. Mica follows:]
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Mr. Mica. That concludes my opening statement. I'm pleased
that we've been joined by our ranking member, the distinguished
lady from Hawaii, Mrs. Mink, who is indeed one of the
Congress's champions in education. I recognize her at this
time.
Mrs. Mink. Thank you, Mr. Chairman. I apologize for being
late and missing part of your opening statement.
Mr. Mica. That's OK. I'll give you a copy right here.
Mrs. Mink. Thank you.
Creating opportunities for young people to go on to college
is an enormous responsibility, not only of the Federal
Government, but of the State and local agencies. It's been one
of the very, very significant efforts on the part of the
Federal Government to open up opportunities for higher
education through loan programs which have enabled many, many
students, not only the low-income students, to go on to
college. It has afforded relief to many middle-income families
as well, as the Congress moved to recognize that the Nation as
a whole was dependent upon its ability to offer higher
educational opportunities and that financial barriers should
never be the reason for persons not being able to go on to
higher education.
I recognize the fact, Mr. Chairman, that there are always
difficulties in the administration of any program and that
there will be people who will attempt to sneak out the back
door or indulge in fraud or misinformation. It is the
responsibility of this subcommittee, I recognize, to
investigate these matters, and for that reason I commend you
for opening this hearing today. Perhaps it will lead us to ways
in which we might tighten up the program, insist upon greater
scrutiny and greater safeguards that the Federal funds invested
in these programs are not wasted.
I look forward to the testimony of all the witnesses that
have been called for this subcommittee hearing and must
apologize, Mr. Chairman, if I have to leave in midperiod of the
hearing as we are in the juvenile justice floor debate, and the
chairman of my Education and the Workforce Committee has a
major amendment which is coming up shortly and I need to be on
the floor. But I will come back as soon as I've had my 2
minutes on the floor. Thank you very much.
Mr. Mica. Thank you so much, Mrs. Mink.
I recognize now the gentleman from Maryland Mr. Cummings.
Mr. Cummings. Thank you very much, Mr. Chairman. I want to
thank you, too, for holding this hearing. As one who has a
daughter just about to enter college, I, too, am concerned
about these loan programs as I am for the students at Johns
Hopkins University in my district and many other colleges and,
of course, the students in my district and students throughout
the country.
As one who came from a mother and father who never passed
the first grade, but were able to send all of their children to
college, their seven children, trying to find ways to make sure
that students are able to have the opportunity to go to college
is something that is very near and dear to my heart. I would
associate my words with that of our ranking member, I think we
have to look at these things very carefully.
One of the things they taught us in criminal law my first
year of law school, was that if there is a way to break the
law, people will find it, and I think that you are always going
to have some problems. The question is whether you deal with
those problems effectively so that the program continues on to
do the good that it does. I think that it is our responsibility
to look very carefully at the program to make sure they are
functioning properly. In the process of doing that, I think we
must be careful to keep in mind that these programs are making
it possible for people to have opportunity.
The great educational scholar James Comber says that people
can have will, they can have ability, but if they don't have
opportunity, they're going nowhere fast. And so I hope that
we'll look carefully at what we're doing here, that we will
take appropriate actions where we deem them necessary, and we
will strengthen the things that need to be strengthened and
made better.
And so I want to thank the witnesses too, for being here
today, and as I have said to witnesses many times, it is your
testimony that makes it possible for us to do what we do. You
are the ones who are on the front line. You are the ones who
are dealing with the issues. You're the ones who have to go
under the scrutiny, and sometimes, I must tell you, after
sitting on this committee for over 3 years, sometimes the
scrutiny is one-sided, and so it is good to have you here so
that you can give us both sides. I've sat in this committee
where you would have thought somebody had committed an offense
that was worth 10 death penalties, and by the time we'd
finished, there was nothing there, and I've seen that many,
many, many times. So I sit here with open ears and open heart.
Thank you very much.
Mr. Mica. I thank the gentleman.
[The prepared statement of Hon. Elijah E. Cummings
follows:]
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Mr. Mica. No further opening statements at this time.
We'll turn to our first panel. Our first panel consists of
Dr. John Berthoud, president of the National Taxpayers Union;
Mr. Thomas A. Butts, the National Direct Student Loan
Coalition; Dr. Fred J. Galloway, former director of the direct
loan program evaluation, currently with Macro International,
Inc.; and Mr. Steven A. McNamara, Assistant Inspector General
for Audit, Office of Inspector General, Department of
Education.
I think you're mostly new witnesses. This is an
investigations oversight panel of Congress. We do swear in our
witnesses, so if you'd please stand and raise your right hands.
[Witnesses sworn.]
Mr. Mica. The witnesses answered in the affirmative, and
I'm pleased to welcome them.
Let me just tell you the ground rules first. If you have a
lengthy statement, we're going to run the little clock here. We
will be glad to submit this statement or additional information
or reports for the record. It will be made a part of the record
upon request. We ask that you summarize your remarks in about 5
minutes here, and we will begin.
I first recognize Dr. John Berthoud, president of the
National Taxpayers Union. Welcome, and you're recognized, sir.
STATEMENTS OF JOHN BERTHOUD, PRESIDENT, NATIONAL TAXPAYERS
UNION; THOMAS A. BUTTS, NATIONAL DIRECT STUDENT LOAN COALITION;
FRED J. GALLOWAY, FORMER DIRECTOR, DIRECT LOAN PROGRAM
EVALUATION, MACRO INTERNATIONAL, INC.; AND STEVEN A. McNAMARA,
ASSISTANT INSPECTOR GENERAL FOR AUDIT, OFFICE OF INSPECTOR
GENERAL, DEPARTMENT OF EDUCATION
Mr. Berthoud. Mr. Chairman, distinguished members of the
committee, thank you very much. It's an honor to appear before
you. As you said, Mr. Chairman, I'm John Berthoud, president of
the National Taxpayers Union. We are a nationwide grassroots
lobbying organization of taxpayers with 300,000 members.
I come before you today to state our views, and I will
summarize my remarks as you requested, Mr. Chairman.
To state our views on the Federal direct loan program, we
believe that the evidence shows that this program has been
plagued by intractable administrative problems and
inefficiencies. These inefficiencies in turn cost taxpayers
directly today, and in the future could lead to greater losses
if there are significant defaults on the program's loans. The
Federal direct loan program has been the fastest-growing
Federal loan program, yet until recently there has been little
attention to this program or the Department of Education's
management practices. We are very grateful at the National
Taxpayers Union that you are holding this hearing today to shed
some light on some of the difficulties.
One of the greatest problems for this program has been
slipshod administration by the Department of Education. Mr.
Chairman, you touched on some of the problems. I'll repeat a
few others.
In a March 1999 study, the Inspector General of the
Department of Education found inefficiencies in both the FDLP
and the Federal family education loan program. Regarding the
FDLP, the Inspector General wrote, ``To approximate the effect
of these inefficiencies, we compared our estimates to the
Department's cost to manage the FDLP, $17 per loan, to the
average cost that we estimated, based on U.S. Treasury
research, the large private lenders would have incurred to
manage the FDLP, $13 per loan. A significant portion of the $4
difference may be due to inefficiencies; however, some of the
difference may be due to other factors.'' As you said, I
believe, Mr. Chairman, this is indeed bad news for taxpayers.
Beyond what the Inspector General found, there have been
other troubling indications of waste. Since 1992, while student
aid awards were up 28 percent, administrative spending is up
about 200 percent, as your chart over here demonstrates. Two
years ago, taxpayers were forced to pay $40 million in
penalties because of the Department of Education's actions
related to the FDLP. I think, as you indicated, the Department
had to shut down the loan consolidation program from August
1997 to December 1997 because it couldn't keep up with the
backlog of applications.
However, these were not the first warning signs for this
program. An earlier report by the Inspector General of the
Department of Education found other problems. They found
problems and weaknesses in other areas, including student
status reporting, electronic data processing controls, loan
record accuracy, timeliness of reporting, cash management
reconciliation, written policies and procedures, and quality
assurance systems. The record of the Department of Education in
running this program is clearly not one in which the
administrators or taxpayers can take pride.
The question arises as to why we have these problems, and I
know on the second panel you will hear from the Department of
Education. They may assure you that if there have been
problems, they will get better. We are not so confident of
that. I think the problems, from a structural point of view,
come from the fact that we are asking a bureaucracy to be
something it is not, which is a bank. NTU believes that where
the private sector can better fulfill a mission desired by the
Congress and the President, it should be allowed to do so.
In my written testimony is discussion of the benefits of
using the private sector in all facets of public policy. I will
note that strong use of the private sector is a central
component of the reinventing government concept that Vice
President Al Gore often touts. Here, I will only note that
beyond greater efficiencies through heavy use of the private
sector, there are lower risks to taxpayers. There's also
greater satisfaction among end users of the customers of
government, as was demonstrated in the Macro International
study.
Inefficiencies in the FDLP program lead to taxpayer costs
and risks. The size of the program puts the extent of this risk
in perspective. The FDLP is more than five times as large as
the next biggest Federal direct loan program. Through last year
it had issued more than $30 billion in loans, which is about
one-third of all outstanding Federal loans. By 2004, just 5
years from now, it's projected the program will have issued
more than $100 billion in student loans. Even if this program
were small, there is no excuse for inefficiency, but the
enormous size of the program magnifies the cost.
In conclusion, Mr. Chairman, it is not surprising that the
Department of Education has not done well with this program.
NTU believes education policy is best set by those closest to
students and most concerned with results. To maximize
efficiency and service delivery, program implementation should
be turned over to the private sector wherever feasible.
While many are clamoring for yet more education spending on
the K through 12 levels and higher, we see, as representatives
of taxpayers, a huge run-up in education costs in recent years.
In my testimony, you will see both numbers looking at K through
12 spending and overall Federal education spending. I think our
message to you today, which is why these hearings are so
important, is despite a lot of calls out there for yet more
dollars to go to our education systems, the facts are clear
that we have invested heavily in recent years in education. The
time has come to not spend more, but to spend wiser. In light
of this huge run-up, the National Taxpayers Union adamantly
rejects the need for more dollars for education. Again, what we
need is wiser spending. One small step in that direction would
be rolling back the Department of Education's role in direct
loans. As is often the case, much of what the government is
doing currently could be handled more efficiently and
effectively through the private sector. Thank you.
Mr. Mica. Thank you for your testimony. We'll withhold
questions until we finish the panel.
[The prepared statement of Mr. Berthoud follows:]
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Mr. Mica. Our next witness is Mr. Thomas A. Butts, with the
National Direct Student Loan Coalition. Welcome, and you're
recognized.
Mr. Butts. Thank you, Mr. Chairman. I am Thomas A. Butts,
associate vice president for government relations at the
University of Michigan. I was, at one time, the director of
student financial aid at Michigan and have served as the Deputy
Assistant Secretary in the U.S. Department of Education. I am
pleased today to have the opportunity to appear before you on
behalf of the National Direct Student Loan Coalition.
