[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





      CONSOLIDATION LOANS: WHAT'S BEST FOR PAST BORROWERS, FUTURE 
                      STUDENTS, & U.S. TAXPAYERS?

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

                                HEARING

                               before the

              SUBCOMMITTEE ON 21st CENTURY COMPETITIVENESS

                                 of the

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             July 22, 2003

                               __________

                           Serial No. 108-28

                               __________

  Printed for the use of the Committee on Education and the Workforce



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                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice     George Miller, California
    Chairman                         Dale E. Kildee, Michigan
Cass Ballenger, North Carolina       Major R. Owens, New York
Peter Hoekstra, Michigan             Donald M. Payne, New Jersey
Howard P. ``Buck'' McKeon,           Robert E. Andrews, New Jersey
    California                       Lynn C. Woolsey, California
Michael N. Castle, Delaware          Ruben Hinojosa, Texas
Sam Johnson, Texas                   Carolyn McCarthy, New York
James C. Greenwood, Pennsylvania     John F. Tierney, Massachusetts
Charlie Norwood, Georgia             Ron Kind, Wisconsin
Fred Upton, Michigan                 Dennis J. Kucinich, Ohio
Vernon J. Ehlers, Michigan           David Wu, Oregon
Jim DeMint, South Carolina           Rush D. Holt, New Jersey
Johnny Isakson, Georgia              Susan A. Davis, California
Judy Biggert, Illinois               Betty McCollum, Minnesota
Todd Russell Platts, Pennsylvania    Danny K. Davis, Illinois
Patrick J. Tiberi, Ohio              Ed Case, Hawaii
Ric Keller, Florida                  Raul M. Grijalva, Arizona
Tom Osborne, Nebraska                Denise L. Majette, Georgia
Joe Wilson, South Carolina           Chris Van Hollen, Maryland
Tom Cole, Oklahoma                   Tim Ryan, Ohio
Jon C. Porter, Nevada                Timothy H. Bishop, New York
John Kline, Minnesota
John R. Carter, Texas
Marilyn N. Musgrave, Colorado
Marsha Blackburn, Tennessee
Phil Gingrey, Georgia
Max Burns, Georgia

                    Paula Nowakowski, Chief of Staff
                 John Lawrence, Minority Staff Director
                                 ------                                

              SUBCOMMITTEE ON 21st CENTURY COMPETITIVENESS

            HOWARD P. ``BUCK'' McKEON, California, Chairman

Johnny Isakson, Georgia, Vice        Dale E. Kildee, Michigan
    Chairman                         John F. Tierney, Massachusetts
John A. Boehner, Ohio                Ron Kind, Wisconsin
Thomas E. Petri, Wisconsin           David Wu, Oregon
Michael N. Castle, Delaware          Rush D. Holt, New Jersey
Sam Johnson, Texas                   Betty McCollum, Minnesota
Fred Upton, Michigan                 Carolyn McCarthy, New York
Vernon J. Ehlers, Michigan           Chris Van Hollen, Maryland
Patrick J. Tiberi, Ohio              Tim Ryan, Ohio
Ric Keller, Florida                  Major R. Owens, New York
Tom Osborne, Nebraska                Donald M. Payne, New Jersey
Tom Cole, Oklahoma                   Robert E. Andrews, New Jersey
Jon C. Porter, Nevada                Ruben Hinojosa, Texas
John R. Carter, Texas                George Miller, California, ex 
Phil Gingrey, Georgia                    officio
Max Burns, Georgia
                                 ------                                
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on July 22, 2003....................................     1

Statement of Members:
    DeLauro, Hon. Rosa, a Representative in Congress from the 
      State of Connecticut.......................................     9
        Prepared statement of....................................    13
        Article submitted for the record.........................    10
    Kildee, Hon. Dale E., a Representative in Congress from the 
      State of Michigan..........................................     5
    McKeon, Hon. Howard P. ``Buck'', a Representative in Congress 
      from the State of California...............................     2
        Prepared statement of....................................     3
    Regula, Hon. Ralph, a Representative in Congress from the 
      State of Ohio..............................................     7
        Prepared statement of....................................     8
    Wilson, Hon. Joe, a Representative in Congress from the State 
      of South Carolina, prepared statement of...................    77

Statement of Witnesses:
    Martin, Dr. Dallas, President, National Association of 
      Student Financial Aid Administrators.......................    35
        Prepared statement of....................................    37
    McCormack, June, Executive Vice President, Sallie Mae........    43
        Prepared statement of....................................    45
        Response to questions submitted for the record...........    78
    Morrow, Barry, Chief Executive Officer, Collegiate Funding 
      Services...................................................    52
        Prepared statement of....................................    54
        Response to questions submitted for the record...........    80
    Wasserman, Rebecca, Vice President, United States Student 
      Association................................................    33
        Prepared statement of....................................    34
    Wozniak, Paul, Managing Director and Manager, Education Loan 
      Group, UBS Financial Services, Inc.........................    57
        Prepared statement of....................................    59


 
CONSOLIDATION LOANS: WHAT'S BEST FOR PAST BORROWERS, FUTURE STUDENTS, & 
                            U.S. TAXPAYERS?

                              ----------                              


                         Tuesday, July 22, 2003

                     U.S. House of Representatives

              Subcommittee on 21st Century Competitiveness

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The Subcommittee met, pursuant to notice, at 10 a.m., in 
room 2175, Rayburn Office Building, Hon. Howard P. ``Buck'' 
McKeon [Chairman of the Subcommittee], presiding.
    Present: Representatives McKeon, Isakson, Petri, Johnson, 
Ehlers, Osborne, Carter, Burns, Kildee, Tierney, Kind, Wu, 
Holt, McCarthy, Van Hollen, Ryan, and Hinojosa.
    Ex Officio present: Representative Boehner.
    Also present: Representatives Bishop and Hoekstra.
    Staff present: Kevin Frank, Professional Staff Member; 
Cindy Herrle, Senior Budget Analyst; Alexa Marrero, Press 
Secretary; Susan Oglinsky, Coalitions Advisor; Alison Ream, 
Professional Staff Member; Deborah L. Samantar, Committee 
Clerk/Intern Coordinator; Dave Schnittger, Communications 
Director; Kathleen Smith, Professional Staff Member; Holli 
Traud, Legislative Assistant; Ellynne Bannon, Minority 
Legislative Associate/Education; Ricardo Martinez, Minority 
Legislative Associate/Education; Alex Nock, Minority 
Legislative Associate/Education; and Joe Novotny, Minority 
Legislative Assistant/Education.
    Chairman McKeon. A quorum being present, the Subcommittee 
on 21st Century Competitiveness will come to order.
    We're meeting today to hear testimony on consolidation 
loans: what's best for past borrowers, future students and U.S. 
taxpayers. Under Committee Rule 12, the opening statements are 
limited to the Chairman and Ranking Minority Member of the 
Subcommittee; therefore, if other members have statements, they 
may be included in the hearing record.
    With that, I ask unanimous consent for the hearing record 
to remain open 14 days to allow member statements and other 
extraneous material referenced during the hearing to be 
submitted in the official hearing record.
    Without objection, so ordered.
    I now read my opening statement.

    STATEMENT OF HON. HOWARD P. ``BUCK'' McKEON, CHAIRMAN, 
          SUBCOMMITTEE ON 21st CENTURY COMPETITIVENESS

    Good morning. I want to thank all of you for joining us for 
this important hearing on the consolidation loan program. As we 
move forward with our efforts to reauthorize the Higher 
Education Act, we continue to address the many issues within 
that Act in order to help make post-secondary education a 
reality for low income students who previously had little 
chance of pursuing such a dream. This hearing is another in our 
continuing series and is meant to provide information to the 
members of this Committee about one of the loan programs within 
the Higher Education Act.
    Earlier today, Chairman Boehner and I joined together to 
unveil the principles that will guide the remainder of the 
reauthorization of the Higher Education Act. When the Higher 
Education Act was authorized in 1965, its intention was to 
expand access and provide opportunities to low income students. 
Yet, today I believe some of the higher education programs have 
lost sight of that original mission and the crisis of 
skyrocketing college costs makes it more important than ever to 
ensure the higher education programs are reaching their full 
potential to expand access to higher education in America.
    I believe the principles we have outlined will help us 
address this crisis and realign programs under the Higher 
Education Act to more fully meet the goal of expanding access 
to a college education. Briefly, these principles are: holding 
colleges accountable for cost increases, removing barriers, 
particularly those that disproportionately harm non-traditional 
students, improving quality and innovation by empowering 
consumers, and realigning student aid programs to ensure 
fairness for America's neediest students and families. These 
principles will guide reforms to all areas in the Higher 
Education Act, including the Consolidation Loan Program, which 
is the topic of today's hearing.
    The Consolidation Loan Program was implemented as part of 
the reauthorization of the Higher Education Act in 1986. The 
intent of the Consolidation Loan Program was to provide an 
opportunity for borrowers with multiple loan holders and a high 
level of student loan debt to consolidate that debt with one 
holder to allow for 1 monthly payment. The program often 
provides a longer repayment period as well, thereby lowering 
the borrower's monthly payment.
    When a borrower applies for and receives a consolidation 
loan, all underlying loans are paid in full by the 
consolidating lender and a new loan is created in the amount of 
the debt paid in full. The repayment term for that loan is then 
determined by the borrower's outstanding debt at a fixed 
interest rate up to a maximum of 30 years.
    When the program was originally developed, it was done so 
as a way to address a specific issue - providing for an 
opportunity to consolidate debt with one holder. While the 
interest rate structure for this program has changed over time, 
it has always called for a somewhat higher rate than the 
underlying loans. It is only because of the recent low variable 
rate, which was a result of our reauthorization in '98, that we 
worked so hard on, the rates for this program has now taken on 
a mantle of a home mortgage, even though it is totally 
dissimilar.
    With this rate decline, the program has seen a dramatic 
increase in the number of borrowers choosing to consolidate. In 
1998, there were 160,000 FFELP consolidation borrowers and 
106,000 direct loan consolidation borrowers. In 2002, there 
were 717,000 FFELP consolidation borrowers and 363,000 direct 
consolidation borrowers.
    In terms of loan volume, there has been an almost 600 
percent increase in FFELP volume and an approximately 270 
percent increase in direct loan volume in the consolidation 
loan program. While some of that increased volume is due to the 
availability of lower interest rates, some may be due to the 
increase in the number of organizations specifically marketing 
consolidation loans, which had not occurred in years past.
    There is no question that I and my colleague, Mr. Kildee, 
support the availability of low, variable interest rates for 
students. As you know, the changes we made in the last 
reauthorization put in place the same variable rate formulas 
that have provided for the lowest rates in the loan program's 
history.
    With the ever-rising costs of post-secondary education in 
this country, we want to continue to do all that we can to 
increase affordability and access to post-secondary education 
for low and moderate income students. However, I believe 
achieving that goal will require us to look carefully at where 
Federal resources and Federal support are being allocated.
    We must consider the needs of students attempting to pursue 
their post-secondary education and how we can best assist them 
in that goal. This goal has to be reviewed in the context of 
whether it is prudent to continue long-term subsidies for those 
who have already taken advantage of educational opportunities 
provides by the Higher Education Act and its many student aid 
programs that are now in the workforce, reaping the benefits of 
that education. This is just one of the many questions facing 
this Committee as we work through the reauthorization process.
    This hearing will allow us to learn more about how the 
Consolidation Loan Program fits into the mission of the Higher 
Education Act, how it fits into our goals for this 
reauthorization, that is, increasing access and affordability 
to students pursuing post-secondary education, and the fairness 
of the programs being offered.
    I am hoping today's discussion provides for a constructive 
discourse about the program, the different views as to how or 
if it should be amended, and what is truly best for the 
students we are trying to help secure a quality education.
    I look forward to hearing all of the testimony to be 
presented here today and to our continued collaboration in 
addressing the needs of low and moderate income students and in 
increasing access for these students to an affordable, quality 
education.
    [The statement of Mr. McKeon follows:]

     Statement of the Honorable Howard ``Buck'' McKeon, Chairman, 
              Subcommittee on 21st Century Competitiveness

    Good morning. Thank you all for joining us for this important 
hearing on the Consolidation Loan Program. As we move forward with our 
efforts to reauthorize the Higher Education Act, we continue to address 
the many issues within that Act in order to help make postsecondary 
education a reality for low income students who previously had little 
chance of pursing such a dream. This hearing is another in our 
continuing series and is meant to provide information to the members of 
this Committee about one of the loan programs within the Higher 
Education Act.
    Earlier today Chairman Boehner and I joined together to unveil the 
principles that will guide the remainder of the reauthorization of the 
Higher Education Act. When the Higher Education Act was authorized in 
1965, its intention was to expand access and provide opportunities to 
low-income students. Yet today, I believe some higher education 
programs have lost sight of that original mission--and the crisis of 
skyrocketing college costs makes it more important than ever to ensure 
the higher education programs are reaching their full potential to 
expand access to higher education in America. I believe the principles 
we have outlined will help us address this crisis, and realign programs 
under the Higher Education Act to more fully meet the goal of expanding 
access to a college education. Briefly, these principles are: holding 
colleges accountable for cost increases; removing barriers, 
particularly those that disproportionately harm non-traditional 
students; improving quality and innovation by empowering consumers; and 
realigning student aid programs to ensure fairness for America's 
neediest students and families. These principles will guide reforms to 
all areas in the Higher Education Act, including the Consolidation Loan 
Program, which is the topic of today's hearing.
    The Consolidation Loan Program was implemented as part of the 
reauthorization of the Higher Education Act in 1986. The intent of the 
Consolidation Loan Program was to provide an opportunity for borrowers 
with multiple loan holders and a high level of student loan debt to 
consolidate that debt with one holder to allow for one monthly payment. 
The program often provides a longer repayment period as well, thereby 
lowering the borrower's monthly payment. When a borrower applies for 
and receives a consolidation loan, all underlying loans are paid in 
full by the consolidating lender and a new loan is created in the 
amount of the debt paid in full. The repayment term for that loan is 
then determined by the borrower's outstanding debt at a fixed interest 
rate up to a maximum of 30 years.
    When the program was originally developed, it was done so as a way 
to address a specific issue - providing for an opportunity to 
consolidate debt with one holder. While the interest rate structure for 
this program has changed over time, it has always called for a somewhat 
higher rate than the underlying loans. It is only because of the recent 
low variable interest rates that this program has now taken on a mantle 
of a home mortgage even though it is totally dissimilar.
    With this rate decline, the program has seen a dramatic increase in 
the number of borrowers choosing to consolidate. In 1998, there were 
160,000 FFELP consolidation borrowers and 106,000 direct loan 
consolidation borrowers. In 2002, there were 717,000 FFELP 
consolidation borrowers and 363,000 direct consolidation borrowers. In 
terms of loan volume, there has been almost a 600 percent increase in 
FFEL volume and an approximately 270 percent increase in direct loan 
volume in the consolidation loan program. While some of that increased 
volume is due to the availability of lower interest rates, some may be 
due to the increase in the number of organizations specifically 
marketing Consolidation loans, which had not occurred in years past.
    There is no question that I, and my colleague, Mr. Kildee, support 
the availability of low, variable interest rates for students. As you 
know, the changes we made in the last reauthorization put in place the 
same variable rate formulas that have provided for the lowest rates in 
the loan program's history. With the ever rising costs of postsecondary 
education in this country, we want to continue to do all that we can to 
increase affordability and access to postsecondary education for low 
and moderate-income students. However I believe achieving that goal 
will require us to look carefully at where Federal resources and 
Federal support are being allocated.
    We must consider the needs of students attempting to pursue their 
postsecondary education and how we can best assist them in that goal. 
This goal has to be reviewed in the context of whether it is prudent to 
continue long term subsidies for those who have already taken advantage 
of educational opportunities provided by the Higher Education Act and 
its many student aid programs and are now in the workforce, reaping the 
benefits of that education. This is just one of the many questions 
facing this Committee as we work through the reauthorization process.
    This hearing will allow us to learn more about how the 
Consolidation Loan Program fits into the mission of the Higher 
Education Act, how it fits into our goals for this reauthorization, 
that is, increasing access and affordability to students pursuing 
postsecondary education, and the fairness of the programs being 
offered. I am hoping today's discussion provides for a constructive 
discourse about the program, the different views as to how or if it 
should be amended and what is truly best for the students we are trying 
to help secure a quality education.
    I look forward to hearing all of the testimony to be presented here 
today and to our continued collaboration in addressing the needs of low 
and moderate-income students and in increasing access for these 
students to an affordable, quality education.
    I yield now to my friend from Michigan, Mr. Kildee, for his opening 
statement.
                                 ______
                                 
    Chairman McKeon. I now yield to Mr. Kildee for his opening 
statement.

STATEMENT OF HON. DALE E. KILDEE, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF MICHIGAN

    Mr. Kildee. I thank you, Mr. Chairman. I am pleased to join 
Chairman McKeon at another hearing on reauthorization of the 
Higher Education Act. Today's hearing is especially important 
since it deals with the issue of loan consolidation and the 
ability of students to refinance their consolidate loans.
    These are two issues which have garnered the attention of 
the public and many of our colleagues here in Congress. Our 
economy, we know now, is struggling. Teachers in many states--
California, Washington, Oregon, all those states--are losing 
their jobs, are going to be pink-slipped. The economic 
downturn, coupled with the massive levels of crippling debt 
students incur to attend school, is making it increasingly 
difficult to pay back student loans.
    The question for this Subcommittee should be how do we 
respond to the needs of these borrowers in a way that is 
productive for all parties. One of the issues lies in allowing 
students to refinance their existing consolidation loans and 
eliminating restrictions on which lenders students can 
consolidate with.
    The existing consolidation programs provide an opportunity 
for students to combine their existing loans into one loan and 
therefore 1 monthly payment. Under this structure, students are 
provided with the ability to reduce the number of payments they 
make to different lenders and lock in a fixed interest rate for 
the length of their loans. This fixed interest rate is 
essential to the financial well-being of the students.
    A fixed rate protects students from the volatility of 
rising and falling interest rates. Unfortunately, current law 
restricts the choice of students when they seek to consolidate. 
The so-called single lender rule forces students whose loans 
are held by one lender to consolidate with that lender. This 
limits the ability of borrowers to choose the consolidator that 
would benefit them the most.
    Both Chairman Regula and Congressman Wu have been leaders 
in fighting for the repeal of this provision. Both of these 
members have introduced legislation to repeal the single lender 
rule. And Congressman DeLauro has also introduced legislation 
to allow refinancing of student loans. I hope this Subcommittee 
can include in the provisions of these bills and report out a 
bill later this year.
    On the issue of refinancing existing student loans, new 
authority to permit this is important for a number of reasons. 
Interest rates on student loans are the lowest in 37 years, as 
low as 3.5 percent or even 2.85 percent if a student is in 
school or in a 6-month period after graduation.
    Allowing refinancing would enable students to access these 
rates; current law does not. For the average borrower with 
17,500 in loans, the difference between a 8 percent and a 3.5 
percent rate is $40 per month and over $4,500 in interest 
savings over the life of the loan. This added debt impacts 
students in very negative ways as they struggle to buy a home, 
a car or start a family.
    Another answer to rising levels of student debt is to 
increase the maximum Pell grant. We do not provide enough grant 
aid to our neediest students. In addition, loans are becoming a 
greater and greater share of the means students use to finance 
a college education. And since we began this program, the whole 
idea was access and while loans are very, very important, the 
enormity of the debt very often makes that access only 
theoretical.
    We should reverse this trend and dramatically increase the 
maximum Pell grant over the life of the reauthorization. 
However, the Committee faces a barrier to enactment of 
proposals to refinance consolidation loans and increase Pell 
grants. Instead of focusing on how we can expand student access 
to post-secondary education through student loans and higher 
maximum Pell grants, we are focused on tax cuts.
    Now the administration has projected that we will have over 
$455 billion deficit for this current fiscal year, with $475 
billion deficit next year. This means that there will be 
considerably less resources available for expansion of our 
higher education programs.
    This Committee, unfortunately, will have to pick up and 
choose how we support our higher education programs. These 
priorities, I really think, are not the proper priorities if we 
are to remain competitive in the world economy.
    In closing, I want to thank Chairman McKeon for assembling 
this panel of witnesses. I believe the panel is knowledgeable, 
both the members in the next panel, and I hope that, Mr. 
Chairman, we can do as well as we did in 1998 in writing a 
bipartisan bill. That was a great achievement and what we 
reported out so far, the teacher quality and the loan 
forgiveness program did go out in a bipartisan way, and I hope 
we can continue on that path.
    Chairman McKeon. Thank you, Mr. Kildee. We have two panels 
of witnesses today, and I'll begin by introducing the first 
panel now.
    We're fortunate to have with us two appropriators today. 
They have been very, very busy, and I think we're farther along 
on the appropriation process this year than in the 10 years 
I've been in Congress, probably in the hundred years you've 
been in Congress--27, excuse me.
    [Laughter.]
    Chairman McKeon. But we're happy to have the Hon. Ralph 
Regula, who is No. 2 on the Appropriations Committee, serves as 
the Vice Chairman of the Appropriations Committee and Chairman 
of the Appropriations Subcommittee on Labor, Health and Human 
Services, and Education. His public service career spans more 
than four decades, from currently representing Ohio's 16th 
Congressional district--which I had the good fortune to visit a 
couple of weeks ago, they're doing some outstanding things 
there in his district --in the U.S. Congress.
    He has previously served as a member of the Ohio House and 
Senate, also as a teacher and principal--I didn't even know 
that--in the Ohio public school system, and as a member of the 
Ohio Board of Education.
    And sitting next to him is the Hon. Rosa DeLauro, Democrat 
from Connecticut, who is serving her seventh term. I've been 
here almost as long as you have, but I look like I have been 
here a lot longer.
    Congresswoman DeLauro serves as a member of the 
Appropriations Committee and its Subcommittees on Labor, Health 
and Human Services, and Education, as well as the Budget 
Committee. In 1999, she was elected assistant to the Democratic 
leader, making her the second-highest-ranking Democratic woman 
in the House of Representatives.
    We are honored to have both of you here today, and you know 
how these lights work and how the system works, and we'll turn 
the time over now to Chairman Regula.

 STATEMENT OF RALPH REGULA, A REPRESENTATIVE IN CONGRESS FROM 
                       THE STATE OF OHIO

    Mr. Regula. Well, thank you, Mr. Chairman. And first of 
all, I want to commend your Committee for the great work you've 
done. Having been in public education in a number of 
capacities, I know how vitally important education is to the 
future of our nation and how important it is to every 
individual whose, one way or another, life is touched by either 
his or her opportunities in school as well as parents of 
children.
    And I particularly was interested in your bill on teacher 
quality. Teachers are the heart and soul of the system and in 
addressing that problem, you've taken a great stride. I like 
the No Child Left Behind but I still think the quality of that 
teacher in the classroom is a key to a good educational 
experience for every child.
    And I think you for holding this hearing today on the issue 
of student loan consolidation and for allowing me the 
opportunity to appear before you on this topic. I appreciate 
the chance to speak with you about this subject and share with 
you my goal in introducing legislation to eliminate the single 
lender rule in student loan consolidation. The bill, H.R. 942, 
is the Consolidation Student Loan Flexibility Act of 2003.
    When the House reauthorized the Higher Education Act in 
1998, the bill contained no exceptions for loan holders who 
wished to consolidate their student loans. As I understand it, 
however, at the insistence of the Senate during the conference, 
the provision that precluded one specific group of student loan 
holders from shopping for the best rates on their loan 
consolidation was retained in the law, those students with 
multiple loans from only one lender.
    This provision has become known as the single lender rule. 
I believe it is unfair, hence the reason for my legislation, 
and I ask that in the 2003 reauthorization of the Higher 
Education Act the exception be removed.
    This exception makes no sense and it is unfair to this one 
group of student loan recipients. It has been argued that 
unscrupulous lending companies would swoop down and take 
advantage of these naive students when they are making 
decisions about managing their student loans, and I find that 
one very difficult to accept.
    Those supporting the exception said that the students need 
to be sheltered, protected--that's a real vote of confidence in 
our education system. This implies that there is some magical 
knowledge that is imparted when you receive loans from more 
than one lender that isn't received if you get multiple loans 
from the same lender.
    It also implies that the graduates now out in the workforce 
as teachers, administrators, and professionals are not smart 
enough to weigh the options before them and make the best 
decision for their situation. I believe that the graduates of 
our schools and of higher education are capable of deciding 
what is best for them, whether they received loans from one 
lending institution or multiple institutions. With interest 
rates at historic lows, it is unfair to limit the choices that 
these recent graduates are given.
    More than 22 members of the House agree with me on this 
position and have cosponsored my bill. Furthermore, this topic 
has become of interest to other members such as Ms. DeLauro, 
who have introduced bills that have similar provisions.
    Again, I appreciate your interest in this subject and I 
look forward to an informative hearing this morning. When the 
Subcommittee drafts its proposal for the reauthorization of the 
Higher Education Act, I ask your support in eliminating the 
single lender exception.
    And I thank you for the opportunity to be here.
    [The statement of Mr. Regula follows:]

 Statement of Hon. Ralph Regula, a Representative in Congress from the 
                             State of Ohio

    Mr. Chairman, thank you for holding this hearing today on the issue 
of student loan consolidation and for allowing me the opportunity to 
appear before you on this topic.
    I appreciate the opportunity to speak with you about this subject 
and share with you my goal in introducing legislation to eliminate the 
single lender rule in student loan consolidation. The bill, H.R. 942, 
is the Consolidation Student Loan Flexibility Act of 2003.
    When the House reauthorized the Higher Education Act in 1998, the 
bill contained no exceptions for loan holders who wished to consolidate 
their student loans. As I understand it, however, at the insistence of 
the Senate during the conference, the provision that precluded one 
specific group of student loan holders from shopping for the best rates 
on their loan consolidation was retained in the law, those students 
with multiple loans from only one lender. This provision has become 
known at the single lender rule. I believe it is unfair, hence the 
reason for my legislation, and I ask that in the 2003 reauthorization 
of the Higher Education Act the exception be removed.
    This exception makes no sense and is unfair to this one group of 
student loan recipients. It has been argued that unscrupulous lending 
companies would swoop down and take advantage of these naive students 
when they are making decisions about managing their student loans. 
Those supporting the exception said that the students needed to be 
sheltered, protected. This implies that there is some magical knowledge 
that is imparted when you receive loans from more than one lender that 
isn't received if you get multiple loans from the same lender. It also 
implies that the graduates, now out in the workforce as teachers, 
administrators, and professionals, are not smart enough to weigh the 
options before them and make the best decisions for their situation. I 
believe that the graduates of schools of higher education ARE capable 
of deciding what is best for them, whether they received loans from one 
lending institution or multiple institutions. With interest rates at 
historic lows, it is unfair to limit the choices that these recent 
graduates are given.
    More than 22 Members of the House agree with me on this position 
and have cosponsored my bill. Further, this topic has become of 
interest to other members, as well, who have introduced bills that have 
similar provisions.
    Again, I appreciate your interest in this subject, and I look 
forward to an informative hearing this morning. When the subcommittee 
drafts its proposal for the reauthorization of the Higher Education 
Act, I ask your support in eliminating the single lender exception. 
Thank you.
                                 ______
                                 
    Chairman McKeon. Thank you.
    Ms. DeLauro.

