[Senate Hearing 107-443]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 107-443

                CONSOLIDATED STUDENT LOAN INTEREST RATES

=======================================================================

                                HEARING

                               BEFORE THE

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                                   ON

                 EXAMINING FEDERAL STUDENT AID PROGRAMS

                               __________

                              MAY 9, 2002

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


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                            WASHINGTON : 2002
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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

               EDWARD M. KENNEDY, Massachusetts, Chairman

CHRISTOPHER J. DODD, Connecticut     JUDD GREGG, New Hampshire
TOM HARKIN, Iowa                     BILL FRIST, Tennessee
BARBARA A. MIKULSKI, Maryland        MICHAEL B. ENZI, Wyoming
JAMES M. JEFFORDS (I), Vermont       TIM HUTCHINSON, Arkansas
JEFF BINGAMAN, New Mexico            JOHN W. WARNER, Virginia
PAUL D. WELLSTONE, Minnesota         CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington             PAT ROBERTS, Kansas
JACK REED, Rhode Island              SUSAN M. COLLINS, Maine
JOHN EDWARDS, North Carolina         JEFF SESSIONS, Alabama
HILLARY RODHAM CLINTON, New York     MIKE DeWINE, Ohio

           J. Michael Myers, Staff Director and Chief Counsel

             Townsend Lange McNitt, Minority Staff Director


                            C O N T E N T S

                              ----------                              

                               STATEMENTS
                         Thursday, May 9, 2002

                                                                   Page

Kennedy, Hon. Edward M., a U.S. Senator from the State of 
  Massachusetts..................................................     1
Gregg, Hon. Judd, a U.S. Senator from the State of New Hampshire.     2
Wellstone, Hon. Paul D., a U.S. Senator from the State of 
  Minnesota......................................................     8
Murray, Hon. Patty, a U.S. Senator from the State of Washington..     9
Hansen, William, Deputy Secretary, U.S. Department of Education, 
  Washington, DC; accompanied by Sally Strump....................    12
    Prepared statement...........................................    15
Prepared statements of:
    Colby White..................................................    18
    Brant Olson..................................................    19
    Mark Brenner.................................................    19

                          ADDITIONAL MATERIAL

Statement of the American Medical Association....................    24

 
                       CONSOLIDATED STUDENT LOAN 
                             INTEREST RATES

                              ----------                              


                         THURSDAY, MAY 9, 2002

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room SD-430, Dirksen Senate Office Building, Hon. Edward M. 
Kennedy (chairman of the committee) presiding.
    Present: Senators Kennedy, Wellstone, Murray, and Gregg.

                  Opening Statement of Senator Kennedy

    The Chairman. Good morning. Today's hearing examines the 
Administration's proposal to eliminate the fixed rate 
consolidated loan program and replace it with a program that is 
based on variable interest rates.
    In recent years, the obstacles to a college education have 
grown higher, not lower, for average Americans. Low- and 
middle-income families trying to send their children to college 
today could face double-digit increases in college costs.
    Yet the experts tell us that the Administration's proposal 
to eliminate the fixed rate college loan consolidation program 
would add yet another barrier to a college education. Six 
million students are expected to take advantage of this program 
over the next 10 years, and this proposal would add thousands 
of dollars to the cost of the average college loan today.
    A college education is the gateway to success for millions 
of Americans and helps keep our country strong and competitive. 
We should be doing everything in our power to make college more 
affordable, not less. So I believe that hardworking low- and 
middle-income Americans were shocked to learn of the 
Administration's proposal to eliminate a program that has 
helped make college more affordable for so many students. If 
you are going to be a doctor or a lawyer, then maybe thousands 
of dollars of loans do not present an insurmountable obstacle. 
But if some students hope to be teachers or nurses or 
firefighters, where the financial rewards are not as great, 
then adding $10,000 over the 30-year life of a college loan can 
force many of these idealistic young Americans into other, more 
lucrative careers.
    The facts are daunting. Today, 64 percent of all students 
depend on Federal student loans to finance their higher 
education. The typical undergraduate leaves school with almost 
$17,000 in student loan debt. In a recent study by the Public 
Interest Research Group, 39 percent of student borrowers 
graduate with unmanageable loan debt, meaning that their 
student loan monthly payment is more than 8 percent of their 
monthly income.
    Current law allows students to consolidate their Stafford 
loans under the FFEL or Direct Lending programs. In 2001, over 
680,000 borrowers decided to consolidate their student loans. 
Some did so to take advantage of a lower interest rate; others 
did it to reduce their payments from several lenders to one 
lender; and still others made the decision to spread their 
student loans out over a longer repayment period to 
dramatically reduce their monthly payments.
    These borrowers wanted to plan their lives--get married, 
have children, buy a car or a house, decide about a career 
move. They wanted a fixed interest rate so they knew exactly 
what their payment was going to be for the life of their loan. 
They did not want to have the uncertainty every year of waiting 
for a new interest rate and a new monthly payment.
    The Administration's proposed change could cost graduating 
students thousands of dollars. This July, Federal student loan 
interest rates are expected to fall to an all-time low rate of 
about 4 percent. The new rates will save the typical borrower 
over $3,000 over the life of a 10-year loan, and up to $10,000 
over the life of a 30-year loan.
    Hundreds of students have called my office in the last week 
to encourage us to fight to save the fixed interest 
consolidation program. Two of our witnesses today will share 
their personal stories about the importance of financial aid, 
and I thank them for their willingness to come before the 
committee this morning.
    We are facing many tough decisions on funding this year, 
but our priorities are clear--we will not fund one education 
program at the expense of another. We need to do better.
    I am anxious to hear from Deputy Secretary of Education 
Bill Hansen about the Administration's proposals on the 
consolidated loan program, and I thank him for his willingness 
to testify today.
    Senator Gregg.