The Coalition is composed of institutions participating in
the Federal direct student loan program. Its purpose is to
assure the direct loan program accomplishes its goals and
mission of providing outstanding service and accountability to
students, institutions, and taxpayers. The chair of the
Coalition executive committee is Marian Smithson, director of
financial aid at Southern Illinois University.
The direct loan program was first authorized as a
demonstration program as part of the 1992 reauthorization of
the Higher Education Act and signed into law by President Bush.
Recognizing the lower cost to the taxpayers and potential
improved service to students and institutions, the direct loan
program was expanded in 1993. Today, institutions have the
choice of participating in either the government-guaranteed
Federal family education loan or direct loan programs.
Presently, more than 1,200 institutions participate in the
direct loan program and originate about $11 billion per year in
new loans to about 1.9 million students.
The University of Michigan was among the first 105
institutions to participate in direct lending. We originate
about $130 million in direct loans each year and have had a
very successful experience with the program. It has helped us
streamline our student aid operations and deliver loans to our
students in a timely, cost-effective manner. Like other direct
loan institutions, we have been able to fully integrate the
loan process with all of our financial aid and business
processes. While there have been bumps along the way, as anyone
experienced in large system change projects would expect, the
Department of Education has really done a wonderful job in
meeting its responsibilities to us and to our students. I
believe the Michigan experience is typical, as demonstrated by
the loyalty direct loan schools have shown to the program and
its mission.
Direct loan institutions are also pleased by the fact that
the competition that we introduced to the FFEL program has
resulted in improved service to our colleagues who have chosen
to say in FFEL. Although most dissatisfied institutions left
FFEL for direct lending, it is good to see that satisfaction of
those who remained has improved.
One of the reasons those involved in direct lending thought
the program would be a success is that it permitted government
to leverage the best of private market principles. Capital for
the program is obtained essentially through the auction of
government securities in the private capital markets, and the
program is administered through competitive contracts with the
private sector. This stands in stark contrast with FFEL, which
essentially is a corporate welfare program masquerading as free
enterprise. I had to add that in light of the previous
testimony. I'm sure the Department will be providing us with
cost comparisons, which, when considering both administrative
and subsidy costs, will show that direct lending is a good deal
for taxpayers.
While the direct loan program is only completing the 5th
year of operation, it captured one-third of the student loan
market in its first 3 years. Some express concern that it seems
to be on hold at that level. However, any private company that
introduced a new product and went from zero to one-third of
market share in 3 years would be the darling of Wall Street.
The last couple of years have given the Department and the
institutions the opportunity to adjust to rapid expansion.
Under the new performance-based organization, we are expecting
substantial improvements in all aspects of program operations,
including cost.
We believe that the PBO authorized by the Department and
being implemented will do much to improve service to direct
loan institutions and students. Indeed, it should better the
operation of all of the student financial aid programs. In my
testimony, I further talk about some of the implementing
activities of the performance-based organization. I think it is
well on its way, as we'll hear, I presume, from the Department
shortly, about what it is about.
We are also concerned that students receive equal access to
benefits provided by the taxpayers and that all students in
both programs be given similar terms and conditions on their
loans. That is, their interest rates, fees, and so forth should
be the same. To the extent that the Congress has chosen,
through a system of mandatory payments to the lenders in the
FFEL program, to evidently give more than is necessary to
provide a reasonable profit and cover operating expenses in
order for them to determine who should get taxpayer benefits,
we believe the same should obtain in the direct loan program.
The direct loan program for every $100 lent is $7 cheaper than
FFEL when considering all of the subsidy costs and the
administrative costs of both programs.
Mr. Chairman, thank you. I'd be happy to answer any
questions.
Mr. Mica. Thank you. We will withhold questions until we've
heard from everyone.
[The prepared statement of Mr. Butts follows:]
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Mr. Mica. We will now hear from Dr. Fred J. Galloway,
former director of the direct loan program evaluation, with
Macro International. You're recognized, sir. Welcome.
Mr. Galloway. Thank you, Mr. Chairman. My name is Fred
Galloway, and I appreciate the opportunity to appear before you
today to share with you the results of the 5-year evaluation of
the Federal direct loan program that I directed while at Macro
International.
In my remarks today, I'll be touching on three topics of
interest to the subcommittee: The structure of our evaluation,
the research questions that drove the evaluation, and some of
the results from the evaluation. I'll begin with the structure
of the evaluation and try and limit my rather lengthy remarks
between to 5 and 6 minutes.
The evaluation itself was a 5-year, $6.7 million project
funded by the Department of Education. Its stated purpose was
to evaluate the implementation and effectiveness of the direct
loan program. The project began on October 1, 1993, and was
scheduled to end on September 30, 1998, although final
revisions to reports continue through the end of this year.
In the almost 3 years I spent running the evaluation, I can
assure you that all of our work was done in a completely
unbiased manner, and in no way did the Department of Education
ever force us to change or manipulate any of our findings.
However, as you will see in a moment, they did cancel part of
our contract during the 4th year of the evaluation.
Now, we had four research questions that drove the
evaluation: What do institutions think about direct lending;
what do borrowers think about direct lending; how well has the
Department of Education managed and administered the direct
loan program; and what are the Federal costs of the direct loan
program? I would like to spend approximately 1 minute on our
answers to each of those questions to provide some context for
you to help understand the program's successes and failures.
We asked what institutions think about direct lending. We
conducted four annual surveys of over 3,000 direct loan and
FFEL institutions. We started in academic year 1994-1995 and
went through 1995-1996, 1996-1997, and concluded with academic
year 1997-1998. We used a mail survey methodology with the
option of completing the survey over the Internet, and our
response rates ranged from 75 percent in 1995-1996 to 86
percent in 1997-1998, most importantly with no evidence of
nonresponse bias.
We had two major findings from our four institutional
surveys. First, we found that all schools, direct loan and FFEL
schools, were increasingly satisfied with their respective loan
programs. In fact, 81 percent in our last survey expressed
their satisfaction. This is up from 68 percent in academic year
1994-1995, suggesting that, something I believe Mr. Butts said
before, the competition between the two programs has seemed to
improve both programs.
Our second finding over the last 4 years, institutional
satisfaction with the direct loan program had fallen for 3
years before rebounding last year in academic year 1997-1998.
Satisfaction with the FFEL program rose through all 4 years. In
fact, during the first 2 years of our surveys, we found direct
loan schools were significantly more satisfied than were FFEL
schools. In the last 2 years of our surveys, we found just the
opposite, that FFEL schools were more satisfied than direct
loan schools.
Now, we also had two minor findings from our institutional
survey I'd like to briefly share with you. In terms of
institutional satisfaction with the Department of Education and
other service providers, in all four of our surveys, we found
that direct loan schools were more satisfied with the services
provided by the Department than were FFEL schools. Not
surprisingly, FFEL schools were significantly more satisfied
with the materials and training provided by lenders and
guarantors than that provided by the Department of Education.
Our last finding, which is quite interesting among
institutions actually participating in both programs, we found
those institutions trying to do both were less satisfied with
the direct loan program than all the institutions participating
fully in the direct loan program, and they were less satisfied
with the FFEL program than institutions participating fully in
the FFEL program. For those schools trying to do both, it was a
rough road to hoe.
Now, our second research question, what do borrowers think
about direct lending? In this case, we conducted three borrower
surveys, between 2,500 and 5,000 direct loan and FFEL
borrowers. These were telephone surveys using computer-assisted
telephone interviewing techniques. Our response rates ranged
between 64 percent for our survey of borrowers in repayment to
77 percent for our last, our 1996-1997 survey. Again, there was
no evidence of nonresponse bias.
Two major findings: Borrowers were extremely satisfied with
their respective loan programs; 94 percent of students and 91
percent of parents expressed satisfaction during our last
survey, suggesting that borrowers in both programs seemed quite
satisfied with the loan programs.
We also found in all of our surveys that when we asked
students and parents about specific aspects of the loan
programs, they were also very satisfied. We found no
significant differences, however, between direct loan and FFEL
borrowers. Taken together, these findings also suggest the
competition between the loan programs has improved both
programs.
We also found two other things of interest. When we talked
to borrowers in repayment, over 90 percent of them were
satisfied with their contacts with the Department of Education
and other service providers, so it seems things are working
quite well here. Finally, and perhaps most interestingly, we
found borrowers indicated a relatively low awareness of the
terms and conditions of their loans. For example, only 15
percent of students and 19 percent of parents were able to
recall or estimate the amount of their recent loan within 1
percent. Almost 6 out of every 10 students and almost half of
all parent borrowers did not even know their loan amount within
50 percent of the actual amount. It's quite shocking. It turns
out, what's even worse is borrowers have become less
knowledgeable between 1994-1995 and 1996-1997. Fortunately,
borrowers in repayment do seem to know a little bit more about
this.
I would like to turn to our third research question, which
is how well has the Department of Education administered and
managed the program? To answer this question, we used our
survey results together with between 40 and 50 interviews a
year with individuals involved in the management,
administration and oversight of the direct loan program to help
shape our reports. Although we produced several reports, I'd
like to concentrate on the structure content of our last and
most retrospective report, direct loan program administration
1993 to 1998. However, rather than discuss the successes and
failures that occurred, as documented in our report, I'd like
to focus on the structure of the report, which the subcommittee
may find useful helping to understand the context surrounding
the Department's management and administration of the program.
We prepared this report in the spring of 1998. It was
written largely for the new Chief Operating Officer, Greg
Woods, although we didn't know who it was going to be at the
time coming in to run the congressionally mandated performance-
based organization. Our goal in producing the report was to
provide a contextual understanding for some of the major events
that occurred during the history of the program so the new
chief operating officer could hit the ground running.
Specifically, we developed a framework that looked at three
things. We looked at the effect of external or exogenous
factors on departmental decisionmaking. We looked at operating
constraints common to all Federal agencies, and finally, we
looked at problem areas unique to the Department.
In developing this context, the two factors that the
Department must take as given to their daily operations is the
amount of money they have to operate the program and the level
of political scrutiny that the program receives. Although to
some extent, all Federal programs operated under these
constraints, time and time again we were told by individuals in
the Department that not having as much money as they needed to
run the program, coupled with the increased level of political
scrutiny that resulted from the 1994 congressional elections,
forced many direct loan decisionmakers into adopting a risk-
adverse posture when making key decisions.
Now, in addition to these outside factors, we looked at two
factors prominent in most Federal agencies that the Department
also has to grapple with: contracting issues and personnel
issues. It's discussed in a number of the reports by the
Inspector General and the General Accounting Office.
Contractual oversight issues coupled with structural weaknesses
in the technical skills of many employees make running a
technologically sophisticated program like direct lending a
tremendously challenging task.
Finally, we looked at several problem areas unique to the
Department. These included such issues as organizational
structure, systems problems and accountability, all of which
affect the context that surrounds the management and
administration of the program.