STATEMENT OF ROSA L. DELAURO, A REPRESENTATIVE IN CONGRESS FROM 
                    THE STATE OF CONNECTICUT

    Ms. DeLauro. Thank you very much, Mr. Chairman, and I, too, 
am honored to be here with you this morning and ranking member 
Kildee, and I appreciate the opportunity that you have afforded 
to my Chairman, Chairman Regula, and I to come and speak with 
you this morning about this serious issue.
    And I want to just say to Chairman Regula that it is an 
Honor to serve on the Labor, Health, Education, Human Services 
Subcommittee of the Appropriations Committee. With someone who 
has had a background in education the way he has, he brings a 
practical knowledge of these issues and their importance. I 
think I've told him before that my practical knowledge in the 
classroom was when I served as a substitute teacher for several 
years and you know what kind of attention they pay the 
substitute teachers in school, Mr. Chairman.
    But this whole issue of education--and I just will say this 
as a brief comment and in my own interest. I view education as 
the great equalizer so that your socioeconomic background, your 
gender, your religion, your race, your political party, none of 
that makes any difference. What makes a difference is your God-
given talent.
    I'm particularly interested because my dad came as an 
Italian immigrant in 1913. He couldn't speak the language when 
he came. He paid a price for not being able to speak the 
language, is that he left school in the seventh grade when both 
teachers and classmates laughed at him. But he was determined 
in his lifetime that his only child, his daughter, was going to 
get the finest and the best of educations no matter what, and 
struggled hard--both my folks did--to make sure that I had 
those opportunities.
    And I believe that this is the institution that allows us 
to, quite frankly, make that road a little bit easier for 
people in order to reach their vision and their goals and 
realize their dreams.
    Finding new ways to expand college access to all Americans 
I think is the goal that we all share, and particularly this 
Committee. It starts with making the Higher Education Act more 
responsive to the needs of families and for all the progress 
that we've made in increasing the opportunity to receive a 
college education in America, I hardly need to tell this group 
that we face serious obstacles. Students face serious obstacles 
today.
    Among the obstacles is the increasing cost of higher 
education. It's risen nearly 40 percent in the last decade. My 
state of Connecticut faces a billion dollar budget shortfall, 
public university tuition is being increased by 14.5 percent at 
the same time the Connecticut University system is cutting 
programs and services and reducing the size of faculty.
    These trends, as you know, are not unique to Connecticut. I 
don't know if it was serendipity, Mr. Chairman, Ranking Member, 
but today's Washington Post front page stories, States Plan Big 
Tuition Increase, Budget Woes Lift College Costs as Much as 40 
Percent. Front page story of the Washington Post, a very, very 
telling argument and I'd like to put it into the record, if I 
might.
    Chairman McKeon. No objection, so ordered.
    [The provided material follows:]

                   States Plan Big Tuition Increases

             Budget Woes Lift College Costs As Much as 40%

By Dale Russakoff and Amy Argetsinger
Washington Post Staff Writers
Tuesday, July 22, 2003; Page A01

    State colleges and universities in every region of the country are 
preparing to impose this fall their steepest tuition and fee increases 
in a decade--the latest fallout of state fiscal crises in which most 
governors and legislatures this year sharply reduced aid to higher 
education.
    Recently announced tuition increases for in-state students of as 
much as 21 percent in Maryland and almost 30 percent in Virginia over 
last fall's levels are larger than those in many states, but still well 
behind increases in states with even larger budget gaps. Tuition and 
fees at the State University of New York and the University of Oklahoma 
are rising about as much as those at the University of Virginia, but 
they are rising 39 percent at the University of Arizona and 40 percent 
at the University of California.
    The pattern marks a reversal from the boom times of the late 1990s, 
when state tax collections soared and most governors dramatically 
raised aid to public colleges and universities, which educate two-
thirds of the nation's four-year college students. Some states, 
including Virginia, froze or even rolled back instate tuition; others, 
including Maryland, kept increases to a minimum.
    Like most of their counterparts, Maryland Gov. Robert L. Ehrlich 
Jr. (R) and Virginia Gov. Mark R. Warner (D) lifted tuition limits in 
the face of record budget gaps. Tuition and fees at the University of 
Maryland at College Park will be $6,759 this fall ($1,089 more than 
last year), and at the University of Virginia, $5,968 ($1,370 more than 
last fall). In dollar terms, those increases are among the nation's 
highest.
    Governors and lawmakers in several states said they cut state aid 
to higher education reluctantly, but did so knowing that colleges and 
universities could raise money from other sources, including tuition.
    University officials voiced concern that many lower- and moderate-
income students now will be pushed into community colleges or out of 
higher education because federal financial aid and most state aid 
programs are not keeping pace with rising tuition. Meanwhile, the job 
market for young adults is dismal, and more students need to work to 
afford college.
    ``It is curious that national and state political leaders are so 
interested in ensuring access to and quality in K-12 education, yet 
once you get to higher education, the interest in accessibility seems 
to fall off,'' said Charles Hoslet, director of state relations for the 
University of Wisconsin system, where tuition on flagship campuses is 
going up 18 percent.
    David W. Breneman, dean of the Curry School of Education at the 
University of Virginia, said the shift represents a largely 
unacknowledged national policy decision, as states react one by one to 
the most serious fiscal crises in decades. The effect, he and others 
said, is to shift the cost of higher education away from states, onto 
in-state students and their families.
    ``They're just balancing budgets, and this is the fallout, and 
nobody is asking, 'What about our future?''' said Joni E. Finney, vice 
president of the National Center for Public Policy in Higher Education 
in San Jose.
    Some states, including New York, Oklahoma and Washington, are 
increasing financial aid to cover some or all tuition increases for 
lower- and moderate-income families, but many, including Maryland and 
Virginia, made no changes. And several, including Tennessee and 
Massachusetts, reduced needbased aid, saying the fiscal crisis left 
them no alternative. The largest federal grant program, the Pell Grant, 
is not increasing its maximum award.
    With the increases, tuition and room and board at many state 
universities is now more than $10,000 a year. The National Association 
of State Universities and Land-Grant Colleges found that room and board 
at major state universities last year averaged a little less than 
$6,000.
    Students interviewed last week in several states had reactions 
ranging from annoyance to despair, depending on their financial 
circumstances. Michael Hansen, who faces a $570 tuition increase at 
Maryland's Salisbury University, where he will be a junior this fall, 
said he already works two jobs--at the library and delivering Chinese 
food--to help his parents pay his tuition, and now ``will have to work 
a little harder so that I can remain a member of academia and not a 
full-time delivery boy at some random Chinese restaurant.''
    The stakes are higher for University of Iowa senior Mayrose 
Wegmann, one of eight children of a single mother who earns the minimum 
wage working at a coffee shop. Wegmann already has more than $24,000 in 
debt, works more than 40 hours a week, doubles up with three students 
in a two-bedroom apartment, does without cable TV and long-distance 
service and walks rather than driving or riding the bus. She also 
receives the maximum Pell Grant of $4,000, which isn't going up, 
although her tuition and fees will increase almost $900 this fall--for 
a combined increase of 55 percent more than when she was a freshman. 
She said her options are to work even more hours or go further into 
debt.
    ``It's disheartening for anyone from my background to see these 
increases, because we know how important a higher education is,'' said 
Wegmann, a political science major. ``We're all working harder and 
harder to pay our way, but we're not getting a better education. In 
fact, we're getting a worse education because the time we have to study 
is so limited.''
    A survey by the National Association of State Universities and 
Land-Grant Colleges found tuition rising at public institutions in all 
37 states that have responded so far, almost all as a result of state 
budget cuts. Increases were less than 5 percent in only three states--
Montana, New Mexico and Hawaii.
    This is the second consecutive year of higher education budget cuts 
in 24 states, according to the American Association of State Colleges 
and Universities, and with no sign of an upturn in state revenue, 
another round is likely next year. Many states have raised tuition two 
years in a row.
    In Minnesota, the state colleges and universities system recently 
approved 12.5 percent increases for this September and September 2004, 
which will mean four consecutive years of double-digit tuition 
increases for in-state students. The legislature increased need-based 
grants by 17 percent over the past two years, but officials said some 
financial-aid students still will pay more.
    While public colleges are still far more affordable than their 
private counterparts, unpredictable costs are a growing issue. Karen 
Kielbasa, who is putting herself through Virginia Tech, where she will 
be a senior, said she could handle last year's 9 percent increase and 
this year's 7.6 percent boost--she simply took out larger loans--but 
was blindsided by the school's decision to raise tuition in the middle 
of the year by about $400 a semester.
    She said she had to double the hours she worked in the campus 
library and at a horse stable--from 15 to 30 a week--while taking 15 
credits.
    Elizabeth Hust, who is paying her own way through the University of 
Wisconsin with financial aid and an almost 40-hour work week, said she 
cannot afford to finish her five-year program for a bachelor of fine 
arts degree. With tuition increasing $700 this fall, she said, she will 
have enough money for only one more year of college and will drop out 
in the spring, work full-time and finish her degree part-time over the 
next few years.
    Meanwhile, she may profit from her privation. She has reduced her 
food budget to $40 a month by eating a lot of rice and making her own 
bread and pasta--a regimen she is detailing in a cookbook for students 
that she plans to call ``How to Survive on Literally Nothing.''
                                 ______
                                 
    Ms. DeLauro. It's unbelievable reading. One of the biggest 
obstacles to students and families is the high amount of debt 
they accrue during college and carry with them for decades 
after they graduate. At a time when young people and families 
are looking to start out on their own, make a life for 
themselves, they are finding instead that they are burdened 
with massive debts that limit their professional opportunities 
and reduce their quality of life.
    Some of you are familiar with the recent article in U.S. 
Today that chronicled how difficult it has been for Kathy and 
Jerry Dillon from Georgia to off a $30,000 student loan despite 
having a good credit rate, no credit card debt and an 
affordable home loan.
    One of the reasons this problem persists for so many 
families is that the interest rate on these loans can only be 
consolidated once. As a result, families like the Dillons who 
consolidated their student loans in 1996 are stuck paying an 8 
percent rate. Even though the interest rates are at a historic 
low today, 3.42 percent, Federal law does not allow borrowers 
like this family to take advantage of them.
    The issue of loan consolidation is an issue that my 
colleagues, Chairman Regula, Congressman Wu, Congressman Miller 
and others on this Committee, have worked on for a very long 
time.
    Rising debt, coupled with large debts and little recourse 
to refinance, are the reasons why I introduced the College Loan 
Assistance Act. And this came from constituents coming to me at 
weekly office hours. I stand at a Shop and Shop or a Waldbaum's 
on a Saturday morning where I do office hours and where young 
people have come up--this is where I first thought about the 
issue and, quite frankly, went to my colleagues who sit on this 
Committee and so forth and said hey, if we can refinance our 
homes at a lower rate, why can't we refinance student loans at 
that lower interest rate?
    This would allow students that have already locked in at a 
much higher interest rate to take advantage of these historic 
lows and consolidate their debt. In addition, the College Loan 
Assistance Act would eliminate loan and origination fees that 
are charged to student borrowers. Currently, the government 
charges student borrowers a fee of up to 4 percent on a loan 
principal, accruing interest and adding to the burden of a 
student's debt, in effect a tax on student borrowers.
    Along the same lines, I would like to echo the comments of 
the Chairman of my Committee, and that's regarding the repeal 
of the Single Lender rule so that students have the opportunity 
to consolidate their loans with another lender at a lower 
interest rate. The only thing that I would add to what my 
distinguished Chairman has said is that I believe we should 
include increased consumer disclosure to ensure that the 
borrower is well-informed of all of their financing options.
    While we need to find solutions to make student loan debt 
more manageable, on the other side of that we need to also make 
sure that college education is more affordable. In the next 
decade, more than 15.3 million undergraduate students will 
attend the nation's colleges and universities and they will 
face an increase of more than 14 percent.
    Historically, the Federal Government has played a major 
role in college tuition assistance with Federal grant, loan, 
and work-study programs accounting for two-thirds of all 
available student aid in academic year 2001-2002, 57 billion 
out of 85 billion. That year, more than 8.3 million students 
received Federal student aids with an average award of more 
than $3,500.
    One of the most powerful tools we have had to help students 
has been the Pell grant, which is targeted to the neediest 
families, providing grants to nearly four million undergraduate 
students who have an average family income of $17,300. But as 
the cost burden of higher education has increased dramatically, 
the strength of the Pell grant has decreased, from covering 84 
percent of tuition in 1975-76 to 39 percent today.
    The need is particularly pronounced when you consider that, 
despite gains in overall post-secondary education participation 
during the past three decades, the rate at which high school 
graduates from high income families enroll in college is about 
27 percentage points greater than for low income families.
    The bill that I would introduced would restore the original 
purchasing power of the program by increasing the authorized 
level of the maximum Pell grant to $7,000. It increases the 
maximum grant to make that college dream a reality but it also 
means that students would not have to borrow as much, in a 
practical way making reconsolidation and consolidation in 
general cheaper. Increasing the Pell grant maximum is a common 
sense idea that is long overdue.
    I am hopeful that some of these provisions, which are 
similar to those in Mr. Miller's recently drafted College 
Opportunity Act, will be included in the bill reported out by 
the Full Committee. At a time when we do have serious 
challenges before us for the coming decades, when the budget 
cuts in so many areas are imminent, we need to maintain and 
improve the Federal Government's commitment to higher 
education. It is that great equalizer. We need to continue to 
give every motivated student the opportunity to grow and to 
contribute to our society.
    I thank you very much, Mr. Chairman, and our ranking 
member, for allowing and affording me the opportunity to speak 
with you today.
    [The prepared statement of Ms. DeLauro follows:]

 Statement of Hon. Rosa L. DeLauro, a Representative in Congress from 
                        the State of Connecticut

    Thank you Mr. Chairman and Mr. Ranking Member, and thank you all 
for this opportunity to testify before you this morning on an issue so 
critical to the families of this country.
    Finding new ways to expand college access to all Americans is a 
goal I think we all share. I believe that starts with making the Higher 
Education Act more responsive to the needs of families. But for all the 
progress we have made in increasing the opportunity to receive a 
college education in America, I hardly need to tell you that very 
serious obstacles face students today.
    Among these obstacles is the increasing cost of higher education, 
which has risen by nearly 40 percent in the last decade. In my state, 
which faces a billion dollar budget shortfall, public university 
tuition is being increased by 14.5 percent at the same time the 
Connecticut University system is cutting programs and services and 
reducing the size of faculty. These trends, as you know, are not unique 
to Connecticut. These trends, as you know, are not unique to 
Connecticut, as the front page article in today's Washington Post 
confirms.
    One of the biggest obstacles to students and families is the high 
amount of debt they accrue during college and carry with them for 
decades after they graduate. At a time when young people and families 
are looking to start out on their own, to make a life for themselves, 
they are finding instead that they are burdened with massive debts that 
limit their professional opportunities and reduce their quality of 
life.
    Some of you may be familiar with a recent article in USA Today that 
chronicled how difficult it has been for Kathy and Jerry Dillon from 
Georgia to pay off a $30,000 student loan, despite having a good credit 
rating, no credit card debt and an affordable home loan.
    One of the reasons this problem persists for so many families is 
that the interest rate on these loans can only be consolidated once. As 
a result, families like the Dillons, who consolidated their student 
loans in 1996, are stuck paying an 8 percent rate. Even though interest 
rates are at a historic low today 3.42 percent federal law does not 
allow borrowers like this family to take advantage of them. The issue 
of loan consolidation is an issue my colleagues Mr. Miller and Mr. Wu 
have worked on for some time.
    Rising debt, coupled with large debts and little recourse to 
refinance are why I introduced the College Loan Assistance Act, which 
would allow students that have already locked in at a much higher 
interest rate to take advantage of these historic lows and consolidate 
their debt. In addition, the College Loan Assistance Act would 
eliminate loan and origination fees charged to student borrowers. 
Currently, the government charges student borrowers a fee of up to 4 
percent on the loan principal, accruing interest and adding to the 
burden of a student's debt--in effect a tax on student borrowers.
    Along those same lines, I would like to echo the comments of my 
chairman on the Labor HHS subcommittee, Mr. Regula, regarding the need 
to repeal the Single Lender rule so that students have the opportunity 
to consolidate their loans with another lender at a lower interest 
rate. The only thing that I would add to what my distinguished Chairman 
has said is that I believe we should include increased consumer 
disclosure to ensure that the borrower is well-informed of all their 
financing options.
    While we need to find solutions to make student loan debt more 
manageable, we also need to make college education more affordable. In 
the next decade, more than 15.3 million undergraduate students will 
attend the nation's colleges and universities an increase of more than 
14 percent. Historically, the Federal government has played a major 
role in college tuition assistance, with federal grant, loan, and work-
study programs accounting for two-thirds of all available student aid 
in academic year 2001-2002--$57 billion out of $85 billion. That year, 
more than 8.3 million students received federal student aid, with an 
average award of more than $3,500.
    One of the most powerful tools we have had to help students has 
been the Pell Grant, which is targeted to the neediest families, 
providing grants to nearly 4 million undergraduate students who have 
average family incomes of $17,300. But as the cost burden of higher 
education has increased dramatically, the strength of the Pell Grant 
has decreased, from covering 84 percent of the tuition in 1975-76 to 39 
percent today.
    The need is particularly pronounced when you consider that, despite 
gains in overall postsecondary education participation during the past 
3 decades, the rate at which high school graduates from high-income 
families enroll in college is about 27 percentage points greater than 
that for low-income families.
    The College Loan Assistance Act would restore the original 
purchasing power of the program by increasing the authorized level of 
the maximum Pell Grant to $7,000. Not only will increasing the Pell 
Grant maximum grant make the dream of college a reality for millions of 
low-income families, it will also mean students would not have to 
borrow as much--making reconsolidation and consolidation in general 
cheaper. Increasing the Pell Grant maximum is a common sense idea that 
is long overdue.
    I am hopeful that some of these provisions, which are similar to 
many of those in Mr. Miller's recently-drafted College Opportunity Act, 
will be included in the bill reported out by the full committee. At a 
time when we have serious challenges before us in the coming decades, 
when budget cuts in so many areas are imminent, we need to maintain and 
improve the Federal government's commitment to higher education, so 
that we can continue to give every motivated student the opportunity to 
grow and contribute to our society.
    I would like to thank the Chairman and the distinguished ranking 
member again for giving me this opportunity today and I look forward to 
working with the Committee as it moves forward with the reauthorization 
of the Higher Education Act.
                                 ______
                                 