                   Opening Statement of Senator Gregg

    Senator Gregg. Thank you, Mr. Chairman.
    This is a specious hearing about an issue which does not 
even exist. So let us talk a little bit about the facts and 
about what this Administration has done for children who wish 
to attend school and about this Administration's commitment to 
education as a beginning point.
    Let us remember that the Democratic party has not offered a 
budget, so there is no proposal from the Democratic Members of 
the Congress for educational spending. They did not offer one 
in the House, and they have not offered one on the floor of the 
Senate.
    In the alternative, this President has done a great deal in 
the area of education and has focused a significant amount of 
his attention and effort on education and has made exceptional 
progress in the area of education. The President's 2003 budget 
proposes the highest level of funding for student aid in the 
history of these programs. The President has requested funds to 
provide over $55 billion in new grants, loans, and work-study 
funds to over 8.4 million students.
    The keystone of the President's higher education agenda is 
the Pell Grant program, the most effective and well-targeted of 
the student aid programs in helping low-income and middle-
income students.
    Under the President's plan, funding for the Pell Grants 
would be increased by over half a billion dollars over last 
year's level and more than three times the current level of 
inflation.
    From 1995 to 2000, funds for the program grew from $6 
billion to $7.6 billion--that was under the prior 
Administration. Since President Bush took office, he has fought 
for an additional $3.3 billion for Pell Grants, the largest 
increase proposed by any President, and dramatically more than 
President Clinton's administration.
    Today, almost 4.4 million needy college students, half a 
million more--half a million more--than when President Bush 
took office, are receiving Pell Grants, a testament to what can 
be done when Republicans are in favor of education.
    Last year, President Bush expressed his concern that the 
$4,000 maximum award mandated for the fiscal year 2002 
appropriation could not actually be funded. Currently, it is 
unfunded to the tune of $1.3 billion. No proposal has been 
brought forward by the Democratic membership of the Senate or 
the House pursuant to a budget resolution to address this 
shortfall and none has been taken up on the floor of the 
Senate.
    Alternatively, the House of Representatives has filled this 
hole just yesterday in its funding of the Pell Grants, and the 
President has accepted this as an approach. So the $1.3 billion 
shortfall has been addressed without the assistance of the 
Democratic membership of the Senate.
    President Bush has done everything in his power to avoid 
taking steps that the former Administration took in 1993 when 
it cut--when it cut--the maximum Pell Grants under the Clinton 
administration. He has increased them dramatically.
    Earlier this year, the Administration joined with the 
Congress in supporting a compromise measure that would maintain 
the stability of the student loan marketplace and ensure that 
access to low-cost education financing for students and their 
families was not interrupted.
    That measure, which President Bush signed into law in 
February, extended the current low variable rates until 2006 
and established a 6.8 percent fixed rate thereafter. If he had 
not acted, the rates for student loans would have jumped 
dramatically, and students would have been thrown into 
disarray. But he did act.
    The result of this action was significantly lower interest 
rates for students. By historical standards today, the 5.99 
percent rate is a bargain. In July, they are projected to drop 
to their lowest rate ever--4 percent--obviously, a very 
significant bargain for students.
    If you factor in the benefits of the in-school interest 
benefits and the increased tax deductibility, the effective 
rate for a typical borrower will be just under--just under--2 
percent.
    Over 10.2 million students and parents will be eligible for 
these low interest rate loans under President Bush's budget. 
Over a million more students will now be eligible for these low 
interest rate loans than were eligible in the last year of the 
Clinton administration.
    So let us stop trying to scare students and American 
families. Student loans are widely available to more people 
today than they were under the prior Administration. Pell 
Grants are more available to more people today at a higher 
level than they were under the prior Administration.
    The President has also initiated significant tax breaks to 
assist families as they try to help their children get 
educated. Over $10 billion each year in tax breaks are 
currently being provided to working families who are struggling 
to meet the skyrocketing costs of college and to students who 
are repaying their student loans.
     A few highlights of the tax relief which was passed 
without any Democratic support--I guess there were Democrats--
I'm sorry, there were 12 members of the Democratic party; I 
apologize for that--there was Democratic support, but there 
were not any Democratic supporters on this committee for the 
tax relief package which the President gave students, and which 
included eliminating the 60-month limitation on the student 
loan interest deduction, and an increase in the income levels 
for being able to take advantage of the deduction. This change 
makes this tax benefit simpler to administer and increases the 
affordability of student loan repayment by approximately $3.4 
billion a year. That is the savings for students and their 
parents. In addition it increased annual contributions for 
educational savings accounts from $500 to $2,000--from $500 to 
$2,000--that is a huge boost and a significant plus for parents 
wanting to save for their children's education--that represents 
approximately $1.2 billion over 5 years.
    There is a new above-the-line deduction for qualified 
higher education expenses; approximately $11 billion of tax 
benefit for people who want to help their children going to 
school.
    The President's tax relief package provided for tax-free 
distributions from Qualified Tuition Plans, Section 529 plans, 
and permitted private institutions to offer more of those 
qualified tuition plans, which represents $2.3 billion worth of 
assistance to parents and students.
    It makes the employer-provided educational assistance 
income exclusion permanent and extends the benefit of the 
exclusion to graduate-level courses, which represents a $2.8 
billion benefit to people who are trying to better themselves 
as they are working in everyday jobs.
    Those are the types of dollar commitments that this 
President has made to education. Those are real numbers. Those 
are real programs. That, of course, joins with the President's 
commitment to education at the elementary and secondary level, 
which has been extremely significant. He has increased the 
funding for title I in his first 2 years by more than all the 
funding increases for title I during the entire term of the 
Presidency of Bill Clinton.
    He has increased the funding for special education in his 
first 2 years by more than what President Clinton's 
administration proposed in its entire 8 years of service--
although Congress reversed the Clinton position and increased 
it significantly on its own, over the objection of the 
Administration.
    This hearing today is part of a political attack which has 
been orchestrated, and which arose out of a report in a 
newspaper article. The New York Times reported that there may 
be a proposal coming from OMB to change the current fixed 
interest rate on consolidation loans to a variable rate in 
order to account for paying the difference in the Pell Grant 
shortfall. This was an idea. I presume it was floated. I 
presume that that was a trial balloon of some sort coming from 
OMB, which is not, by the way, the educational policy shop of 
this Government.
    What has been the reaction of the Democratic membership of 
this committee? For weeks, rightly so, they have held press 
conferences, and they have gone to the floor of the Senate and 
they have berated the Administration for this trial balloon. 
That is their right as politicians, and they are certainly 
being politicians.
    Thought police--we read about what is happening in the 
Muslim countries today and how they have these people, mulaats, 
who walk around the street, beating people with sticks if they 
say the wrong thing or appear to be wearing the wrong clothes. 
We now appear to have our own thought police on this committee.
    But the step of holding a hearing and representing that the 
Administration policy, as was the statement put forward by the 
chairman in his statement, that the Administration policy is to 
advocate a change to a variable rate on consolidation loans, 
and to hold a hearing on a proposal that does not exist, to 
hold a hearing on an idea that was floated and to claim that 
that idea is the policy of the Administration, is to step 
beyond the proper function of the committee process.
    The proper function of the committee process is to review 
real policy that actually exists. If the Administration takes a 
stand, if it formally takes a position, if it proclaims a 
purpose, then this committee has every right to pursue it. But 
when somebody floats a trial balloon in a New York Times 
article which has been refuted, specifically refuted, by the 
agencies that are responsible for education, to have this 
committee hold a hearing on that trial balloon as if it were 
policy when it is not policy is thought police, and it is 
inappropriate, and it violates the comity of this committee.
    The Republican membership of this committee since I have 
been ranking member has attempted in every way to be 
cooperative. We have agreed to mark-ups on bills we did not 
agree with, and we have not tried to undermine those mark-ups; 
we have not hit them with the various amendments that might 
have caused us to be here for days. We have expedited hearings. 
We have even allowed mark-ups to occur when there may or may 
not have been an operating quorum on this committee.
    We have bent over backward, quite honestly, beyond what I 
would have expected in many instances to try to be 
accommodating so that this committee could do constructive 
work. What is the response we get? An incredibly petty partisan 
hearing such as this.
    The Administration is put in the impossible position of 
either not showing up and therefore being subjected to an 
unending vitriolic attack for being unwilling to defend a 
policy that does not exist, or to show up and be berated as 
they were in the opening statement. It is a Hobson's choice, a 
Hobson's choice.
    Well, the Republican members of this committee have 
caucused, and we have concluded that this type of action is 
totally inappropriate. We have come to the conclusion that this 
committee is not functioning in a fair and proper way. So we 
put the majority on notice that the minority has rights--and 
yes, you can hold this hearing, this trumped-up piece of 
partisan pettiness--but do not believe it is not going to cost 
you.
    Remember there is a 2-hour rule; remember there is 
something called a filibuster; remember there are quorums--all 
of which we have as our resources, all of which we intend to 
use.
    I yield the floor.
    The Chairman. Well, we have obviously touched a raw nerve 
with our good Republican ranking member when we come to funding 
education; we have obviously touched a very raw nerve. If the 
Senator wants to huff and puff about quorums and delay tactics, 
be my guest, be my guest. You are just going to be 
shortchanging the children of America, shortchanging the 
children of America.
    Senator Gregg. Don't use children as your defense, Mr. 
Chairman.
    The Chairman. If I could--I did not interrupt you, I did 
not interrupt you, Senator--I have a document right here from 
OMB, April 25 which says, ``Offset Options for the 
Supplemental, $1.3 billion for the Pell Grant shortfall, 
student loan consolidation, OMB proposal.''
    Mr. Ari Fleischer in a White House press briefing, when 
asked by a reporter, ``Is the fixed rate versus the variable 
rate no longer an option?''
    Mr. Fleischer's quote, ``Well, we are just going to 
continue to work with the Congress.''
    That is a trial balloon? That is taking it off the table?
    I had indicated to my friend--and he is my friend, Senator 
Gregg--that if we had had a letter from OMB that stated there 
was going to be no consideration of eliminating the fixed rate 
consolidation program and that this was no longer going to be 
an option considered by the Administration, we would cancel the 
hearing. We have had no such indication. I have offered that, 
but nothing has been forthcoming; nothing has been forthcoming. 
So I do not understand his logic and reasoning when he says 
that this is off the table. It has been reported in the press 
and it was an actual proposal in an OMB document, and it was 
sustained by the White House as an active proposal.
    If the Secretary wants to say right now this Administration 
will not consider this proposal for the remainder of the 
Administration, we will now adjourn the hearing if he wants to 
do that. If he is prepared to do that, we are prepared to do 
it; resolving this issue is the reason we called this hearing.
    But if the Senator from New Hampshire thinks that we are 
going to be somehow threatened here in the majority when we 
know what the consequences of this kind of proposal would mean 
in terms of increasing out-of-pocket payments for working 
families and low- and middle-income families in this country, 
he is mistaken. If he wants to threaten quorum calls and 
threaten filibusters, so be it. But I want to make very clear 
to him that Democrats are going to do everything that we 
possibly can to fight this proposal.
    If the Administration wants to take it off the table, 
fine--do it, do it--say that it is off the table. But if you 
are not prepared to do that, if you are not prepared to do 
that, we have no other recourse but to say that it is still an 
active proposal that the Administration is considering, and we 
are going to resist it and fight it.
    This program change requires a legislative change. That is 
what we are--legislators--this requires a legislative change. 
If you have a legislative change, you go to the committee of 
jurisication and you find out whether you can get this 
legislative change. That is the purpose of this hearing.
    So I am bothered that my friend is so worked up about all 
of this--thought police, threatening the demise of the work of 
the committee--all of the threats that he has proposed.
    We are talking about the cost of education, and it has 
obviously hit a raw nerve, and I can understand why--because if 
you look at what is happening in the funding of the 
Administration's proposals--and I am not going to go all the 
way through the years past--but if you look particularly when 
he was talking about No Child Left Behind, under the 
Administration's proposal, they proposed a 3.5 percent increase 
last year. Congress increased funding 20 percent.
    I am not going to list the amendments that were offered, 
but it was increased because of the Democrats. Now the 
Administration has taken great pride in the fact that education 
funding increased, but then--guess what--this year they have 
gone right back down to 2.8 percent increase. You would think 
if they were so incredibly proud of last year's increase--we 
just listened to how proud they are; we have done all of these 
things; we have increased more than it has ever been before--
you would think, well, he wants commendation for that--but 
then, the Administration comes right back and requests only a 
2.8 percent increase.
    Let me just draw your attention to one other item, and that 
is the strong commitment that we made in this committee to make 
sure we were going to have a well-qualified teacher in every 
classroom. Look at what was in the budget last year, with the 
Administration's support, with Republican and Democrat support 
alike--$742 million to recruit, train, retain, and upgrade 
professional skills for teachers.
    Look at what is in the budget this year--that is what is 
troubling the Democrats, quite frankly, and it is troubling 
parents, it is troubling children, and it is troubling 
educators across this country. We do not want to have made a 
false promise. Many of us who supported that proposal--and I 
yield to no one in terms of the support--do not want to mislead 
the American people.
    Talk is cheap around here. Rhetoric is cheap around here. 
School districts know when they are going to get funded and 
when they are not, and students will know when they are going 
to pay higher interest rates because they are denied the chance 
to take an opportunity for a fixed low rate, being denied an 
opportunity which is out there for every small businessman, 
shopkeeper, everyone in America except students.
    So, Senator, I have listened to you, and I get all worked 
up once in a while myself, and I understand that you are all 
worked up about this, but I want to give you very clear 
assurance that we are not going to let this issue go. I know 
you are disturbed this morning, and you are worked up about it, 
but I can tell you that the Democrats on our side are going to 
keep right after this issue. We are going to keep after this 
issue, and we are going to bring it home to the American 
people, and I think the American people are going to be on our 
side on it, but we will have to wait and see.
    Senator Gregg. Mr. Chairman, I hope I could have time to 
respond to that.
    The Chairman. I would like to also give the other members a 
chance to talk, and then I will be glad to recognize you again.
    Senator Wellstone, Senator Murray.
    Senator Wellstone. If you want to respond----
    Senator Gregg. No; I will respond after you folks make your 
points.