In our report, we used this contextual framework to help
explain some of the major events in the history of the direct
loan program, like the transition of loan origination from
Utica to the Montgomery, the decision to move to multiple
services that was subsequently reversed, and the difficulties
associated with the consolidation process that occurred in the
latter part of 1997.
We also looked at a host of smaller issues, and in our
report we provide the historical perspective and discuss how
the departmental decisionmaking was influenced by the context
that the program operates within. If our report could be summed
up in only one phrase, it might be that of a long-time observer
of the Department who commented that the program was run better
than we had thought, but not as well as was needed.
Now, our last research question, which will take less than
a minute to discuss, because we didn't complete it, was what
were the Federal costs of the direct loan program? In this we
enlisted the help of Coopers & Lybrand to help us with some of
the accounting information we obtained from the Department, and
Economic Systems, Inc., to build a microsimulation model for
us. Together our firms were engaged in the tasks of calculating
the actual cost to the Federal Government of running the two
loan programs, which involved gathering such information as the
administrative costs from the general ledger accounts of the
Department's primary accounting system. We also looked at
invoices and analysis of the major Office of SFA program
systems contracts and loan data from the National Student Loan
Data System.
During the summer of 1997, we were hard at work estimating
the Federal cost of the loan programs when our work was stopped
by the Department of Education. We were told to turn over all
our work documents and provide a summary of our work to date,
which we did on August 15, 1997. The modification to our
contract became official on September 19, 1997, and the
Department reduced our contract amount by slightly more than
300,000 as a result of their cancellation of the cost
component.
Within less than a month, we had signed a $20,000 contract
with the Office of Inspector General to provide both materials
and training necessary for OIG staff to prepare our report
comparing the cost of the direct loan and FFEL programs. We
completed our approximately 160 hours of training by the end of
January 1998 and closed the books on our contract with the OIG
at that time. I'd be happy to answer questions after the final
statement.
Mr. Mica. We'll take the questions not in fast forward when
we get back to you.
[The prepared statement of Mr. Galloway follows:]
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Mr. Mica. I'm going to interrupt before we get to you, Mr.
McNamara, because Mr. Gilman has joined us and may have to
leave for another hearing.
Mr. Gilman, I'd like to recognize you for your statement.
Mr. Gilman. Thank you, Mr. Chairman. I'll be very brief. I
want to commend you, Chairman Mica, for conducting this
hearing, and when we see a deficit of $11 billion at the end of
this year, and possibly by the year 2004 going to $100 billion,
it certainly warrants a very thorough review of this whole
process and possibly moving it to the private sector. I want to
commend the panelists for being here to give us the benefit of
their thinking, and I want you to know that many of us are very
much concerned about this kind of a deficit at a time of our
budgetary constraints.
So I would like to ask that my opening remarks be made part
of the record. I thank you for allowing me to.
Mr. Mica. Without objection, so ordered.
[The prepared statement of Hon. Benjamin A. Gilman
follows:]
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Mr. Mica. I appreciate your patience, Mr. McNamara, you are
our last witness in this panel. Steven A. McNamara, who is the
Assistant Inspector General for Audit, Office of Inspector
General, the Department of Education. Welcome, sir. You're
recognized.
Mr. McNamara. Good morning, Mr. Chairman and members of the
subcommittee. Thank you for the opportunity to discuss issues
and costs affecting the Federal loan programs. My name is
Steven McNamara, and I am the Assistant Inspector General for
Audit at the Department of Education, Office of Inspector
General. Today, I am representing the Office of Inspector
General because our new Inspector General, Lorraine Lewis, was
just sworn in on Monday of this week. She regrets not being
here today to provide our testimony, but she has not yet had
sufficient time to become familiar with the details of our
report entitled, Study of Cost Issues, Federal family education
loan program and Federal direct loan program, which is the
focus of my testimony today.
Mr. Chairman, with your permission, I would like to provide
a brief oral summary of my statement and submit my complete
statement for the record.
Mr. Mica. Without objection, the entire statement will be
made part of the record.
Mr. McNamara. Thank you, Mr. Chairman.
Before discussing what the study did say, let me put to
rest some misconceptions about what we didn't say. We did not
conclude that one program is inherently cheaper than the other.
We did not conclude that eliminating the direct loan program
would save the government money. We did not state that the
inefficiencies affect only one of the programs. And finally, we
did not state that private lenders making student loans are
more efficient than the government contractors serving the
direct loan program.
Let me say just a little bit about how we did our study,
which was not an audit of either program. We obtained cost
information for both programs as reported in the Department's
published financial statements for fiscal years 1996 and 1997.
Consistent with the Credit Reform Act, we segregated costs into
two primary categories, subsidy costs and administrative costs,
and we addressed them separately in our study. Subsidy costs
include interest expense, loan origination fees, default costs,
and other fees, and they constitute by far the majority of the
direct loan and FFELP costs. The Department has limited control
over subsidy costs because the economy and Congress exert the
greatest influence on these costs.
Administrative costs are those that the Department incurs
in managing both the FFELP and the direct loan program, and
they include such costs as contracting, personnel, travel, and
others. The Department can largely control these administrative
costs through effective management. Because the Department
lacks a cost accounting system, it does not allocate
administrative costs to the various financial aid programs.
Consequently, we allocated administrative costs to the
particular loan program in light of the activities and services
actually performed.
Our study reached two principle conclusions: No. 1, in any
given year, either the direct loan program or the FFELP program
total cost may be greater, given the effect of prevailing
economic conditions on subsidy cost. Since costs may be higher
or lower at any one point in time, the total cost figure for
any one year does not definitively answer the question of
whether FFELP or direct loans are more expensive over a longer
period of time.
Second, we concluded that inefficiencies likely affect the
Department's administrative costs for both loan programs. We
base this conclusion on cost calculations that we made in this
study and reviews that we had done in previous audits. For the
direct loan program, we estimated the Department's cost to
administer the loan portfolio to be $17 per loan. We compared
our estimate of the Department's cost to the benchmark average
cost of $13 that we derived based on a Treasury study of
servicing costs of large lenders. We believe that a significant
part of the $4 difference may be due to inefficiencies. These
inefficiencies can largely be controlled by improved access to
reliable information, increased technical and contract
management expertise, and compatible automated data processing
systems. We do recognize, however, that some of the differences
are due to such uncontrollable factors as Federal procurement
policies and personnel rules. We were unable in our study to
estimate what portion of the FFELP administrative costs result
from inefficiencies. This was the case because we didn't have
any comparable private sector entity to compare the
Department's FFELP administrative costs to.
I do want to be perfectly clear on one essential point. We
are not taking the position that either program over an
extended period of time is cheaper than the other. The intent
of the study was to serve as a beginning with the expectation
that the Department would refine our cost estimates as it
strives to improve the management of both loan programs. We
suggested four actions the Department could take to improve the
administration of the loan programs: No. 1, institute an
activity-based cost accounting system; two, track employees'
time to the programs that they work on; three, develop models
to predict borrower behavior; and four, take actions to address
possible reasons for cost inefficiencies which we cited in the
report.
We are encouraged that the Department has begun efforts to
develop a managerial cost accounting system, and the OIG is
working with them as they go forward. Further, the PBO has
initiated several actions to address areas where we have found
inefficiencies in our past audits.
Mr. Chairman, this concludes my statement, and I would be
happy to respond to any questions on this issue or other work
products.
Mr. Mica. Thank you, Mr. McNamara.
[The prepared statement of Mr. McNamara follows:]
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Mr. Mica. I'll start out real quickly. Mr. McNamara, this
is the study that was produced. It says, Study of Cost Issues,
Federal family education loan program.
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Mr. Mica. On page 17 it says, ``the 2-year average of the
Department's FDLP administrative cost is $24 per loan. Of the
$24 total, $7 is used to perform oversight and default
functions, while the remaining $17 represents FDLP management
costs. To assess the reasonableness of the FDLP management
costs, we compared the Department's cost to manage the FDLP,
$17 per loan, to the average cost that we estimated the large
lenders would have incurred to manage the FDL program, $13 per
loan,'' and you refer to a table and an appendix.
The report goes on to say, ``Given the similarities of the
two programs and results of the audits we've reviewed''--and
another appendix--``we believe a significant portion of the $4
difference may be due to inefficiencies.''
Now, I'm not a rocket scientist. I didn't do extremely well
in math, but the administrative costs appear to be 31 percent
higher for the government program; is that correct?
Mr. McNamara. Yes, Mr. Chairman, the difference between the
$17 and the $13.
Mr. Mica. Now, what's gotten a lot of publicity isn't
something that we've uncovered here, but rather what we've
watched on television. Some of it is probably sensational, but
some of the reports are that we have $73 million gone astray
for forgiven disability payments and $3.8 million forgiven
payments for students that really didn't die. Can you explain
what's going on there?
Mr. McNamara. Yes, Mr. Chairman.
Mr. Mica. Are those inaccurate figures?
Mr. McNamara. Yes, Mr. Chairman.
Mr. Mica. Tell us what the figures are.
Mr. McNamara. The figures are pretty much as you described.
What we found in doing an audit----
Mr. Mica. The figures are as I described: $73 million
forgiven for folks who weren't disabled, $3.8 million for
students that weren't dead.
Mr. McNamara. Let me check that very quickly.
Mr. Mica. Am I in the range?
Mr. McNamara. Yes, Mr. Chairman. During the period July
1994 through December 1996, our audit determined that $216
million in student loans were discharged for death; $292
million in student loans were discharged for total and
permanent disability. Nearly $77 million, or approximately 14
percent, were forgiven for these individuals who we later found
appeared to have earned income.
Mr. Mica. That's more, $77 million, 14 percent. Again, it's
very hard for me to understand. I empathize with Mr. Cummings
and the ranking member. Their concern is my concern, that these
dollars should be going to students who are in need, that's the
reason we set this up. But when you tell me in your testimony
that we really don't have a problem, that there's not much
difference, then you testify that there's a 31 percent
difference, the 14 percent of those given to disability are
forgiven on a wrong basis, there's something dramatically wrong
with the program.
Mr. McNamara. Mr. Chairman, I would point out that the
numbers I'm quoting are for the FFELP program. We think the
underlying cause would be the same for both, so it doesn't
relate to the administrative cost of the direct loan program.
Mr. Mica. I don't care if it's for the government or for
the private sector. It's still just not an acceptable level,
and again, I don't mean to give you a hard time, but what we're
trying to do is find out--if the information is correct, and
are the reports we're getting correct. Is this happening?
Mr. McNamara. Yes.
Mr. Mica. Thank you.
Mr. Butts, you're from the University of Michigan, and you
had some laudatory things to say about the direct program.
That's correct?
Mr. Butts. Yes.
Mr. Mica. Is it true that the University of Michigan in
1995 and 1996 could not reconcile its books on this program?