    Chairman McKeon. Thank you very much. I am going to reserve 
my time and turn the time now to Mr. Kildee.
    Mr. Kildee. Thank you, Mr. Chairman. A question to Mr. 
Regula. We've worked closely through the years on so many 
issues where you've been so good. I can recall those lean years 
where you were able to pull some extra money for Native 
Americans and I always appreciated that. They didn't always 
assign me that much money in the budget but you always were 
very good and you certainly have done much to promote human 
dignity and I appreciate that.
    Criticisms about lifting the single lender rule include 
that it will destabilize the marketplace. Do you believe those 
fears are justified?
    Mr. Regula. Well, we haven't said that allowing you to 
refinance your car or your credit cards or your mortgages could 
be destabilizing the market and there's a lot more money 
involved there than in this. And I think it's a fairness issue, 
just plain and simple. It's fairness.
    It's only fair that these students who, in an effort to get 
their quality of life improved and their opportunities 
improved, have taken out loans. And it's a great program, but 
they shouldn't be penalized because the lending agency is able 
to borrow the money that they use at a much lower rate and all 
this does is--this high return that they get from students, is 
enhance their profits. But pure and simple, it is a fairness 
issue and we're relying on this Committee to correct this 
injustice.
    Mr. Kildee. Thank you, Mr. Regula. Rosa, you have 
introduced legislation to allow students to refinance their 
student loans. You keep the consolidation program at a fixed 
rate. Why do you think it's important to maintain that at a 
fixed rate?
    Ms. DeLauro. I thank my colleague for the question because 
I think if you lock in at a lower fixed interest rate and in 
some cases simplify the repayment of loans by combining 
multiple loans into one, consolidated loans enables borrowers 
to lower their monthly payments by extending the repayment 
period.
    This is--I'll go to what the Chairman has talked about. We 
make this kind of creative financing very--available to 
families to deal with their homes. What is the reason why that 
we shouldn't allow for this kind of effort if--you know, owning 
a home is one of the great American dreams, having an education 
in which you can contribute to our society in a very productive 
way has got to be one of the major goals of our society today.
    And to allow this in this combination and allow for lower 
monthly payments, allowing to extending the repayment period, 
allowing to make it as easy as possible, if you will, with 
being able to repay, not pay--you know, not not paying but 
being able to do what you need to do in a way that puts less of 
a burden and stress on the individual.
    If you read the article in today's paper, we've got young 
people who are going to school with two, three jobs in order to 
be able to make the increase in tuition costs, leaving little 
time, as one quote in the article, that--one quote from a young 
woman, we're all working harder and harder to pay our way but 
we're not getting a better education. In fact, we're getting a 
worse education because the time we have to study is so 
limited.
    Let's do something about allowing for people to get a good 
education.
    Mr. Kildee. You know, my wife and I were in a position 
financially when my--I had three children in school--in college 
at the same time.
    Ms. DeLauro. Ditto.
    Mr. Kildee. And when my last one graduated, it was like 
getting a pay raise. But we took a second mortgage out on our 
home to be able to do that because we didn't want to burden 
them with debt. And then recently I refinanced my mortgage on 
my house and that money was used actually for their college 
education.
    So I think both of you make very good sense there, that we 
do permit this on mortgages on our house and we used that 
method in order to finance our three children's education at 
the time, so I think both of you make very good sense on that.
    Thank you very much, Mr. Chairman.
    Chairman McKeon. Mr. Carter.
    Mr. Carter. I'm actually going to do double duty here. Mr. 
Burns wanted me to ask a couple of questions for him because he 
had to slip out to a markup.
    His questions are what exactly is the role of the Federal 
Government in these loans if we do allow the second 
reconsolidation and what effect will it have on the taxpayer?
    Mr. Regula. Well, I think the role of the Federal 
Government is a societal interest in having a well-educated 
population and giving everybody an opportunity. I'm a product 
of the GI Bill which enabled me to go to college and probably 
made a substantial difference in my life and I think that we 
fund in our Committee, Rosa and myself, the Pell grants because 
we say we want every young American who wants an opportunity, a 
chance at the American dream, to get that.
    And part of the reason it's a Federal--participation in 
these programs is that it's to our advantage as a nation to 
have a well-educated population. And I suspect--somebody did a 
study on the GI Bill and said it's been paid for many, many 
times over by the increased productivity of the GIs who took 
advantage of that legislation and that program, and the same 
thing is true on the student loans.
    Those people that get a loan that has some help on the 
interest rate are going to repay that loan many times over in 
increased productivity and increased--maybe better citizenship. 
And all those things together are good for a nation.
    Mr. Carter. I agree with that absolutely and I happen to be 
in the situation personally where I have had a kid in college 
since 1988. I still have two kids in college today. They love 
it.
    [Laughter.]
    Ms. DeLauro. They're going to stay as long as they can, Mr. 
Carter.
    Mr. Carter. I'm going to say to them what my dad said to me 
when I was in law school--``Am I going to have to burn the 
University of Texas to the ground to get you out of it?''
    [Laughter.]
    Mr. Carter. But seriously, on the question of being able to 
once again, a second time, refinance. One of the problems that 
we face in our family as we look at this is that--we deal with 
a lot of Plus loans--is the situation where they're still not 
out of school. Although now is the time, if there ever was, to 
consolidate your loan, is today but I may have a daughter that 
may still have at least four or more semesters left to 
graduate. Now she says she's going to med school which means, 
you know, God knows when--
    Mr. Regula. Another loan.
    Mr. Carter. --and so the point is it would certainly fit my 
program to be able to reconsolidate twice because as it exists 
today, I could consolidate existing loans, but then the new 
loans I wouldn't be able to consolidate? Is that the way the 
program works today?
    Mr. Regula. They have a one-time--
    Mr. Carter. One-time only?
    Ms. DeLauro. One-time only today. What I've proposed is 
that the college will allow borrowers to refinance more than 
once.
    Mr. Carter. As many times as they would choose to do to 
seek the lower rate.
    Ms. DeLauro. That's right.
    Mr. Regula. We do it in homes, automobiles--
    Mr. Carter. I think that makes good sense.
    Ms. DeLauro. And your point earlier, I think the Federal 
Government has played a very serious role in education in the 
United States and I, like you, I believe, believe that that's 
a--it's a good role to play and we have tried to make that road 
easier for young people, and it was GIs, et cetera, to be able 
to get an education which increases a person's earning 
capacity, all the economic spinoffs of that education, and I 
think it's high time we take a look at where we are currently 
and continue to review that and how we do.
    Mr. Carter. And as appropriate, look at this from the 
practical standpoint of the overall debt that the government is 
carrying, you feel like this will enhance the ability of the 
student to actually pay off his debt rather than forfeit--
    Mr. Regula. No question about it, and it's a small part of 
the national debt but it's probably one of the most productive 
investments. I like instead of the word debt, investment. We do 
it with a home. You have a mortgage but it's an investment. And 
this is what you do. You invest in the young people of this 
nation and what better place to do it than with these students.
    Mr. Carter. That's our No. 1 asset.
    Mr. Regula. Absolutely.
    Mr. Carter. Thank you, Mr. Chairman.
    Chairman McKeon. Thank you. Mr. Wu.
    Mr. Wu. Thank you, Mr. Chairman. I just want to agree with 
our witnesses and make a couple of points, then ask a question 
or make a request based on our appropriators witness--the 
status of our witnesses as appropriators.
    I think that Chairman Regula is spot-on with his citation 
of home ownership. I have always thought of home ownership and 
education as the two appreciating assets that most middle class 
Americans have access to. That is, most folks can get cars or 
refrigerators or whatever and they wear out over time. They do 
not appreciate in value. For most middle class Americans, it is 
your home, it is your education which have appreciating values 
over time and these appreciating assets deserve support.
    Second, I want to point out that what we're talking about, 
student loans, is the largest source of assistance in financial 
aid. It leverages billions of--what Federal subsidy there is 
leverages billions and billions and billions of dollars in 
financial aid and I believe that the original intent of a 
legislation creating these programs was that the interest that 
one would pay on student financial aid would be among the 
lowest in one's loan portfolio rather than among the highest. I 
mean, that's the point of the Federal subsidy.
    But with this consolidation process, and perhaps 
consolidating at an earlier time and now with interest rates 
diving so low, we have stood the system on its head, in 
essence, and student loans could be among the higher interest 
rate loans in one's portfolio.
    And I think that the legislation that you all are 
proposing, that Mr. Davis of Illinois is proposing, Mr. Miller 
and I and others, along with Mr. Holt on this Committee, we are 
all moving in the same direction and we look forward to working 
together to find some appropriate adjustments and incorporate 
that in the higher education reauthorization so that we can get 
this done this year.
    The request that I have for you all as appropriators is 
that there is some concern--because of a Federal subsidy 
involved, whether it's the special allowance payment or 
otherwise, because of the Federal subsidy involved, that any 
adjustments for current borrowers, if we assume that there is a 
fixed amount of total student aid, any adjustment for current 
borrowers that--making it--giving them additional benefits 
might come at the price of future borrowers.
    That is, students coming through the chain, that benefits 
for people who are refinancing might come at the expense of 
people who are in school and borrowing or might come at the 
expense of people who are applying for Pell grants.
    That may be a legitimate concern that can certainly be 
addressed if we don't look at student financial aid as a fixed 
pie to be divided among current loan holders, future loan 
holders or Pell grants, but that we look at the total size of 
the pie and be willing to adjust that so that we can 
accommodate this refinancing, which I think is the right thing 
to do, and also accommodate new borrowers and also people who 
are applying for grants.
    Mr. Regula. Well, keep in mind that the lenders assemble 
pools of money which they in turn lend for many different 
purposes. But their access to money is predicated on the market 
and therefore the pool that they are using to make the new 
loans is at a much lower rate and therefore they can give a 
better rate.
    Being fixed in what the existing borrowers pay is a 
windfall because they're constantly refinancing their pool of 
available money, whether it's through insurance companies that 
assemble money or a whole--banks, you name it. And therefore I 
don't think it would have any impact in a negative way on 
prospective borrowers but certainly would bring justice or 
fairness to those that have existing loans.
    And I, for the life of me, can't figure out why a student 
is locked in when we're not locked in on any of the other 
sources of credit. I'm sure all of you do as I do, you get a 
letter every day from a credit card company saying come play 
with us because we're going to give you a better deal and we'll 
pay off your credit cards and give you a lower rate.
    Why shouldn't students, of all people, have this kind of an 
opportunity?
    Ms. DeLauro. I would just echo the Chairman's words and I 
would also add that, you know, we do put values and priorities 
on what you spoke about before, Congressman Wu, is what is it 
that appreciates in value. We have a physical manifestation in 
a home, we have an intellectual manifestation in a person's 
ability to succeed through, as I said at the outset, their 
talent.
    We ought to be reassessing that situation all along the 
continuum as we move forward to find out better ways in which 
we can allow for that expansion and have our institutions--you 
know, no one is talking about breaking the--trying to break the 
bank but just trying to keep forward and doing what have been 
standard practices in other ways, which seem to have worked out 
pretty well.
    Mr. Wu. Mr. Chairman, if I may have your indulgence just to 
make a 30-second comment.
    Chairman McKeon. Use it on the panel, if you would, because 
we're going to have two panels and we're going to have votes 
between 11 and 12:00, so in the interest of time we're going to 
have to move on.
    Mr. Ehlers.
    Mr. Ehlers. Thank you, Mr. Chairman. And before I ask my 
questions and make my comments, I would like to yield 30 
seconds to my colleague from Michigan, Mr. Hoekstra, who has to 
leave for another meeting.
    Mr. Hoekstra. I thank my colleague for yielding and I thank 
the Chair for letting me sit in on at least part of this 
hearing.
    I just want to express my support for eliminating the 
single holder rule. It's an issue that this Subcommittee in the 
House sought to repeal in 1998 and I think it's a good idea for 
us to revisit the issue. I also want to submit for the record, 
Mr. Chairman, a letter indicating--signed by 73 of our members 
indicating strong support for strengthening the student loan 
program and the efforts of this Subcommittee.
    With that, I'll yield back to my colleague.
    [The information referred to has been retained in the 
Committee's official files.]
    Mr. Ehlers. Reclaiming my time, I am very pleased with the 
testimony I've heard here and especially Chairman Regula. I 
wasn't even aware of the problem and it just makes no sense at 
all and I will certainly do what I can to help incorporate that 
in any legislation we do.
    I also want to comment on the general problem and some 
issues that were raised. Congresswoman DeLauro, you mentioned 
placing value in intellectual capital. And it always amazes me 
that students are so reluctant to take out loans to get an 
education and my colleagues here have heard me comment that 
when I was a professor, I always encouraged students to borrow 
money rather than drop out of school.
    They're all worried about, oh, I don't want these debts 
hanging over my head. My response is simply as soon as you get 
out of school, you're likely to get married and buy a house and 
a car and you won't--you'll have a lot more debt hanging over 
your head for about 40 years. But what's more important, an 
education or a car?
    And furthermore, the education gains in value and helps you 
figure out your other debts. A car declines in value. So I 
think we have something to do in order to educate our students 
as well about how much an education is worth and why it is 
worth borrowing money to get an education because it's self-
financing in the long run.
    It's almost an entrepreneurial decision because by getting 
an education, you are borrowing money to invest in something 
that will pay back at a rather handsome rate. So I'm very 
strongly in favor of the student loan program. I would like to 
increase the maximums.
    One other point I'd like to raise, Mr. Chairman, and that 
is we have to look at some of the regulations dealing with 
this, too. I'm dealing in an issue with a constituent in my 
district now, a young girl who shows great promise. She is not 
a member of our church but we have helped her as members of the 
church to get an education.
    She is very talented in music. She wants to go to college 
and her mother refuses to sign the financial aid forms and so 
she cannot borrow money without that. She is now going through 
the process of emancipation. She has left home and is living 
with some friends of mine in order to establish her 
independence so that she can fill out her own financial aid 
forms.
    I don't think the child or a student should have to leave 
home in order to get a student loan and so we have to look at 
that aspect, too. Where there is a recalcitrant parent, there 
has to be some way to waive the requirement.
    With that, I believe--
    Ms. DeLauro. I would just like to say to my colleague, I 
thank you for your comment. I think that young people today are 
being entrepreneurial. As I understand it, with 64 percent of 
students who have a debt and the average debt is about $17,000 
for a 4-year public education, so I think young people are 
heeding what your advice is.
    And the fact of the matter is between 1991-1992 and 2001-
2002, average tuition and fees grew by 37 percent in private 4-
year institutions, 38 percent in public 4-year institutions. 
The increase has outstripped 8 percent growth in inflation, 
median family income over the same period.
    I mentioned the average debt is about $17,000 and the 
National Center for Public Policy and Higher Education reported 
this past week that students at public 4-year colleges in 16 
states were hit with tuition increases of more than 10 percent 
this academic year.
    So I think that tuitions are going up. I think that young 
people are borrowing and you're absolutely right about 
investing in an education.
    Mr. Ehlers. Well, Chairman McKeon is going to take care of 
the rising tuition rates.
    Chairman McKeon. Hear, hear.
    Mr. Ehlers. But just another aspect of this, students may 
have $17,000 of student loans. I'm more worried about their 
$5,000 of credit card debt that they have also acquired at a 
very exorbitant interest rate and if we need financial 
education about anything, it's about credit card debt.
    I yield back the balance of my time.
    Chairman McKeon. Thank you. Mr. Kind. Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman. I want to commend 
Mr. Regula and Ms. DeLauro for your initiative here. I think 
it's an important step toward trying to reduce the costs of 
education and the burden that many of our students leave 
college and university with.
    This is an issue obviously on the minds of many people. 
Especially in this last year we've seen dramatic tuition 
increases across the country. In Maryland, my state, just 2 
weeks ago we saw the Board of Regents raise tuitions as much as 
21 percent at some of our public institutions. And as I talk to 
constituents, this is very much on their minds these days so I 
appreciate the step you're taking.
    Another obviously huge component of this--and it's great to 
have appropriators before the Committee and have an opportunity 
to talk to you about this--is the Pell grant. Obviously the 
loan component is a very important part of the whole picture 
but the Pell grant, as you've heard from testimony before your 
community and contact with constituents and others--has 
obviously diminished significantly in the purchasing power over 
time from what was, I believe, once around 80 percent to now 
around 40 percent.
    And that's obviously something this Committee is going to 
be taking a look at in a variety of ways and I'm just 
interested as to whether or not, as appropriators, given our 
budget climate but at the same time given the high priority I 
know that you all attach to this and have spoken eloquently 
about the fact that investing in our future, making sure that 
every student who wants to go, who has shown the ability to go 
to college is not denied that opportunity because of income, 
that given the fact that that is a priority, what you see the 
prospects are in the out years for really signif--making a real 
commitment to significantly increasing the appropriations for 
Pell grants.
    Mr. Regula. Well, I think that's a real challenge. Since 
Ms. DeLauro and I have been working together on that 
Subcommittee, we have increased Pell grants about 15 to 20 
percent, recognizing the importance of these to the needs.
    I would hope we can continue to do that but it depends a 
lot on the nation's economy, on the availability of funding. In 
our Subcommittee, we have such enormous demands in education, 
in medical research, in labor, that it's tough to sort it out 
and we've done the best we possibly could with the Pell grants.
    Mr. DeLauro. I think as the gentleman knows, a part of the 
legislation I've introduced would increase the maximum Pell 
grant award amount to $7,000 thereby trying to do what you've 
talked about, increasing that purchasing power and allowing 
further access.
    I also happen to believe that then that cuts down on debt 
and the need for consolidation and the need for 
reconsolidation. I believe that's the end product of it. And 
the Chairman has said that, and he has worked in very good 
faith to try to increase the amount of the Pell grants, I 
believe we have to take a look at where our priorities lie and 
where our values lie in this country.
    And if we put a high premium on education and understanding 
that at the Federal level we do about 7 percent of what 
education is about, so it's not 50, 60 and moving to 70 or 80 
percent. We are at a very--you know, it's at a low number, that 
we need to think about how in fact we do get a handle on our 
economic growth and what that means in terms of what tax policy 
is about and how we can in fact utilize our resources and put 
them in places where we see a tremendous investment and a 
receipt on that investment dollar.
    Chairman McKeon. Mr. Isakson.
    Mr. Isakson. Welcome to both of you. Chairman Regula, you 
know my deep interest in education. I associate myself with 
your comparison that the payback is not just in dollars but 
it's in the productivity and the life of the individual.
    However, I want to ask a question because I'm sitting here 
trying to sort through all of this in my own mind. I spent 33 
years of my life selling houses and placed a lot of mortgages, 
millions and millions of dollars.
    Mortgages are quite different from student loans. federally 
insured mortgages and student loans do have a difference and I 
want to ask you if there is a--your Committee can get back and 
maybe quantify something for me.
    FHA and VA loans, although guaranteed by the government, 
are collateralized by a liquidatable asset that more often than 
not recovers the obligation and that's one difference. Second, 
they, like student loans, have an income stream. VA loans have 
funding fees, FHA loans have insurance. So there is a slight 
difference.
    The only subsidy that really takes place is the tax 
deductibility of the interest on the income taxes by the 
borrower. In student loans, the guarantee of the collateral is 
the individual's ability to pay. The inducement to the industry 
is the government's guarantee, which is significantly most of 
the loan and its attractiveness also is the subsidy between the 
lender rate and the loan rate.
    So my question is or what I'm wondering about, wanting to 
accomplish everything the two of you are talking about, have 
we--and since we have a mandated appropria--this is not an 
appropriation issue because it's--the money is guaranteed. I 
mean, we're going to appropriate it out based on whatever the 
number comes out to be on subsidy.
    Have we quantified the amount of money or has the industry 
quantified the difference that would take place if these 
consolidations and refinances took place, our subsidy cost went 
up as far as the government's concern, what impact that would 
have on appropriations in the years that followed versus if it 
stayed the same?
    Mr. Regula. Well, I'm not sure that this would have an 
impact in that the government subsidy is predicated on the 
numbers that are allocable or allowable under the program. And 
if the student gets a better rate that reduces their demands on 
their income and for that particular cost and they can use it 
for other things which enhances our economy.
    And I'm sure that you, as a realtor, always said to the 
clients you better buy a home because it increases in value. 
Well, those homes are going to increase in value because we 
have an educated population that can go out there and earn the 
money to buy that home and take out the mortgage.
    And I'm sure that when you took those people into the bank 
or the finance company, one of the questions is what's your 
level of education and they became better risk if they had a 
higher level of education.
    So I think the two go hand in hand. Obviously you don't 
have a building as a security but more--equally important you 
have the credibility of the individual and the talent that 
they've gained through that loan as the bankable asset, if you 
will, and I'm sure that you had a much easier time with those 
who are well educated in getting loans for a property they 
chose to buy.
    I don't think this is going to add measurably to the cost 
to the Federal Government. It simply reduces the amount of 
spread that the lender gets on this loan which accrues on their 
profit and bottom line more than it does on any government 
obligation.
    Mr. Isakson. Well, I was never at a loss for explaining to 
somebody why it was a good time to buy a house.
    [Laughter.]
    Mr. Regula. I'm sure that's true.
    Mr. Isakson. Even in 1983 when interest rates were 16 
percent. But nonetheless, my concern is like yours. It's also 
always a good time to get a better education and improve 
yourself. My only concern would be the financial ramifications 
or the unanticipated consequences that might impact us, that 
could later impact what we could increase Pell grants to or 
what we could do in terms of more affordability for student 
loans.
    Mr. Regula. I don't think it would be significant.
    Mr. Isakson. Thank you, Mr. Chairman.
    Chairman McKeon. Mr. Kind.
    Mr. Kind. Thank you, Mr. Chairman. I want to thank my 
colleagues for your presence and your testimony here today. 
It's such a crucial issue that we're going to be taking up in 
this session, the reauthorization of the Higher Education Act, 
the access, the affordability issue. We just need to recognize 
the importance of making sure that higher ed is an opportunity 
that all of our students can share in this country.
    And it's not just because it makes sense as far as the 
great equalizer in this country but it makes sense in regards 
to our geopolitical interests globally and our strategic and 
security interests globally.
    I mean, just last year China graduated four times the 
number of engineering students than we did in our own country. 
India is ramping up their higher ed infrastructure and 
realizing that that is the key to their future. And if we don't 
recognize this and start leaving students behind, we're going 
to find ourselves in a less competitive position in regards to 
technology and biotechnology and everything else that's very 
important for the future growth and prosperity of our nation.
    And, you know, the issues that you're talking about, the 
consolidation of student loans, I think is something that 
merits attention. We're going to have to work hard at--we know 
the state budget crisis from state to state, the tuition 
increases that are taking place. We have an opportunity in this 
bill to make some adjustments in order to make up for what is 
occurring in virtually all 50 states.
    In my state, in my Congressional district, the average 
undergraduate is looking at 16,000 of debt coming out of 
school. They're looking also at about a $300 per semester 
increase in tuition fees because of the shortfall in Wisconsin 
and, you know, 300 bucks here, $300 there, out here it may not 
sound like a lot but back home, for low income students, that's 
a huge amount of money and it could make the difference between 
them going on to school and not.
    As far as the loan consolidation proposals that you have, 
let me just ask you your opinion in regards to where you see 
the resistance or the concerns or the arguments on the other 
side of why this doesn't make sense or why it isn't fair. Why 
wouldn't there be more support for doing this than what there 
is right now? Is it different from home mortgages and 
refinancing and, if it is, in what way?
    Mr. Regula. The resistance is from the lenders, very 
simply, and it's different because the law says you can only do 
it once. And all we're saying is let's remove that barrier so 
that you have the same privilege here you have with your home 
loan, your credit card, whatever it is.
    Mr. Kind. Well, I'm sure in the next panel we're going to 
have some representatives from the lending institutions and 
they're not going to claim it's all about money and it's all 
about the bottom line and the profit. You know. Locking in at 8 
or 9 percent today is a great deal but there's got to be 
something more to it, I mean, from their point of view.
    Ms. DeLauro. Well, it will be interesting to find out what 
it is from their point of view because the Chairman has been 
eloquent--
    Mr. Regula [continuing]. It's hard to sell.
    Ms. DeLauro. And this is helping people to manage debt, 
helping people not to default on loans, to go back to Mr. 
Isakson's concern. This is about expanding people's opportunity 
to be able to have an education. It seems that it has the 
earmarks of something that we can coalesce around and there are 
a lot of people on this Committee who have been working on it 
for a number of years.
    There shouldn't be the kind of barriers that may be there 
now and that's what we'd like to try to work at in order to 
mirror a program which we believe works very, very well in this 
country, allowing home buyers to--homeowners to refinance their 
debt.
    Mr. Kind. Ms. DeLauro, I think you articulately stated the 
trend that has been taking place in this country over a number 
of years from grant opportunities to a greater reliance on 
loans and what that is building into the system is a growing 
mountain of debt for these students just as they're beginning 
their lives, their careers, their families, that they're going 
to have to wrestle with for many, many years to come, more so 
than even many of us who took out loans when we were undergrads 
or graduates but certainly not to the extent of what we're 
seeing today.
    Has there been any analysis in regards to the cost savings, 
in regards to the loan consolidation that students may face 
nationally, how that might reduce their expenses over the long 
term? Have you seen any studies or any figures along those 
lines?
    Ms. DeLauro. I'm sure there are. I haven't--you know, I 
don't have them at hand but it would be something we would be 
happy to take a look at and--
    Mr. Regula. Logic tells you that if you can reduce an eight 
to a four, there's going to be some savings.
    Mr. Kind. Yeah. That's right. Well, thank you very much.
    Ms. DeLauro. Thank you very much.
    Mr. Kind. Thank you, Mr. Chairman.
    Chairman McKeon. Chairman Boehner.
    Mr. Boehner. Thank you, Mr. Chairman. Let me thank my dean 
of my delegation, Mr. Regula, Ms. DeLauro, for coming and 
offering an opportunity for your proposals to be heard.
    There was a discussion of Pell grants and we'd all like to 
obviously increase the amount of Pell grants considering the 
ridiculous increases in tuition. This morning's front page of 
the Washington Post outlines it pretty clearly and if you 
understand public institutions and the problems the states are 
having, you can understand the public institutions' need to 
raise tuition.
    I don't know what that has to do with private institutions 
who are raising rates are the same level, but they are. And 
when you consider that one of the real key goals of the Higher 
Education Act is to expand access for low to moderate income 
students, it seems like the more we do, the further we get 
behind.
    Now, we've increased the Pell grant 73 percent--the maximum 
award 73 percent over the last 7 years. Total amount of Pell 
grant spending, though, has more than doubled because we have 
more students taking advantage of it and as you begin to look 
down the road at this wave of students that are coming, even if 
we don't raise the maximum award, we're going to spend 
considerably more on the Pell grant.
    And let's just say that No Child Left Behind is as 
successful as we think it's going to be. We're going to have 
more students, better qualified and able to attend post-
secondary institutions.
    On the loan side--loan program in 1990 it was a $10 billion 
a year program. Today it's a $50 billion a year program and by 
the end of this decade, it will be a $100 billion a year 
program. But when you step back and look at where the money is 
going, where the benefits of the program are going, I've begun 
to ask myself a lot of questions.
    And the questions revolve around fairness. Now, fairness is 
like beauty. It's in the eye of the beholder. But when you 
think about where the Federal Government is spending its money, 
where should the benefits go? And I love all this discussion 
about consolidation and reconsolidation. These people aren't 
students. They are out of school. They have jobs. They are 
making money. Some of them are serving here in Congress.
    But when you see all the problems we're having granting 
access to low to moderate income kids, you begin to ask 
yourself what's fair. Should we in fact shift more of the 
benefits from the back end of the program toward the front end 
of the program? Should we be looking at loan limits for 
freshmen? Should we look at frontloading Pell grants for the 
neediest of our students?
    And as we get through this reauthorization process, I think 
our goal is to put more light on where the benefits of the 
program are to be. I love this discussion about debt. We had a 
young lady here last summer or last fall who was complaining 
about the $11,000 worth of student loan debt that she had. And 
I asked her if she had bought a car. She had. How much was the 
loan? $12,000. And of course I couldn't keep from comparing a 
$12,000 loan on a depreciating asset as compared with her 
$11,000 student loan on an appreciating asset.
    Now, let's just look at the averages. The average college 
graduate will make a million dollars more over the course of 
their lifetime. The average student. The average graduate. The 
average graduate today also has $17,000 worth of student debt. 
Now, this is the best deal I have ever seen in my life. I'll 
take it every day.
    You have $17,000 worth of debt that assures you upon 
average that you're going to get a million dollars over the 
course of your lifetime in higher earnings.
    Now, I don't want to saddle anybody with debt. I don't like 
debt. I don't have much debt. I don't like living with debt. 
But what a deal. I think it's the best deal in the world. And 
so I would--as we spend the rest of this summer and fall 
getting into this, we ought to talk about what's fair and look 
at ways to do our job, which I think is to provide more access 
to highly qualified students.
    I do really appreciate both of you being here and putting 
up with all this.
    Mr. Regula. Mr. Chairman, if I might comment, it would be 
interesting to calculate the additional income tax that that 
million dollars is going to generate as compared to the minimal 
costs of the government's subsidy for the $17,000 loan. Talk 
about a good deal. That is a superb deal.
    Mr. Boehner. Good deal for the government, too.
    Mr. Regula. Good deal for everybody because that individual 
is not only earning more money, he or she is likely to have a 
greater role in their community and do the things that build 
quality communities that are vital to the future of our nation.
    Chairman McKeon. Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman. It's interesting to 
listen to our great Chairman of the Education Committee and I 
see things with my glasses slightly different. But thank you, 
Chairman Regula and Congresswoman DeLauro, for coming to share 
with us your thoughts on how we could address concerns that 
students have to be able to access higher education.
    Listening to my colleague, Congressman Isakson, talk about 
his experience with the mortgage industry and selling homes, I 
wanted him to hear me but unfortunately he left. He talked 
about the guaranteed loan program for some mortgage holders 
through FHA and other agencies and it seems to me that what you 
all are proposing should be guaranteed just like those homes 
because we are going to be making an investment that is going 
to make a lot of people enjoy better quality of life and thus 
reduce the numbers that we are sending to prison.
    It will reduce the cost of building those prisons and 
maintaining those prisoners in prison and just completely 
reverse it to let them produce hopefully a million dollars and 
spend it improving our economy and giving us the prosperity 
that we want.
    So as I listened to Congressman Isakson, I was confirming 
that your ideas of guaranteeing these loans and consolidating 
them and just allowing that the Pell grant go to 7,000, I heard 
our Chairman talk about how we have successful increased Pell 
grants from 1,500 to 3,500 but he didn't say that back when 
they were 1,500 it covered 80 percent of the cost of going to 
college, and today the 3,500 only covers 40 percent of what it 
cost to go to college before the loans that are in the 
newspaper today, and how the colleges are going to go up from 7 
to 25 percent in this year.
    All of this to say that what you all are bringing to us 
here in this Committee has a lot of substance and it doesn't 
take much to envision how this kind of an investment is going 
to actually improve the use of our money.
    And finally, Mr. Chairman, he said we need to know how we 
are spending our money, our budget, at two and a quarter 
trillion dollars. Well, I wanted to tell the Chairman that we 
just increased the amount that we can owe in the deficit by one 
trillion, approved that just recently, and we increased the 
amount that we're going to spend in the military budget from 
just 2 years ago to 2004 by an additional $100 billion.
    So does it make sense that we just continue to be spending 
the money, the big chunks of money, in the military and in 
prisons versus in education where you told me that what a 
wonderful difference it made in your life when GI Bill came 
into effect?
    So I thank both of you for coming and lending some light to 
what is possible with your legislation and we hope that we can 
continue this dialog and that we can, in the end, make the 
right decision instead of the way that we are headed which is a 
bigger deficit and spending so much money in military and on 
prisons.
    Thank you very much for coming to speak to us.
    Chairman McKeon. Mr. Burns.
    Mr. Burns. Thank you, Mr. Chairman. I appreciate the panel 
and their input.
    Just a couple of very brief questions. First of all, I 
share with you your concerns for the debt burdens of the 
students that are out in the academic world and those who are 
beyond that world. Spending 20 years in that world, I 
understand the challenges they face.
    The cost to the taxpayer in consolidation or 
reconsolidation, could you address that issue? Do you see a 
cost to the taxpayer in the proposal that maybe either of you 
have presented here today? Is there a cost to the taxpayer, 
additional burden to the taxpayer with allowing students to 
consolidate or reconsolidate or eliminating the single lender 
provision? Is there any cost to the taxpayer?
    Mr. Regula. I wouldn't anticipate any great change here. 
The agreement is between the student and the lending agency.
    Mr. Burns. That needs to be very clear because I think 
there's a bit of confusion on that issue. If the taxpayer is in 
any way subsidizing the reconsolidation of a student loan, 
especially those students who may be beyond the academic 
environment where we're putting our money now, not into new 
students getting an education but really into those students 
who are two, five, 8 years out.
    And I agree with you. They should be allowed to take 
advantage of the marketplace and I want to provide that 
opportunity. And I was glad to see in the testimony, especially 
in your proposal, Representative DeLauro, that we had increased 
consumer disclosure, that they had more information.
    But I think the most important thing that we face is if we 
were to provide this opportunity, which I'm fundamentally in 
favor of, it must not add a burden to the taxpayer who would 
reasonably be expected to subsidize or support the new loans, 
not the existing loans.
    So, again, that's my one single question. You do not see 
any problem with that?
    Ms. DeLauro. I don't see a problem with that effort. 
Obviously it's something that you want to take a look at. My 
sense of this is just in listening to families and listening 
when we talk about young people. I think the ability again, as 
I say, to manage debt, to be able to lower the cost on default 
and all of those kinds of efforts, I think add to taking a 
burden off of taxpayers in this effort.
    Do we view that the cost of refinancing your home in the 
way that we do and we view that now has come to be almost by 
way of right as what the--
    Mr. Burns. Yeah, but who pays the origination fee and the 
consolidation fee and those fees associated with renegotiation? 
Mr. Chairman?
    Mr. Regula. You get deductibility of your interest.
    Mr. Burns. You get deductibility of your interest.
    Mr. Regula. On your home loan.
    Ms. DeLauro. On your home loan.
    Mr. Regula. Not even on the student loan.
    Ms. DeLauro. You can deduct it. And actually, you're 
adding--one of the things I had pointed out with the 
origination fees in some of these other efforts that you 
really--you know, you add to the--it's almost like a tax to 
these other folks and with the home mortgage you can deduct 
those fees.
    And we have two separate systems here and what we're trying 
to do is to see if we can mirror the other. We're obviously 
willing to take a look at what the issues are but we are 
clearly open to where there are questions and happy to try to 
answer them and work them through.
    Mr. Burns. I would support a proposal that would ensure 
that the taxpayer did not subsidize the refinancing--the 
reconsolidation and consolidation of student loans and I would 
also support those measures that would focus these programs on 
students entering the system so that we frontload it so that 
more students have opportunities to obtain a college degree and 
then enjoy the professional benefits of that.
    So I thank you for your input and I look forward to working 
with you on this program.
    Chairman McKeon. Thank you. Mr. Ryan.
    Mr. Ryan. Thank you, Mr. Regula and Ms. DeLauro for your 
leadership, Mr. Regula, also in the State of Ohio, not only for 
what you do for your district but what you do for all the 
schools in our state and all the help you've given.
    Interesting that the student loan is 3.42 percent and the 
staff just gave me off the web site for the credit union, 
annual percentage rate for a new car is 1.2 percent. And it's 
3.4 percent for student loans.
    I kind of want to bring and make more of a statement. 
Chairman Boehner stated that $1 million over the course of 
one's life, should they have a Bachelor's degree as opposed to 
a high school diploma.
    According to most of the tax groups, we say we spend about 
40 to 50 percent or our earned income in taxes. So if you would 
take that number of a million dollars over the course of your 
lifetime and say you were going to pay 40 percent of that in 
taxes, that's $400,000 that's going to go back into the 
government in some fashion on a 17 to $20,000 investment that 
you're making.
    And I agree with the Chairman that that's a great deal and 
I think that illustrates the point that we have to make these 
investments and we can't wait any longer. We have to make them 
now. And I encourage the last group that we had last week when 
we were holding the Committee--I know in Ohio, Chairman Regula, 
that we have a lot of statistics saying that for every dollar 
that the State of Ohio invests into higher education, they get 
$1.84 to $2 back in tax money, and that if Ohio would be at the 
national average for Bachelor's degree, Ohio would have another 
$2 billion in the state kitty because of the investments that 
we would have made.
    And I made this argument when I was in the State Senate and 
I want to encourage, whether it's through our Committee or 
through your Committee, that we fund a study or find someone to 
do a study to find out what the return on the Federal 
investment actually is so we can talk in an educated manner 
about this.
    One last point that I want to bring up. I just read an 
article in the New York Times about IBM moving three million 
jobs from here, from the United States to India. And these are 
software design jobs, these are high tech jobs. Oracle is going 
to increase by 3,000 jobs from here--they're going to increase 
them in India. Microsoft is going to double their employment in 
India for high tech jobs.
    The only way we can compete--because we can't compete with 
wages, and I understand this gets into a discussion about 
trade. And Mr. Tierney made a great point. We made all these 
deals on trade with the premise that we were going to make 
investments in education so that our workers would be able to 
compete.
    If we don't do this now, we're not just losing our 
manufacturing jobs. We're losing our white collar jobs as well, 
by the millions. And the projection is going to be 3 or $4 
million in the next few years.
    So my point is the same as I think many people have been 
making here today. It's not just manufacturing jobs. It's high 
tech, white collar, computer design, software design jobs. If 
we don't make the investments that we know we get a great 
return on now, at what point is it going to be too late? And if 
we want to compete with these other countries that pay very low 
rages, we're going to have to compete by having more skills, 
more talent, more entrepreneurialship than all these other 
countries.
    And it starts, as we've said ad nauseam here today and in 
this Committee, with funding education. And to me, I can't 
bring this conversation up without talking about the priorities 
of the tax cuts that we have in this country compared with the 
investments that we could make in education.
    And I just want to make that point and just encourage you 
to keep up the good work, especially in the State of Ohio, and 
ask Ms. DeLauro or Chairman Regula for any comments that you 
may have on that.
    Ms. DeLauro. I want to say thank you to the gentleman for 
his commentary. I didn't respond to Chairman Boehner and I 
understand his perspective but there is a whole lot that we 
could take a look at within the Federal budget that deals with 
the issue of fairness and you address the issue of tax cuts and 
I've addressed that in other venues and I'm not going to go 
into that today--
    Chairman McKeon. Thank you.
    Ms. DeLauro. --because I think the heart of what this is 
about--thank you, Mr. Chairman--I think it's a very, very big 
issue.
    On the other hand, we have--the handwriting, I believe, is 
on the wall with regard to education and I think if we don't 
understand this as an institution that has some ability to 
allow and to assist families in this nation to open up the 
avenues of education and provide assistance that talks about 
what Chairman Regula is talking about of not putting restraints 
or constraints on families and young people to be able to get 
that education, they want to pay for it, they're not asking for 
it for free.
    And if you read today's Washington Post story and you 
listen to some of these students, we ought to be trying to say 
OK, where are we in trying to do something about this. It is a 
crisis. We have got tuitions rising all over the country. We've 
got young people--we've got unemployment that's rampant. We 
don't have the skills that people need in this country to do 
the jobs and they're going--some of the efforts are going 
overseas.
    Why is it that we focus on how we take the tools at hand 
and try to say as the Federal Government--and we can't do 
everything. We don't have the resources to do everything here 
but we have a role in this effort and what the Chairman is 
talking about in not repealing that rule, what I am talking 
about and others on this Committee have talked about is saying 
let's do what we've done in other arenas. It works.
    It has made millions of Americans homeowners and allowed 
them to do what they need to do in their economic lives. Why do 
we not want to try to open those avenues in education which I 
would regard as a higher appreciable asset than home ownership 
when my intellect and my God-given talent can be promoted to 
work on behalf of this great nation? That's something that the 
U.S. Congress ought to be interested in trying to do.
    Chairman McKeon. The gentleman's time has expired. Mr. 
Tierney.
    Mr. Tierney. Thank you, Mr. Chairman. I want to thank Mr. 
Ryan for stealing most of my comments.
    That's a point that I often make, as well as Mr. Hinojosa's 
point about the current value of Pell grants and Mr. Regula, we 
appreciate the work that you do and the perspective that you 
bring to education. It's refreshing. And Rosa, you know that we 
always love the work that you do, too.
    I just don't want to add a lot more. I think we've asked 
this a lot. Let me just say that if we were to eliminate the 
single lender rule, what could we expect lenders to do in 
response? Not what they'll threaten to do but--
    Mr. Regula. Well, I think we've seen this. The credit card 
companies have responded by lowering rates because of 
competition. Banks have lowered rates. Look at the home 
mortgage today versus 10 years ago? Automobile rates, just 
listen to the TV. They practically want to pay you to buy the 
car anymore.
    The marketplace responds, and that's the essence of America 
that the marketplace makes the decision and I think we're 
simply saying let's let our students go to the marketplace for 
the decision and not to some artificial barrier that stands in 
their way under the present law.
    Mr. Tierney. I'm dying to hear what our financial 
institution folks who are always telling me about how great the 
marketplace is are going to say to respond to that and that's 
why I pose that out there.
    Can you think of any--because I don't think that you're 
going to stick around necessarily. Can you think of any 
fairness argument in respect to their position that we ought to 
consider?
    Mr. Regula. I'd be interested. I can't conceive of it 
myself.
    Ms. DeLauro. I'll chat with several of you after, because 
we probably won't be here for that, to find out what's been 
said.
    Mr. Tierney. Let me just close by saying I think the 
important thing here to note is--you know, Mr. Boehner made the 
comment--and I think it's a good thing that more students are 
getting out of college. It's a great thing. That's what we've 
always said, is that we wanted to have more students go further 
in education and we should expect to make that investment. 
That's sometimes why the cost goes up and that's not a bad 
thing.
    Look at the money we spent in bailing out the airlines. 
Look at the money we spent in bailing out savings and loans, in 
the auto industry. Look at the money that we put into farm 
subsidies. We should be thinking about that in contrast to the 
amount that we invest in our future in terms of making sure 
that our population is better educated, particularly with the 
comments that I joked with Mr. Ryan about talking about.
    We are talking about a global marketplace here where the 
competition is brutal. The first time that I think we've ever 
seen where a country like the United States with a fairly well 
educated populous is competing against countries as large or 
larger with people as well educated or better educated who are 
willing to work for so far less.
    We had better have some sort of strategy to get our people 
up to snuff so that they can compete and be as productive.
    Mr. Regula. Well, that's borne out by the fact that many 
countries in the world make higher education a right, without 
cost, just as the first 16 years here and I daresay that the 
vast majority of industrialized countries provide access to 
higher education at no or relatively small cost. This is 
because they understand that it's in the interest of society to 
have a well educated people.
    Mr. Tierney. Exactly. Rosa, do you want to say anything?
    Ms. DeLauro. No, I think he's said it. A society is marked 
by its educated population, its humanity, its intellect. Those 
are the things that we ought to be striving for. That's the 
work of this Committee. That ought to be where our values and 
our priorities and our goals lie and relieve a lot of--you 
know, I'm not going to talk about No Child Left Behind but 
children--but I'm thinking we're leaving a lot of young adults 
behind today if we don't allow them an opportunity to do it.
    They want to do this. They're motivated. They're 
interested. They don't want to game the system. I believe that 
it's our opportunity to try to help them to try to reach 
their--realize their dreams.
    Mr. Tierney. I'll just close and thank the both of you for 
the perspective that you bring for the common sense and the 
approach of trying to get things done as opposed to fight a war 
every time. Thank you.
    Chairman McKeon. Thank you very much. I will not ask any 
questions in the interest of time. We have a vote call. We will 
adjourn until 12. Thank you.
    [Recess.]
    Chairman McKeon. The Committee will come to order. We will 
now begin with our second panel and our first witness in the 
second panel will be Ms. Rebecca Wasserman.
    Ms. Wasserman is the vice president of the United States 
Student Association, an organization founded in 1947, which 
represents students on Capitol Hill with the White House and 
the Department of Education. She's a recent graduate of the 
University of Wisconsin - Madison, where she studied political 
science and social welfare.
    Our second witness will be Mr. Dallas Martin. Dr. Martin is 
president of the National Association of Student Financial Aid 
Administrators which is made up of 3,100 institutions and 9,300 
financial aid professionals. Prior to his current role, Dr. 
Martin served as director of program planning and 
administration for the Division of Student Assistance Programs 
with the American College Testing Program as well as serving a 
number of years as a college and university administrator and 
educator.
    Next will be Ms. June McCormack. Ms. McCormack is the 
executive vice president of guarantor services and sales 
marketing for the Sallie Mae Corporation where she leads the 
guarantor services business loan and is in charge of their 
product management for loan consolidation. While working with 
Sallie Mae, Ms. McCormack has also served as senior vice 
president for sales management and as vice president of 
institutional and public finance.
    Then we'll have Mr. Barry Morrow. Mr. Morrow is the chief 
executive officer at Collegiate Funding Services. Previously, 
Mr. Morrow served with the U.S. Department of Education as the 
general manager of financial services for the office of student 
financial assistance and he spent nearly 20 years as the senior 
operations executive at Sallie Mae.
    And finally, we'll have Mr. Paul Wozniak. Mr. Wozniak is 
the managing director and manager of the Education Loan Group 
for UBS Financial Services, Inc. He has been involved for over 
20 years in financing education loans including all aspects of 
investment banking for both Federal and private loans. He has 
served on the Congressionally created alternative index and 
market mechanism study groups and works with groups such as the 
Education and Finance Council, Consumer Banking Association and 
National Council of Higher Education Loan Programs Committees.
    Before you begin, I'd like to remind you about the 5-minute 
rule, that the green light comes on when your time starts, the 
yellow light when you have a minute left, the red light when 
your time is up. I'd appreciate if you could adhere to that, 
and all of the questioners also.
    [Laughter.]
    Chairman McKeon. Ms. Wasserman.