                 Opening Statement of Senator Wellstone

    Senator Wellstone. For one of the few times in my life, I 
am speechless.
    Actually, I think what I would say is--I have a statement 
that I want to include in the record, Mr. Chairman, and that is 
all about the statistics and the impacts this has on students 
in Minnesota.
    I think, Mr. Hansen, if you are prepared today to say that 
this plan is not on the table, then, I think we can all 
conclude the hearing, and we can all conclude the hearing I 
think as friends and feeling good because a really unwise and 
profoundly mistaken proposal has been taken off the table. That 
is what I want to hear.
    The second point, which is a different one than my 
colleague from New Hampshire has made, is that I would thank 
the chair. I would say to the chair of this committee that it 
is really important for us as Senators to be vigilant and to 
have this committee hearing to know what the Administration 
plans to do on this issue, because it has such a critical 
impact on so many of the students in higher education in 
Minnesota and around the country.
    By the way, many of these students are not necessarily 19 
years old, living in the dorm; many of them are older, and the 
consolidated loan program is extremely important to them 
financially as to whether or not they can afford to go on with 
their education. This proposal would make a huge difference.
    My last point--and this is in response to Senator Gregg, 
and I do not want him to have to respond to all three of us; he 
can say whatever he wants to say--but I will just repeat what I 
have said a thousand times. I think the thing that is just so 
unconscionable--and I will say it to the two of you from the 
Administration, but not in personal terms; I mean it more 
systemically, not at you; I am glad you are here--is that when 
I heard the President in his inaugural speech talk about 
leaving no child behind--I remember that is when I first heard 
it--I was thinking this is the mission statement of the 
Children's Defense Fund--I thought to myself, you know what, 
whether I wanted him to win or not, if that is his mission, and 
it is real and authentic, I am going to be there with him.
    But do you know what--I have said it a million times--the 
President has put forward a tin cup budget. This is symbolic 
politics with kids' lives. The figures on this chart 
demonstrate that during the Elementary and Secondary Education 
Act Conference Committee, the Administration blocked full 
funding for special education. We did pass that in the Senate, 
and it was blocked by House Republican leadership and the White 
House.
    Our school districts and our schools and our kids are 
really hurting, and I would just say to the President that as 
the Senator from Minnesota, I am not going to let you all get 
away with symbolic politics with kids' lives. You have to back 
up the rhetoric with the resources. We are all for the little 
children--the littler, the better--we all want to have the 
photo ops--but the question is whether or not it is real and 
there is a commitment of resources. This is a tin cup budget. 
That is what is so unacceptable. This hearing on fixed interest 
rates is critically important, and I thank the chair.
    [The prepared statement of Senator Wellstone follows:]

                Prepared Statement of Senator Wellstone

    I am deeply disappointed that the President has proposed to 
eliminate the fixed interest rate for consolidated student loans. It is 
outrageous that at the same time he has proposed to make permanent 
billions of dollars in tax cuts for the wealthiest corporations and 
individuals, he is turning around and saying to low and middle income 
borrowers that they will have to pay thousands more in interest 
payments over the life of their loans. In fact, if the Bush proposal 
passes, the average Minnesotan would have to pay as much as $10,000 
more over the life of their loan.
    Now I do not know who the President has been talking to, but I will 
tell you what I am hearing. Students and parents are gravely concerned 
about the growing amount of debt young students are taking on. I have 
not had a single meeting with student groups where this concern was not 
raised among the top priorities of students.
    The data bears this concern out. In my state, 60 percent of 
students graduate with debt. The average ranges from $14,000 to 
$22,400--depending on the institution students attend.
    It is estimated that 39 percent of students graduate with 
``unmanageable debt.'' This is at the same time that the economic slow 
down has reduced the number of jobs available to many college 
graduates.
    This trend is disturbing--especially since tuitions are 
skyrocketing. The University of Minnesota, for example, saw a 14 
percent tuition increase last year and expects to see a 16 percent 
increase for the coming year.
    College is becoming more and more inaccessible to low and middle 
income students due to cost. I fail to understand how we can, at this 
time, propose a change to the consolidated loan program that would 
saddle already indebted students with thousands more in loan payments.
    I fail to understand how the Administration can argue that we need 
to take from indebted college students in order to pay our own debt to 
the Pell grant program.
    I thank the Chairman for holding this hearing and I look forward to 
hearing the Administration's response to this most important question. 
I also look forward to hearing first hand, from our witnesses, how this 
proposal would effect them and their ability to not just afford 
college, but to pursue their future goals for their careers--whatever 
they may be.

    The Chairman. Thank you.
    Senator Murray.

                  Opening Statement of Senator Murray

    Senator Murray. Thank you very much, Mr. Chairman.
    I want to express my appreciation to you for holding this 
hearing.
    I have heard the charge that this is a political issue. 
Well, Mr. Chairman, I just have to tell you that for students 
who are going to college and are desperately trying to pay for 
their education, knowing what they face when they graduate, it 
is not a political issue. It is a very, very real issue.
    I may be one of the few Senators who was only able to go to 
college because of student loans and Pell Grants, and I know 
what it is like the day you graduate and you do not have a job, 
you do not have a car, you do not have a place to live, you 
have no appropriate clothes--and you have got to pay back a 
loan as well. It is overwhelming.
    I also know the incredible economic downturn that has hit 
our States this year and have hit many families hard. In my 
State, we have the second-highest unemployment in the Nation 
today. Many families are struggling to figure out how to send 
their kids to college, and when proposals like this come out 
that affect their bottom line and their ability to put food on 
the table and their ability to send their children to college 
and their ability to pay back their loans, it is very, very 
real.
    This is not about politics. It is about a proposal that is 
out there, and if we as Members of the Senate do not understand 
the impacts of it, we will not be able to make the right 
decisions.
    I know we have a number of students on the next panel as 
well--Brant Olson is a graduate of Whitman College in my home 
State, and I know that his testimony, which I have had a chance 
to look at, is really relevant.
    I think it is important for this committee and the Members 
of this committee to take the time to understand what the 
impacts of proposals are. This is actually the second effort by 
the Bush administration to fund the Pell Grant by by taking 
money from other education programs. I know that the President 
asked Congress to cancel $1.3 billion worth of so-called low-
priority earmarks, and Congress reacted back and said we will 
not do that, and that proposal went away, and now we are seeing 
this proposal on student loans. I would just say, Mr. Chairman, 
that there is always a deficit in the Pell account in difficult 
times, and it has always been made up. This program does not 
need offsets for all students to get the Pell Grant they 
qualify for, so I am curious as to why we are all of a sudden 
looking for those offsets.
    But I would just go back to the point that if we do not 
understand the policies that are out there and question them 
and ask about them and have discussions about them, we cannot 
make the right decision. This is not about thought police. This 
is about a fundamental principle in this country, which is 
debate and discussion. It is about disagreements, and it is 
about proposals. This is about us as Americans and how we run 
this Government. This is not about thought police. This is 
about how we as legislators make good decisions about policy 
proposals that are out there.
    So I think this hearing is very important, and I would 
agree with my colleagues that if Mr. Hansen is here today to 
tell us that this is not and will not be a proposal, I am happy 
to go and do what else I have to do today.
    Thank you, Mr. Chairman.
    The Chairman. Senator Gregg.
    Senator Gregg. Well, first to address the funding issue 
again, let me point out that that chart that is sitting there 
is dated in that the ESEA bill which we just reauthorized took 
classroom size and teacher quality and the Eisenhower Program, 
merged them together and created one program which became the 
Teacher Empowerment Act, which is funded at $2.8 billion.
    The funding for Title I--as long as we have the charts up 
here--is reflected in this chart. During the Administration of 
President Clinton from 1995 to 2001, there was a $2 billion 
increase; in 2 years of the President's funding, it is $2.5 
billion worth of increase.
    But this is not about elementary and secondary education; 
this is about postsecondary education. This was a trial 
balloon--I do not deny that--put out not by the education arm 
of the Government but by the numbers people. It was a stupid 
idea, and it was quickly identified as such. And it has been 
rejected.
    The fact that this hearing is being held on a proposal that 
was a trial balloon that has been rejected is what makes this 
hearing so obscene.
    We are getting the quote--I believe there is such a quote, 
since we are quoting press secretaries at the White House--
where Ari Fleischer supposedly said that this was not going to 
be a program that they were going to go forward with.
    I know that there must have been a quote, because I heard 
one of the better members of our press corps as far as 
credibility, Judy Woodruff, in an interview with students over 
a week and a half ago state that this proposal had been floated 
but that it was not going to be pursued with the 
Administration, and she had been advised that it was not going 
to be pursued by the Administration. I presume she got that 
from the White House press level, so I presume there is an Ari 
Fleischer statement.
    It is my understanding that the OMB legislative staff 
called the majority staff on this committee over a week ago and 
told them that this was not going to be pursued.
    The only reason this hearing is being pursued at this time 
is to beat an idea which is no longer being considered, and 
therefore, it is a straw dog exercise, and it is totally 
inappropriate to the committee process.
    If this were a genuine proposal that had been carried 
forward, then, of course, there should be a hearing on it, and 
I would probably be in agreement, because I think it would be a 
foolish thing to do. But it is not an idea that is being 
carried forward; it is, rather, a political exercise that is 
being pursued purely to score political points on an issue that 
does not exist. For that reason, we feel that it has abridged 
the comity of this committee, and we feel very strongly about 
this, and I do not know what Mr. Hansen is going to say because 
as a practical matter I think it is a shame that he even showed 
up. Had it been my druthers, he would not have--but he did have 
a Hobson's choice, as I stated earlier. So I look forward to 
hearing his testimony, and I hope that before he comments on 
this issue--whatever his comment is going to be, and I suspect 
it will be that it is not being pursued--I hope that he will 
outline some of the things this Administration is doing in the 
area of higher education, especially in relationship to the 
prior Administration, because I think this Administration has a 
track record which is exceptional and in which it can take a 
great deal of pride.
    The Chairman. Since we are looking for the clarification, 
if the good Senator wants to get into a bidding war in terms of 
increased funding for education and funding for title I and 
ESEA, we welcome that.
    This chart over here shows the Clinton increases in 2001, 
22 percent; the Bush proposal, 2002, ended up at 20.3 percent, 
and that is because it was increased at the insistence of the 
Democrats.
    But we will let yesterday's battles go on. As I mentioned 
before, the OMB document has $1.3 billion for Pell Grants and 
talks about other proposals--HUD housing recaptures $300 
million; export enhancement, $450 billion; EOL training, $100 
million; student loan consolidation proposal, $1.3 billion. And 
I think----
    Senator Gregg. Well, did the majority receive a call from 
OMB saying they were not pursuing it?
    The Chairman. With all respect, 46 Senators wrote to the 
President about this. I indicated to you last night that if we 
received a written statement saying this proposal is off the 
tables--or, Mr. Hansen right now can say ``we are not even 
proposing to eliminate the fixed rate consolidation program.''
    I indicated that to you last night, Senator Gregg, that we 
would not have this hearing today if we could get a written 
statement from the Administration. That is all we are asking--
or, if the Deputy Secretary of Education says it on the record 
here before all the committee--but we can't accept that someone 
talking to someone on the staff level means the Administration 
has changed their policy. That is not the way we do it. This is 
too important. Students are entitled to know, and they are 
entitled to the answer.
    I reject the suggestion that this was not a proposal that 
was put forward. You can search all you want. I will include 
all of Ari Fleischer's comments. He recognized the proposal, 
and he did not say it is off the table.
    We had no indication from the Department of Education when 
they were invited to this hearing that this was off the table.
    That is all we need. With that, we will ask the question of 
Mr. Hansen.
    The Chairman. I want to welcome you here, Mr. Hansen. Mr. 
Hansen is a professional. I have had opportunities to deal with 
him on education issues. We welcome him as well as the second 
panel.
    I have respect for him, and I hope he is not going to try 
to make a gallant effort to defend an indefensible position, 
but I am not going to assume that just yet.
    I am going to ask you the question--I am going to let you 
make whatever comments you wish, but I will ask you as my first 
question whether this proposal is on or off the agenda--on or 
off consideration by the Administration for this year--but you 
may proceed in whatever way that you like.