Mr. Butts. I'm not sure exactly what you're referring to,
Mr. Chairman.
Mr. Mica. Isn't one of the requirements that when you
participate in the direct loan program that you reconcile your
books?
Mr. Butts. It's my understanding that all of our records
are reconciled, and all cash has always been reconciled.
Mr. Mica. Is it not also true that more than $100,000 is
given out in 1 fiscal year that could be collected by your
university?
Mr. Butts. I'm not aware of that.
Mr. Mica. I would appreciate it if you go back and check
and see if 1995 and 1996 have even yet been reconciled.
Mr. Galloway, you conducted this extensive--sounds like a
consumer survey. How much did that cost? What was the total
cost of finding out whether these folks are satisfied or not?
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Mr. Galloway. Our institutional surveys which we conducted
for them, the cost varied between $215,000 and $300,000 per
survey.
Mr. Mica. The total amount contracted over the period of
years for your activities, all of your activities?
Mr. Galloway. Put together were about $6.3 million.
Mr. Mica. You ended by saying that you felt that there were
still problems. In fact, some of the problems you cited you
said--and this is from your testimony ``structural weaknesses
in the technological skills of many employees make running a
technologically sophisticated program like direct lending a
tremendously challenging task.'' Were you trying to say it's
hard for a government bureaucracy to be a bank? Is that what
you said, Mr. Berthoud?
Mr. Berthoud. Yes, it is, Mr. Chairman.
Mr. Mica. Is that basically what it boils down to?
Mr. Galloway. That's part of it. The other part of it,
there's a lot of systems requirements in running the direct
loan program, and it seems a lot of people told us they really
had trouble getting people with cutting-edge technical skills.
Mr. Mica. You also said that given the difficulty of firing
anyone in the Department I'm very familiar with that, I chaired
the Civil Service Subcommitee for 4 years. Mr. Cummings was one
of my ranking members. We found it was almost impossible to
fire anyone in the Federal work force. Managers are forced to
rely constantly on a thin layer of capable people. Now, these
aren't my words. This is your testimony; is that correct? Is
that one of the problems?
Mr. Galloway. If I could add one word to that, I would be
glad to say it's correct. Some managers--not every manager has
that problem, but a lot of managers talked to us about having
problems with some people who couldn't get the job done, and
they kind of shove them off in a corner of the room, and they
rely on the people who could get the job done.
Mr. Mica. Still on the payroll, and then we tax the ones
who are able to--
Mr. Galloway. It's tough for the people who have the skills
because they get called on all the time.
Mr. Mica. Mr. McNamara, one final question. There's also
been a number of stories and reports about the problem with
foreign schools, people getting loans and not attending school
or something wrong with the school. What's the problem there in
a nutshell?
Mr. McNamara. In a nutshell, Mr. Chairman, foreign schools
operate differently than schools in the United States. The
check goes directly to the student, and currently there isn't
any process in place to verify either before the student gets
the loan or while they're in school that they actually are
attending the school.
Mr. Mica. So there's still no mechanism in place to check
up on this?
Mr. McNamara. As of this moment, no, but I'm aware the
Department is in the process of setting up a website. They
could tell you more about the exact status. There is no
mechanism in place to prevent the student from initially
getting the fraudulent loan.
Mr. Mica. Thank you.
I'd like to yield now to the ranking member, Mrs. Mink.
Mrs. Mink. Thank you very much.
Mr. McNamara, the Chair has raised some disturbing
statistics about discharges from liability to repay loans on
the grounds of total permanent disability or death or other
reasons where the government is allowed to discharge the debts
rather than by payment. Are there any safeguards in the law
which--upon audits such as the one that was performed--which
disclosed all of these figures allowing the government to go
back and reclaim the loan payments due? Or is the discharge and
waiver that's issued final and permanent even though the
circumstances upon which those waivers were given turn out not
to be true?
Mr. McNamara. I believe if we could determine that people
that applied for disability did so based on fraud, we could
prosecute them criminally or civilly and attempt to----
Mrs. Mink. In the absence of fraud, is there any way in
which the law would permit a recovery of the loan payments due?
Mr. McNamara. The regulations would not permit us to go
back and do that right now.
Mrs. Mink. So if, at the date of discharge of the loan
liability, the person was indeed disabled, perhaps, as
indicated from these notes, collecting Social Security
disability, and then subsequently was able to recover, get a
job notwithstanding that disability--I mean, blind people are
employed, and they do earn sufficient moneys. Persons that are
disabled in many ways can go back to school, become trained in
computer technology or something and become gainfully employed.
Under those circumstances there's no way that the government is
able to go back then and recover the loan liability if
subsequently the person became an earner, and therefore liable
for taxes under IRS? Because I assume that the IRS is the one
that disclosed some of these figures.
Mr. McNamara. Actually, we obtained these figures by
matching everyone who had received a discharge with the Social
Security master earnings data base. It certainly could be the
case that someone could be declared permanently disabled and
then perhaps recover. The Department's regulations right now
state that, and I think they're on the chart on the wall--on
the board over there, basically you have to be so disabled that
it's unlikely you can either return to work or go to school or
that you're going to die. So it's pretty extreme.
Mrs. Mink. So is there any ability, under the loan
regulations that exist, for the government to go back and
reclaim the loan liability?
Mr. McNamara. Currently, no.
Mrs. Mink. So would it be your recommendation that we
correct the discrepancy or omission in the law and allow the
government to go back and reopen this liability?
Mr. McNamara. I think if it can be proven that there was
fraud, definitely.
The other question, the previous regulations dealt with
that, if you were going to get a new loan, your previous loan
would be reinstated. That regulation changed, I think, in 1995,
that's clearly a policy question but we would support that.
Mrs. Mink. Now, on the cost basis which your inspector's
report indicated as a $4 difference in terms of operational
costs, to what do you directly attribute the $4 difference?
Mr. McNamara. We attributed that to possible inefficiencies
surrounding access to the necessary information to run the
programs. The Department didn't always have necessary
management information. As has been mentioned earlier by other
members of the panel, the Department is aware that it needs to
make improvements in its technical and contracting expertise.
We've met with the new PBO Chief Operating Officer, Greg Woods,
on that regard, and he has brought in people that have this
expertise. And finally, the last inefficiency would be
basically the timely information coming in that would allow you
to make the management decisions you needed to make.
Mrs. Mink. How do you determine what the cost of the loan
is if the basis of the determination is lack of information,
lack of a cost accounting system, or lack of relevant data? How
do you make an assessment on what the true cost is for the
program?
Mr. McNamara. We use the audited financial statements for
fiscal years 1996 and 1997, so we started with a full deck.
Then basically, we just allocated it down to one program or the
other, and we came out with a bottom line.
Mrs. Mink. So if you had the true data, it might turn out
to be quite different?
Mr. McNamara. We did have the true data.
Mrs. Mink. You had the true data in terms of how to
distribute the administrative costs to each type of loan?
Mr. McNamara. Yes, ma'am.
Mrs. Mink. You have confidence that the $4 difference is a
true difference?
Mr. McNamara. I have confidence in what the actual costs
were for fiscal years 1996 and 1997. The $4 difference is
derived by a projection that we made using a U.S. Treasury
study that estimated the cost of a large private lender to
service a similar portfolio. We used that as a benchmark, and
we compared that to the actual cost.
Mrs. Mink. Which is the large private vendor that was used
as a benchmark?
Mr. McNamara. There was no particular lender. This was a
Treasury study done to try to determine how much FFELP lenders
should be paid last year when there was a lot of controversy
about the interest rates and what they should get. This was
their approximation of what it would cost a hypothetical large
lender to service loans.
Mrs. Mink. The decision of the Congress to go into the
direct loan program was basically to save money. As I recall
the deliberations in my committee, there was an assumption that
there would be a $4 billion savings in establishing a direct
loan program which the universities would administer directly
rather than going through the private lenders route. Has that
savings panned out?
Mr. McNamara. I could comment on the results of our study.
The savings, I guess, would depend on what previous study you
were quoting and whether they said it would cost more or less.
Studies we looked at fell out on both sides. I think one of the
major flaws we found in all the studies we looked at was that
some of them were made before the law was passed. They were
assumed to be 100 percent direct loan program, for example, and
other significant changes Congress made really invalidated the
assumptions of many of those studies. We know what we found,
and I really couldn't compare it to the earlier studies because
they didn't use the same assumptions.
Mrs. Mink. What is your conclusion then in terms of whether
there have been any budgetary savings overall by the transfer
to a direct loan program?
Mr. McNamara. We didn't make that conclusion. What our
conclusion was that in any given year, and that really subsidy
costs drive it, either program could cost more or less. I think
there are projections available, and depending on what interest
rates you use going into the future, you could project one to
be more or less than the other.
Mrs. Mink. I have just one final question, Mr. Berthoud,
representing the National Taxpayers Union. Certainly I
appreciate your comments with respect to the attention which
your National Taxpayers Union directs to the cost of various
programs.
I just wanted, Mr. Chairman, to note that when this matter
was being debated in the Congress, specifically in my
committee, the author of the program was Congressman Robert
Andrews, with the support of our then chairman, Mr. Ford. We
have a letter from the record dated September 20, 1991, from
the National Taxpayers Union endorsing the bill that Mr.
Andrews introduced, H.R. 3211. The letter commends him for
introducing it because it would yield taxpayers savings of $1.5
billion a year. I'd ask unanimous consent to have this inserted
in the record.
Mr. Mica. Without objection so ordered.
Mrs. Mink. Thank you very much.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T3517.094
Mr. Mica. I'd like to now recognize the gentleman from
Indiana, Mr. Souder.
Mr. Souder. I thank the chairman, and I also thank him for
this hearing. This has been a difficult topic as we move
through the higher education bill over in the education
committee, and it's important that we continue to monitor this
issue.
First, I'd like to ask Dr. Berthoud in general, I was on
the small business program, and every time we expanded small
business lending, people said, well, this is free. We have this
little portion that we can expand. Don't you see this phenomena
happening across the government, that at the time we have
economic good times, we're expanding all the risk of the
Federal Government, and we're not really having an analysis of
what this could cost the taxpayers long term?
Mr. Berthoud. I think that's absolutely right. The Congress
in recent years has made important steps on better accounting
of its loan and direct loan and loan guarantee programs. But in
many cases, with Federal and State governments loans, loan
liabilities, the tremendous unfunded liabilities of the Social
Security program and others, there are a lot of long-term
fiscal concerns that we have.
Mr. Souder. Many conservatives such as you and I, favored
moving toward loans from some grants and having accountability
and responsibility, but there also needs to be a balance of
what amount at risk the government would have if there was a
downturn. I've never seen such a projection in any forecasting.
We see the total cumulative, but not the differential cost to
the government if there's a recession or a growth rate of X
amount. It simply isn't in our budgetary calculations. We see
the large hundred billion exposed, $11 billion annually, but we
don't see what that actually means in the bad debt allowance
that a private company would have to be projecting, assuming an
average bad debt ratio over time. We assume a fixed bad debt
ratio even if the exposure increases.