   STATEMENT OF REBECCA J. WASSERMAN, VICE PRESIDENT, UNITED 
                   STATES STUDENT ASSOCIATION

    Ms. Wasserman. Thank you, Chairman McKeon and distinguished 
Committee members for having me speak on the issue of student 
borrowing and let's be clear, student debt.
    First, let's start with some of the positive aspects of 
higher education. The Advisory Committee on Student Financial 
Aid Assistance reports that by 2015, 1.6 million 18 to 24-year-
olds will enroll in college and most of them will be low income 
students.
    Of those students, many will be the first to attend college 
in their families and this will result in college graduates 
entering our workforce ready to contribute to the economy and 
this will provide services for our communities. It will also 
result in college graduates ensuring that their children will 
have access to college.
    However, with increased numbers of students enrolling, 
particularly low income students, there needs to be an 
increased commitment to student aid. High student loan debt is 
sweeping our country and our college graduates are experiencing 
an average debt of $17,000 in debt. Students are concerned with 
this growing problem and would like to see this Congress lesson 
student debt and increase access to higher education.
    I am a graduate of the University of Wisconsin-Madison 
where I, along with many of my classmates, took on student 
debt. In 2001-2002, there was close to 11,000 borrowers in my 
college alone. The current borrowing climate is different when 
both my parents went to UW Madison and they both said that 
students there used to be able to work during the summer to 
avoid taking on costly loans. Today, for many if not all 
students, there aren't enough days in the summer to make that a 
reality.
    USSA supports the programs in place for student borrowers 
and would like to see them expanded upon. Loan consolidation 
allows students to lock in a fixed rate on their loans, keep 
their monthly payments at a manageable level, have one easy 
monthly bill, and choose between repayment options.
    For example, if student borrowers consolidate with the 
expected new low interest rate, the typical borrower could save 
approximately $3,200 over a standard 10-year payback period. 
Consolidation is one tool students can use to lessen the 
financial burdens that they carry.
    Additionally, reconsolidation would allow students to lock 
in more favorable rates. Ideally students need reconsolidation 
proposals with a fixed rate that allows them to access the 
existing historically low interest rates. Members of Congress 
should advocate for solutions that help student borrowers get 
out of debt in a manageable way.
    However, even with consolidation in place, Congress needs 
to take steps toward reducing the burden of unmanageable debt 
for student borrowers. Students are proposing the elimination 
of origination fees and as well as increasing loan forgiveness 
programs.
    Under current laws, students pay up-front fees with each 
loan they originate. Origination fees result in less money for 
student expenses, yet at the same time students are required to 
pay interest on the full amount of the loan.
    Loan forgiveness is also a proactive policy that helps 
students quickly begin to contribute to the economy instead of 
being stifled by debt. Additionally, loan forgiveness allows 
students freedom to choose professions that are critical to our 
communities.
    In a time when we are in great need of those who contribute 
to our communities by becoming teachers and other civil 
servants it is important that we are providing important 
incentives. Loan debt should not decide a student's career 
path.
    I would be remiss, though, if I didn't bring grant aid into 
this discussion, as the loan debt we have spent the morning 
discussing is a result of inadequate grant aid. USSA believes 
that the Pell grant is the best way to increase access to 
higher education. In the '70's, as we've heard earlier, the 
Pell grant covered nearly 70 percent of college cost and 
student loans were merely making up the difference.
    Today the situation is very different. Students are forced 
to take out loans that cover almost 60 percent of college cost 
while the Pell grant contributes less than 40 percent. It will 
take leadership from higher education champions to restore the 
buying power to Pell and students are looking for those 
leaders.
    USSA has worked with students across the country in the 
past year to develop campaigns for the reauthorization of the 
Higher Education Act. The main goal of these campaigns has been 
to strengthen grant programs and to make loan programs less 
costly. Students hope to be active participants in the 
reauthorization and we hope to ensure increased access to 
college.
    The time is now for Congress to invest in higher education. 
States have tight budgets and are making decisions to freeze or 
reduce higher education spending. This means less money for 
institutions that receive state funding and less grant aid for 
need based programs that directly help students. Considering 
these conditions, Congress must prioritize higher education 
spending.
    These proposals would allow Congress to provide students 
with a variety of solutions that will lessen student debt. It 
must remain a priority for this community to help ease the debt 
burden that students face. We are very eager to see Congress 
take on this issue.
    Thank you for your time and please ask any comments or 
questions.
    [The statement of Ms. Wasserman follows:]

   Statement of Rebecca J. Wasserman, Vice President, United States 
                          Student Association

    Thank you Chairman McKeon and distinguished committee members for 
having me speak today on the issue of student borrowing, and let's be 
clear student debt. First let's start with some positive aspects of 
higher education. The Advisory Committee on Student Financial 
Assistance reports that by 2015, 1.6 million 18-24 year olds will 
enroll in college and most of them will be low-income and first 
generation students. This will result in college graduates entering our 
work force to contribute to the economy and provide services for our 
communities. It will also result in college graduates ensuring their 
children have access to college.
    However with increased numbers of students enrolling, particularly 
low-income students, there needs to be an increased commitment to 
student aid. High student loan debt is sweeping our country and our 
college graduates are experiencing an average of $17,000 of debt. 
Students are very concerned with this growing problem and would like to 
see this Congress lessen student debt and increase access to higher 
education.
    I am a graduate of the University of Wisconsin Madison where I 
along with many of my classmates took on student debt. In the 2001-2002 
academic year there were close to 11,000 borrowers at my college. This 
is definitely far more borrowers than when both my parents attended UW 
Madison from out of state. They have both said that students used to be 
able to work during the summer to avoid taking out costly loans. Today, 
for many, if not all students, there are not enough days in the summer 
to make that a reality.
    USSA supports the programs in place for student borrowers and would 
like to see them expanded upon. Loan consolidation allows students to 
lock in a fixed rate on their loans, keep their monthly payments at a 
manageable level, have one easy monthly bill, and choose between 
repayment options. For example, if student borrowers consolidate with 
the expected new low interest rate, the typical borrower could save 
approximately $3,200 over a standard ten-year pay back period. 
Consolidation is one tool students can use to lessen the financial 
burden they are forced to carry.
    Additionally, re-consolidation, would allow students to lock in 
more favorable rates. Ideally students need re-consolidation proposals 
with a fixed rate that allows students to access the existing 
historically low interest rates. Members of Congress should advocate 
for solutions that help student borrowers get out of debt in a more 
manageable way.
    However, even with consolidation in place, Congress needs to take 
more steps towards reducing the burden of unmanageable debt for student 
borrowers. Students are proposing the elimination of origination fees 
and more loan forgiveness programs.
    Under current law, students pay up-front fees with each loan they 
originate. Origination fees result in less money for student expenses, 
yet at the same time students are required to pay interest on the full 
amount of the loan.
    Loan forgiveness is a proactive policy that helps students quickly 
begin to contribute to the economy instead of being stifled by 
unmanageable debt. Additionally loan forgiveness allows students 
freedom to choose professions that are critical to our communities. In 
a time when we are in great need of those who contribute to our 
communities by becoming teachers and other civil servants it is 
important that we are providing important incentives. Loan debt should 
not decide a student's career path.
    I would be remiss if I didn't bring grant aid into this discussion, 
as the loan debt we have spent the morning discussing is a result 
inadequate grant aid. USSA believes that the Pell grant is the best way 
to increase access to higher education. In the 1970's the Pell grant 
covered nearly 70% of college cost and student loans merely made up the 
difference. Today the situation is very different. Students are forced 
to take out loans that cover almost 60% of college cost while the Pell 
grant contributes less than 40%. It will take leadership from higher 
education champions to restore the buying power to Pell and students 
are searching for those leaders.
    USSA has worked with students across the country in the past year 
to develop campaigns for the reauthorization of the Higher Education 
Act. The main goal of these campaigns has been to strengthen grant 
programs and to make loan programs less costly to students. Students 
hope to be an active participant in the reauthorization process to 
ensure increased access to college.
    The time is now for Congress to invest in higher education. Right 
now, states have tight budgets and are making decisions to freeze or 
reduce higher education spending. This means less money for 
institutions that receive state funding and less grant aid for need 
based programs that directly help students. Considering these 
conditions, Congress must prioritize higher education spending.
    These proposals would allow Congress to provide students with a 
variety of solutions that will lessen student debt. It must remain a 
priority for this community to help ease the debt burden that students 
carry. We are very eager to see Congress take on this issue. Thank you 
for your time and I look forward to your comments and questions.
                                 ______
                                 
    Chairman McKeon. Thank you. Dr. Martin.