STATEMENT OF WILLIAM HANSEN, DEPUTY SECRETARY, U.S. DEPARTMENT 
   OF EDUCATION, WASHINGTON, DC; ACCOMPANIED BY SALLY STRUMP

    Mr. Hansen. Thank you, Mr. Chairman.
    It is a pleasure to be here this morning.
    I would just like to make a couple of comments and 
observations about some of the dialog that has been going on 
over the last couple of weeks and to clear up a couple of 
things.
    First of all, President Bush's priorities in higher 
education are incredible, and they are a record that speaks for 
itself. The budget for Pell Grants this year is a $10.9 billion 
request; coupled with the supplemental in last year's budget, 
this is a $3.3 billion increase for Pell Grants, which is more 
money than was funded in Pell Grants for all of the prior 8 
years of the previous Administration. It is not just more 
money. It is also half a million more students who are being 
funded as opposed to 2 years ago, and also the maximum award is 
up.
    So in terms of the Pell Grant program, it is a win-win-
win--it is more money, more students, and higher levels of aid 
available.
    The Administration took very seriously the need to fill the 
underfunding hole that was created, and we have put together in 
our budget proposals, and we have been seeking to find 
solutions to fill the Pell Grant shortfall over the last couple 
of months.
    I would also like to point out on the student loan area as 
well that we worked in a very bipartisan effort last fall and 
earlier this year to get the student loan bill signed into law 
that brings $8 billion of new money into the loan programs over 
the next 10 years. This will make sure that the programs are 
shored up; it will make sure that the students get the loans 
they need to go to college.
    Also, one million more students are getting student loans 
as opposed to 2 years ago, so again, the money is up, the 
number of students is up.
    I would also like to point out that the interest rates for 
student loans are at an all-time low. They are at 5.99 percent 
today. As indicated earlier, they will be going down to a 
little over 4 percent.
    When we take into account that these loans also have the 
interest paid for them while they are in school and that the 
interest is also tax-deductible when they are out of school, 
the net effective rate on loans today is under 4 percent, and 
the net effective rate on student loans after July 1 will be 
under 2 percent.
    These loans are an incredible opportunity for students. 
They are a very affordable opportunity for students.
    We can even take a look back to 1987, when the average 
student graduating from college had an $8,000 debt. The loans 
at that time were at 9 percent. Students, when they would 
totally have those loans paid off, would have paid over $4,000 
in interest on their loans. Today when a student graduates with 
an $18,000 debt because of the higher cost of college, those 
loans are only going to accrue less than $4,000 in interest, 
about $300 or $400 less than what they would have been 15 years 
ago. So it is a higher price tag, but they are actually more 
affordable than they were 15 years ago.
    I would also like to just draw attention to the President's 
tax package last year. It has been referenced earlier, but this 
is very important to note--that out of all the provisions in 
here--these are important provisions in terms of family 
preparation to save for college and the education savings 
accounts, the Coverdell accounts, the 529 plans, also to bring 
employers into this process with the employer-provided tuition 
assistance. All told in the tax bill that was signed into law 
last year, this brings in $23 billion of additional assistance 
over the next 5 years, and this is building on top of the $10 
billion in the tax code that is already there for higher 
education.
    This is frankly, I think, an incredible record, and it has 
been very much muzzled and dwarfed over the last couple of 
weeks. Just again, bottom line, grants are up; the number of 
grants is up by half a million, and the overall amounts are up. 
A million more loans are being made. They are cheaper than 
ever; the net effective rate will be under 2 percent. And the 
tax availability for families is also greater than ever before.
    I would just like to talk for 1 second about some of the 
other overall funding issues.
    Secretary Paige talks an awful lot that money is very 
important, and we were very much engaged in the bipartisan 
agreement that brought the increase of $7 billion to the 
education budget last year, as did the Republicans in Congress 
the year before that in bringing a $6.5 billion increase.
    But all of this is not just about money. This is about 
results. I am going to point out three interesting trends that 
have occurred from 1992 to 2000.
    No. 1, the percentage of school-age children living in 
poverty actually decreased from 20 percent to 16 percent. 
Spending for K through 12 per student increased in constant 
dollars from almost $5,000 to $6,000; yet the NAEP reading 
scores remained flat. We have fewer students in poverty, we are 
spending more after inflation, yet our results are flat. That 
is what the Administration has also focused on--it is not just 
more money, but spending it more efficiently to get the results 
that we are looking for.
    In conclusion, Mr. Chairman, I would like to point out, 
too, that over on the House side this morning, the House 
Appropriations Committee is marking up their supplemental 
appropriation bill, and it is very much apparent that there is 
going to be a significant amount of money put into the Pell 
Grant program on an emergency basis, and this money for Pell 
Grants is going to be paid for. This is frankly all that the 
Administration has been about since our budget went up in 
February is to help fix this problem and to help make the Pell 
Grant program whole, to make sure that students do not have 
their grants cut as they did 10 years ago when there was a 
shortfall.
    These shortfalls are serious. They can only be taken care 
of in a couple of ways--it is through more money, it is through 
cuts in the maximum award--and we are very much committed and 
devoted to not having a cut to Pell Grants, and that is why we 
have been so aggressive in going after making sure that the 
program is whole. We are very, very pleased with the progress 
on the House side today and hope that the Senate will take up 
what the House is doing in their supplemental appropriation 
mark-up this morning.
    Last, Mr. Chairman, I would like to just put it on the 
record that the Administration is not pursuing a change in the 
strict formula for the loan consolidation program, period.
    Thank you.
    [The prepared statement of Mr. Hansen follows:]

                Prepared Statement of William D. Hansen

    Mr. Chairman and Members of the Committee:
    It is my pleasure to appear before you today to discuss the Bush 
administration's commitment to the Federal student aid programs. I 
appreciate this opportunity to underscore President Bush's commitment 
to these important programs, which are instrumental in ensuring that 
all Americans have an opportunity to obtain the knowledge and skills 
they need to succeed in today's competitive workforce.
    The President's fiscal year 2003 budget proposes the highest levels 
of funding for student aid in the history of these programs. The 
President has requested funds to provide $55 billion in new grants, 
loans, and work-study funds to over 8.4 million students. The keystone 
of the President's higher education agenda is the Pell Grant program--
the most effective and well-targeted of the student aid programs in 
helping low- and middle-income students attend college. Under the 
President's plan, funding for Pell Grants would be increased by over 
half a billion dollars over last year's level and more than three times 
the current level of inflation.

                  PELL GRANTS: A PRESIDENTIAL PRIORITY

    President Bush has made strengthening the Pell Grant program and 
budgeting responsibly for its full costs his highest priority in higher 
education this year. Funding for the Pell Grant program has grown 
dramatically, a testament of what can be done when Republicans and 
Democrats work together for the good of America. From 1995 to 2000, 
funds for the program grew from $6 billion to $7.6 billion. Since 
President Bush took office, he has fought for an additional $3.3 
billion for Pell Grants--the largest increases proposed by any 
President. The $10.9 billion that President Bush has proposed would 
fund almost 4.5 million needy college students--half a million more 
than before President Bush took office.
    Last year, the President expressed his concerns that the $4,000 
maximum award mandated in the fiscal year 2002 appropriation act was 
not fully funded. Currently, the Pell Grant program is underfunded by 
nearly $1.3 billion. In order to ensure that students are not harmed by 
this lack of funding, the Administration has proposed a supplemental 
appropriation in fiscal year 2002 and has been trying to assist 
Congress to identify offsetting spending reductions in the 
appropriations process. President Bush has done everything possible to 
work with Congress to avoid a situation similar to 1993 when the 
previous administration cut the maximum Pell Grant to students by $100. 
Let me be clear, if Congress fails to act now, millions of low- and 
middle-income students could see their badly needed Pell Grants reduced 
or even eliminated. Failing to address this problem now and continuing 
to spend now and pay later could result in a cut of $400 for the 2003-
04 academic year, the largest cut ever. Therefore, to protect our 
neediest students we believe that Congress must do three things to 
solve this problem--Do it, do it right, and do it right now.
    Moreover, to ensure that this situation does not continue to occur 
in the future, the Administration is proposing that Congress authorize 
the Secretary of Education to set the Pell Grant maximum award for the 
upcoming academic year based on the available funds in the 
appropriation and the best available budget projections in January 
preceding the beginning of the academic year in July. This will ensure 
that students will receive the maximum benefit from the funds that are 
available for them during the upcoming academic year.
    I have heard a lot of things said in the past few weeks about the 
President's support for Federal student aid, and most of it is simply 
untrue. For example, this report released last week jointly prepared by 
the Democratic staff of this committee states that the Bush budget 
``cuts Pell Grants from $4,000 to $3,900 and gives financial aid to 
375,000 fewer students.'' That statement is out and out false. So let 
me set the record straight once and for all. Pell Grants are the 
President's No. 1 priority in higher education. He has proposed higher 
increases in funding for Pell Grants in his first 2 years, than were 
enacted during the 8 years of the previous administration. Four and a 
half million students--nearly one-third of all the students enrolled in 
higher education--would receive a Pell Grant under the President's 
budget for 2003. That's a half million more students than before he 
took office. And most importantly, the President is doing this in a 
fiscally responsible way.