Mr. Butts, when the program was first conceived, was there
any consideration given to that variance in the amount of bad
debts and how that would be calculated in the budget?
Mr. Butts. The assumptions were that the defaults should
be--would be roughly similar, and that the Department of
Education needed to do everything it could to reduce the
default rates, and as direct lending comes on-line, it should
have and maintain a loan rate. You'll note that in the last few
years the overall default rate in student loans has dropped
from something like 22 percent to under 10 percent now.
Mr. Souder. But isn't this exactly where the administrative
costs come into play, because if you have fixed overhead plus
the bad debts, it's no longer a savings because we don't
absorb--in other words, if all of a sudden we have a recession
and the bad debts go up, we don't ask the private lenders that
we have to pay their overhead.
Mr. Butts. The private lenders are guaranteed 98 percent of
repayment on their loans and are guaranteed an entitlement,
mandatory payment from the Congress, a subsidy for every loan
they make, which would appear to be more than is necessary to
make a reasonable profit and to cover their overhead costs for
administration.
The direct loan program, it was anticipated--we're in our
5th year. We're making over $10 billion a year in new loans.
And students are beginning to come into repayment, so it is
only logical that the servicing costs should be increasing as
that volume comes on-line. That was anticipated when the
program was enacted, and the administrative funding that was
put into the law anticipated those costs.
If you look at the administrative costs of the program that
the Department has, one of the things that we don't have is a
comparison of what those real administrative costs are in the
FFELP program because it's so diverse, it has never been
studied. We've not had a good study of the subsidies. The
Congressional Budget Office has studied those issues with the
Treasury, and I have some concerns here. But the latest
methodologies that I've seen from the OMB and the CBO, if you
take into account the subsidy payments in both FFELP and direct
lending and the administrative costs to the Department, it is
roughly $7 per $100 loaned cheaper to do a direct loan than to
do a FFELP loan, and if you reduce direct loan volume, taxpayer
costs will increase. If you increase direct loan volume
overall, they will decrease.
Mr. Souder. I already have the yellow light. I want to make
a couple of points. One is that, in a factual basis, we've had
a loan increase since 1992 of 28 percent and an administrative
increase of 212 percent. Now, there may be many different
reasons, but we've heard a number today. This program was sold
that it was going to save the Federal Government money. At
best, the Inspector General seems defensive in his report in
saying he's not saying that the private loan programs are
cheaper to administer. In other words, at best you're saying
it's a draw. Is that a misrepresentation of what you said, Mr.
McNamara?
Mr. McNamara. We didn't conclude it was a draw. We simply
said we didn't draw a conclusion on the difference.
Mr. Souder. In fact, you did draw a conclusion in the sense
you said it could be higher under one program one year, and it
could be lower under another program, which means it could go
back and forth. But you did not suggest that, in fact, the way
the program was sold, which is that it was going to save the
government money, was a definitive conclusion.
Mr. McNamara. Correct. We didn't conclude that.
Mr. Souder. And that furthermore, if this was a private
government audit--and we heard things, as the chairman already
pointed out, structural weaknesses in the technological skills
of many employees, which is because the Department of Education
is not expected to be a bank; the difficulty of firing anyone
in the Department, which is true because it's government; and
as was also pointed out by those from Dr. Galloway and Mr.
McNamara, having access to reliable information.
Well, yes, government departments aren't private sector
organizations that necessarily have this equipment, having
qualified technical aid and contract management, because
they're not a bank using compatible automated data processing
systems. We have that throughout the government, and it's the
danger of trying to expand and take over additional private
sector things; we're not going to be able to afford all the
data processing systems, including uncontrollable factors as
Federal procurement. Yes, we do have personnel rules. Yes, we
do have that.
Furthermore, I think earlier in your testimony you said
they don't have a cost accounting system. I can't imagine a
private sector company this big without a cost accounting
system. And then my personal favorite line of which I am very
proud of is that the--from Dr. Galloway, the 1994 congressional
elections, me, I was one of the people that came in, forced
many direct loan decisionmakers into adopting a risk-adverse
posture. I would hope so. They are loan officers.
As a borrower, I don't like banks a lot of times. They only
want to give you money if you deserve it, and they sit there,
and unless you can prove you have plenty of money, they don't
want to give you the loan. It's aggravating. As a parent with
two students in college, quite frankly, I understand that in
initial procedures with direct lending, it actually helped
simplify, much like sometimes a public sector entity is needed,
but then they back up after we've fixed some of that.
The truth here is that I am concerned about the ability of
the government and definitely don't believe it should be
expanding, and that I hope they continue to be somewhat
concerned by Congress so they adopt a risk-adverse policy, and
I view that as a tremendous compliment, and I want to thank you
for it.
Mr. Mica. I thank the gentleman from Indiana. I don't think
you were asking for a response.
Mr. Cummings.
Mr. Cummings. Thank you very much, Mr. Chairman.
Mr. McNamara, a lot of times these hearings come about--I'm
not always sure about how they come about--but a lot of times
what happens, we read things in the newspaper or we hear it on
the news, and the next thing you know we have a hearing.
There's nothing wrong with that. One of the articles that I
think probably had some impact here was a June 1, 1999,
article, editorial rather, of Investors Business Daily. Are you
familiar with that?
Mr. McNamara. No, sir, I'm not.
Mr. Cummings. They talk about your report extensively.
Mr. McNamara. The cost study?
Mr. Cummings. Yes. When you look at an editorial, a lot of
times the editorial writer takes a lot of liberty, and I'm not
sure whether--I mean, just based upon your testimony today, I
question whether the writer is accurate. I just want to make
sure we're clear.
First of all, the editorial says that your report says,
``one program is costing taxpayers an extra $100 million a
year.'' Is that accurate?
Mr. McNamara. No, sir.
Mr. Cummings. You never said that?
Mr. McNamara. No, sir.
Mr. Cummings. It also says that the Department of Education
ignored your report, do you believe that to be accurate?
Mr. McNamara. No, I don't believe that they have ignored
it. We've had a lot of discussions with them. They also plan to
adopt the methodology we use to allocate costs as they go forth
to set up their accounting system, and we've had a few meetings
with them so far to get that process started.
Mr. Cummings. This article was written on June 1. The
actions that you just spoke of, did some of them happen before
June 1, such as maybe something happened afterwards that the
writer didn't know about? I'm just curious.
Mr. McNamara. I would say it's both.
Mr. Cummings. Could you tell us what has happened since
June 1 so I can sort of update this information in my mind?
Mr. McNamara. Since June 1, and I'm doing this off the top
of my head.
Mr. Cummings. I understand. Do the best you can.
Mr. McNamara. We obtained information from the Army
Materiel Command on activity-based costing. I had my staff
member that did this study review that. I know he's had some
discussions and had preliminary meetings with the head of the
accounting and finance group in the new PBO, and she's
interested in working with us as she decides on a new
managerial cost accounting system. Some of that happened before
the first, and some of it has happened since the first.
Mr. Cummings. Quite a bit of other things happened before
the first. It was only a few days ago.
Mr. McNamara. Yes, sir.
Mr. Cummings. Let me ask you this. Going back to the
editorial, I think you said you had four recommendations?
Mr. McNamara. Yes, sir.
Mr. Cummings. Can you just say them again for me real
quick?
Mr. McNamara. To institute a cost accounting system, a
managerial cost accounting, activity-based cost accounting
system was one.
Mr. Cummings. Some action is being taken on that based on
what you just talked about?
Mr. McNamara. Yes, sir.
Mr. Cummings. Go ahead. Two.
Mr. McNamara. The second one was to allocate employee cost
to the program that benefited.
Mr. Cummings. Has there been anything happening on that?
Mr. McNamara. That would probably be subsumed into the
first recommendation.
Mr. Cummings. I'm not an accountant, but I kind of figured
that.
No. 3?
Mr. McNamara. Was to start studies on borrower behavior.
Mr. Cummings. Tell me what you have in mind by that? What
does that mean?
Mr. McNamara. Well, the more you know about borrower
behavior, the more you know about what might happen if you
change various policies, what effect it might have on defaults
and various other things. I think lenders typically do this to
know that if you raise interest rates, are you going to make
more loans or less loans; what affect would certain collection
practices have in terms of your ability to get the loans back
in, that sort of thing.
Mr. Cummings. Has any action been taken on that?
Mr. McNamara. I'm unaware of that. The Department would be
in a better position to talk about that.
Mr. Cummings. No. 4.
Mr. McNamara. Recommendations. I'm almost going from memory
now. Let me just refer to the fourth one. The final one was to
address the inefficiencies that we pointed out from previous
studies that we had done or the General Accounting Office had
done. Problems with the--for instance, the information systems,
trying to consolidate those, eliminate the stovepipe systems
that have been discussed earlier.
Mr. Cummings. Some action has been taken on that?
Mr. McNamara. It's currently under way. That's why the PBO
was set up. Greg Woods is working on a blueprint that I'm sure
he'll tell you about. Our office has been invited, and we are
working with them as they design the systems to try to make
sure that internal controls are designed in at the start.
Mr. Cummings. Do you feel comfortable with--having spent
this time doing your investigation? Do you feel satisfied that
the Department is doing their part to followup on the things
that you recommended generally, and from what you do know?
Mr. McNamara. From what I do know, they clearly made a
beginning on the first two, and that's the cost accounting. The
others, you know, they've gotten started, but it's really too
early to tell.
Mr. Cummings. I don't have anything else.
Mr. Mica. Thank you.
We'll recognize now Mr. Ose, the gentleman from California.
Mr. Ose. Thank you, Mr. Chairman.
Mr. Butts, I want to make sure I understand the process in
the direct program. The student comes in, applies to a
university or higher education facility seeking financial
assistance for continuing at school, for tuition, books and the
like. The institution goes through its underwriting criteria, I
presume, exercises some judgment on the ability of the student
to repay, and makes a loan. Once the loan is made, what happens
to the loan itself? You package it and sell it to Sallie Mae?
Mr. Butts. Once the university has given a student a
financial aid package of Pell grants, loans, and so forth, we
distribute the funds to the students with appropriate
promissory notes and draw down the money from the Federal
Government, as we do for all of our programs, and allocate it
to the students' account wherever it is appropriately to go.
The signed promissory note is sent to the Department of
Education's contractor for servicing purposes. The servicer
then enters it and sends a confirmation notice to the student
that reminds the student that they have a loan. The government
then assumes the responsibility for the billing and servicing.
All the servicing of the student loans for direct loans is
handled by private sector contractors to the Department of
Education.
Mr. Ose. That's the $13 or $17 figure we keep talking
about?
Mr. Butts. Yes, sir. That $17 figure, as I understand it,
includes the profit paid to the contractors. I'm not sure that
the other number includes that.