    STATEMENT OF A. DALLAS MARTIN, JR., PRESIDENT, NATIONAL 
      ASSOCIATION OF STUDENT FINANCIAL AID ADMINISTRATORS

    Mr. Martin. Thank you, Mr. Chairman, Mr. Kildee. I 
appreciate the opportunity to testify today.
    NASFAA welcomes today's hearing on Federal loan 
consolidation and we support the continued availability of the 
benefits of loan consolidation for those former students who 
need it. In supporting loan consolidation, Mr. Chairman, NASFAA 
should not be seen as supporting all of the developments of the 
past 2 years associated with this program. In fact, many NASFAA 
members are very concerned about by the explosive growth in the 
number and the dollars of loan consolidation.
    NASFAA would recommend that the law dealing with loan 
consolidation revert back to first principles. When loan 
consolidation was first enacted, its purposes were twofold. 
First, loan consolidation was intended to help borrowers who 
had multiple loans from multiple holders getting a single 
payment to reduce the confusion of writing several checks each 
month to lenders. Second, and partially an outgrowth of the 
first reason, was to curtail defaults by reducing monthly debt 
burden.
    It is time to return to those purposes. Nowhere in the 
Congressional debate of the '80's was it contemplated that loan 
consolidation would be used as a refinancing mechanism. In 
fact, the original loan consolidation program carried an 
interest rate that was 1 percent higher than that imposed on 
non-consolidated loans.
    Our members are also perplexed that some individuals 
suggest that federally subsidized consolidation loans are just 
like home mortgages. Obviously, in one case, the person has a 
tangible, physical asset and in the other, an intangible one. 
An education cannot be repossessed or resold.
    Let us take a closer look at the government subsidies. When 
one refinances a mortgage to lower the interest rate and 
monthly payment, the Federal subsidy, that is, the mortgage 
deduction on your Form 1040, goes down and you pay more in 
taxes. When one consolidates Federal student loans, one 
receives a larger interest rate and monthly payment but extends 
repayment by up to an additional 10 to 20 years over the 
standard 10-year repayment plan. The interest rate tax 
deduction goes down, but Federal loan subsidies substantially 
increase.
    While most mortgages are not directly subsidized by the 
Federal Government, student loans are directly subsidized and 
that is the critical difference between student loan 
consolidation and home mortgages. For an example, an 
undergraduate student who borrowed $17,000 would receive 
approximately $700 in subsidies over a regular 10-year Stafford 
repayment term. But if that same person did a consolidated loan 
for a 15-year period, then roughly $4,200 in additional 
subsidies would be paid by the Federal Government on that loan.
    The average subsidies for a professional school graduate 
with a $73,500 loan balance would be $3,100 over a 10-year 
Stafford repayment term as compared to $36,500 for a 30-year 
consolidation repayment term.
    I ask, is it better economic policy to expend scarce tax 
dollars to help subsidize future needy students or to give even 
more subsidies to former students? In my mind, this public 
policy issue is very clear.
    Some have also suggested that a market based solution to 
loan consolidation is appropriate and that we need to repeal 
the single holder rule. NASFAA opposes repeal of the single 
holder rule.
    First, its repeal will destabilize the student loan system 
and second it will reduce competition. Repeal of the single 
holder rule will allow any lending entity to market its loan 
consolidation product to any borrower. Now, you say what is 
wrong with that? The answer is that lenders determine their 
participation in the Federal loan program by anticipating a 
certain amount of profit depending upon their business plan.
    If a borrower can consolidate loans with any entity that 
successfully markets the former student, then the first holder 
must relinquish that loan. At that point, the original lender, 
having lost its loan, will not meet its projected revenue 
goals, thus eventually such a lender would have no alternative 
but to stop making student loans altogether.
    The second negative effect comes directly from the first. 
If fewer lenders participate in the student loan market, then 
naturally the industry will become more concentrated, fewer 
competitors means students have fewer choices in lenders.
    NASFAA also recommends that the student interest rate on 
all Stafford loans, including consolidated loans, be changed 
from a fixed to a variable rate. Public Law 107-139 signed by 
the president last year mandates that student loan interest 
rates rise to 6.8 percent fixed on July 1, 2006. NASFAA 
supported that legislation. However, we proposed then that the 
interest rate cap be lowered to 6.8 percent and that loans 
continue to have a variable rate instead of retaining a 6.8 
percent fixed rate. That continues to be our reauthorization 
proposal.
    We are concerned about the difficulties associated with 
moving to a higher fixed rate if the current low student loan 
interest rate environment continues until 2006. Of course, if 
the July 1, 2006 increase to a 6.8 percent fixed rate is not 
changed, then eventually even consolidated loans will carry 
such a rate, making moot today's controversies on loan 
consolidation.
    In conclusion, Mr. Chairman and Mr. Kildee, I would urge 
you to put the consolidation issue into the context of the 
purposes of the Higher Education Act and that is to create 
educational opportunities, because that's what that Act was 
designed to do.
    We would urge you not to spend scarce Federal budget 
resources on former students who have already been well served 
and amply taken care of and who are going to have a better 
prospect at life, particularly in a program that is not need-
tested or even targeted upon needy individuals because every 
dollar spent on loan consolidation is one less dollar that 
could be spent on needy students in the future.
    Thank you for the opportunity to testify here today, Mr. 
Chairman, and I'll be happy to respond to any questions that 
you have.
    [The prepared statement of Mr. Martin follows:]

Statement of Dr. A. Dallas Martin. Jr., President, National Association 
                of Student Financial Aid Administrators

Introduction
    Mr. Chairman and members of the Subcommittee on 21st Century 
Competitiveness, I thank you for the opportunity to testify today on 
student loan consolidation. I am Dallas Martin and I am the President 
of the National Association of Student Financial Aid Administrators 
(NASFAA). Formed nearly forty years ago, NASFAA represents student 
financial aid administrators at nearly 3,100 postsecondary institutions 
across the nation.
    Our association illustrates the diversity of our higher education 
enterprise with members from private and public institutions, community 
colleges, four-year schools, proprietary schools, and graduate/
professional institutions. At these schools, NASFAA represents 
approximately 9,300 financial aid professionals whose passion is 
ensuring that talented Americans have the opportunity to attend a 
postsecondary institution by providing counseling and financial 
resources.

NASFAA Reauthorization Recommendations
    NASFAA submitted to the Committee its recommendations for 
reauthorization of the Higher Education Act of 1965, as amended. We 
believe this comprehensive set of over 100 individual recommendations 
will go a long way in providing the necessary structure to ensure and 
extend educational opportunities for our citizens, to target and 
retarget scarce taxpayer funds in an era of budget deficits, to 
appropriately deregulate and simplify the financial aid system, to 
encourage innovation, to reform Title IV programs so that entities do 
not have unfair competitive advantages, and to assist borrowers by 
providing both enhanced consumer protections and benefits.
    In crafting reauthorization proposals, NASFAA took seriously its 
obligation to make recommendations that are unambiguously focused on 
students and educational opportunity. Our recommendations, taken as a 
whole, set a high standard for you to meet. That high standard, 
however, will assure a whole range of positive outcomes, especially 
making certain that no child will be left behind from attaining their 
dreams for their future and family because of a lack of the financial 
resources to attend a postsecondary institution appropriate to their 
talents and drive.
    To not meet this high standard will, in our view, put at risk our 
system of postsecondary education that serves well so many individuals 
of limited economic means and will put at risk the ability of students 
to gain the skills necessary to keep American business and industry 
competitive and at the forefront of innovation in our world economy.

NASFAA Supports a Loan Consolidation Program
    NASFAA welcomes today's hearing on federal loan consolidation and 
we support the continued availability of the benefits of loan 
consolidation for those former students who need it.
    In supporting loan consolidation, Mr. Chairman, NASFAA should not 
be seen as supporting all of the developments of the past two years 
associated with this program. In fact, many NASFAA members are very 
concerned by the explosive growth in the number and dollar volume of 
consolidation loans. Our members are also concerned that the focus of 
Congressional discussions of student loan issues appears to be shifting 
from students to former students.
    As you know, a number of bills on loan consolidation have been 
introduced recently. We also are aware of numerous articles in the 
media all dealing with loan consolidation. It is truly unfortunate that 
other urgently needed changes in this reauthorization legislative 
process are not receiving the same attention. For example, we are not 
reading about the need to repeal borrower-paid origination fees or to 
provide other necessary and beneficial changes in the student loan 
programs; we don't hear much discussion about the grant programs or 
important other reauthorization issues. What we do hear loudly and 
clearly are arguments, some of them disingenuous and some of them off 
the point, about the need for ``competition'' in the consolidation loan 
marketplace.
    Indeed, our first panel evidences the deep and sincere 
Congressional interest in extending loan consolidation. Controversy 
surrounds this matter, as you know. Just last year the White House 
surfaced a loan consolidation proposal, but withdrew it under intense 
political pressure. Some possible solutions being considered in this 
area will certainly help former students who are federal loan 
borrowers, but NASFAA strongly believes that some of those solutions 
will consume scarce federal monies that are better expended assisting 
current and future students. Further, some solutions actually will 
disadvantage borrowers and have unintended consequences.
    We understand that the principal motivation for the interest of 
many members of this committee in loan consolidation is the increased 
student debt burden faced by many students and former students. We urge 
you to look at NASFAA's related recommendations on this subject. We 
endorse increased grant assistance and increased authorizations for the 
Title IV campus-based grant and Federal Work-Study programs; reform of 
loan repayment options that have not been significantly changed in a 
long time; an add-on payment for the neediest of Pell-eligible students 
who have a negative Expected Family Contribution (EFC); changing the 
student interest deduction to a refundable tax credit to help reduce 
student debt; and, making the Federal Pell Grant Program a true 
entitlement. If the goal of this subcommittee is to address student and 
borrower debt burden, these topics should be on the table and acted 
upon.

Explosive Growth in Loan Consolidation and Consolidation Loan Marketing
    The amount of loan consolidation has risen to unprecedented levels. 
More than $32 billion consolidation loan volume was realized in 2002, 
double the amount in the previous year and double the level of the year 
before, according to The Chronicle of Higher Education. This volume 
results not only from the opportunities created by the current 
extraordinarily low interest rates, but also as a result of aggressive 
and, in our view, sometimes inappropriate marketing efforts.
    Financial aid administrators report they have never seen the amount 
of loan consolidation marketing aimed at borrowers, their families, 
and, it almost seems, everyone in America. Some of my staff report they 
have been targeted multiple times with loan consolidation marketing 
letters and telemarketing phone calls even though they and their 
children have graduated from college and paid their student loans in 
full years ago.

Misleading Marketing & Incomplete Consumer Protection Disclosures
    Sadly, I must report that a number of these firms eager to sign up 
loan consolidation borrowers paint the most positive picture, but 
neglect to tell the whole story. These rosy scenarios tell borrowers 
that they can lock-in low interest rates and by using other benefits 
such as making a certain number of on-time payments or using electronic 
payment methods, borrowers can receive even lower interest rates. While 
many firms do caution potential loan consolidation candidates on the 
possible downsides to loan consolidation, others are less than 
forthcoming with consumer information or do not inform consumers about 
the ``Catch 22s'' of their plans.
    Some loan consolidation firms give a hard sell to former students 
telling them that they can reduce their monthly payments by tens or 
hundreds of dollars and get an unbelievably low interest rate. These 
firms soft pedal information or, in some cases, do not disclose at all 
that the borrower's overall debt will climb by hundreds or thousands of 
dollars, even double or triple what they would have paid compared to 
maintaining a standard ten-year repayment plan.
    Some firms using the current low rate compare the amount saved by 
loan consolidation to the statutory 8.25 percent interest rate cap 
thereby inflating such ``savings.'' Some firms, but not all, will 
suggest that the low interest rate can be reduced even further by 
offering on-time payment or electronic checkbook deduction benefits, 
but do not disclose that few borrowers ultimately qualify for such 
benefits. When one examines the fine print of on-time payments and 
electronic transfers of loan payment benefits, then all too often the 
restrictions are so extensive that for most borrowers, such benefits 
evaporate. For example, some firms tout the fact that former students 
in their loan consolidation program can prepay their loans, that all 
prepayments reduce principal, but neglect to say that a prepayment 
violates their on-time payment standard and, therefore, a prepayment 
makes one ineligible for their on-time interest rate reduction benefit. 
One would think the combination of on-time payment and use of 
electronic payments from a checking account is unbeatable; however for 
some firms, if a borrower's checking account does not have sufficient 
funds in a single month to cover the consolidation loan payment, that 
overdrawn account make the borrower ineligible for both the benefits of 
on-time payment and electronic debit of a checking account.
    Finally, we find poor consumer information regarding some of the 
other downsides of loan consolidation. Some firms will suggest in their 
marketing that borrowers retain their federal loan benefits such as 
deferment, forbearance, and student loan interest tax deduction. They 
understate or, in some cases, do not disclose at all especially if 
Perkins Loans are included in consolidation--that certain benefits such 
as loan cancellation for teachers or nurses or other similar 
cancellation benefits are lost if one decides to consolidate. Some 
gloss over the fact that lender-provided benefits are not offered by 
certain loan consolidation firms. Some soft pedal the idea that 
interest-free grace periods may be lost. I am not suggesting that the 
entire loan consolidation industry either uses or condones such 
practices, but enough do so to be problematic.
    A number of you will suggest that we can fix these problems. 
Perhaps you can, but federal student aid history is replete with 
examples of solutions that don't work; that are overly burdensome; that 
are inappropriate; that can be circumvented; or that are not enforced 
by federal authorities. What I believe needs to be accomplished in the 
area of loan consolidation is for the Congress to reassert historical 
first principles back to when loan consolidation was initially 
authorized.

First Principles of Loan Consolidation
    You all know that in making changes to the Title IV student aid 
programs, you need to make choices. And, it is true that in making 
choices, especially in an era of scarce resources, certain decisions 
will enhance educational opportunities for our citizens and other 
choices, however well-meaning, will benefit some individuals, but not 
extend other benefits that are more important to the greater population 
of students. Your decisions on loan consolidation are choices that 
underline that distinction.
    Our proposal recommends that the law dealing with loan 
consolidation revert back to first principles. When loan consolidation 
was first enacted, its purposes were twofold. First, loan consolidation 
was intended to help borrowers who had multiple loans from multiple 
holders gain a single payment to reduce the confusion of writing 
several checks each month to lenders. Second, and partially an 
outgrowth of the first reason, was to curtail defaults by reducing 
monthly debt burden. Borrowers who were unable to make monthly payments 
could avoid default by consolidating their loans to stretch out the 
repayment time period and receive the benefit of lower monthly 
payments.
    It is time to return to those purposes. Nowhere in the 1980's 
congressional debate was it contemplated that loan consolidation would 
be used as a refinancing mechanism. In fact, the original loan 
consolidation program carried an interest rate that was one percent 
higher than that imposed on non-consolidated loans. At that time, the 
interest rate charged on consolidated loans was set by law at the 
higher of 9 percent or a weighted average of the interest rates on 
loans being consolidated (rounded to the nearest whole percentage 
rate). And, I must state that those original purposes successfully 
assisted in the reduction student loan defaults and the burden on 
borrowers with impossibly high monthly payments. We should return to 
those original purposes for several reasons.
    In my mind, the most important reason for returning to first 
principles comes back to my earlier remarks about choices. To retain a 
consolidation loan program that can be used as a refinancing tool or to 
expand refinancing options will cost the government large amounts of 
resources. If we had unlimited money, I might recommend what the 
witnesses who spoke before me and others suggest in the area of loan 
consolidation. But we don't have unlimited resources and so you must 
make choices. And, the choice I urge you to make is to spend those 
limited resources any new funding or retargeted funding that you might 
have in this Higher Education Act reauthorization on expanding 
educational opportunity for current and future students.
    NASFAA has made numerous recommendations to help ensure that each 
American is not denied their dreams through attainment of a 
postsecondary education due to a lack of funds and we urge your serious 
consideration of them. Among our recommendations are several that 
retarget funding or even deny current federal aid to certain 
individuals. As to loan consolidation, we recommend the committee 
reform the loan program repayment options. We believe our 
recommendations will not only make loan repayments easier for those who 
need relief, but also will eliminate the need for loan consolidation 
except in very limited circumstances.
    The choice I urge you to make is to use those resources for 
individuals who are seeking or continuing their education. I believe 
that the wisest use of limited funding is to expend it on better 
student aid programs and funding at the front end of the educational 
process for current and future students and not at the back end upon 
individuals who have already been amply assisted, have successfully 
completed their schooling, and are gainfully employed and enjoying all 
of the benefits that accrue to them because thy were provided an 
educational opportunity.

Consolidation Loans Should Not Be Compared to Home Mortgages
    Our members are also perplexed that some individuals suggest that 
federally-subsidized consolidation loans are ``just like home 
mortgages.'' Obviously, in one case the person has a tangible, physical 
asset and in the other an intangible one; an education cannot be 
repossessed. Let us take a closer look at the government subsidies. 
When one refinances a mortgage to lower the interest rate and monthly 
payment, the federal subsidy (the mortgage deduction on your Form 1040) 
goes down. When one consolidates federal student loans, one receives a 
lower interest rate and monthly payment, but extends repayment by up to 
an additional 10 to 20 years over the standard 10-year repayment plan. 
The interest rate tax deduction goes down, but federal loan subsidies 
substantially increase. While most mortgages are not directly 
subsidized by the federal government, student loans are directly 
subsidized and that is the critical difference between student loan 
consolidation and home mortgages. For example, an undergraduate student 
who borrowed $17,000 receives approximately $700 in subsidies over a 
10-year Stafford repayment term and roughly $4,200 in subsidies over a 
15-year consolidation repayment term. The average subsidies for a 
professional school graduate with a $73,500 loan balance would be 
$3,100 over a 10-year Stafford repayment term, as compared with $36,500 
for a 30-year consolidation repayment term.
    Again, I come back to my earlier point: ``Is it better economic 
policy to expend scarce tax dollars to help subsidize future needy 
students or to give even more subsidies to former students?'' This 
public policy issue, in my mind, is very clear. One is a good 
investment for our future and the other is a needless investment.
Other Negative Policy Outcomes Related to Loan Consolidation
    To retain loan consolidation as it currently exists has other 
ramifications, all of them negative. Borrowers who consolidate loans 
with repayment periods out to 30 years will repay a total student loan 
amount of up to double or triple what they would have paid if they had 
retained the standard 10-year repayment. They are not going to have as 
much disposable income. They will not have the funds to buy the home of 
their dreams, automobiles, or other consumer durable goods. Worse than 
that they are not going to be in a good financial position to save 
money for their retirement or contribute as much as they might to their 
children's postsecondary education or be in a position to utilize PLUS 
loans for their child's education. These are serious considerations for 
you to ponder; the ramifications of loan consolidation go well beyond 
the effects on borrowers, lending institutions, and the federal 
government.

Single Holder Rule
    Some have suggested that a market-based solution to loan 
consolidation is appropriate and that all we need to do is repeal the 
``single holder rule.'' Proponents argue that repeal of the single 
holder rule will open the market up to competition.
    NASFAA opposes repeal of the single holder rule for several 
reasons. First and foremost, we believe that repeal of the rule will 
destabilize the student loan system and, thereby, reduce competition. 
Repeal of the single holder rule will allow any lending entity to 
market its loan consolidation product to any borrower. What is wrong 
with that you may ask? The answer is that lenders determine their 
participation in the federal loan program by anticipating a certain 
amount of profit depending on their business plans. Some merely 
originate loans and, then, turn around and sell them. Some hold the 
loans and service them for the entire length of the loan. If a borrower 
can consolidate loans with any entity that successfully markets the 
former student, then the first holder must relinquish the loan. At that 
point, the original lender having lost its loan will not meet its 
projected revenue goals. So what is that lender to do if it cannot meet 
such revenue goals? We suggest that no rational business plan can be 
constructed to meet such an eventuality and, consequently, such a 
lender would have no alternative but to stop making student loans 
altogether. We believe this is not only a real possibility, but one 
that will quickly become a reality leading to massive disruption and 
instability in the student loan marketplace.
    And, stemming from this fact, let me state my serious doubts that 
any lending entity involved in loan consolidation from the most 
reputable to the least caring about borrowers would support a change in 
the law that would allow any borrower to refinance their consolidation 
loan once or again and again (reconsolidation). My educated guess is 
that they would support continuation of current law providing that loan 
consolidation can only occur once. To allow multiple refinancing, as is 
true in the case of home mortgages, would financially devastate such 
loan consolidation lenders. Certainly, the generous add-on benefits 
would be eliminated.
    The second effect comes directly from the first one. If fewer 
lenders participate in the student loan market, then, naturally, the 
industry will become more concentrated. The student loan industry is 
already highly concentrated with a few giant lenders dominating the 
field. NASFAA has no doubt that a concentrated industry obviously leads 
to less, not more competition. Fewer competitors mean students have 
fewer choices in lenders.
    In sum, we believe that repeal of the single holder rule will lead 
to an undesirable destabilization of the loan industry, to less 
competition and greater concentration in the industry, and, eventually, 
to greater disparities in borrower benefits and the services offered by 
the industry. We strongly urge no change in this matter.

Perkins Loan Clarification
    Another issue associated with loan consolidation relates to the 
application of the ``single holder rule'' with regard to Federal 
Perkins Loans. NASFAA recommends a clarification so that it is clear 
that Perkins Loans may continue to be eligible for inclusion in a 
consolidation loan, but are not treated as a separate ``loan holder'' 
to get around the single holder rule. Some loan consolidation firms, in 
our view, have been violating the law and circumventing the single 
holder rule by claiming a Perkins Loan held by a school is therefore a 
separate holder. Consequently, such firms have been consolidating loans 
in violation of the single holder rule. We believe a clarification is 
necessary.

A Variable Interest Rate on Consolidation Loans
    NASFAA recommends that the student interest rate on all Stafford 
Loans, including consolidation loans, be changed from a fixed to a 
variable rate. We understand this position is an evolution in our 
thinking since we joined with our sister associations in opposing the 
Administration's proposal to implement a variable rate loan last year. 
But, in rethinking the whole issue of loan consolidation and student 
loan interest rates we have come to the conclusion that consolidation 
loan interest rates should parallel regular Stafford Loans.
    We note that P.L. 107-139 signed by the president last year 
mandates that student loan interest rates rise to a 6.8 percent fixed 
rate on July 1, 2006. NASFAA supported this legislation; however, we 
proposed then that the interest rate cap be lowered to 6.8 percent and 
that loans continue to have a variable rate instead of retaining a 6.8 
percent fixed rate. That continues to be our reauthorization proposal. 
We suggest to the subcommittee that the subject of interest rates is an 
important one. We are concerned about the difficulties associated with 
moving to a higher fixed rate if the current low student loan interest 
rate environment (now at 3.42 percent) continues until 2006. Of course, 
if the July 1, 2006 increase to a 6.8 percent fixed rate is not 
changed, then eventually even consolidation loans will carry such a 
rate making moot today's controversies on loan consolidation. Finally, 
if consolidation loan interest rates are changed to variable ones and 
Stafford Loan interest rates are maintained as variable, then the only 
reason for consolidating a loan is to get a single payment in the event 
of multiple loans from multiple holders or to extend the repayment time 
period to receive a lower monthly payment to avoid a default.

Other Consolidation Issues and Recommendations
    Mr. Chairman and members of the subcommittee, NASFAA has 
recommended two other loan consolidation related changes in the Higher 
Education Act. To reduce loan consolidation costs to the government, we 
recommend consideration of a ``loan consolidation fee.'' We have not 
recommended the amount of the fee or the nature of such a fee, i.e. a 
percentage or flat figure. Second, as part of a comprehensive set of 
recommendations to level the playing field between the loan programs, 
NASFAA suggests there is not a need in either FFELP or Direct Loans 
(DL) for an in-school consolidation benefit and so would eliminate it 
from the DL program.

Consumer Information
    As I referenced earlier, some would suggest that increased student 
consumer information requirements be mandated for consolidation loans. 
NASFAA does not believe this is a wise decision. Consumer information 
disclosures on loan consolidation are included in the counseling 
requirements that schools and others are required to perform. Financial 
aid administrators are already diligently helping former students who 
seek information on loan consolidation and they assist thousands in 
making informed decisions on whether to consolidate or not consolidate 
their loans. I must frankly state we are doing as much as we can to 
inform and provide educational materials to our students and former 
students. Financial aid administrators know that providing excellent 
counseling is one of their primary jobs. We oppose any further 
extension of loan counseling activities or mandates since they would be 
duplicative of current legal requirements.
    In conclusion, Mr. Chairman and members of the subcommittee, NASFAA 
urges you to put the consolidation issue into the context of the 
purpose of the Higher Education Act: to create educational opportunity. 
We urge you not to spend scarce federal budget resources on former 
students, especially in a program that is not need-tested or even 
targeted to needy individuals. Every dollar spent on loan consolidation 
is one less dollar that can be spent on needy students.
    Thank you for the opportunity to testify here today. I look forward 
to working with you, Mr. Chairman, and all members of the subcommittee 
to reauthorize a Higher Education Act that meets the needs of students, 
their families, and all of the parties involved in the delivery of 
student aid dollars in this nation. I hope that those of you who have 
not yet reviewed NASFAA's Higher Education Act reauthorization 
proposals will do so by visiting http://www.nasfaa.org/publications/
2003/gnasfaadetailedreauthrecs070903.html
    I would be pleased to respond to any questions you may have.
                                 ______
                                 
    Chairman McKeon. Thank you.
    Ms. McCormack.