      STUDENT LOANS: MORE AVAILABLE AND MORE AFFORDABLE THAN EVER

    It is also unfortunate that recently some have tried to scare 
students and their families with statements that the Administration is 
trying to raise student loan interest rates. The fact of the matter is 
student loans are more available and more affordable than ever before.
    Earlier this year, the Administration joined Republicans and 
Democrats in Congress to support a compromise measure that would 
maintain stability in the student loan marketplace and ensure that 
access to low-cost education financing for students and their families 
was not interrupted.
    That measure, which President Bush signed into law in February, 
extended the current low variable rates until 2006 and established a 
6.8 percent fixed rate thereafter. Had we not acted together in a 
bipartisan fashion to extend the current rates, the student loan 
programs would have been thrown in disarray and families would be 
scrambling right now to find the money to pay for next year's tuition 
bills. This law builds $8.2 billion of new money into the loan programs 
over the next 10 years.
    The result of this compromise and the one that was reached in the 
1998 Higher Education Amendments is lower interest rates on student 
loans than ever before. By historical standards, today's 5.99 percent 
rates are a bargain. In July, they are projected to drop to their 
lowest point ever--just over 4 percent. If you factor in the advantages 
of in-school interest benefits and increased tax deductibility, the 
effective rate for many borrowers will be under 2 percent.
    Additionally, contrary to the gloom and doom stories coming out 
from various congressional offices in the past weeks, student loans are 
more available than ever. Over 10.2 million students and parents will 
be eligible for these low-interest rate loans in 2003 under the 
President's budget--over a million more recipients than when the 
President took office. So let's stop scaring America's families. 
Student loans are widely available to more people than ever before. 
They are more affordable than ever before. And thanks to our recent 
work together, the programs are more financially stable than ever 
before.
    Another important benefit in the student loan programs is loan 
forgiveness, and the President has sought to more than triple the loan 
forgiveness for mathematics, science, and special education teachers in 
low-income schools. Under the President's proposal, these teachers 
would qualify for up to $17,500 in loan forgiveness, up from the 
current $5,000 limit, for teaching in high-need schools for 5 years. 
Unfortunately, this committee failed to take action on this proposal 
last year, and I urge you to help the President help local communities 
attract and retain highly-qualified teachers in schools where they are 
needed most. Let's not let another year go by without acting on the 
President's plan to relieve the debt burden on the hard-
working teachers who are helping to leave no child behind.

    TAX RELIEF TO HELP WORKING FAMILIES AND STUDENTS AFFORD COLLEGE

    Another Administration accomplishment in higher education has been 
on the tax front. The tax relief bill that the President worked with 
Congress to enact last year not only lets working families keep more of 
the money they earn right now, but targets additional tax relief to 
encourage savings for postsecondary education, make student loan 
repayment more affordable, and encourage the private sector to offer 
higher education assistance to employees. Let me list a few of the 
highlights for higher education in the President's tax relief package, 
which total over $22.7 billion in savings for working American families 
over the next 5 years:
     Eliminates the 60-month limitation on student loan 
interest deductions and increases the income levels of individuals able 
to claim the deduction. This change makes this tax benefit simpler to 
administer and increases the affordability of student loan repayment. 
($3.4 billion over 5 years)
     Increased the annual limit on contributions to education 
savings accounts from $500 to $2,000. ($1.23 billion over 5 years)
     Adds a new above-the-line deduction for qualified higher 
education expenses. ($11.97 billion over 5 years)
     Allows tax-free distributions from Qualified Tuition Plans 
(Section 529 plans) used to pay educational expenses and permits 
private institutions to offer such plans. ($2.32 billion over 5 years)
     Makes the income exclusion for employer-provided 
educational assistance permanent and extends the benefit of the 
exclusion to graduate level courses. ($2.8 billion over 5 years)
    Taken together with the tax benefits already on the books for 
higher education, over $10 billion each year in tax breaks are 
currently being provided to working families who are struggling to meet 
the skyrocketing cost of college and to students who are repaying their 
student loans.

        CONSOLIDATION LOANS: A VIABLE OPTION FOR SOME BORROWERS

    Consolidation Loans were created in the mid-1980's to allow 
borrowers with loans from multiple lenders to combine their loans into 
a single loan. It also allows borrowers with high-debt levels to 
stretch out their payment terms beyond the standard 10-year term that 
has not changed since 1965. In 1998, Congress standardized 
Consolidation Loan interest rates across the two student loan programs 
at a fixed rate equal to the weighted interest rate of the underlying 
loans, rounded up to the nearest eighth of a percent.
    As the median student loan amount tripled over the last decade from 
$4,000 to nearly $12,000, the dollar volume in the Consolidation Loan 
program grew dramatically throughout the 1990's increasing from less 
than $2 billion in 1994 to nearly $13 billion in 1999. Most of these 
borrowers have been out of school for some time; many have embarked on 
high-paying careers in medicine, law, business and other professions.
    Consolidation loan volume in 2002 is expected to exceed $15 billion 
with approximately 483,000 borrowers taking advantage of this option. 
Most of these borrowers are consolidating variable-rate loans, which 
are at 5.99 percent and will drop to just over 4 percent in July. These 
loans are capped at 8.25 percent. The Congressional Budget Office has 
estimated that providing consolidation subsidies to these borrowers 
costs the government $1.3 billion. In addition, the Chairman of the 
House Education and Workforce committee has asked the U.S. General 
Accounting Office to examine who benefits from the current 
Consolidation Loan program. As we move into reauthorization, asking 
questions like these will help to better determine whether Federal 
subsidies should be more directed to help needy Pell Grant recipients 
gain access to college or should continue to subsidize relatively well-
off professionals. Although the Administration never adopted a policy 
to change this program, we look forward to working with you to find 
better ways to ensure that deserving students are not left behind.

       RISING COLLEGE COSTS: A REAL PROBLEM FOR AMERICAN FAMILIES

    As a member of the National Commission on the Cost of Higher 
Education I witnessed first hand the anxiety that parents face when 
they look at the cost of sending their children to college. These 
escalating costs have simply priced many families out of the market and 
denied them educational opportunities. Over 40 percent of our high 
school graduates do not enroll in postsecondary education, and low-
income and minority families have suffered the most. More than half of 
the high school graduates from low-income and Hispanic families do not 
attend college, and the enrollment rates for black students lag behind 
white students by nearly 10 percentage points. With over 80 percent of 
the growth jobs that provide self-supporting salaries requiring some 
postsecondary education and training, and the gap in earning potential 
between those with a postsecondary education and those without 
continuing to grow, it is clear that colleges need to get serious about 
controlling their costs.
    To address this growing problem, the National Commission on the 
Cost of Higher Education made several recommendations on all 
stakeholders in the higher education arena:
     Strengthen institutional cost control;
     Improve market information and public accountability;
     Deregulate higher education;
     Rethink accreditation; and
     Enhance and simplify Federal student aid.
    I am pleased to report that the Department has been doing its part 
to address these recommendations. Earlier this year, working with the 
House postsecondary education subcommittee, we reviewed the thousands 
of suggestions they received that were submitted from college 
administrators seeking regulatory relief. We then sat down with 
representatives from colleges across the country to find ways to 
implement these changes in our regulations to ease the administrative 
burden on schools and students. These negotiations just concluded, and 
in a few weeks, we will publish proposed regulations to implement the 
changes that the colleges requested. In our office of Federal Student 
Aid (FSA), we have been working hard to improve customer service, and 
simplify the financial aid process. In March, after consultation with 
the Advisory Committee on Student Financial Assistance, I directed FSA 
to, implement the simplified needs test to streamline the financial aid 
application process for our neediest applicants. We have also included 
accountability measures and more simplifications in our Department 
strategic plan.
    We are committed to continuing to do our part to solve this 
problem. Colleges must also step up to the plate and do their part to 
curb their spending, become more efficient, and lower the cost of 
college for American families.

             PROGRAM INTEGRITY IN THE STUDENT AID PROGRAMS

    Secretary Paige and I have moved aggressively to address long-
standing management problems in the student aid programs. We are 
committed to removing the student aid programs from the General 
Accounting Office's high-risk list. Senior staff at the Department are 
working with GAO to identify and implement a series of concrete steps 
to make this long-standing goal a reality. Within the context of the 
Secretary's overall management initiative, we are implementing new 
financial systems for the student aid programs, as well as the 
Department as a whole, and are proposing a new, streamlined funding 
structure for student aid administration that encourages innovation and 
efficiency while linking funding to workload and performance.