Mr. Ose. In this process, somewhere along the way, the note
is sold, or is it held by the Federal Government?
Mr. Butts. It is held by the Federal Government. You see,
the capital for these loans have been obtained for all
practical purposes through the weekly auction in the private
capital markets, similar to T-bills and at, of course, very
good rates for the government because it can leverage its
purchasing power in the marketplace. As the loans are repaid in
direct lending, then they are simply turned to the Treasury.
Mr. Ose. The actual loan is never packaged and sold?
Mr. Butts. Not in the direct loan program.
Mr. Ose. How about the Federal family education program,
the FFELP?
Mr. Butts. In the FFELP program, there are, I think, some
7,000 lenders, over 300 or so very active lenders, and a
variety of secondary markets including Sallie Mae, tax exempts
and so forth. Those loans can be bought and sold in the
marketplace. One of the advantages, we think, of the direct
loan program is that the student always knows who owns their
loan and who to make the payment to.
Mr. Ose. Because the institution continues to hold it, and
it is serviced by the private contractor.
Mr. Butts. Because the government owns the loan, and it's
being serviced by one entity.
Mr. Ose. Now, you would have the direct loans, so you would
not be involved in the guarantee, because if the Federal
Government isn't paid, they just write it off or declare them
dead.
Mr. Butts. At one point we were involved with the
guaranteed loan program, and we dealt with every lender and
secondary market in the country as a national university and
dealt with--it was a very complicated process for us, which is
why we changed. We think direct loans provide better service to
our students; other institutions think otherwise. Clearly the
marketplace is now making both programs competitive, but we
think that the fact that the student in direct lending knows
who owns their loan, and that doesn't change, may change
repayment plans wherever possible, and has access to income-
contingent repayment plans are clear advantages for the
students.
Mr. Ose. Mr. Chairman, I thank you for the 5 minutes. I
know we have a vote, so I yield back.
Mr. Mica. I want to thank all of our panelists: Mr.
Berthoud from the National Taxpayers Union. Mr. Butts, we're
waiting to hear back from the University of Michigan's
reconciliation of accounts from 1995-1996. Dr. Galloway, we
wish you many further studies and contracts. Mr. McNamara,
thank you. We appreciate the new Inspector General's
willingness to go forward today, even though she's not in
place, but we wanted to get this matter before the subcommittee
in a timely fashion.
I might say, too, this is not the result of a GAO study
ordered by Congress. This is a study, as I understand, that the
Department authorized, and the audit results speak for
themselves, but we do need your interpretation and appreciate
your cooperation.
We will hear from the second panel and the Department of
Education in--I think we have four votes or so. We're going to
have to recess the hearing until about 12:35. It will be just
under an hour, which will give folks an opportunity to catch a
quick bite.
I apologize to our next two witnesses, but there will be a
series of votes, and we can't conduct business in the interim.
I thank this panel. You're excused. This meeting of the
subcommittee is in recess.
[Whereupon at 11:45 a.m., the subcommittee recessed to
reconvene at 12:35 the same day.]
Mr. Mica. I would like to call this meeting of the
subcommittee back to order.
We have our second panel before us: Dr. Marshall S. Smith,
Acting Deputy Secretary, Department of Education; Mr. Greg
Woods, Chief Operating Officer, Office of Student Financial
Assistance Programs under the Department of Education.
Gentlemen, this is an investigation and oversight
subcommittee. Would you please stand and be sworn?
[Witnesses sworn.]
Mr. Mica. The witnesses answered in the affirmative.
If you have lengthy statements, we'll make them part of the
record by unanimous consent. Otherwise, you're recognized.
The first witness is Dr. Marshall Smith, Acting Deputy
Secretary, Department of Education.
Welcome, and you're recognized, sir.
STATEMENTS OF MARSHALL S. SMITH, ACTING DEPUTY SECRETARY,
DEPARTMENT OF EDUCATION; AND GREG WOODS, CHIEF OPERATING
OFFICER, OFFICE OF STUDENT FINANCIAL ASSISTANCE PROGRAMS,
DEPARTMENT OF EDUCATION
Mr. Smith. Thank you, Mr. Chairman, Mrs. Mink.
The Department of Education administers two Stafford
student loan programs. Under the FFEL, Federal family education
loan program, the Federal Government subsidizes private lenders
to make student loans and then guarantees those loans against
defaults.
Under the direct loan program, we fund student loans with
Federal capital and hire private companies under performance-
based contracts to deliver and service the loans.
This year, the FFEL program will provide an estimated $20.4
billion in new loans for approximately 3.5 million students;
and the direct loan program will provide $10.6 billion in loans
to 1.9 million students.
Before the direct loan program was founded in 1994,
students and schools were often confused by an array of
different paperwork, procedures and schedules in the FFEL
program. Only 68 percent of schools expressed satisfaction with
the program. Federal subsidies for FFEL lenders and guarantee
agencies were too costly for taxpayers, and the program had not
received a clean audit opinion at least since the Department of
Education was founded in 1980.
The direct loan program reduced paperwork, created a single
loan account with one point of contact for each student and
allowed the graduates greater flexibility in repaying the
loans, including the new income contingent repayment plan. In 3
years, over 1,200 schools chose to leave the FFEL program and
join direct lending. The direct loan program now originates as
many loans as the largest 15 FFEL lenders together. It holds
one-third of one of the largest financial markets in the world.
A new and strong competitor, the direct loan program helped
inspire FFEL lenders to help improve their services. As a
senior FFEL executive said last year, ``Direct Loans have
introduced some ways of doing business and some delivery
mechanisms that made the private industry wake up a little bit.
It's been good for the industry, particularly for students and
schools.''
Competition does help, primarily to improve service in the
FFEL program. Satisfaction with both student loan programs
among schools increased from 68 percent in 1994-1995 to 81
percent in 1997-1998.
Students are also satisfied. A 1998 survey found that 94
percent of all student borrowers were satisfied with their loan
program.
With the help of Congress and our partners, the Department
strengthened the financial management of the loan programs. The
national cohort default rate has been reduced from 22.4 percent
5 years ago to a record low 9.6 percent. At the same time,
annual collections have increased by two-fifths, from 6.6
percent of outstanding defaults in fiscal year 1993 to 9.2
percent in fiscal year 1998.
The National Student Loan Data System has helped prevent
ineligible students from receiving as much as $400 million in
grants and loans this year. These and other improvements helped
the Department receive an unqualified opinion from its auditors
on its fiscal 1997 financial statement.
The subcommittee heard this morning from the Department of
Education's Office of the Inspector General, which recently
completed a study of direct loans and FFEL costs. We welcome
the findings of the study, which I hope will help us reduce
administrative costs and improve our internal accounting.
However, I'm concerned that some have misunderstood the study
and wrongly concluded that the direct loan program is more
expensive for taxpayers than the FFEL program.
The report does not compare the total cost to the taxpayer
of these programs. It's that simple. Instead, the Inspector
General's report compares documented direct loan administrative
costs with estimates of what it might cost a large FFEL lender
to manage the same loans. It does not report actual
administrative costs in the FFEL program. More importantly, it
does not combine the Federal administrative costs with the
Federal subsidy costs.
The overall Federal subsidy includes default costs,
interest subsidies and other expenses that are the large
majority of Federal expenses in operating the FFEL program.
Adding the subsidy costs to the Federal administrative costs
would present a clearer picture of the total cost to taxpayers.
The table on page 8 of my written testimony does this. That
table shows that using current economic assumptions, both by
the CBO and by the administration, the direct loan program is
substantially less expensive for taxpayers than the FFEL
program. In this analysis, each FFEL loan is nearly twice as
expensive for taxpayers as a comparable direct loan, according
to either the administration or the CBO's estimate. As a
result, direct loans are estimated to save taxpayers over $700
million this fiscal year compared to the cost of all direct
loans if they were FFEL loans.
In summary, the student loan programs have come a long way
since the direct loan program was established in 1994. Major
improvements to the program include healthy competition between
the two student loan programs, creating marketplace incentives
to improve service and increase customer service satisfaction.
Now schools can move to the program that they believe will best
serve their students.
We now have lower interest rates for students who have
saved $4.7 billion--since 1994.
Finally, there have been over $5 billion in savings--$5
billion in savings for taxpayers since 1994 due to reduced
subsides for FFEL financial institutions and the lower Federal
costs for direct loans than for FFEL loans. That's $5 billion.
In addition, taxpayers have saved additional billions in
reduced default costs.
Now the loan programs are poised for further improvements.
The new performance-based organization established by Congress
has greater management flexibility, accountability for results,
and incentives for high performance.
We supported this law and have been pleased to implement it
quickly and enthusiastically. The first Chief Operating Officer
for Student Aid, Greg Woods, has hit the ground running. He has
the right experience, including being the CEO of a software
company and 5 years at the Reinventing Government initiative,
to make the PBO a success.
After Mr. Woods describes his plans for improving the
administration of student aid, I'd be happy to answer any
questions you may have. Thank you, Mr. Chairman.
Mr. Mica. Thank you.
[The prepared statement of Mr. Smith follows:]
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Mr. Mica. I'd like to recognize Mr. Greg Woods, Chief
Operating Officer, Office of Student Financial Assistance
Programs.
Mr. Woods. Mr. Chairman, committee members, thank you very
much.
I'll focus on the improvements we're making in the PBO in
the overall delivery of student financial assistance; and, with
your permission, I will submit a written record.
Mr. Mica. Without objection, that will be made part of the
record. Thank you.
Mr. Woods. I'll summarize it briefly here.
Six months ago, I became the first Chief Operating Officer
of the government's first performance-based organization.
Congress created that performance-based organization to focus
on the operational aspects of student aid, as distinguished
from its policymaking functions, the whole idea to make the
thing run more like a business.
That's my background. I'd been a success in business, and I
bring that point of view to this job.
My specific mandates in the legislation are to improve
customer service and to reduce cost and, as a way of doing
both, to integrate and streamline the computer systems. I view
my ultimate customer here as the student who needs financial
help to get an education, but the aid is delivered in the
system. That system includes partnerships with schools and the
financial community.
The overall cost of getting aid to the student includes
everything that our delivery partners and we spend on that
entire process. That means my job, as I view it, is to do
whatever I can to make both these programs, the direct loan
program and the FFEL program, efficient and effective, to make
them both excellent values for the student and the taxpayers
and to make them both excellent investments for America.
The natural competition between the two programs I view is
a good thing and a powerful tool to that end. The Secretary has
already spoken to the advantages that competition has
introduced into this arena and that competition continues. On
the other hand, OSFA and these commercial lenders are partners
with a common goal. That is, we're helping to put America
through school. So we're trying to constantly collaborate with
these partners to improve service and cut costs in the entire
system.
Our overall goal in the PBO is service that equals the best
in business. To get to that level of performance, we're in the
process of changing absolutely everything that goes on in this
organization. We're reorganizing the Office of Student
Financial Assistance along the lines of private sector
corporations to focus in channels on the people that we deal
with, a channel for students, a channel for schools, and a
channel for our financial partners.