   STATEMENT OF JUNE M. McCORMACK, EXECUTIVE VICE PRESIDENT, 
                           SALLIE MAE

    Ms. McCormack. Good afternoon, Chairman McKeon, Ranking 
Member Kildee and members of the Subcommittee. I am June 
McCormack, executive vice president at Sallie Mae. On behalf of 
our 7,000 employees, thank you for the opportunity to speak 
with you today about loan consolidation.
    Sallie Mae is proud to be part of a unique public/private 
partnership, the Federal Family Education Loan Program. Through 
this program, $50 million of private capital is leveraged each 
year by a government guarantee that costs taxpayers very 
little, a small fraction of that, and as a result, ensures 
access to millions of students to college.
    While we support reform of the loan consolidation program, 
we oppose reconsolidation and repeal of the single holder rule. 
These proposals may sound pro-consumer on the surface, but they 
threaten the student loan program that Congress has 
successfully stewarded. Our position is shared by most lender 
and school groups who agree that these proposals will introduce 
massive new long-term costs and do nothing to improve college 
access.
    As you indicated, Mr. Chairman, the seeds of today's 
challenges in the loan consolidation program were sown when 
Congress changed student loans from fixed to variable rates in 
1992 and did not make a corresponding change to consolidation 
loans. Understandably, no one foresaw the rate mismatch that 
unintentionally makes consolidation loans far more attractive 
than the original underlying loans.
    Student loans are made at variable rates and reset annually 
based on the 3-month Treasury bill rates. Meanwhile, 
consolidation loans are made at fixed rates which lock in the 
same 3-month Treasury rate for up to 30 years. That means 
consolidation borrowers are locking in long-term loans at even 
better rates than the U.S. Treasury pays.
    Sallie Mae has a strong record of counseling our borrowers. 
When interest rates were higher, we discouraged borrowers from 
locking in unless they needed to stretch out their payments. 
That was Congress's original intent for consolidation. It was 
never intended to be a refinancing program.
    While we now run national education campaigns to educate 
our consumers about the record low rates, we believe Congress 
should consider the long-term price tag of extending this 
benefit to all borrowers all the time. There are two major 
policy questions that Congress should address as part of 
consolidation reform in the higher education reauthorization.
    First, how does today's loan consolidation program increase 
access? In today's student loan program, the government 
subsidized the cost between the borrower-paid rates and market 
rates. We estimate that 40 billion in student loans 
consolidated last year will add over 5 billion in taxpayer 
costs. If the same volume consolidates this year at today's 
lower rates, it will cost taxpayers an additional $9 billion. 
This is not a lender cost. And think of how many Pell grants 
this could fund.
    This new subsidy is not based on need. Does it make sense 
to need-test the program when students apply for financial aid 
and then confer deep subsidies after graduation regardless of 
need? Would reconsolidation strengthen the student loan 
program? No. It would have the opposite effect.
    Now, some people may try to tell you that reconsolidation 
will save the government money. That's wrong. Just letting 
everyone who previously consolidated have one more chance to 
consolidate, just one more chance, would cost the government 
well in excess of $15 billion, even net of any additional fees 
that may be generated.
    That doesn't begin to contemplate the price of inviting all 
borrowers to reconsolidate all the time. Reconsolidation will 
become the giant that swallowed the student loan program.
    Furthermore, it will create market instability. Most 
lenders enter into hedging and securitization contracts to fund 
future loans. Because of these contracts, Congress has never 
significantly changed the terms retroactively. If Congress 
breaks the terms of legally binding contracts, it will send a 
clear message that loan terms can be changed at any future 
point thereby increasing the cost of financing every student 
loan.
    We know that some of your constituents are asking if I can 
refinance my home, why can't I refinance my student loan? And 
as Congresswoman DeLauro and Congressman Kildee indicated, on 
the face, this argument makes sense and we're all sympathetic 
to those who locked in at higher rates.
    The reality is, though, that there are enormous differences 
between student loans and home mortgages. Mortgage lenders set 
their own rates and build in the risk of repayment. They charge 
borrowers points and fees. They do credit checks and require 
collateral and they adjust rates based on credit. Student loan 
providers can't do any of those things.
    If Congress wants to send the student loan program down the 
road to commercialism, it has to go all the way down that road 
but its imprudent to offer the benefits of a free market system 
unless you create a free market system.
    Finally, I also want to say a word about proposals to 
repeal the single holder rule. Repeal of the single holder rule 
is a solution in looking--in search of a problem. The financial 
aid community and Congress depend on us to provide capital, pay 
up-front fees and invest in technology that processes loans and 
data in seconds.
    Without the assurance provided by the single holder rule, 
lenders would be incented only to be in the consolidation 
business, not the student loan business. Like reconsolidation, 
repeal of the single holder rule will do nothing for the 
student loan program or existing students other than unleash an 
avalanche of spam, junk mail and telemarketers, some pushing 
misleading information.
    So what should Congress do about loan consolidation? First, 
provide better and more flexible options to borrowers who are 
paying their loans.
    Second, ensure that borrowers retain their original 
interest rate structure when they reconsolidate so that those 
who want or need consolidation do not have to become arbitrage 
experts and won't risk locking in consolidation rates that may 
not look attractive in hindsight.
    Third, create consistency for direct and FFELP 
consolidation loans.
    Fourth, require borrower counseling to ensure that 
borrowers fully understand the pros and cons of loan 
consolidation. And fifth, retain the single holder rule.
    Finally, as I mentioned at the outset, we all have to 
remember what this program is here for and what Sallie Mae was 
created for, and the answer is access.
    Thank you for the opportunity to talk to you today. I would 
be pleased to answer any questions.
    [The prepared statement of Ms. McCormack follows:]

  Statement of June M. McCormack, Executive Vice President, Sallie Mae

    Good morning Chairman McKeon, Ranking Member Kildee and Members of 
the Subcommittee, I am June McCormack, Executive Vice President at 
Sallie Mae. On behalf of more than 7,000 employees of Sallie Mae, thank 
you for the opportunity to talk with you about the federal student loan 
program, and, in particular, the loan consolidation program.
    On a personal note, it is an honor for me to be here because nearly 
20 years ago, one of my first jobs at Sallie Mae was building one of 
our earliest loan consolidation programs. Today, I manage a very 
different loan consolidation program for Sallie Mae. I would like to 
describe recent trends in loan consolidation and recommend some 
positive steps that Congress can take as part of reauthorization of the 
Higher Education Act (HEA). I know we share the same goal: To preserve 
a remarkably successful, stable and cost-effective student loan program 
that provides $50 billion each year to finance postsecondary education 
for students.
    As described below, we support reform of the loan consolidation 
program in the upcoming HEA reauthorization. We are, however, 
particularly concerned about recent proposals that would permit 
reconsolidation of loans made to borrowers who have graduated, and who 
already received the benefit of taxpayer-subsidized below-market 
interest rates. 1 The capacity of our nation's financial aid 
system to ensure postsecondary access to all of the projected incoming 
low-income and minority students in coming years is jeopardized by such 
proposals which would shift taxpayer subsidies from students in school 
to borrowers in repayment. Moving in this direction also undermines the 
public/private partnership through which lenders invest private sector 
capital in support of one of the most successful government programs in 
history. Never before has the federal government retroactively changed 
the contract terms of student loans in a significant way after they 
have been made. This type of retroactive change creates new and real 
risk that increases the cost of financing and makes the prospect of 
investor-driven litigation likely.
---------------------------------------------------------------------------
    \1\ The federal guarantee backstopping every student loan ensures 
that every borrower, irrespective of credit history or when they 
borrow, pays interest rates that are well below private market rates 
for unsecured credit. Even in today's record low interest rate 
environment, the average interest rate on unsecured personal credit is 
13%. By contrast, many borrowers who are in repayment currently pay 
3.42%. Borrowers who are in school, in grace or in deferment pay only 
2.82%.
---------------------------------------------------------------------------
    The policy questions raised by this discussion are difficult and we 
appreciate the concerns raised by borrowers who consolidated at rates 
higher than the current market's historically low rates. While we 
sympathize with their concerns, given today's tight fiscal environment, 
policymakers will be asked to determine when should borrowers receive 
the benefits of taxpayer-subsidized below-market interest rates? When 
they are in school or after they have completed school and are better 
economically situated to repay their student loans? For example, if all 
current consolidation borrowers refinanced at today's record low rates 
- and why wouldn't they - the estimated cost to the government, and 
ultimately taxpayers, would be more than $15 billion.
    Late last year, Sallie Mae joined the Consumer Bankers'' 
Association, the Education Finance Council, the Student Loan Servicing 
Alliance and the National Council of Higher Education Loan Programs in 
recommending to this Committee how the reauthorization of the HEA can 
strengthen the student loan program. A copy of these proposals is 
attached to my testimony. While there is not always unanimity among 
loan providers and schools, there is nearly total agreement among loan 
providers and schools that permitting reconsolidation or repealing the 
``single holder rule'' would adversely impact the student loan program. 
Enacting such proposals would not provide access to a single new 
student. These proposals also threaten the ability of loan providers to 
continue to partner with the federal government in making billions of 
dollars in low-cost capital available each year to students and 
families to help pay for college. Repeal of the ``single holder rule'' 
will do nothing for the student loan program, or existing students, 
other than unleash an avalanche of spam, junk mail and telemarketers on 
unsuspecting borrowers.

Background
    Nearly 40 years ago, Congress created one of the most successful 
federal programs in our nation's history--the federal student loan 
program. Thirty years ago, Congress created Sallie Mae to help make 
equal access to higher education opportunity a reality. Sallie Mae's 
mission was to build a stable market where none existed by encouraging 
private sector loan providers to offer student loans and thereby open 
the doors of college to millions of students. Thanks to the leadership 
and vision of a succession of Congresses and Administrations, student 
loans are available today to any student or family, without a credit 
check or collateral, so that no child is turned away from higher 
education based solely on the financial status of his or her family. 
That entitlement is central to the American Dream. It is the envy of 
other nations.
    We are part of a unique public-private partnership--the Federal 
Family Education Loan Program, commonly known as FFELP. Last year, loan 
providers made $50 billion in private capital available in the form of 
student loans to over five million students and their families at more 
than 6,000 postsecondary institutions across the nation. The federal 
government also makes student loans through the Federal Direct Loan 
Program (FDLP).
    The federal student loan program is an unparalleled success story 
of which Congress should be proud. Since 1965, more than 50 million 
students have gone to college, in part, thanks to federal student 
loans. Each year, lenders provide more capital to students, yet the 
total cost of the FFEL program has declined. Last year, FFELP spending 
accounted for less than 1/10th of 1 percent of the government's annual 
$2 trillion in spending. In fact, last year, the federal government 
spent less than one penny for every outstanding student loan dollar. 
Equally impressive is the fact that over the past 10 years, entitlement 
spending increased by 33% while spending on FFELP decreased by 83%. 
These cost savings are due to the efforts of loan providers, in 
partnership with Congress and schools, to reduce defaults, increase 
collections of defaulted loans and reduce costs for interest and other 
expenses.
    Sallie Mae is the nation's leading private sector provider of 
higher education financing with over $83 billion in student loans and 
more than seven million customers. We take our responsibilities to 
students, families, schools and taxpayers under the Higher Education 
Act very seriously. As the original--and, at the beginning--the only 
provider of consolidation loans, we are proud to be the number one 
provider of consolidation loans to borrowers today. Last year, we 
helped more than 312,000 borrowers consolidate nearly $10 billion in 
federally guaranteed student loans.
    The student loan program is successful because, in an era of 
limited government resources and rising college costs, America's 
student loan providers use private capital to invest millions of 
dollars in services and systems that directly benefit students, their 
families and schools. This year, Sallie Mae alone will invest more than 
$150 million in technology support for the student loan program. In 
recent years, loan providers have developed Internet-based services 
that provide fast, reliable services for borrowers. Thanks to these 
investments, students can now receive their loans on the same day they 
apply--all at the click of a mouse. Only a few years ago, this same 
process took weeks. Loan providers are also adding web-based tools and 
services every year that allow students to quickly and easily estimate 
their college costs, compare repayment options, check their loan 
status, learn about managing debt and obtain information on debt 
counseling.
    Schools also benefit from investments made by loan providers. For 
example, we offer financial aid delivery tools to schools that allow 
them to originate loans quickly and with less paper, answer questions 
from parents and students, provide one-stop service for students, and 
give schools greater access to, and control of, loan information. We 
also complement the efforts of financial aid officers and high school 
guidance counselors to promote the availability of financial aid by 
answering millions of calls from parents and students about the 
financial aid process. We help reduce the cost of college by offering 
borrower benefits and interest reductions for on-time payment. Finally, 
we are answering the growing demand for private credit that helps 
bridge the gap between financial aid sources (including federal loan 
programs) and available family resources.
    So how does this type of private sector investment help real 
people? It means that if a parent is filling out their financial aid 
forms and gets stumped on how to answer a question, they can call 
Sallie Mae's ``Parent Answer'' line and we will help them. Or if a 
student decides to enroll at the last minute, thanks to our investment 
in technology, he or she can have a student loan processed in minutes. 
It also means that we work with borrowers to help keep them on-time and 
in repayment, thereby avoiding the consequences and costs of default.
    Our ability to invest in our nation's financial aid system is made 
possible by the historic stability in the federal student loan program 
that Congress has carefully managed. Proposals to fundamentally alter 
the student loan program--some even retroactively--not only threaten 
our ability to make future investments, but will depress the innovation 
that has made the student loan program the success that it is today.

The Origin of the Loan Consolidation Program
    In 1981, Sallie Mae proposed, and Congress enacted, an amendment to 
the Sallie Mae charter to permit development of a loan consolidation 
program. The original purpose of the program was to help solve problems 
faced by an increasing number of borrowers whose loans were ``split'' 
between different loan providers. At that time, students who did not 
accurately navigate changes in their borrower status faced 
administrative confusion and red tape (requesting deferments from 3 or 
4 different lenders and writing 3 or 4 checks a month), and in some 
cases, even ended up in technical default.
    From the beginning, loan consolidation was designed to prevent 
defaults and simplify repayments. It was never intended to be a 
refinancing vehicle. In fact, consolidation loans for the earliest 
borrowers carried an interest rate that was the weighted average of 
their original loans, rounded up to the nearest whole percent. By 
offering borrowers the administrative convenience of making a single 
monthly payment to a single loan provider, policymakers believed that 
they could reduce the incidence of borrowers defaulting simply because 
they were unable to keep track of their original loans. Consolidation 
also provided borrowers with the opportunity to reduce monthly payments 
by extending their repayment period over a longer period of time. 
2 In 1986, responding to requests of other loan providers, 
Congress authorized all other loan providers to make consolidation 
loans.
---------------------------------------------------------------------------
    \2\ It is important to note, however, that by extending payments up 
to 30 years, in normal interest rate environments, many borrowers end 
up paying more in total interest than they would have had they repaid 
their loans within the standard ten-year repayment period.
---------------------------------------------------------------------------
Loan Consolidation Today
    Sallie Mae has an excellent record of advising our customers about 
consolidation. When interest rates were higher, we discouraged 
consolidation unless a borrower needed to stretch out his or her 
payments. As interest rates plummeted and consumers started using 
consolidation as a refinancing vehicle, Sallie Mae made all of its 
customers aware of historically low interest rates, running national 
education campaigns.
    So, how did consolidation become a refinancing program? The seeds 
were sewn when Congress shifted student loans from fixed to variable 
rates in 1992 and neglected to make a parallel change in consolidation 
loans. As a result, while all student loans made after 1992 have 
variable rates that reset annually based upon 3-month Treasury bill 
rates, consolidation loans have fixed rates, which lock-in the very 
same 3-month Treasury bill rate for up to 30 years. Simply put, today's 
consolidation borrower is taking out a long-term loan based on short-
term rates--an enormous interest rate risk that is borne by taxpayers. 
In fact, this formula allows a borrower today to pay a rate of interest 
that is below the United States Treasury's long-term cost of funds.

[GRAPHIC] [TIFF OMITTED] T0133.002


    Granting every borrower the opportunity to borrow at rates well 
below where even the Federal Treasury borrows will drive up the cost of 
the student loan program. Most of the additional federal cost will go 
to benefit borrowers who have received post-graduate training.
    While many of our consolidation borrowers have smaller balances 
(Sallie Mae's minimum balance for consolidation is below that of most 
major consolidation marketers), the majority of our consolidation 
volume is in higher balance, longer-term loans. Fifty percent of our 
consolidation loan volume is made up of loans with balances in excess 
of $40,000 that will be paid back over 25 years or more. Eighty percent 
of our consolidation loan volume is made up of loans with balances in 
excess of $20,000.
    This distribution has significant implications for cost, because 
taxpayers will continue to pay the difference between the below-market, 
subsidized borrower rate and current market interest rates for the 
entire life of these loans 3. Comparing who benefits from 
the additional taxpayer cost, we see that over 60 percent of federal 
subsidies will go to borrowers with balances greater than $40,000--
there are very few undergraduates at this level. Less than 13 percent 
of the additional consolidation subsidies will go to the typical 
college graduate, who can only exceed $20,000 if they are independent 
(generally, over 24 years old) or borrowed at the maximum for five 
years or more.
---------------------------------------------------------------------------
    \3\ The Congressional Budget Office forecasts that within several 
years, the net rate to lenders will be 7%. This reflects the offset fee 
paid annually by lenders of 1.05%.

[GRAPHIC] [TIFF OMITTED] T0133.003


[GRAPHIC] [TIFF OMITTED] T0133.004


Reconsolidation
    As interest rates have declined, borrowers who already exercised 
their consolidation benefit have understandably raised their hand to 
complain that they are not eligible to consolidate now to take 
advantage of the much lower current rates. Quite reasonably, they are 
asking, if I can refinance my home, why can't I refinance my student 
loan, too?
    On its face, this argument makes perfect sense. And we are 
sympathetic to those who have locked in at higher rates. The reality is 
that this argument ignores the enormous differences between student 
loans and home mortgages.
    First, a home mortgage can be refinanced at the will of the 
homeowner, and therefore there is a high probability that the borrower 
will pay off the loan early. This prepayment risk is built into the 
cost of that mortgage. The pricing on a student loan asset, on the 
other hand, is set by federal law, and makes no provision for multiple 
refinancings. Under the terms of today's program, a borrower is 
permitted to consolidate his or her loan only once.
    There are other fundamental differences between consolidation loans 
and home mortgages. For example:
     Homeowners put their homes up as collateral for their 
mortgages.
         Consolidation borrowers put no collateral at risk.
     Homeowners pay points and fees to mortgage lenders to 
refinance their mortgages.
         Consolidation borrowers pay nothing--the federal 
        government and lenders absorb all costs.
     The rate of interest on a mortgage varies daily, is set 
by the market, and varies widely depending upon an individual's credit 
history and the term of the loan.
         The interest rate on a consolidation loan is set by 
        Congress using short-term rates and is determined in exactly 
        the same manner for every borrower, irrespective of credit 
        history.
    Key differences are highlighted in the table attached to my 
prepared testimony.
    We oppose reconsolidation for three other key reasons - cost, 
precedent and program stability.
    Cost: While we feel an obligation to educate our customers about 
historic rates, we believe that the long-term price tag of extending 
this benefit to all borrowers all the time must be considered. For 
example, during the first three-quarters of the 2002-2003 academic 
year, about $28 billion in FFELP loans were consolidated. These new 
consolidation loans will cost the federal government an additional $4 
billion over the life of the loans. An additional one-time 
consolidation by all loan holders who consolidated prior to this 
month's reset, and they all have rates above the current ones, would 
cost the government more than $15 billion as interest rates return to 
historic averages. Even at more moderate interest rate levels, the cost 
of these consolidation subsidies will dwarf the cost of the underlying 
FFEL program.
    By not addressing the issues in the current consolidation program 
and/or by permitting reconsolidation, Congress is providing a costly 
new benefit--in the form of new repayment subsidies--to borrowers who 
have already completed their education and are in the workforce. It 
makes little sense to heavily needs-test the financial aid program on 
the front-end and then confer deep back-end subsidies regardless of 
borrower need. It also invites questions of fairness for those 
borrowers who are not fortunate enough to take advantage of 
historically low rates today. Will these borrowers also be granted the 
ability to lock-in below-market interest rates as low at 2.82%? 
Consolidation could become the giant that swallowed the student loan 
program.
    Precedent: Most lenders enter into hedging agreements and 
securitize their loans to raise funds for future loans. Recognizing 
that lenders have legally binding contracts as part of the student loan 
program, Congress has never significantly changed the terms of student 
loans retroactively. Permitting retroactive reconsolidation of loans 
that have been financed through securitization transactions would 
fundamentally alter contracts between loan providers and investors 
after the contracts were made. If Congress breaks the terms of existing 
contracts, a level of uncertainty will be introduced into the program 
and make the prospect of investor-driven litigation likely. Congress 
will be sending a clear message that loan terms could change at any 
future point. The cost of this uncertainty will have to be built into 
every future loan--Stafford as well as consolidation.
    Program stability: Understanding loan securitization is critical to 
appreciating the challenges loan providers would face if Congress 
authorizes borrowers to reconsolidate their already consolidated loans. 
Loan securitization is the principal means of making private sector 
capital available for students and families to help them pay for 
college. After a student loan is made, most large loan providers 
finance their portfolios of student loans through asset securitization 
to free up capital and make more student loans to new students. The end 
result of these transactions is that more capital is available to make 
higher education possible for more students who need to borrow money to 
pursue higher education. The loan provider continues to maintain the 
customer relationship with borrowers and retains certain residual cash 
flows from securitization trusts. The stable terms and predictable loan 
performance of student loans enable lenders to pass on low funding 
costs to borrowers in the form of reductions in up-front fees and 
interest rates, as well as other benefits that save millions of 
borrowers hundreds of dollars each. Most importantly, securitization 
frees up funds for loans that ultimately make higher education possible 
for more students.
    Lenders securitize student loans, and investors invest in 
securities backed by student loan assets, based upon the statutory 
terms of loans, including the prohibition on reconsolidation. If 
Congress were to retroactively change the contract terms of loans, 
investors would be faced with a level of risk that would be impossible 
to quantify. From Sallie Mae's perspective, such a change could also 
delay the Congressionally-mandated privatization of our Government-
Sponsored Enterprise (GSE). Enacting a reconsolidation proposal would 
retroactively alter the terms of loan contracts, destabilize the 
securitization marketplace and shrink the amount of capital available 
to lenders in the future.
The Single Holder Rule
    Under current law, a borrower whose FFELP loans are held by a 
single loan provider must initially request consolidation from that 
same provider. If their loan provider declines to provide a 
consolidation loan, or declines to provide a consolidation loan with an 
income-sensitive repayment schedule, they can apply for a consolidation 
loan from another loan provider. Borrowers with loans that are held by 
more than one loan provider may consolidate with any eligible loan 
provider. This provision, referred to as the ``single holder rule,'' 
ensures that lenders'' portfolios are not cherry-picked and protects 
``borrowers from mass marketing or selective marketing of consolidation 
loans.'' (Conf. Rept. 105-750)
    Why does this matter? The financial aid community and Congress 
depend on us to provide capital, pay up-front fees, and pay for the 
technology network that processes loans and data within seconds. All of 
these investments are made by loan providers four years before the 
average student makes the first payment. As with reconsolidation, if a 
loan provider's student loan asset is subject to poaching by another 
lender, there will be little incentive for loan providers to invest in 
the financial aid delivery systems that directly benefit schools or 
lower the cost of borrowing for students. Without the single holder 
rule, lenders would be incented to be only in the consolidation 
business, not the student loan business.
    Although some argue that the single holder rule should be repealed, 
Congress'' concern that borrowers be protected from predatory 
telemarketing efforts, reflected in the 1998 Conference Report, has 
turned out to be prophetic. A few companies and telemarketing firms 
that are involved in the loan consolidation market are aggressively 
urging Congress to dramatically restructure the student loan program. 
These companies engage in repeated mass solicitations of these 
prospects. Repealing the single holder rule is a solution in search of 
a problem. Any borrower who wants to consolidate their student loans 
today can do so. And since the interest rate is set by statute, all 
lenders offer the same rate. While this proposal is promoted as a 
consumer choice issue, FFELP borrowers exercise their consumer choices 
at the time they borrow their Stafford or PLUS loans. Elimination of 
the single holder rule could result in aggressive marketing by non-
lenders to borrowers without full disclosure of the benefits and risks 
of consolidation.
What Congress SHOULD do about loan consolidation.
    Late last year, Sallie Mae joined with the Consumer Bankers 
Association, the Education Finance Council, the Secondary Loan 
Servicing Alliance and the National Council of Higher Education Loan 
Programs and submitted several recommendations to this Committee about 
ways to strengthen the loan consolidation program as part of HEA 
reauthorization. I will quickly summarize these recommendations as they 
relate to the consolidation program. Again, a copy of our complete 
recommendations is attached to my testimony.
    1. To ease borrower repayment, we recommend that Congress retain 
the standard 10-year repayment term and make a voluntary, tiered 
repayment term available to Stafford loan borrowers as an option. This 
could be modeled after consolidation loan repayment terms, which allow 
for more reasonable monthly payments. We also propose permitting loan 
providers to provide borrowers with more flexible graduated repayment 
schedules.
    2. LBorrowers should not be forced to guess the best time to make 
their consolidation decisions. Currently, borrowers who need payment 
relief offered by consolidation loans may receive high or low interest 
rates depending upon the year and interest rate environment in which 
they happen to elect to consolidate their loans. Ensuring that 
borrowers retain their original interest rate structure (fixed or 
variable) in consolidation would avoid this trap.
    3. We recommend that Congress make borrower eligibility the same 
for Direct and FFELP loan consolidation loans by making only borrowers 
in grace or repayment eligible for Direct Consolidation Loans.
    4. To ensure that borrowers fully understand the benefits and 
disadvantages of loan consolidation, Congress should require borrower 
counseling concerning loan consolidation.
    5. We recommend that Congress retain the single holder rule to 
avoid mass marketing to borrowers and incent lenders to invest in the 
student loan program.

What Congress should NOT do about loan consolidation.
    Congress has never retroactively significantly changed the terms of 
existing student loans. Any proposal that seeks to retroactively alter 
the terms of existing loan contracts must be rejected. Setting aside 
economics, changing the terms of pre-existing loans would telegraph a 
message of program instability. It raises more questions: What other 
terms will Congress change retroactively? How can loan providers make 
loans under the cloud that Congress could change the loan terms at any 
time or for any reason?
    As you know, financial markets do not react well to instability. 
The net effect of instability in the financial markets is that the cost 
of capital goes up. Changing the terms of loans retroactively would 
seriously undermine long-term private investment in the FFELP and puts 
at risk the $250 billion in private-sector capital that has already 
been invested in financing the higher education of millions of 
borrowers.
    If Congress chooses to provide relief to borrowers who have 
previously consolidated, it is critical that any solution to this 
matter be addressed outside of existing student loan contracts. In 
other words, if Congress determines that some consolidation borrowers 
should be relieved of their repayment obligations, the mechanism for 
providing this new subsidy should be payable to the borrower outside of 
the student loan contract.

Conclusion
    America's student loan program is a remarkably successful public-
private partnership that has helped make college possible for more than 
50 million students. In evaluating the merits of changing the terms of 
this partnership, we believe that there are three fundamental questions 
that must be asked.
        First, will the proposed change increase access to higher 
        education?
        Second, what is the cost to taxpayers of the proposed change?
        Finally, will the proposed change strengthen the successful 
        public-private partnership embodied by the federal student loan 
        program?
    We believe that the consolidation program is in need of fundamental 
reform and that any savings that result from such reform should be 
spent on improving access to all students. We oppose proposals that 
permit reconsolidation or repeal the single holder rule, as they not 
only fail to improve college access, but they seriously undermine 
future access by introducing substantial new long-term costs to the 
student loan program.
    Thank you for the opportunity to talk with you today. I would be 
pleased to answer any questions you may have.
                                 ______
                                 
    [Attachments to Ms. McCormack's statement have been 
retained in the Committee's official files.]
    Chairman McKeon. Thank you.
    Mr. Morrow.