                               CONCLUSION

    A quality higher education has never been more important to our 
nation. Now is not the time for partisan bickering and political 
grandstanding. Nor is it the time to scare American families away from 
college. The bipartisan process that culminated in the No Child Left 
Behind Act and the tax relief act last year stand as great examples of 
how Congress and the Administration can work together to improve the 
lives of all Americans. We look forward to building on that success as 
we move forward together to reauthorize the Higher Education Act.
    I will be happy to respond to any questions you may have.

    Senator Gregg. Can we terminate the hearing?
    The Chairman. Yes, I will be glad to terminate it. I would 
like to be able to include all the statements in the record, 
and I will invite members after we terminate the hearing if 
they would be good enough to remain here so we can at least 
thank the witnesses them for their willingness to come and 
testify.
    Senator Gregg. You mean the students.
    The Chairman. Yes, the students and Mr. Brenner--there are 
two students and Mr. Brenner.
    Senator Gregg. I would like to at least have----
    The Chairman. Yes, we will include all of the remaining 
testimony in the record, and we will recess in just one moment.
    [Statements of Mr. White, Mr. Olson, and Mr. Brenner 
follow:]

                   Prepared Statement of Colby White

    Good morning Senator Kennedy, Senator Gregg, and other Senators of 
the Committee. Thank you for allowing me to speak to you today on this 
very important issue.
    My name is Colby White, and I am a Junior nursing student at 
Northeastern University in Boston, Massachusetts. As long as I can 
remember I have wanted to be a nurse. I could think of nothing better 
than helping people in their time of need. Although my dream gave me 
direction, the cost of a nursing degree is staggering. I remember the 
discussions I had with my mother--a single parent--about how we were 
going to afford my education, as well as my younger brother's.
    The cost of any education is great, but in my mind the cost of not 
following my dream was simply too much to bear. And so, with the help 
of the Federal Stafford loan program, and a lot of extra hours of work, 
I began my education. In doing so I will take on almost $20,000 in 
Stafford loan debt by the time I graduate.
    But the education I am getting is great, and everyday I get a step 
closer to fulfilling my dream. I am not only a student. Currently, I am 
doing my co-op at Shriner's Burn Hospital for Children in the acute 
care unit. Before my co-op at Shriner's, I was splitting my day between 
classes and work at the Beth Israel/Deaconess Hospital as a nursing 
assistant in the neurology department. For me it is a labor of love, 
and I would not change it for the world. But, I would not have had a 
chance to do so had it not been for the opportunity the Stafford loan 
program gave me.
    Last week at a press conference on our campus I heard that there 
was a chance the consolidation program would change. I worry what the 
changes will do to me. I wonder whether I would have had the 
opportunities I have experienced if these changes were in effect back 
then. I am so close to achieving my dream of getting my nursing degree, 
yet I worry about whether I will be able to pay back my loans and be a 
successful nurse. I also want to continue my education in the nursing 
field, and I worry about whether that is financially feasible. The 
prospect of paying back my loans at a higher interest rate is 
frightening. What seemed like a reasonable risk of taking loans could 
now be a bad choice. And who wants to admit that their dream was a bad 
choice?
    I hope that you will do everything you can to help me, my fellow 
nursing students, and all students, by keeping the interest rates down 
on student loans. The difference for me is simply my ability to reach 
my goal: to be a nurse and to help people. I hope you will do 
everything you can to help me in achieving that dream.
                               __________

                   Prepared Statement of Brant Olson

    Mr. Chairman, and Members of the Committee:
    I am pleased to be here today to discuss Federal student aid, 
particularly loan consolidation. Almost exactly 1 year ago I graduated 
from Whitman College in Walla Walla, Washington. Like most of my 
classmates I was anxious, excited and a little bit nervous about the 
possibilities awaiting me outside of my college experience. I was eager 
to pursue a career giving back to the community and had doubts about 
whether or not I would be able to manage because of my student loan 
debt But giving back to the community through non-profit service has 
always been a goal of mine. I knew that I wouldn't make as much money 
as many of my peers who pursued careers in the for-profit sector, but I 
had to give it a try.
    After 4 years of college, I have almost $22,000 in Federal student 
loans. I also received about $8,000 in Pell Grants and participated in 
subsidized work-study programs throughout my academic career to help 
cover the costs of tuition, rent and day-to-day expenses. Without these 
Pell Grants my college education would have been out of reach. My 
student loans and work- study were also essential in making college a 
reality, since neither my mother nor I could cover the total costs of 
my education.
    My financial aid was particularly important during my final 2 years 
at Whitman when my mother, who raised me single-handedly, was diagnosed 
with Lupus, a chronic illness. Her illness put huge emotional and 
financial strains on our family with our income dipping to about 
$20,000 per year. While this meant that we weren't able to take 
advantage of tax incentives like the Hope Credit, my financial aid, 
particularly my Pell Grants and Federal student loans were the only 
reasons that I was able to finish school.
    Just after graduation I found out about consolidation benefits with 
the Department of Education from a friend who had consolidated his 
loans. It seemed like a great option since I could consolidate my 
multiple loans to one holder and lock in the low 6 percent interest 
rate over the life of my loans. Consolidation also made income 
contingent repayment available to me. Although I have not used this 
option yet, it is a comfort to know that if my financial situation 
worsens, I could reduce my monthly payments without having to go into 
forebearance.
    I consolidated my loans in October of 2001 through the Department 
of Education's Direct Loan program. I expect that this will save me at 
least several thousand dollars over the life of my loan The money that 
I'm saving from consolidation benefits help to make it possible for me 
to continue my work. Living on my $18,000 salary is possible, but it 
requires careful financial planning.
    Consolidation has allowed me in my first year out of school to 
pursue making a difference in my community, working to improve public 
health and air quality standards. I am happy to say that, thanks to 
Congress' support through the Federal financial aid programs, I've been 
able to realize my life-long dream of pursuing a non-profit career.
    Again, thank you for your support of the Federal financial aid 
programs, such as Pell Grants and student loans that have made higher 
education a reality for me and millions of other students across the 
country.
                               __________

                   Prepared Statement of Mark Brenner

    I would like to thank Chairman Kennedy and the distinguished 
members of the Senate Health, Education, Labor and Pensions Committee 
for inviting me to testify on the important issues surrounding the 
Federal Family Education Loan Consolidation Program. I would like to 
take this opportunity to introduce College Loan Corporation and express 
our support for the Consolidation Loan Program, including key 
provisions of the program that allow young Americans to better mange 
their student loan debt burden.
    I also want to thank Senator Kennedy, Senator Gregg and other 
Members of the Senate Health, Education, Labor and Pensions Committee 
for allowing College Loan Corporation a voice in the discussion of 
higher education policy. Our company is grateful for this chance to be 
heard on this important issue and we are hopeful that we will continue 
to have the opportunity to discuss any related issues at the time they 
arise and in consideration of the upcoming Higher Education Act 
reauthorization.
    Allow me to go directly to the main point of this discussion. I 
have heard a few prominent loan providers say that Congress should 
``fix'' the Consolidation Loan program.
     In short, the Federal Family Education Loan Consolidation 
Program is NOT broken.
     Student loan borrowers face a unique opportunity to save 
an average of more than $3,100 through loan consolidation, beginning on 
July 1, 2002.
    The current fixed rate Consolidation Loan program is an 
exceptionally pro-consumer program that allows borrowers options and 
opportunities. College Loan Corporation is committed to working with 
recent college graduates to explain the Consolidation Loan program and 
allow those who qualify to lock-in historically low-fixed rates. During 
fiscal year 2002, we believe that well over one-half million recent 
college graduates will avail themselves of the low-fixed rate loans 
they are allowed to receive under this program. Congress should 
definitely not try to ``fix'' a program that is benefiting so many 
people in so many ways.
    I have also heard a few lenders say that a high volume of new 
Consolidation Loans has the potential to ``destabilize'' the Federal 
Family Education Loan Program (FFELP) We know this statement is untrue. 
The terms of loans originated by FFELP participants will continue to be 
economically viable for participants. For example, we are a full 
participant in the FFELP and we are absolutely committed to access and 
providing loans to college students and parents in all 50 states and 
the District of Columbia.
    We wish all FFELP participants could embrace what is best for the 
student and join us in the upcoming year in providing the benefits of 
the Consolidation Loan program to all qualified borrowers. On a going 
forward basis, College Loan Corporation believes Congress must consider 
further expanding borrower choice to assure the Consolidation Loan 
Program is available to all students.
        the administration and congress' commitment to education
    The Bush administration has spent the last 18 months working in a 
bi-partisan manner with Senator Kennedy, Senator Gregg and other 
members of the Senate as well as Congressman Boehner, Congressman 
Miller and members of the U.S. House of Representatives to improve 
education in this country. President Bush said it best, ``when it comes 
to the education of our children failure is not an option.'' The 
exchange of ideas and the ability to work together has been a hallmark 
of success for this 107th Congress on education issues. All Americans 
should thank members of this committee for their tireless efforts.
    I know that fully funding the Pell Grant program is an important 
priority for this Administration, the Senate HELP Committee and all of 
Congress. However, changing the way interest rates are calculated on 
student Consolidation Loans is not an appropriate approach to saving 
taxpayers money. I was heartened to hear that the Bush administration 
quickly discarded the idea after initially considering it.

                INTRODUCTION TO COLLEGE LOAN CORPORATION

    College Loan Corporation (``CLC'') a California corporation, was 
formed in 1999. CLC is a national student loan company offering Federal 
Family Education Loan Program loans (Stafford, Plus and Consolidation 
Loans) to eligible applicants in all 50 states and the District of 
Columbia. CLC specializes in providing one-on-one counseling to 
families searching for the best way to pay for college. CLC has helped 
students finance their education at over 1,500 colleges and 
universities. The CLC business development team works directly with 
schools to provide a high level of service to students and their 
families. Additionally, CLC works with eligible consumers to facilitate 
the completion of Federal Consolidation Loans.
    College Loan Corporation's sole business consists of originating 
loans under the FFEL Program. At this time, CLC refers its borrowers 
applying for non-Federal loans (commonly referred to as alternative or 
private loans) to a business partner so that the student loan 
borrower's needs are met.
    College Loan Corporation is a 100 percent employee-owned 
corporation. CLC currently occupies approximately 31,000 square feet of 
office space, including an onsite data center that maintains all CLC 
software applications. CLC is open 14 hours a day, 7 days a week. This 
coverage allows CLC to offer its clients extensive customer service.