We're instituting a financial management system to get the
kind of cost data that the IG referred to as necessary to do
proper cost estimates and to manage this business day in and
day out.
We have a Customer Service Task Force that's been in
consultation with our partners listening to students, listening
to partners, listening to our own employees; and, next month,
we'll publish a report with about 200 ideas on ways to improve
service delivery in our organization.
We have a new acquisition strategy. We are in the process
of renegotiating all of our contracts for our computer systems
into performance contracts with goals that would tie to my own
as the Chief Operating Officer of the organization.
With the help of the schools community, technical centers
like Highway One and financial powerhouses like the Bank of
America, we've been preparing a Modernization Blueprint that
will go after the reengineering of our stovepipe computer
systems. And in September, I'll deliver to the Congress a 5-
year performance plan that will have an aggressive set of goals
for improving service and lowering cost. In fact, everything
we're doing goes back to the PBO mandates from Congress to
improve service to the students and to cut costs, whether they
be FFEL or direct loan costs.
Thank you very much. I would be happy to assist the
Secretary now in answering any questions that you might have.
Mr. Mica. Thank you.
[The prepared statement of Mr. Woods follows:]
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Mr. Mica. I have questions for both of you. We'll try to
cover this pretty quickly here.
First of all, we've seen the audit, the report, and there
are a number of criticisms. There were some items that we had a
report--was it Mr. McNamara who cited that corrections are
being instituted, some corrections he was aware of, some he was
not? Specifically, what has brought this hearing to such a peak
are questions about disability and people having their payment
waived and then coming back on the system and being reeligible.
Could you tell us, first of all, what's being done to correct
that?
Mr. Woods. Absolutely. One thing I'd like to make sure is
understood here, this is an example of the Department
identifying a problem and trying to get after it on its own.
The study that the IG did here was at the request of the
Department. The Department was concerned about fraud and other
disability programs and was concerned about trends in the rise
in its disability claims and asked the IG to look into it.
The results of the study confirmed those fears, as you've
indicated, in the worst way. We have things in process already
with our partners here.
Note that this problem exists within the FFEL program
primarily. That's where the difficulties have been found
because more of the loans in the FFEL program are into the
repayment status. And we're working with the guaranty agencies
on new procedures here, looking again at commercial practices.
We can require certified certificates. That's something we
haven't done. It's common practice in the insurance industry.
We can require doctors' identification numbers and phone
numbers. We can go into training programs with the guarantors
and their people who are reviewing these applications for
disability so that they're better informed about what to look
for.
The other thing I'd like to state here is that we, in fact,
believe we can go after and recover this money. Where we find
that there were mistakes made in processing, we can reinstitute
these loans and collect on them.
Mr. Mica. Well, Dr. Smith, in the record, page 8, I believe
it is--there's a chart. It says, new loans after disability
discharge, and it shows 1994-1995 pretty much stable and then
1995 just shoots off the charts. It's my understanding that the
Department changed the regulations in 1995 to make it easier
for students who have gotten loans forgiven to get new loans.
Has that policy been changed back or are we still operating
under the policy that had this sort of shoot off the charts?
Mr. Smith. At this moment we're still operating under the
policy. The regulation will be under review. It is now under
review. All these regulations have to go through something
called negotiated rulemaking. It's the congressional intent for
all of our regulations. So we have to bring people together in
order to change things, and we intend to look at that. I intend
to talk with the Secretary soon about this, and we'll be
moving.
Mr. Mica. We just heard reports coming out in a month after
this hearing or so with a lot of suggestions, but to get things
done and--you know, we have to focus on the big enchiladas
here. Certainly, this is the biggest area, we have identified
the program. Your audit which--I congratulate you for taking
that step, but now our job in oversight is making certain that
there's a change in action and a change in policy. So we're
going to have to followup on this, and we need a change in the
policy.
We've also satisfied the PBO with I'm told more than 1,000
folks; is that correct?
Mr. Woods. The staffing level----
Mr. Mica. Tell me what our staffing level is. We've ramped
that up pretty dramatically, and our administrative costs I
guess have risen 200 percent in 6 or 7 years.
Mr. Woods. I'd be delighted to address that.
Actually, the staffing level in the PBO is relatively
stable at 1,200 people. These people were involved in the
loan----
Mr. Mica. That's a third of the Department of Education.
Mr. Woods. It's a third of the Department of Education--a
quarter.
Mr. Mica. I'm sorry, 25 percent approximately; and when did
they come on?
Mr. Woods. This staff?
Mr. Mica. Yes.
Mr. Woods. The staff was increased over the past few years
with the direct loan program, but that staffing increase number
I don't have for you here today. It's nothing like the kind of
percent that's shown on this chart. The indication in the chart
is that we've dramatically increased the cost without an
increase in workload, and I'd like to dispel that idea. That's
just not the case at all.
What we've been doing in the direct loan program for
several years now is issuing on the order of $10 billion a year
in loans. So each year a loan is put out, that adds to the
workload. It doesn't go away after the first year.
Now we're actually entering a period of time where as the
loans go into servicing, the workload increases. The servicing
is a much more expensive proposition than simply issuing them.
They're not being serviced to that extent while they're in
school. So our workload has actually increased dramatically
over this time.
Mr. Mica. We're told that one of the biggest problems with
the PBO is that there's no chief information systems officer.
Is that still the case?
Mr. Woods. We have an excellent man who's been leading the
information systems work there for some time. We've been able
to add a couple of experts, for example, in privacy and
security to support that. And, of course, this is my
background. I'm certainly fully qualified to carry that work
out and make decisions in that area. So compared to where we
were 6 months ago, we're probably dramatically stronger.
Mr. Mica. Two other areas, there's been great concern
expressed about both in this panel and in the public arena, and
that's payments for students who claim to be dead and are very
much alive and then the problem with our foreign student loans.
Could you address both of those for me?
Mr. Woods. The death and disability claims is what we
referred to earlier and the changes we're making there with
death certificates and training and those improvements as well
as the policy issue you addressed to the Secretary.
Mr. Mica. Specifically, though, are you now requiring the
death certificate?
Mr. Woods. Yes. We're----
Mr. Mica. Is that in place?
Mr. Woods. We have notified the guarantors that we intend
to do this.
Mr. Mica. But it's not in place?
Mr. Woods. No, sir. They are already looking at changing
their policies. Where we stand with each of the guarantors I
couldn't tell you today. I would be happy to answer that
detailed question for the record.
Mr. Mica. Is that a policy question that Dr. Smith would
have to address that becomes----
Mr. Woods. We don't believe that change is a regulatory
change, so we believe we can proceed administratively to deal
with this. The community is very eager to work with us on this.
Mr. Mica. But it's still not in place. It's a request at
this point?
Mr. Woods. That would be accurate.
Mr. Mica. Dr. Smith, did you want to respond?
Mr. Smith. Well, it's just that Mr. Woods has to work with
a variety of guaranty agencies out there and explain to them
exactly what they need to do and they need to look it over and
see how quickly they can put their changes into practice. I
think that's the delay in this process. It's not as though
they're going to get a choice. They will have to carry out the
policy.
Mr. Mica. That would be a variety, I guess, of
participants.
What about the direct loan program where you can make a
decision. Has that been made?
Mr. Woods. That decision has been made.
Mr. Mica. And is taking place?
Mr. Woods. Yes, sir.
Mr. Mica. The other item was the foreign student problem.
Mr. Woods. Right. The foreign schools issue I don't believe
is a schools issue per se. Several years back, the Department
undertook a review and went through a recertification on
schools and a number of schools dropped out of the program--in
fact, over 400. We have about 450 foreign schools currently
involved in the direct loan program. The cases that were found
seemed to be cases that were involved with students, and 18
cases is what we're talking about here. Eighteen cases of fraud
identified where students are being pursued for that, a
relatively small number.
The other point I'd make about the foreign schools program
is that the overall default rate, which has been much at issue
here this morning and this afternoon, that default rate is 5.5
percent, which is better than the national average. So while
we're concerned about fraud any time we find it, I just want
that to be in perspective.
We also think we've instituted some practices here that
will improve the performance going forward. We're notifying
schools, for example, when loans are issued to students who are
alleged to be enrolled there. That will get the schools
involved as a checkpoint on whether that student is actually
there and eligible for funding.
Mr. Mica. Dr. Smith, did you want to respond?
Mr. Smith. No, that's fine.
Mr. Mica. You said that one of the things you wanted to do
was study borrower behavior. Could you elaborate a little bit
more on that?
Mr. Woods. My private sector experience was that it's very
important to be focused on the customer and to think in terms
of what the private sector talks about as customer
segmentation. Different parts of the population have obvious
different needs. Small business is different than big business,
seniors different than juniors.
In our case, students in 4-year, 2-year and proprietary
schools have different needs and, as we find, much different
default rates among those institutions. We think that by
understanding behaviors in these customer segments and the
needs of those populations, we can intervene earlier, and
thereby reduce the cost in terms of default and produce a
better situation for that borrower in terms of services. That's
what we are interested in.
Mr. Mica. One other quick question before I get to the
ranking member, I did not ask you. I asked you about the number
of employees with the PBO. Do we have any way of assessing the
contract employees or employees that are involved through
contract?
Mr. Woods. We certainly could get you an accurate number if
you'd like. I believe that number, at a peak during the year,
might run to 3,000 employees if you totaled it up for all the
peak periods.
The reason I say peak is because our business is cyclical.
When we're consolidating loans, we ramp up in that area. We
don't maintain that staff level. As soon as we don't need the
people, these part-time people under contract are reduced.
The same thing with our student eligibility application. We
ramp up and tail off in order to minimize the cost. So that's
the way we're managing that contract work force.
There was conversation here about the practice of involving
the private sector, using private sector firms to handle the
loan programs. The truth is that this organization is well on
the path to contracting out these service functions and
processing functions. We have experts for phone service,
experts for computer processing, experts for transforming paper
into electronic images, and contractors who ramp up and down to
meet the particular business cyclical needs.
Mr. Mica. Let me yield now to Mrs. Mink, if I may.
Mrs. Mink. Thank you very much, Mr. Chairman.
I served on the Education and Workforce Committee when it
was known as the Education and Labor Committee, and as I
recall, the initiation of the whole idea of direct loans, it
was something that was generated by Congressman Robert Andrews
and supported by the chairman, William D. Ford of Michigan.
Those were the two individuals most responsible for the
initiation and creation of this program.
After a number of discussions and debates and meetings with
the administration, the administration came on board and
supported the program. Is my memory correct on that?
Mr. Smith. I think that's right, Mrs. Mink. I believe that
a direct loan program existed in the prior Congress as well, a
small direct loan program. Congressman Petri as well as, I
believe, Congressman Andrews and, of course, the chairman were
all involved in that. And then I believe there was discussion
early in Mr. Clinton's administration, and there was a decision
to move with a larger program rather than just the pilot.