STATEMENT OF BARRY MORROW, CHIEF EXECUTIVE OFFICER, COLLEGIATE 
                        FUNDING SERVICES

    Mr. Morrow. Mr. Chairman and members of the Committee, 
thank you for the opportunity to talk about a program that is 
critically important to helping America's college students 
manage the growing burden of student loan debt.
    The average student today graduates with over $19,000 in 
student loan debt at a time when the job market is weak and 
cash-flow pressures are often severe. Consolidation allows 
these students to refinance their multiple loans into one new 
loan with a low fixed rate and a payment that often saves 
hundreds of dollars a month.
    College affordability is a key issue in this 
reauthorization. Some allege that the consolidation program 
diverts Federal resources that would otherwise make college 
more affordable. Stop and think a moment. For the most part, 
students don't have to pay loans back while they're in school. 
The reality of college cost doesn't hit until the student 
leaves college and has to start making payments. That's when 
the bill for college comes due and consolidation makes that 
bill more affordable.
    Some argue that consolidation has strayed from its original 
purpose which was to assist student borrowers having multiple 
lenders. However, that was an era of much smaller debt. As 
college costs and student loan debt have increased dramatically 
for the past few years, consolidation has become a vital tool 
in managing these debt levels.
    I spent most of my career in this industry. As a senior 
officer of Sallie Mae and then at the Department of Education 
and now as the CEO of a full service provider of student loans, 
and also as a father of three college graduates. As a result, I 
have reviewed the debate over consolidation loans from a 
variety of perspectives.
    It is my belief that the debate over consolidation loans 
comes down to whether or not this Congress is going to put the 
best interest of students and their families ahead of a desire 
by big financial institutions to protect profits.
    Most big financial institutions don't like consolidation 
loans because they're less profitable. Lenders have to pay the 
Federal Government a half a percent origination fee on each 
loan made as well as an annual fee of 1.05 percent on each loan 
each year. The result of these fees is that since fiscal year 
1995, lenders have paid to the Federal Government a $1.3 
billion surplus, a fee income in excess of subsidies.
    Now it's true that the unusually low rates of today may 
lead to future costs. However, it is important to note it's for 
this particular group of loans only, that is, consolidation 
loans disbursed between July 1, 2002 and June 30, 2004.
    The economic policy group from Ernst & Young is completing 
a study on the incremental cost of consolidation that we will 
provide to the Committee. According to the study, if you 
recognize this current group of loans as water over the dam in 
the sense that the pending reauthorization comes too late to 
impact them, and if you look ahead to the fiscal year 2005 to 
2010 timeframe, between this reauthorization and the next, 
then, based on current CBO interest rate estimates, fixed rate 
consolidation rates made during that timeframe are estimated to 
create a further revenue surplus of $700 million.
    Those who oppose consolidations, the consolidation program, 
offer two alleged solutions. One is an extended repayment term 
for the underlying loans that otherwise are subject to 
consolidation. The problem with this is that these extended 
term loans would deprive the Federal Government of billions of 
dollars of fee revenue generated by the consolidation program 
today. It's a bad deal for the taxpayer.
    The other alleged solution is to make all new consolidation 
loans variable rate instead of fixed rate. However, many of you 
will recall that during the 2002 interest rate fix legislation 
came out of this Committee which decided that as of 2006, all 
new student loans will move to a fixed rate. Students clearly 
prefer the certainty and simplicity of a fixed rate.
    In closing, I'll briefly mention two final topics. The so-
called single lender rule provides that if a student wishing to 
consolidate has all their student loans with the same lender, 
then that student must utilize that lender to consolidate even 
if better rates, terms and service are available elsewhere. 
This Committee had, in the Chairman's mark of the 1998 
reauthorization, a full repeal of this ruling.
    We are merely asking you to do what you did in the House 
during the last reauthorization, which is to repeal this anti-
consumer rule.
    The topic of reconsolidation. If the law were changed to 
permit reconsolidation, it would be costly to our company and 
to all student loan lenders. We'd be turning higher rate loans 
into lower rate loans. But student loan borrowers clearly want 
the ability to reconsolidate and if Congress can work out the 
budget-scoring challenges of reconsolidation, we support 
whatever is best for student loan borrowers and their families, 
even if our revenues take a hit in the process.
    To make the burden of growing student loan debt more 
affordable for America's college graduates, I hope you will 
continue support of a vibrant student loan consolidation 
program.
    Thank you.
    [The prepared statement of Mr. Morrow follows:]

      Statement of Barry Morrow, CEO, Collegiate Funding Services

Summary:
     Consolidation is a key tool to help student loan 
borrowers manage the growing burden of student loan debt. Most students 
don't have student loan payments in college. The real affordability 
crisis hits after college, when the payments begin.
     Consolidation is not a program that benefits the 
affluent. Nearly 20% of consolidators are nurses and teachers.
     Big financial institutions don't like consolidation loans 
because they are less profitable.
     The consolidation program has generated a surplus to the 
federal treasury of $1.3 billion between fiscal year `95-`02. CBO 
estimates an additional $1 billion surplus for fiscal year `03-`04.
     Estimates of future subsidy costs of consolidation are 
highly interest-rate sensitive, and thus, are probably exaggerated. 
They are based on materially higher future interest rates, contrary to 
the low rate outlook of the Federal Reserve.
     Extended repayment of Stafford loans would be very costly 
because it would deprive the federal government of billions in lender-
paid fee revenue.
     Student borrowers prefer the simplicity and certainty of 
a fixed interest rate.
     Congress should require enhanced consumer disclosure 
language and unbiased borrower counseling for consolidation loans.
     The single lender rule keeps student borrowers from 
comparison shopping for the best rates and terms when consolidating. It 
should be repealed.

    Mr. Chairman and Members of the Committee:
    Thank you for the opportunity to talk about a program that is 
critically important to helping America's college students manage the 
growing burden of student loan debt. The average student today 
graduates with $19,000 in student loan debt at a time when the job 
market is weak and cash flow pressures are often severe. Consolidation 
allows these students to refinance their multiple loans into one new 
loan with a low fixed rate and a monthly payment that often saves 
hundreds of dollars a month in cash outflow.
    College affordability is a key issue in this Reauthorization. Some 
allege that consolidation diverts federal resources that would 
otherwise make college more affordable. But stop and think a moment. 
Although the perception of affordability is a barrier to access for 
those students concerned about incurring loan debt, for the most part 
students don't have loan repayment burdens in college. The reality of 
affordability doesn't hit until the student leaves college and has to 
start making loan payments. That's when the bill for college really 
comes due--and consolidation makes that bill more affordable. 
Unfortunately, according to a recent Harris survey, 53% of graduating 
college seniors are unaware of the consolidation program.
    Some argue that the consolidation program has strayed from its 
original purpose, but what in the student loan industry hasn't? Sallie 
Mae, once prohibited by statute from originating student loans, now 
competes vigorously with the lenders it was originally created to 
serve. Wall Street securitizations of student loans have largely 
replaced the need for taxpayer-supported non-profit state secondary 
markets, although the latter continue to persist. Guaranty agencies 
have diversified into loan origination and servicing. And the 
Department of Education's Direct Loan program vigorously competes in 
the marketplace. Yes, the consolidation program has changed--- like 
many of the other changes, it has become better for consumers.
    The original purpose of consolidation was to assist student 
borrowers having multiple lenders. However, that was in an era of much 
smaller debt levels. For example, median undergraduate debt has 
skyrocketed about 80% since just 1997, and is now about $19,000. As 
college costs and student loan debt have climbed dramatically in the 
past few years, consolidation has become a vital tool to make those 
high debt levels more affordable--and post-graduation affordability has 
become a major problem. A Roper survey last year found that a 
significant percentage of graduates had to pursue a career choice other 
than the one they preferred in order to make their loan payments. 
Recent articles in the Washington Post and the New York Times have 
reported on a finding in a survey by the Partnership for Public Service 
that two thirds of law school graduates would not consider public-
interest or government jobs because their income would be too low to 
make their student loan payments.
    It should also be noted that consolidation provides a potent 
default prevention tool, as described in a study entitled ``Factors 
Affecting the Probability of Default'', published in the Journal of 
Student Financial Aid, Vol. 32, No.2 (2002.)
    The Congress realized the need to make loans more affordable during 
the 1998 Reauthorization of the Higher Education Act. It did so by 
making consolidation loans more readily available and opening up the 
marketplace to far greater competition. This has provided significant 
benefit to the more than one million student loan borrowers just last 
year.
    Opponents of the consolidation loan program claim that the program 
benefits primarily doctors, lawyers, and other high-income 
professionals. However, data we are providing to the Committee shows 
quite the opposite. According to a large study done by Experian (the 
credit reporting agency), less than 4% of consolidators are doctors and 
lawyers--and nearly 20% are nurses and teachers. Their average age is 
only 27. This is not a program that favors the affluent.
    I've spent most of my career in this industry. Before joining 
Collegiate Funding Services, I was a senior manager in the Office of 
Student Financial Assistance at the U.S. Department of Education. Prior 
to that, I was a senior officer at Sallie Mae for nearly 20 years with 
responsibility for its then 4000 employees handling loan origination 
and customer service operations. In fact, when Sallie Mae temporarily 
withdrew from the consolidation program a few years ago in protest over 
the federal imposition of new lender-paid fees on consolidation, I was 
involved in the shutdown. As a result, I've viewed the debate over 
consolidation loans from a variety of perspectives. It is my belief 
that the debate over consolidation loans comes down to whether or not 
Congress is going to put the best interests of students and their 
families ahead of the desire by big financial institutions to protect 
their profits.
    Most big financial institutions don't like consolidation loans 
because they're less profitable. Lenders have to pay the federal 
government a half-percent origination fee on each loan made, as well as 
an annual loan rebate fee of 1.05% each year on each consolidation loan 
in the lender's portfolio. The result of all those fees is that, since 
fiscal year 1995 (as far back as we could obtain data), the federal 
government has received a $1.3 billion surplus of fee income in excess 
of subsidies. The CBO estimates that for fiscal years `03-`04, 
consolidation loan revenues will provide a further surplus of $1 
billion. By the time of the completion of this reauthorization, more 
than $2 billion in fees will have inured to the Federal taxpayer that 
would not have been paid had the loans not been consolidated.
    Now, it's true that the unusually low interest rates that have been 
available for the last year or so will likely lead to future net 
subsidy costs. However, it is for this particular group of loans only 
(loans disbursed between July 1, 2002 and June 30, 2004). Opponents of 
consolidation like to use examples such as a $75,000 loan that lives 
for 30 years in order to show how much interest subsidy risk exists for 
the government. However, the reality is that the average consolidation 
loan is about $25,000 and usually is paid off before its maturity, 
typically in about 12 years. It should also be noted that many of the 
speculative estimates of the future cost of the consolidation program 
assume materially higher interest rates in the future. This runs 
counter to the Federal Reserve's statements that interest rates are 
expected to remain relatively low for a considerable period of time.
    The economic policy group from Ernst & Young, LLP, is completing a 
study on the incremental cost of consolidation that we will be 
providing to the Committee. According to Ernst & Young, if you 
recognize the current group of unusually low rate loans as ``water over 
the dam'' in the sense that the pending Reauthorization comes too late 
to impact them, and if you look ahead to the fiscal year 2005-2010 time 
frame between this Reauthorization and the next, then, based on current 
CBO interest rate assumptions, fixed-rate consolidation loans 
originated during that time frame are estimated to create a further 
incremental revenue surplus to the federal government of approximately 
$700 million.
    Those who oppose consolidation offer two alleged solutions to their 
exaggerated claims of cost to the federal government. One is an 
extended repayment term for the underlying loans that otherwise are 
subject to consolidation. Big financial institutions like this concept 
because it would mean fewer consolidation loans, which translates into 
bigger profits. The problem with this is that extended-term Stafford 
loans would deprive the federal government of billions of dollars of 
fee revenue generated by consolidation. It's a bad deal for the 
taxpayer.
    Extended repayment also does not allow consumers who are 
dissatisfied with the service their current holders are providing to 
consolidate and obtain better service with another lender. Recently, a 
major holder of student loans admitted it had improperly billed 800,000 
of its customers, requiring increases in payment amounts often 
exceeding $100 per month. Student loan borrowers should have a way to 
escape service problems of this kind; consolidation provides it--unless 
the problematic service provider holds all of a borrower's loans.
    The other alleged solution offered by consolidation's opponents is 
to make all new consolidation loans variable rate instead of fixed 
rate. However, many of you will recall that during the so-called ``2002 
interest rate fix'' legislation which came out of this Committee, it 
was decided that as of 2006 all new student loans will move to a fixed 
rate. Students clearly prefer the certainty and simplicity of a fixed 
rate.
    Another contentious topic is the so-called ``single lender rule.'' 
It provides that if a student wishing to consolidate has all their 
student loans with the same lender, then the student must utilize that 
lender to consolidate--even if better rates, terms, and service are 
available elsewhere. On the other hand, if a student's underlying 
Stafford loans are owned by multiple lenders, then the student is free 
to comparison-shop for the best deal.
    Congress recently spoke to this issue in the Conference Report 
accompanying the Omnibus Appropriations Act for FY 2003 (page 1141):
        ``The conferees continue to be concerned about issues within 
        the consolidation loan program. The conferees are aware that 
        some borrowers would like to see the current law changed to 
        allow for consolidation with any lender or holder, regardless 
        of how many lenders with whom the borrower has loans. The 
        conferees are concerned that without change to the current law 
        governing consolidation loans, some borrowers may not be 
        permitted to consolidate their loans with any lender they 
        choose. The leaders of the authorizing committees have 
        expressed a desire to address this and other issues during the 
        reauthorization of the Higher Education Act so as to address 
        the Consolidation Loan Program as a whole. The conferees urge 
        those committees to ensure borrowers have the best options 
        available to them in order to manage their student loan 
        obligations.''
    Additionally, Congressman Joe Wilson, a member of this Committee, 
said during the floor debate on the Teacher's Bill:
        ``While it would be great if no teacher would have student 
        loans, for those who do have debt we need to make sure every 
        student loan borrower has a REAL opportunity to consolidate 
        their loans. Later during the reauthorization of a different 
        part of the Higher Education Act we will need to make sure that 
        we repeal the single holder rule. It will be part of my 
        commitment to teachers everywhere that they can have the 
        benefit of competition from the more than one thousand lenders 
        in the program when they consolidate their loans and, thus 
        allow them to further reduce their debt burden by taking 
        advantage of historically low fixed interest rates.''
    Big financial institutions--wanting to protect their loan 
portfolios from competition--argue that repeal of the single lender 
rule would cause lenders to exit the business and have a negative 
impact on access to loan capital. This is an empty threat. Competition 
for student loan business is more vigorous than it's ever been...just 
ask any college financial aid director.
    In an article in the May, 2003 edition of the Greentree Gazette, 
Paul Sheldon, Managing Director at Salomon Smith Barney's Education 
Finance Group, supported the view that student loan capital is 
unthreatened. He wrote: ``There appears to be no practical limit to the 
appetite of lenders to make student loans. There is very aggressive 
competition for loans among huge financial institutions. There is 
growth in smaller size specialty companies. And a handful of new 
entrants are growing very rapidly. The supply of funds for growing loan 
volume is ample.''
    This Committee had, in the Chairman's mark of the 1998 
Reauthorization, a full repeal of the single lender rule (which is a 
budget-neutral initiative.) We are merely asking you to do what you did 
in the House during the last Reauthorization, which is to repeal this 
anti-consumer rule. Imagine a federal law that restricted the ability 
of homeowners to comparison-shop for the best deal when refinancing 
their mortgage. Make sense? Of course not, and neither does the single 
lender rule. It is time for Congress to repeal this special interest, 
anti-consumer piece of legislation.
    In addition to repealing the single lender rule, we urge the 
Committee to require enhanced consumer disclosure language and borrower 
counseling for consolidation loans. Although most of the companies 
offering consolidation loans adhere to high standards, regrettably 
there are some fly-by-nights that tarnish the reputations of everyone. 
CFS is concerned about that and has joined with other leading 
consolidation lenders to form the Student Aid Integrity Coalition. 
Members of the Coalition are substantial companies, typically being 
among the Top 50 holders of FFEL loans in the program, with multi-
billion dollar student loan portfolios, AAA-rated Wall Street 
securitizations, hundreds of employees, Advisory Boards of financial 
aid directors from top colleges, and a substantial investment in the 
long term success of the FFEL program. In consultation with financial 
aid administrators and student groups, the Coalition has developed a 
list of pro-consumer best operating practices covering such things as 
no deceptive marketing practices, required employee training, borrower 
counseling, strict adherence to do-not-call lists, etc. Members of the 
Coalition agree to adhere to these best practices as a condition of 
membership. Like other Members of our Coalition, CFS does periodic 
customer satisfaction surveys. Our last survey showed that over 95% of 
our customers would do business with us again and would refer us to a 
friend. We take our commitment to our customers very seriously.
    In closing, I'll comment on the topic of re-consolidation. The 
Higher Education Act currently provides that once a student 
consolidates, they cannot re-consolidate. If the law were changed to 
permit re-consolidation, it would be costly to our company--and to all 
student loan lenders--because we'd be turning higher interest rate 
loans into lower rate loans. But, student loan borrowers clearly want 
the ability to re-consolidate and if Congress can work out the budget-
scoring challenges of re-consolidation, we support whatever is best for 
student loan borrowers--even if our revenues take a hit in the process.
    To make the growing burden of student loan debt more affordable for 
America's students, I hope you will continue to support a vibrant 
student loan consolidation program.
    Thank you again for the opportunity to testify today.
                                 ______
                                 
    Chairman McKeon. Thank you. Mr. Wozniak.

STATEMENT OF PAUL W. WOZNIAK, MANAGING DIRECTOR, UBS FINANCIAL 
                         SERVICES, INC.

    Mr. Wozniak. Thank you, Chairman McKeon, Ranking Member 
Kildee, members of the Subcommittee.
    I am Paul Wozniak. I am the head of the largest student 
loan group involved in financing higher education and student 
loans in the country. What I was asked to describe for this 
Subcommittee is the manner in which education loans, and 
specifically consolidation loans, are financed and to address 
market issues that may arise as a result of permitting such 
loans to be reconsolidated.
    Education loans are held by a variety of entities, 
including by for-profit, not-for-profit and state agencies. 
During the past 18 months, some $58 billion of long-term 
securities were issued by these entities to finance 
postsecondary education loans, primarily FFELP loans. 
Approximately 30 percent of this amount has been consolidation 
loans. Additional capital was provided to a lesser extent to 
this sector by lenders through other internal sources of funds.
    The securities issued take many forms, but there are many 
common themes. One, they are issued as asset-backed securities, 
basically meaning that the loans themselves are used to pay off 
the debt or other type of financing; two, they are structured 
with a variety of complexity, depending upon how complex the 
loan portfolio is.
    And in one little point of note, always talk about 
Stafford, Plus and consolidation loans as three basic loans. 
There are so many permutations of those types of loans that our 
models actually model about 150 different variants to what we 
have outstanding there.
    Three, they are structured to meet strict rating agency 
stress tests to ensure that we have an investment grade rating 
to be able to sell to investors, and four, the programs are 
generally designed to meet investor preferences because that's 
going to get you the most efficient cost of funds.
    The securities are distributed globally to investors and 
include securities including things called floating rate notes, 
auction rate notes, reset notes and fixed rate bonds. Each of 
these are just different types of financing mechanisms and have 
really long maturities, some of them beyond 30 years, to 
accommodate very long lives that the loans could become in this 
student loan program.
    Many programs also incorporate interest rate swaps or other 
types of derivatives and all those loans are usually put into a 
trust that's used again to pay down to the bondholder.
    The purpose of using derivatives or interest rate swaps is 
actually one to allow hedging mechanisms to be able to match 
your cost of funds. You want to be able to match your borrowing 
costs to your asset that you're trying to finance and make sure 
that you've got a revenue stream that's similar and, two, 
there's also a reason that you may want to convert what one 
investor preference may be by issuing to that investor's 
preference and then, indeed, using a synthetic mechanism to 
allow you to finance better.
    An example of this is in the U.S. market, floating rate 
notes are a very attractive financing vehicle but it's not easy 
to find a lot of U.S. dollar assets that are willing to be 
invested in a long-term mode. However, there are other 
currencies where people like to have variable rate investments 
in that manner and what is done is basically using these 
interest rate swaps, and again, they're contracts under the 
trust, to basically put together to match what the investor 
wants with the portfolio that the issuer wants to be able to--
the lender wants to be able to finance.
    With this as background, there is one thing that lenders 
and investors value most and that's predictability. The greater 
the predictability, the more efficient the pricing of the debt 
will be. The more efficient the pricing of the debt, the better 
able the lender will be to offer borrowers the most beneficial 
terms and, ostensibly, those lenders offering the best terms 
and service to students will achieve a growing share of the 
market.
    Investors that have invested in student loan backed 
securities have been drawn to the sector by the relative 
predictability of the cash-flow repayment stream despite the 
many unique features inherent in the FFELP program. Floating 
rate note investors, in particular, carefully analyze the speed 
at which they expect a portfolio of loans to repay.
    Significant variances from expectation cause investors to 
reassess the risk or value of an investment. Identifiable 
market developments may cause an investor to reevaluate the 
model. Systematic risk, such as legislative risk, may be viewed 
with more caution, as it is less predictable and not market 
driven.
    A loan refinancing option that gives borrowers a second 
bite at the apple is something that most investors could not 
have contemplated in assessing the average life of their 
investment. The original consolidation option was generally 
viewed as a mechanism that permitted those with multiple loans 
to combine them into a single loan thereby resulting in a 
single borrower repayment, or by those borrowers with large 
balances to achieve a more manageable monthly payment through 
extended repayment.
    Reconsolidation, on the other hand, will only target 
certain loans, as currently proposed, most attractive to 
borrowers that may have consolidated several years ago at a 
much higher rate, those having the greatest value within the 
outstanding trusts. So those would be the most likely to be 
reconsolidated.
    It's safe to say that as a result, investors in all types 
of student loan backed securities will be unambiguously less 
secure, on a relative basis, in the event of reconsolidation 
than they would absent a reconsolidation option. The magnitude 
of this decreased security may only be assessed on a trust-by-
trust basis, depending on the portfolio and what type of 
contracts may have been entered into.
    One of the things that investors--investors have already 
signed on in both the floating rate and the fixed rate 
investors, they've already agreed to accept a certain yield 
spread or interest rate on those securities for the life of the 
offering. It's a risk that they will bear as the market adjusts 
to new information.
    Investor memories are quite long and increased prepayment 
speeds and the potential loss of favorably performing 
collateral, potentially creating a negative selection bias for 
the portfolio, will invariably be factored into future 
investors evaluations of the sector. Presumably, investors 
would also increase the weight that they place on the 
evaluation of legislative risk to the extent that it could be 
measured.
    As there is a large foreign investor base, especially in 
floating rate notes, their ability to assess or manage this 
potential risk is somewhat diminished, therefore it is 
difficult to assess a magnitude to any investor response.
    Reconsolidation will also have an impact on the Direct Loan 
portfolio. As the government continues to look at certain 
options to manage its own portfolio, a reconsolidation option 
will diminish the value to the government and will be able to 
realize--that they'll be able to realize on any loan sales or 
securitizations of its own.
    The implications of reconsolidation of consolidation loans 
are subtle, to be sure. It's important to weigh the goals and 
benefits of any new options against the goals and benefits of 
the entire FFELP program. The ability of lenders to continue to 
raise capital on the most efficient basis possible should be 
one of the criteria included in this evaluation, because this 
has been one of the driving factors in providing borrowers the 
benefits and services they've come to expect.
    I thank you for the opportunity to address you this 
afternoon.
    [The statement of Mr. Wozniak Follows:]

Statement of Paul W. Wozniak, Managing Director, UBS Financial Services 
                                  Inc.