                  THE COLLEGE LOAN CORPORATION MISSION

    College Loan Corporation's primary mission is to provide the 
highest quality service to its borrowers and schools. To achieve this 
mission, it has selected business partners with a reputation for 
superior service. Our overall goal is to provide the best possible 
experience for the student loan borrower.
    An example of our emphasis on customer service is how we work with 
the borrower or school if an issue arises Our borrowers are never told, 
``Call the servicer''. We personally follow up with our business 
partners and then return calls to the borrower. We have what we call a 
``One Call Promise''. We will endeavor to solve every problem brought 
to our attention without the need for a second call from the student 
loan borrower.
    CLC's employees follow one main rule: we must commit ourselves to 
the highest quality of customer service every day. We are pleased to 
say that our employees have embraced this concept. As an employee-owned 
company, our employees have a vested interest in making decisions to 
ensure each client is pleased with their level of service. We have a 
``no limits'' philosophy about service and our employees appreciate 
that they can ask for anything it takes, provided that the actions 
required are in compliance with the Higher Education Act and all other 
relevant laws.

   TODAY'S INTEREST RATE ENVIRONMENT AND ITS IMPACT ON STUDENT LOANS

    Here are key historical interest rates compared to current interest 
rates:
     The 91-Day T-bill rate averaged 4.53 percent over the last 
10 years, which included the last 6 months of exceptionally low rates.
     The 91-Day T-bill rate was as high as 6.39 percent in 
October 2000 and as low as 1.73 percent in December 2001.
     The 91 day T-bill rate from this week's auction was 1.77 
percent.
    Today's interest rate environment is the lowest it has been since 
the inception of the student loan program. The student loan rate resets 
on July 1 based on the last T-bill auction of this month. If interest 
rates do not change before this auction, the new rate will be almost 2 
percent lower than it was last year and approximately 2.75 percent 
below the 10-year historical average. Recent college graduates will 
have a tremendous opportunity to lock-in this low rate for the life of 
their loans.
    Under the Higher Education Act, borrowers who consolidate their 
loans receive a fixed rate loan at a rate equal to the weighted average 
interest rate of the underlying loans rounded up to the nearest \1/8\ 
of 1 percent. Borrowers who do not qualify, or choose not to 
consolidate, retain a variable rate loan that is adjusted every year 
based on the 91-Day T-bill plus a specific percentage, as defined 
below.

               VARIABLE RATE STUDENT LOANS RESET ANNUALLY

    Non-consolidation student loans are a variable interest rate that 
resets annually. The rate is computed on the basis of the 91-Day T-
bill. In addition, the rate is dependent upon when the borrower first 
received a student loan. The following table provides examples of how 
the interest rate is calculated for student loans that are not 
consolidated:


------------------------------------------------------------------------
                                            Student Loan  Borrower Rates
               Date of Loans                         (In Percent)
------------------------------------------------------------------------
On or after October 1, 1992...............  T-Bill Rate + 3.1%
On or after July 1, 1995..................  T-Bill Rate + 3.11
On or after July 1, 1998..................  T-Bill Rate + 2.32
------------------------------------------------------------------------
1 Substitute 2.5 percent in this formula while such loans are in the in-
  school or grace period.
1 Substitute 1.7 percent in this formula while such loans are in the in-
  school or grace period.

         BENEFITS OF THE CURRENT FIXED RATE CONSOLIDATION LOANS

    With today's interest rate environment, student loan borrowers have 
a once in a lifetime opportunity to lock in the lowest fixed interest 
rates in the history of the student loan program:
     Recent borrowers that have entered repayment can lock in 
rates just over 4 percent for the life of their loan.
     Recent borrowers that consolidate while ``in-grace'' can 
lock in rates as low as 3.5 percent for the life of the loan.
    In-grace borrowers have a lower fixed rate because their interest 
rate is .6 percent lower than borrowers already in repayment. As long 
as the borrower consolidates before the grace period is over, this 
provision of current law provides a natural advantage of .6 percent to 
recent college graduates. As long as borrowers know about the program 
and can gain access to a lender participating in the program, Student 
loan borrowers may receive the single best long-term interest rate on 
any consumer loan they will ever have to take.
    Borrowers that wish to extend their repayment and maintain a 
variable rate loan already have that option. The 1998 Higher Education 
Act allowed for extended repayment of loans with a variable rate if the 
balance is more than $30,000. Changing consolidation loans to a 
variable rate constricts rather than expands borrower choice.

                         FEDERAL BUDGET POLICY

    There are certain key facts that I would like to present at this 
time. First, the consolidation loan program generates positive revenue 
for the Department of Education. There are two fees that are required 
to be paid by a Consolidation loan lender:
     A 0.50 percent origination fee, and
     A 1.05 percent per annum fee on the total Consolidation 
loan balance (principal and interest).
    These two lender fees have consistently generated additional net 
revenue for the Department that they would not otherwise have if loans 
were not consolidated.
    According to numbers prepared by the Congressional Research 
Service:
     More than $1.077 billion in revenue was generated by the 
.5 percent Consolidation Loan origination fee and the 1.05 percent per 
annum fee between the beginning of fiscal year 1995 and the end of 
fiscal year 2001.
     Fiscal Year 2002 will likely provide more than $400 
million in additional revenue to the Department.
    Reducing demand for consolidation loans will significantly reduce 
the revenues of the Department of Education:
     If the variable rate proposal was to become law and the 
Federal Family Education Consolidation Loan Program was cut by 50 
percent there would be a significant reduction in revenue to the 
Federal treasury.
     The lost revenue from these fees based on loan volume 
projections for loans made over the next 5 years alone would be $2.016 
billion.

                      EXPANSION OF BORROWER CHOICE

    Expansion, not contraction, of borrower choice should be 
encouraged. The 1998 Higher Education Act Amendments provided 
significantly greater borrower choice by allowing borrowers with two or 
more lenders to consolidate with whom ever they wish. Student loan 
borrowers should be allowed to choose any eligible lender for 
Consolidation Loans. Under the current statutory provisions found in 
section 428C (b) of the Higher Education Act, many students seeking 
consolidation loans to reduce their monthly student loan payments and 
simplify the payment process may be denied the right to seek out the 
lowest cost Consolidation Loan. Some borrowers are precluded from 
receiving a Consolidation Loan from their lender of choice--even if the 
other lender offers preferable terms and conditions--if the current 
holder of their loans offers a Consolidation Loan with an income 
sensitive repayment option. This restriction of borrower choice 
provision is known as the ``Single Lender Rule.''
    As we all know, more and more students find it necessary to borrow 
to pay for the cost of higher education. The cost of providing high 
quality education has grown, and continues to grow, at a rate far 
greater than inflation. This year, 1.7 million college graduates will 
enter the U.S. workforce with a student loan debt load of more than 
$16,000 on average. For graduate and professional students the burden 
is even greater. The Higher Education Act, in Section 428C, set up a 
program for consolidating student loans that was intended to assist 
borrowers with a high level of debt to manage their financial 
situations.
    The 1998 Higher Education Act allowed for borrower access to a 
choice of lenders. Under this law, a borrower may seek a Consolidation 
Loan from any eligible lender provided that the borrower has two or 
more lenders under the Higher Education Act. The 1998 Act ultimately 
provided a solid incremental step toward maximizing borrower choice.
    As I mentioned earlier, today's interest rate environment allows 
student loan borrowers a once in a lifetime opportunity to lock in the 
lowest interest rates in the history of the student loan program. 
Borrowers from lower and middle-income families will have the chance to 
lock in rates that could be as low as 3.5 percent for the life of the 
loan. In short, there may be no better opportunity for borrowers to 
lock in low rates than there will be between July 1, 2002 and June 30, 
2003. Many of today's borrowers are unlikely to take advantage of this 
opportunity, because their student loan providers do not actively 
attempt to educate borrowers about this program. In fact, many current 
loan holders actively discourage borrowers from consolidation loans, 
because it is not as profitable for the lenders.

                           WHO CONSOLIDATES?

    Arguments have been made that the Consolidation Loan program 
benefits doctors and lawyers. The answer is, ``Yes, the Consolidation 
Loan program benefits doctors and lawyers''. However, it also benefits 
Peace Corps volunteers, nurses, teachers, and any other recent college 
graduate that chooses to consolidate. The Consolidation Loan program 
does not discriminate. It benefits those who had to borrower to pay for 
college, regardless of whom they are or where they work.

                    ENCOURAGE REGULATORY COMPLIANCE

    According to Department of Education Regulation 34 CFR 682.209 (j) 
Certification on loans to be repaid through consolidation: Within 10 
business days after receiving a written request for a certification 
from a lender under Sec. 682.206(f), a holder shall either provide the 
requesting lender the certification or, if it is unable to certify to 
the matters described in that paragraph, provide the requesting lender 
and the guarantor on the loan at issue with a written explanation of 
the reasons for its inability to provide the certification.
    In order for a borrower to receive a Consolidation Loan, the lender 
(including a lender in the FFELP program and the Direct Loan Program) 
is required to receive the payoff amount(s) from the existing loan 
holder(s). The holder is required to complete the LVC within 10 
business days. Once the LVC is returned and the original loan holder is 
paid in full, the loan is officially consolidated.
    When a loan holder does not return the LVC in a timely manner, 
borrowers are delayed in effecting their Consolidation Loan. Often, 
borrowers need to reduce their payment, or they need to lock-in a low 
fixed-rate loan. Timely LVC returns will allow borrowers to lock in at 
least a .6 percent per year for the life of the loan benefit (thousands 
of dollars in additional interest payments).
    In a strictly private transaction, student loan borrowers would 
have a private right of action against loan holders if the LVC were not 
returned in a timely manner. But, the Higher Education Act does not 
allow a student loan borrower to sue directly. There is no private 
right of action granted under the Higher Education Act even if the 
student loan borrower is severely damaged by the result. The courts 
have stated that it is solely up to the Department of Education to 
enforce the Higher Education Act and the associated regulations. Young 
Americans are counting on the Department of Education and the Congress 
to protect them and enforce the existing rules.