Mrs. Mink. Yes. What I wanted to note with reference to
this history is that--to dispute or dismiss the assumption that
this was a grab on the part of the Federal Government for the
administration, supervision and management of a program.
Rather, as I recall, it was an initiation by the Congress at a
time when everyone was looking for ways in which to reduce the
deficit and balance the budget. And because of the high
interest that the private sector banks and financial
institutions were charging for the management of this program,
there was this idea that maybe the Federal Government, even
though you realize you have to put on more manpower and
personnel and create a whole new system, that it could be done
with a cost savings.
Now, in your statement, Dr. Smith, you say substantial
savings have occurred for the taxpayers. Can you elaborate on
that?
The testimony we heard this morning seemed not to conclude
that that has, in fact, occurred; and since that was the
genesis of this whole idea, I'm very anxious to really get to
the bottom as to whether we, in fact, have enjoyed any savings.
Mr. Smith. Mrs. Mink, we estimate and the Congressional
Budget Office estimates that the savings have been
considerable. As I mentioned, we can estimate them at about
$700 million this year if all of the direct lending students
were, in fact, in the FFEL program.
Now, there have been a lot of other savings as well to the
taxpayers and to the students, and they've come about in two
ways. One is the way I just mentioned. That is, that the direct
lending program, because it doesn't have to pay huge subsidies
to private lenders, turns out to be a cost saver under most
economic assumptions.
As you recall, the IG said he wasn't sure. There are
certain economic assumptions one can make about the interest
rates and so on where it might not be a cost saver but, by and
large, and certainly over the last 6 years, the life of this
program, it has clearly been a cost saver. We estimate that the
cost savings to the taxpayer have been roughly $5 billion since
1994.
We can supply more detail on that if you'd like, but it is
from a couple of things. One is from the direct lending program
having one-third of the business. The other is the reduction in
some of the subsidies that have gone to the private sector. The
private sector, as you know, continues to make a reasonable
profit on this, a fair profit.
Mrs. Mink. What is the percentage surcharge now on the
loans that the private sector charges the student or the
program?
Mr. Smith. The interest rates?
Mrs. Mink. Yes. The surcharge for managing the program.
Mr. Smith. To the Federal Government? We do it in terms of
subsidies. The private sector gets an origination form of fee,
which is about 4 percent. They also then charge interest rates
to the students, and they get to keep whatever profits on those
interest rates. In effect, they have to give some money back.
By and large, what you have is a system where the Federal
Government guarantees the private sector payments and then pays
them a reasonable subsidy in order to provide loans for
students. It has worked reasonably well over the last 4 or 5
years.
I think here is where the other real savings comes in.
There's competition between the two programs, which I believe
resulted in savings to students and much better service to
students and has gotten the two sectors competitive. The
private sector, the FFEL program, for example, has become quite
competitive in the reduction of some of the origination fees
and in some of the other costs to students. So I think we've
got a very healthy, competitive system now that has saved
students a large amount of money and saved taxpayers a large
amount of money.
Adding them together, it's almost $10 billion over the last
6 years.
Mrs. Mink. About a third of the loans currently expected
are about one-third in the direct loan and the balance in the
private sector; is that correct?
Mr. Smith. That's correct.
Mrs. Mink. That's a balance you expect to maintain over the
long haul?
Mr. Smith. That's certainly what we expect to maintain over
the foreseeable future, that's right. And it is, as I said, a
competitive market; and we're working to maintain that.
Mrs. Mink. The direct loan program was initiated when? When
was the first loan issued?
Mr. Smith. I believe in 1994.
Mrs. Mink. Now, has there been, since the initiation of the
direct loan programs, any experience with collections and
defaults and determinations of waivers and discharges of debt
and so forth with respect to the direct loan program?
Mr. Smith. Well, there's been some but not very much to
make a real generalization.
Mrs. Mink. It hasn't been in existence that long to
experience----
Mr. Smith. That's right. In fact, the numbers are very low
right now. The percentages are low. I wouldn't count on that as
being something that will hold up in the future. We see no
reason that this will behave any differently than the FFEL
program.
Mrs. Mink. The reason for my question, the reports that
generated the call of these hearings with respect to the
discharges for disability and the erroneous notion of students
being dead and having their debt discharged emanate not from
the direct loan program but from the existing private sector
loan program.
Mr. Smith. I believe that's true. It's probably true for 98
to 99 percent of the cases, if not 100 percent.
Mrs. Mink. So the management of the private sector loans to
which this problem is attributed is a responsibility of the
private sector? Or is it the responsibility of the Federal
Government to institute control so that it doesn't occur?
Mr. Smith. I believe it's a shared responsibility. These
are fiscal----
Mrs. Mink. Who recommends the waiver of the collection? Is
that the private sector that recommends it or is it the Federal
Government that recommends it?
Mr. Woods. The process would have the private sector agency
processing the paperwork. As the chairman indicated earlier,
there are regulations that the Department issues that cover
this practice and then----
Mrs. Mink. Who makes the final decision?
Mr. Woods. At that instant in time on the piece of paper,
the private organization would make that determination, but we
have required certain things of them. Once they've gone through
that, they're perfectly within their rights to make that call.
Mrs. Mink. If they sign off and say this is discharged
because of disability, in the end it's the taxpayer that loses
because it's unable to collect.
Mr. Woods. That's correct.
Mrs. Mink. What is the process then that the Federal
Government has set up to look at these discharges to make sure
they're all valid? Is there someone in the Department that does
that?
Mr. Woods. We have not had a review function specifically
focused on this issue. We have an active review program that
looks at the overall practice, makes site visits, program
reviews for these guarantors. And naturally those reviews in
the future, any one of them that we make, would focus on this
issue. But we haven't got a medical examiner or a medical
reviewer at the Department level for this function.
Mrs. Mink. Can you say with some assurance that, with
respect to the new program, the direct loan, that you have this
in hand and that these sorts of misdeterminations would not
occur under the government-managed program?
Mr. Woods. I wouldn't want to assure you that there would
be zero, but I know we can reduce this number dramatically by
instituting the kind of practices that are followed in other
Federal agencies and in other retirement programs in making
these determinations. Those are available to us, and we'll be
able to institute those.
Mrs. Mink. Mr. Chairman, I'm at the end of my questioning;
I just simply want to say that I'm very much reassured by the
testimony of the two witnesses from the Department that the
direct loan program is being well administered. The questions
that we raised have now been brought to their attention, and I
have confidence that they'll be able to correct it. I say this
not as an early supporter of the direct loan program. I have to
make a public confession that I had great misgivings about the
creation of this huge bureaucracy to manage a program that I
considered so vital. At that point in our early deliberations,
it seemed to me that it was an undertaking that was going to
challenge our witnesses and our abilities.
But I'm pleased to hear today that it's progressing along,
and I commend the Department for initiating the audit to look
at yourselves and come up with safeguards to make sure that
this program will continue to be managed well and that the
taxpayers' dollars will indeed be saved by it.
Thank you, Mr. Chairman.
Mr. Mica. Thank you. I appreciate the comments of the
gentlelady and the ranking member.
I wish I could be as confident in the bureaucracy we've
created to oversee this program. Quite frankly, I do have some
concerns, as I said even during their testimony, that they had
commented that corrections are on the way. I think I've sat and
heard that before and then some of the mechanisms and resources
that we've provided for them, including PBO, which have been
put in place at great expense, still have not produced the
results we hoped for.
We now have 24 percent of the entire Department of
Education, as far as personnel, involved in the program, and
costs are escalating for administration, so I have some
concerns. Not to mention that we have some great loopholes in
forgiveness of payments for people who are ineligible and, in
fact, by their own report and these are not insignificant
amounts.
Again those corrections are not in place. Some policy
changes are not in place, and we need those in place. Some of
the administrative corrections are not in place by their own
general audit. We still have some serious personnel deficits
and problems that need to be addressed to make this whole
program work. I have additional questions regarding the
differential between the administrative costs that have been
presented, not by me but by the audit, and I think we'll have
some very specific questions in writing so that we can get a
written response.
Additionally, I have specific questions which I didn't get
to about loan consolidation costs.
In closing, maybe I could just ask a quick question. The
information that our subcommittee obtained said that loan
consolidation costs of the direct loan program greatly exceed
those of the guaranteed loan program. For example, I guess you
have indicated that the direct loan consolidations in 1998 cost
$12.9 million for 107,000 loans or $121 per consolidation. In
1999 you reported $21.8 million for 194,000 consolidations
equaling a little bit less than cost, bigger volume, $112 per
consolidation.
However, we're told that these figures may, in the private
sector, be about half the amount, far less than the
consolidation loans that are done by you. In fact, I guess the
consolidation problem got so bad, and this has been testified
to, that in August 1997, the Department had to close down the
direct loan consolidation program. What's being done to correct
this situation? And, in fact, is it still costing almost twice
as much for loan consolidation by the Department?
Mr. Smith. Mr. Chairman, we're going to have to check your
figures. The $110 figure is actually the maximum figure, the
underperformance-based contract. They're expected to hit a
target of, I believe it's 65 days, or whatever the industry
standard is. If they come in earlier than that with a
consolidated loan that is faster for the student, they get an
increase in that payment. If they come in later, they can
deduct it from their amount of money.
The average amount of money here is $70 per loan. For a
regular loan, we charge--it costs us, in terms of paying the
consolidator, considerably less for certain other kinds of
loans. So there's a real mixture of loans, and I believe what--
the figure you're using is actually the figure for the maximum
amount that could be paid rather than the amount that on
average is actually paid. But we will get you those figures.
I also believe that the numbers for 1998 were not quite
right, but we'll also get you those.
Mr. Mica. Again, we're using figures that have been
supplied by the Department or figures that have been taken from
the audit studies. So we have some very specific, lengthy
questions. And I know that you have a limited time schedule;
and you've been most patient, Dr. Smith. We appreciate your
testimony today.
Mrs. Mink, why don't we, by unanimous consent, submit the
balance of the questions to the Department for response in
writing?
Mrs. Mink. Fine with me.
Mr. Mica. And we'll leave the record open for 30 days to
give you extra time to respond.
Again, I think we've raised some important issues here.
It's not our job just to be bad guys. Mrs. Mink practices in
trying to be one of the nicest Members in Congress, and she's a
wonderful ranking member, but we have a responsibility to
conduct oversight of these programs. Your audit helped trigger
some of the reports about continuing problems, and they
certainly need to be addressed by our panel. Working with you
we hope we can get this program in order and make it work
efficiently and take whatever legislative steps are necessary.
We hope that we'll get response from the policy and operational
end.
There being no further business to come before the
subcommittee at this time, this meeting is adjourned. Thank
you.
[Whereupon, at 1:20 p.m., the subcommittee was adjourned.]
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
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