                               CONCLUSION

    It is important that Congress continue to support young Americans 
and preserve their right to benefit from what might be the single best 
borrowing opportunity of their lifetimes. In the last few weeks, we 
have observed an incredible level of support by Members of the Senate 
and the U.S. House of Representatives in supporting recent college 
graduates. On behalf of College Loan Corporation and the students and 
recent college graduates we serve, we thank you for this support and 
the opportunity to speak to you about these important issues. Student 
loan borrowers face a unique opportunity to save more than $3,100 on 
average through loan consolidation, beginning on July 1, 2002. Changing 
this program at this point in time would be detrimental to hundreds of 
thousands of low- and middle-class students and recent graduates.

    The Chairman. I will just conclude, since we are talking 
about Pell Grants--the fact of the matter is that last year, 
Congress approved $400 million more than the Administration 
requested, and last year, about $600 million more than the 
Administration requested. During the period that we have over 
here for Pell Grant maximums, during the Clinton 
administration, Pell Grants increased by $1,450, and in 4 of 
those years, he even requested additional funds which were 
denied by the Congress; in only 3 years did he get what he 
actually requested.
    We will make this available to the press, exactly the 
difference that the Democrats have made in terms of increasing 
the Pell Grants.
    I thank you--Sally Stroup, you have had quite a morning 
here. I want you to know that you are very welcome here. And 
Mr. Hansen, we look forward to working with you.
    Our committee will stand in recess.
    [Additional material follows:]

                          ADDITIONAL MATERIAL

               Statement of American Medical Association
Re: Variable Rate Consolidated Student Loans For Higher Education

    On behalf of the medical student, resident physician, and physician 
members of the American Medical Association (AMA), we are pleased to 
submit this statement on the critical issue of consolidated student 
loans.

                              INTRODUCTION

    In 1986, the Federal Consolidation Loan program was established by 
Congress to help student borrowers with the burden of Federal student 
loan debt. A Federal Consolidation Loan allows an individual to 
consolidate his or her Federal student loans into a single loan, choose 
a flexible repayment term and have a fixed interest rate for the life 
of the loan.
    According to recent press accounts, a proposal for a variable 
interest rate for consolidated student loans has been under discussion. 
The AMA urges Congress to allow the student loan consolidation program 
to continue with the fixed interest rate. Consolidated loans with a 
fixed interest rate benefit all student loan borrowers who chose to 
consolidate their loans. If Congress accepts the variable interest rate 
proposal it would effectively raise the interest on education loans for 
millions of Americans entering the workforce.

            THE FEDERAL CONSOLIDATION LOAN PROGRAM EXPLAINED

    The Federal Consolidation Loan program was established by Congress 
to assist student borrowers with the burden of Federal student loan 
debt. The amount of a Federal Consolidation Loan reflects the total 
amount of loans one consolidates.
    According to law, each year on July 1, the Department of Education 
resets the student loan interest rate based on the 90-day Treasury 
Bill. The formula for loans in repayment is 91-day T-bill + 2.3: the 
formula for in-school loans is 91-day T-bill + 1.7 (thus, it is better 
for a student to consolidate his or her loans while in school, or 
during the 6-month automatic deferment period).
    The interest rate on consolidated loans is the weighted average 
(rounded up to the nearest \1/8\ percent), or 8.25 percent, whichever 
is less, of the interest rate on each loan. Unless consolidated, 
Federal student loans have variable interest rates, which are set by 
the Federal Government each July. Consolidation converts the variable 
interest rate to this fixed rate for the life of the loan.
    Federal Regulations do not allow lenders to consolidate loans that 
are currently in default. A loan is considered to be in default only 
after a borrower fails to make payment on the loan for 270 consecutive 
days. Any loans that are not in default are eligible for consolidation.
    Student borrowers, out of school borrowers and parent borrowers are 
all eligible to consolidate the following loans (one may consolidate a 
Consolidation Loan only if he or she is combining that loan with at 
least one other eligible loan):
     Subsidized Federal Stafford Loans, formerly Guaranteed 
Student Loans (GSL)
     Direct Subsidized Stafford Loans
     Unsubsidized and Nonsubsidized Federal Stafford Loans
     Direct Unsubsidized Stafford Loans
     LFederal Supplemental Loans for Student (formerly 
Auxiliary Loans to Assist Students/ALAS and Student PLUS Loans)
     LFederal Perkins Loans, formerly National Defense/National 
Direct Student Loans (NDSL)
     Health Professions Student Loans, including Loans for 
Disadvantaged Students
     Health Education Assistance Loans
     Federal Insured Student Loans
     Federal PLUS (Parent) Loans
     Direct PLUS Loans
     Subsidized Federal Consolidation Loans
     Direct Subsidized Consolidation Loans
     Unsubsidized Federal Consolidation Loans
     LDirect Unsubsidized Consolidation Loan, including Direct 
PLUS Consolidation Loans
     Federal Nursing Loans

                     CONSEQUENCES OF HIGH LOAN DEBT

    Students are taking on a tremendous burden as they move through 
college and graduate school in order to pursue higher education. 
Roughly two out of three college graduates leave college with debt, 
and, within the last 8 years, the student loan obligation has doubled 
for American students. Presently, 39 percent of college students 
graduate with debt that is more than 8 percent of their monthly income, 
creating a severe financial burden on them.
    As previously mentioned, a proposal has been considered that would 
replace the fixed interest rate with a variable rate for consolidated 
student loans. This approach was suggested in order to offset a deficit 
in the Pell grant program, which benefits low-income college students. 
Such a measure could cost students and graduates (including Pell grant 
recipients) on average, $2,800 in higher interest rates. This figure 
applies to the national average of $ 16,000 in student loan debt by 
college graduates.
    Medical school graduates enter their residency with an average of 
almost $100,000 in student loan debt. Such debt is a tremendous 
hardship throughout the repayment period of the loan, but it is 
especially difficult during the years a physician is undergoing his or 
her 3 to 8 years of training in a residency program.
    Almost all first-year residents make less than $31,000 a year. This 
figure does not substantially increase throughout residency training. 
Under a variable rate system it is assumed that there is an increase of 
$2,800 for every $16,000 in loans. Thus, for $100,000 in loans, the 
variable interest rate would increase interest by an additional $17,500 
over a 10-year period, and, $39,375 more in loan interest over a 20-
year repayment period.
    When education is so costly, graduates' career choices are 
affected. With such high loan debt, careers serving the public often 
are put aside for more lucrative jobs so the loan borrower is able to 
pay off his or her loans. Thus, those who may be considering whether to 
practice medicine in an ``underserved'' area, enter the public health 
service, start a career in medical education or research, or practice 
primary care medicine are often deterred from such paths.

      CONTINUED PROGRESS REQUIRED FOR THE AFFORDABLE FINANCING OF 
                            HIGHER EDUCATION

    Recently, Congress passed and the President signed into law a 
number of provisions assisting student loan borrowers. Included in the 
``Economic Growth and Tax Relief Reconciliation Act of 2001'' (P.L. 
107-16) is a provision that greatly expands previous law allowing 
student-loan borrowers to receive a tax deduction on the interest paid 
on their student loans. Specifically, the law:
     LIncreases the income threshold for the phaseout of the 
tax deduction for student loan interest up to a modified adjusted gross 
income of $65,000 (up to $130,000 for joint returns);
     Adjusts the income phase-out ranges for inflation after 
2001;
     Repeals the 60-month limitation on the tax deduction; and
     Repeals the restriction that voluntary interest payments 
are not tax deductible.
    Another provision of P.L. 107-16 allows recipients who earn 
scholarships granted by the National Health Service Corps (NHSC) and 
the Armed Forces to receive tax-free status as ``qualified 
scholarships'' without regard to any service obligations by the 
recipient.
    In February 2002, additional legislation (P.L. 107-139) was enacted 
that will:
     Fix the student loan interest rate at 6.8 percent 
beginning in 2006,
     Extend the current rate structure until that date,
     LFix the interest rate on PLUS loans (loans taken out by 
students' parents) at 7.9 percent, and
     Fix the student loan consolidation rate at no more than 
8.25 percent.
    Given these positive developments relating to the financing of 
higher education, it would be a tremendous step backward to allow the 
latest proposal on loan consolidation to go forward. It is essential 
that all student loan borrowers be able to avail themselves of the best 
possible loan terms when seeking to refinance their debt.

                         SMART EDUCATION POLICY

    Keeping higher education affordable and keeping the student loan 
interest rates at an affordable level contributes to the United States' 
overall competitiveness as a nation. When individuals make career 
choices based on how much money will be earned to pay back student 
loans, it affects how diverse the country is in terms of chosen career 
paths. The entire country benefits when the Federal Government 
contributes to the higher education system by offering student 
borrowers with affordable interest rates.
    The AMA believes that it is in our national interest to encourage 
the best and brightest to complete their education, to be involved in 
the communities of this country, and to contribute to our Nation's 
values. One such value is to pay off our debts. Since the Federal 
Government has allowed student loan consolidation, the default rate has 
dropped from 22 percent to 5.6 percent. Additionally, by allowing 
students to lock in today's historically low interest rates, it will 
assist students in lowering their overall debt load.
    At a time when many states are cutting their higher education 
budgets and more individuals are struggling to pay for a college 
education, we need the Federal Government to assist students in 
obtaining their goal of a college degree and graduate study, when 
possible.

                               CONCLUSION

    Thank you for the opportunity to submit our views regarding the 
proposal to change loan consolidation interest rates from a fixed 
interest rate to a variable interest rate. The AMA looks forward to 
working with the Committee on finding solutions to the critical issue 
of financing higher education for all American students.

    [Whereupon, at 10:55 a.m., the committee was adjourned.]