    Good Morning. I am Paul Wozniak, a Managing Director and Group 
Manager of UBS Financial Services Inc.'s Education Loan Group. The 
Group is the largest of its kind on Wall Street, and we are mandated to 
coordinate all education loan related finance activities in the Asset-
Backed Finance, Taxable Fixed Income and Municipal Securities 
Departments. Last year my group managed $12.5 billion of education loan 
financing activities. I am currently in my 22nd year of financing 
postsecondary education loans.
    I was asked to describe for the Subcommittee the manner in which 
education loans, and specifically consolidation loans, are financed and 
to address market issues that may arise as a result of permitting such 
loans to be reconsolidated.
    Education loans are held by a variety of entities including for-
profit and not-for-profit corporations and state agencies. During the 
past 18 months, some $58 billion of long-term securities were issued by 
these entities to finance postsecondary education loans, primarily 
FFELP loans. Additional capital was provided to a lesser extent to this 
sector by lenders through other internal sources of funds.
    The securities issued took many forms, but generally reflected 
common themes; (i) they were asset-backed (meaning secured by the loans 
themselves) securitizations or debt financings, (ii) they were 
structured vehicles of various complexity, (iii) they were structured 
to meet strict rating agency stress cases to achieve investment grade 
ratings and (iv) they were designed to meet investors'' preferences. 
Further, it is essential to the rating agencies rating opinion that 
asset securitizations are issued via a bankruptcy remote trust or 
entity.
    The securities were distributed globally to investors and included 
such securities types as floating rate notes, auction rate notes, reset 
notes and fixed rate bonds. Virtually all these securities have very 
long dated maturities. To achieve the most efficient structures, many 
programs incorporated derivative products into the trust. The purpose 
of these instruments is generally twofold: First, to provide asset-
liability management or match funding for the assets, and second, to 
allow an issuer to access one market that may be preferred by 
investors, and synthetically converting the risk of the obligation to 
something more useful to the issuer.
    For example, while the US dollar floating rate note market 
(``FRN'') is an excellent funding vehicle for FFELP loans, investor 
demand is thin for longer maturities, especially maturities that would 
help securitize the longer cash flows of consolidation loans. However, 
there is longer term investor interest in Euro denominated floating 
rate notes. Hence, a derivative product can be employed to convert Euro 
currency and rate risk to US dollar rates in a less expensive manner 
than could otherwise be done directly with US dollar investors around 
the world.
    With this as background, there is one thing that lenders and 
investors value most and that is predictability. The greater the 
predictability, the more efficient the pricing of the debt will be. The 
more efficient the pricing of the debt, the better able the lender will 
be to offer borrowers the most beneficial terms, and ostensibly, those 
lenders offering the best terms and service to students will achieve a 
growing share of the market. Investors that have invested in student 
loan backed securities, have been drawn to the sector by the relative 
predictability of cash flow repayment despite the many unique features 
inherent in the FFEL program. FRN investors, in particular, carefully 
analyze the speed at which they expect a portfolio of loans to repay. 
Significant variances from expectation cause investors to reassess the 
risk or value of an investment. Identifiable market developments may 
cause an investor to reevaluate its model. Systematic risk, such as 
legislative risk, may be viewed with more caution, as it is less 
predictable or market driven.
    A loan refinancing option that gives some borrowers a second bite 
at the apple is something that most investors could have not 
contemplated in assessing the average life of their investment. The 
consolidation option was generally viewed as a mechanism that permitted 
those with multiple loans to combine them into a single loan thereby 
resulting in a single borrower repayment, or by those borrowers with 
large balances to achieve a more manageable monthly payment through 
extended repayment. Reconsolidation, on the other hand, will target 
only certain loans (as currently proposed, most attractive to borrowers 
that may have consolidated several years ago) having the greatest value 
in outstanding trusts. It is safe to say that as a result, investors in 
all types of student loan backed securities will be unambiguously less 
secure than they would be absent a reconsolidation option. The 
magnitude of this decreased security may only be assessed on a trust-
by-trust review, and for FRN and fixed rate investors who have already 
agreed to accept a certain yield spread or interest rate on their 
securities for the life of the offering, it is a risk they will bear as 
the market adjusts.
    Increased prepayment speeds and the potential loss of favorably 
performing collateral (potentially creating a negative selection bias 
for a portfolio) will invariably be factored into future investor 
evaluations of the sector. Presumably, investors may also increase the 
weight they place on an evaluation of legislative risk to the extent 
that it could be measured. As there is a large foreign investor base, 
especially in FRNs, their ability to assess or manage this potential 
risk is somewhat diminished. Therefore, it is difficult to assess a 
magnitude to any investor response.
    Reconsolidation will also have an impact on the Direct Loan 
portfolio. As the government continues to look at certain options to 
manage its portfolio, a reconsolidation option will diminish the value 
the government will be able to realize on any loan sales or 
securitizations of its own.
    The implications of the reconsolidation of consolidation loans are 
subtle to be sure. It is important to weigh the goals and benefits of 
any new options against the goals and benefits of the entire FFEL 
program. The ability of lenders to continue to raise capital on the 
most efficient basis possible should be one of the criteria included in 
this evaluation, because this has been one of the driving factors in 
providing borrowers the benefits and services they have so come to 
expect.
    I thank you for your time.
                                 ______
                                 
    Chairman McKeon. Thank you very much. Now, this is a 
subject we've really been grappling with here on the Hill and 
in the Committee and I talk to people and I get different 
responses to different questions or I get different responses 
to the same question. And I'm happy to have all of you here. We 
have people from both sides of the issue, we have people that 
are somewhat objective on the issue.
    And what I would like to find out, there was a question 
asked of the previous panel, is there any cost to the Federal 
Government for refinancing or consolidating loans. I think the 
answer came out kind of--was kind of nebulous, kind of no cost, 
or if there was a cost it would be recouped in other ways, 
taxes or something over a long period of time.
    I would like to hear from you, is there a cost to 
refinancing or consolidating loans.
    Mr. Martin. Mr. Chairman, yes, there is a cost. I mean, 
these are subsidized loans and that's what makes them unique. 
They're not the same--we've heard a lot of discussion today 
from people, well-meaning, talking about differences between 
products like home mortgages or automobiles or whatever, but 
those are not things that carry the same kind of subsidies and 
structure the way student loans are.
    If the interest rates go back up, and we assume that they 
will because they're cyclical, then obviously there will be a 
cost on those assets with student rates being set, of what is 
the difference of paying that subsidy for the holder of that 
loan. And those are going to be costs that are going to have to 
be absorbed, just as we pay now on the regular loan program a 
special allowance cost on those loans.
    The same thing is going to be true on these except we're 
dealing with unusually low interest rates, so it's going to be 
even more, depending on where that upper rate cap is set. So 
there is going to be a cost and my concern is not that I'm not 
sensitive or our association is not sensitive to people that 
are out of school that have a lot of debt. In fact, we have a 
lot of our proposals under the reauthorization to try to work 
on extending repayment terms, providing other kinds of benefits 
for students who are borrowers, even changing some of the 
benefits around so that we target them more successfully upon 
the most needy to try to keep indebtedness down.
    But under this issue of loan consolidation, my concern is 
knowing that we have limited dollars, the question is should we 
spend those dollars now upon individuals who have received 
their education, who have been amply assisted, who had the 
benefit of in-school interest, have had their grace periods and 
so on, that are out in our society that are going to be 
successful--and not that I don't want to help them, but if I 
don't have enough dollars, is it better to use those dollars to 
come back over here to this new influx of students that we've 
got coming in that are very, very needy and we know the with 
costs going up--of having monies to assist those students so 
that they're going to have the same opportunity to get their 
education?
    And that is--if we had unlimited funds, I would--might be 
one of the people who would say yes, let's see what--if we 
can't spend some more of this, because there is a great return 
on people to our society that have an education in terms of the 
amount that they're going to pay in taxes, the contributions 
they make to our society, living healthier lives, participating 
more in civic governance, but the reality is we have a finite 
amount of dollars and I do not want to deny upcoming students 
the opportunity to get that education simply by providing 
continued subsidies to those that have already benefited.
    Chairman McKeon. Ms. McCormack.
    Ms. McCormack. Yes. Mr. Martin has certainly very 
eloquently pointed out that there is, one, a huge cost, and 
two, it would shift dollars from the front end of the program 
and providing access to the back end.
    As I indicated in my testimony, we at Sallie Mae believe 
that cost is well in excess of $15 billion just for a single 
reconsolidation and would be substantially higher if borrowers 
were allowed to reconsolidate over and over again, particularly 
because interest rates may be going down even further over the 
next year.
    So yes, there is a cost and it's definitely shifting 
dollars to graduates as opposed to having dollars available to 
help with access at the front end.
    Chairman McKeon. Mr. Morrow.
    Mr. Morrow. Yes. I guess I'll be the lone wolf on this one. 
We talked about investments earlier in the first panel. If you 
look at the consolidation program and the student loan program 
as an investment, much like the stock market, prior to 1999 you 
bought stocks, you probably did pretty well. If you bought in 
1999, you probably didn't do very well. Today, prices are back 
down.
    Consolidation program is the same way. Between '95 and 
projected for 2004 for loans originated in 2002 is a surplus to 
the government because of fees paid by lenders to the 
government. Between '02 and '04, maybe a negative because of 
the unusually low interest rate period. '05 to '02, if rates 
normalize, which everybody expects they will do, there's a 
surplus back to the government.
    This is a fairly simple issue to understand and I don't get 
the--why there's so much confusion about it. So if you look at 
the investment over the long haul and your broker always tells 
you with stocks, stay in for 10 years, stay in for 20 years. 
Much the same way with this investment.
    Chairman McKeon. Mr. Wozniak.
    Mr. Wozniak. I guess if someone were giving me the task to 
do that computation--and I'm not volunteering for that--it 
would be somewhat akin to someone looking at a mortgage and 
saying, gee, should I go with the 5 percent mortgage with the 
changes every 3 years or the 6 percent locked in over the term? 
Which is going to be the better option?
    And in many regards, because of the mechanics of the way 
that the consolidation program works and the various fees and 
interest rate assumptions, it's a very difficult fact to just 
say the answer is six. It's a very difficult assessment.
    Mr. Morrow. Let me just add to what Paul said. It's 
difficult going forward because of the rate assumptions and you 
can play with rate assumptions in the out years and get the 
answer you want to get. But if you deal with facts, look at the 
facts, '95 to 2002, those loans that were consolidated 
generated a surplus to the government.
    So if you deal with facts and not speculation about future 
interest rate possibilities, I think the facts speak for 
themselves.
    Ms. McCormack. I would like to correct Mr. Morrow's 
statement. Between that time period that he stated, 
approximately $1.3 million was ret--billion dollars was 
returned to the Federal Government but the cost was actually 
higher than that to the government for the loan program, so 
that's actually an incorrect statement in terms of the net 
impact.
    Mr. Morrow. And I'll disagree with you on that comment. The 
1.3 was net of subsidies.
    Chairman McKeon. Here's where I--this is a problem. This we 
deal with constantly. I would like both of you--or all four--
all five of you to address that question in writing, if you 
could, and we'll get back to you and follow up on that because 
I'm really grappling with this, OK?
    Ms. McCormack. We would be happy to do that.
    Chairman McKeon. Thank you. Mr. Kildee.
    Mr. Kildee. Thank you, Mr. Chairman. Mr. Wozniak, in going 
over your testimony, you seem to close the door totally on 
reconsolidation. Am I reading your testimony right?
    Mr. Wozniak. That's correct. From a standpoint, again, 
there are issues with regard to securities, again, that 
investors have certain preferences but from the standpoint of 
the most efficient market, it would be to maintain the status 
quo because that's the best. From the standpoint of the 
contractual issues, those will be some type of difficulties 
that may have to be addressed as well because there were 
certain assumptions as to how quickly some of those loans would 
pay down.
    With regard to consolidating a loan and what it does going 
forward on changing the speeds, while that will change the cost 
of capital it may increase the cost of capital. It certainly 
would probably be more likely to increase the cost of capital 
to lenders rather than decrease it. That would be a correct 
reading.
    Mr. Kildee. Thank you very much. Mr. Morrow, your testimony 
mentions your support for elimination of the single lender 
rule. Why is this important to the competition between 
consolidators for borrowers and how is repeal going to benefit 
the student in the loan industry?
    Mr. Morrow. Well, I'm not sure it's just the consolidators 
at issue here. The real reason, to me, behind the repeal of the 
single lender rule is competition. It's simply put, and I think 
Congressman Regula mentioned that in his testimony, that 
competition always is in the best interest of the consumer.
    And by having an 18-year-old freshman have basically a loan 
provider chosen for them as opposed to free choice and then 
having to be locked into that situation irrespective of 
innovations that bring better price, better services, whatever, 
to have that person locked in for 10 years, even not speaking--
not consolidation but just for 10 years, that lender seems to 
be kind of completely opposite consumer choice and what this 
country is about in terms of the capital markets and 
competition.
    Mr. Kildee. And it will help the student and will not drive 
out a healthy lender?
    Mr. Morrow. Well, let me put it this way. When we started 
this back in 1998, people told us you couldn't offer discounts 
on these loans because you couldn't make money. We did. Did we 
make as much money as we could have? No, but we made money by 
offering discounts on these consolidation loans.
    I work with three of the largest--five largest lenders in 
the program. They're very anxious to get these loans so I don't 
see a destabilization issue at all. I don't know where that 
comes from.
    Mr. Kildee. Thank you very much. Ms. Wasserman, your 
testimony mentions the need to do away with the origination 
fees. How much will elimination of these fees benefit the 
average student in terms of lower monthly payments or less 
interest paid over the life of the loan?
    Ms. Wasserman. In terms of the exact numbers, we can get 
that to you but the key is these are important in reducing 
monthly payments but also in just sort of that students should 
not be paying interest on money that they don't ever receive 
and they're paying interest on the full amount of the loan, 
including these fees that they pay right away.
    So just in terms of fairness, these fees should be removed. 
And I think that--I mean, this goes to sort of-- I think the 
big question here that Chairman McKeon was just asking in terms 
of will consolidation have costs to the government, will 
consolidation, reconsolidation have costs.
    I think for us it's about saying that that should not be 
the debate. The debate should be we need to help students and 
access. While we prioritize grants, the Pell grant, for 
example, we also see the need for consolidation and 
reconsolidation because students are graduating with 
unmanageable levels of debt.
    So if we are able to remove origination fees, if we are 
able to do loan forgiveness, if we are able to do these 
consolidation programs, it means that the students that are 
graduating are able to help the economy and they are able to 
choose jobs based on what they want to do, not their monthly 
payments.
    So I think whatever small amount it does is important.
    Mr. Kildee. Dallas, you said if we had unlimited or 
significantly greater amount of money we could have the 
consolidation and we should return it to its original purpose. 
There's no question if we had more money we could do a lot more 
things around here. We probably in the last 2 years have voted 
for--last two and a half years voted for about $2 trillion 
worth of tax cuts. Now, if we had maybe made it 2 trillion 
minus 12 billion, which is the figure I get as a cost of this, 
the 12 billion would help, would it not?
    Mr. Martin. It certainly would. I mean, I would like to see 
$12 billion out of the Pell grant program, Mr. Kildee. There's 
a lot of things we could do in education with $12 billion. It 
would be a big help.
    Mr. Kildee. If it had been a rule germane I would have 
offered an amendment to the tax bill, minus $12 billion to be 
used for this purpose here, but I think I would have been ruled 
out of order.
    Mr. Martin. I think you probably would have, sir.
    Mr. Kildee. Thank you very much.
    Mr. Martin. Let me just--I would like to add one thing, 
though. It goes back to the question that Rebecca was saying 
about the fees and we also are on record of eliminating the 
origination fees.
    And I do think that this is an issue that I hope the 
Committee will look at because that is money that is taken away 
that students are not receiving in many cases up front and I 
realize that in some cases lenders or others are providing that 
so not all students are paying that, but that is a fee that 
eliminates the purchasing power of that loan in the beginning.
    And, yeah, that was put in back when we were dealing with 
high interest rates in the early 1980's. It was actually part 
of the Budget Reconciliation Act of 1981. And we were dealing 
with 13, 14-point percent interest at that time on short-term 
monies and we put that in as a short-term fix for students, to 
assist--to preserve in-school interest subsidy.
    And I would suggest in this interest environment it is time 
to revisit that issue because we are long past that and that is 
money that does not go to help students that really need that 
that are borrowing that comes back to the government.
    Mr. Kildee. I believe your memory is correct on that. That 
was the purpose when it was put in in the first place and 
things have significantly changed since then. Thank you very 
much.
    Chairman McKeon. Thank you. Mr. Burns.
    Mr. Burns. Thank you, Mr. Chairman. I appreciate the panel, 
I appreciate the diversity of your viewpoints.
    Let's go back to the consolidation and reconsolidation 
issue which I do not have a fundamental problem with. I have a 
fundamental problem with the American taxpayers subsidizing 
that. If we have an issue with fixed rates versus variable 
rates, perhaps, Mr. Morrow, what is the problem with going with 
the consolidation, reconsolidation at No. 1 variable rates and, 
No. 2, if the student chooses to reconsolidate and renegotiate 
a rate that they have for their education, why would it not 
then become their option and their alternative to do that 
independently without the government subsidy? What's the 
problem with variable rates if we can't agree on what a fixed 
rate might need to be?
    Mr. Morrow. At the basic policy level probably there is 
nothing wrong with variable rates. We are moving toward, as 
current legislation calls for, a fixed rate program in 2006 
because--
    Mr. Burns. At 6.8 percent, but we don't know what 2006 is 
going to look like. It might be high, it might be low.
    Mr. Morrow. There might be some discussion about how that 
fixed rate should be set; I'm not sure what the mechanisms 
were--
    Mr. Burns. Or perhaps whether a fixed rate--
    Mr. Morrow [continuing]. Whether there should be. But I 
think the issue that's missed here often, and it gets back to 
Ms. Wasserman's point, just kind of like they say in politics, 
it's the economy. In student loans, it's the payments.
    It's not the rate. Look back at 1999 and 1998, 2000, even 
before, people needed cash-flow relief. That's the issue here. 
The accessibility issue, to me, is once those loans come due we 
have to start making payments and we're seeing people, Ms. 
Wasserman--we've actually done a study; it's referenced in my 
written testimony--people are making life choices because of 
the amount of student loan debt they have. That shouldn't be 
the case.
    When I was with the Department of Education we made a trip 
up to the Harvard School of Business and Government. We were 
speaking with a young lady who had gone through a very 
successful academic career and had taken on a lot of loan debt, 
Harvard and elsewhere, and was worried because she wanted 
nothing more than to go to work for the government in public 
service.
    And her comment--it wasn't to me, it was to Mr. Woods who 
then ran the office of student financial assistance--was, I 
can't afford to take a job in public service because my monthly 
payment on my student loans will be over $700 a month and no 
public service job pays that well.
    That's not what education investment should be about, in my 
mind.
    Mr. Burns. Was that not a choice of the student to accept 
the burden of that high cost of that high quality education?
    Mr. Morrow. I agree. It was--
    Mr. Burns. And if you look at the testimony that Ms. 
McCormack provides, well over 50 percent of the subsidies are 
going to students with in excess of $40,000 in debt. Again, 
that's a terrible burden and as you suggest, you know, I just 
had two sons who went through the education environment and 
fortunately, you know, they did not have to deal with 
significant debt.
    I'm all in favor of a free market. I'm in favor of an 
opportunity for students to determine what is best for their 
financial situation. I think the challenge we face is finding a 
mechanism that will afford that and at the same time not burden 
the taxpayer and not penalize those new students who are coming 
into the system quite dramatically over the next decade and 
allow us to focus the subsidies of the Federal loan payment 
programs on those new entering students.
    Again, I think we have to look at the fact that originally 
we had a fixed rate for a fixed term and now what we're doing 
is we're seeing an extension of that term to from 10 years to 
20 years to 30 years in order to get the cash-flows that you 
suggest, and I understand that.
    But what we have to recognize is if the student chooses to 
refinance, that's a good thing and I'm open to that. But at the 
same time I'm not sure the taxpayer should be subsidizing the 
refinance.
    Mr. Morrow. Let me clarify. There's two separate issues. On 
the consolidation program, back to my comment about the stock 
market, I don't think there's a cost to the government on the 
basic consolidation program. I do believe, as I said in my 
oral, that there probably is a budget-scoring issue with 
refinancing and depending how that may or may not be solved, 
that's almost a separate issue.
    I believe there are some probably inherent costs in doing 
that but I think if it's something we can do because of the 
fact that constituents are asking for it, we should look at it. 
But the basic consolidation program, if taken over a long 
period of time, not just a blip in time, I think is cost 
neutral to the government, in some cases as the Ernst & Young 
study will show, in writing, cost positive.
    Mr. Burns. If indeed it is cost neutral, then a variable 
option might be something we would want to consider.
    Mr. Morrow. I would have to look at the analysis, but it 
could be.
    Mr. Burns. In closing, if a student has a loan and they 
complete their education and enter the marketplace and they 
become professionally employed, hopefully, and have a positive 
earnings environment, if after that scenario they then choose 
to refinance--in other words, first of all, I would accept the 
fact that under our current program we should continue to 
support it and enhance it.
    But once they move beyond the educational environment and 
are into the marketplace, they are making that decision because 
of the direct benefit they will receive from a lower interest 
rate. And when that happens, I think that it is not reasonable 
to then ask the taxpayer to subsidize their position and again 
to ask the lending institutions to accept the risk of the 
variation in the interest rates.
    And I think once of things we want to look at is once we 
get beyond the student graduation point and into the 
marketplace and into a position of beginning the repayment 
plan, that we then allow them to refinance but let that be a 
market-driven decision as opposed to a Federal Government 
program.
    Thank you, Mr. Chairman.
    Chairman McKeon. Thank you. Mr. Tierney.
    Mr. Tierney. Thank you. One thing that the market hasn't 
provided for us is an affordable higher education for all 
students and that's why the state governments and the Federal 
Government are involved in the first place. I mean, it just 
simply isn't happening.
    So I think going back to some of the comments that were 
made earlier, what we're looking at here is we supposedly have 
made a Federal commitment to the importance of education in 
higher education and we talked earlier--Ralph Regula was very 
good about talking about what other countries do in terms of 
making that commitment despite our lofty rhetoric.
    So if we really believe that more education is a good 
thing, then obviously we could obviate a lot of this discussion 
by, as Dr. Martin says, put more money into Pell grants. Then 
we wouldn't be talking about trying to make sure the kids on 
the other end have a right to reconsolidate and get a break.
    So I wonder if we're not looking at this thing inside out, 
that is, somehow capture that money that we're talking about, 
put it at the front end and giving kids more money in Pell 
grants, even in work study monies, I mean, something to get 
them to lower the cost so that the burden they have in the long 
run really comes down.
    I think that makes more sense to those of us who went 
through that way, those of us who have kids that recently went 
through that way. It just seems--you know, this whole debate is 
one that we ought to be having after we talk about funding 
appropriately Pell grants and getting kids into college that 
can afford it.
    Once kids are into college and we have encouraged them to 
go to school and we think that's good for the productivity of 
the Nation to move in that direction, then--once you get out, 
you have a burden and it's not a question of this kid saying, 
you know, I've got a choice or anything like that. We want them 
in.
    And the choice is now do we burden them so that they have 
to make a career or a life choice once they get out, like, I 
got into school and I was a relatively poor kid, I didn't have 
a family to pay for it and couldn't pay for it myself so I took 
a loan but now I can't go into government service because I 
chose to have an education or I wanted to get to the level 
where I could do something good in education or I go into a 
public service law firm instead of a big fancy law firm that 
pays six numbers?
    And there are needs in all these places and those are 
choices that kids ought to be able to make. So I just think 
we're doing it at the wrong end for one part and that we do 
have to do something about giving them the opportunity to 
refinance and consolidate on the other end.
    And Dr. Martin, I think you're absolutely right about doing 
it on that end but I think--what I want to know is how would a 
student be injured--and I guess I want to set up a little bit 
of a debate between Dr. Martin and Mr. Morrow here because I 
think you both mentioned this earlier in your comments.
    If I'm a student who just comes out with a lot of loan and 
I want to talk about consolidating, what harm to me, as a 
student, would there be in consolidation? What things ought we 
look out for? Dr. Martin?
    Mr. Martin. Well, from a student's standpoint I don't see 
necessarily a downside although, depending on who you 
consolidate with, I will have to say, Mr. Tierney, that we have 
had a lot of anecdotal information that's come back to us from 
some people who are very aggressive marketeers and selling 
consolidated loans that they have not fully disclosed to 
students what the downside is by consolidating, in terms of 
giving up other benefits.
    Many of these people do not tell students, for an example, 
when they consolidate their loans that they may lose certain 
cancellation benefits because of their prior loans that carried 
those, such as a Perkins loan or something else--
    Mr. Tierney. So we have to make--
    Mr. Martin. --so it's important that we do that. We at the 
institutions, when students make loans, do precounseling and we 
do exit counseling. But many times when the students are doing 
consolidated loans, they're taking it out after they're out of 
school and so they're not necessarily subject to the same 
counseling.
    And so--and I'm not saying everybody in the industry does 
that. I don't want to be misstated because I think some people 
are very responsible but we have enough evidence that a lot of 
students are being misled in terms of, oh, we're going to do 
all these wonderful things for you, without them realizing what 
they're giving up.
    Mr. Tierney. Thank you. Mr. Morrow?
    Mr. Morrow. I actually agree with Dr. Martin on this one. 
To the student, there really is no harm as long as they're 
getting the right information. As with any business, you do 
have interlopers who might not provide the best quality of 
service and that true and it's been true in the basic student 
loan program.
    There's been cases where people that shouldn't have been in 
were in. That's the primary job of the Department of Education 
to control that eligibility, which they have done with the 
major players in the business. They have come and looked at 
what we're doing.
    To address this issue, though, we've taken it a step 
farther. We have teamed up, actually with Ms. Wasserman's 
organization and others, to form a non-profit industry benefit 
type of corporation called the Student Loan Integrity 
Coalition. That coalition, just like the Good Housekeeping 
stamp of approval, will have standards of conduct in terms of 
how you do business when dealing with education loans, 
everything from what rights may you give up, what are your 
rights, what are your options under various programs.
    There are a number of things that you might give up and 
consolidation is not for everybody and I think the organization 
doing it has to walk the individual through the pros and cons 
and be very up-front about it.
    Mr. Tierney. Thank you. Ms. McCormack, I've got just a few 
seconds left. What harm to entities like Sallie Mae, 
consolidation? What are your list of grievances to it? For you. 
Don't tell me about the taxpayers because we'll take care of 
them but what about Sallie Mae?
    Ms. McCormack. For just plain consolidation, we think it's 
a good benefit for consumers and for borrowers who are having a 
difficult time managing their debt, consolidation can be a very 
effective way to manage that debt.
    However, reconsolidation is very problematic in terms of 
the student loan contracts that we have in place with our 
investors and in the asset securitizations that we do which we 
believe will--the cost will be substantially increased as a 
result of reconsolidation.
    Mr. Tierney. Well, wouldn't you adjust those once 
reconsolidation became a factor? Wouldn't you then make the 
appropriate adjustments for that?
    Ms. McCormack. These are outstanding contracts that are 
already in place. We can't adjust them.
    Mr. Tierney. But future ones you would?
    Ms. McCormack. In the future, if there were changes in the 
rules of the program we would adjust them.
    Mr. Tierney. Fine. What else? Anything else?
    Ms. McCormack. The biggest issue, I think, with 
reconsolidation, and I think we would certainly do this as 
well, is it causes the investment to go from the front end of 
the program to the back end. If we are not assured that we can 
hold onto an asset that we've spent millions of dollars in 
developing technology and support to create access for students 
to be able to get the loans and to have cost effective loans on 
the front end, we would be in the position as any other market 
consolidator out there and we'd be investing our dollars on the 
consolidation piece of the business instead of the front end 
access piece of the business and we think that's bad public 
policy and we think that's bad for students and it will do 
nothing to put another student in college.
    Mr. Tierney. You don't think somebody else will just step 
into that part of the market?
    Ms. McCormack. If the rules change, absolutely, people will 
go into the reconsolidation part of the market.
    Mr. Tierney. But somebody would step back and take whatever 
part you think you're going to move into.
    Ms. McCormack. I would think that the economics would not 
be there anymore. You would be trying to make a loan that you 
had no assurance that you'd be able to hold onto once the loan 
was made.
    Mr. Tierney. Thank you.
    Chairman McKeon. We have time for another round. If you 
could bear with us for a little bit longer, this is a rare 
opportunity for us.
    Mr. Wozniak, I think you said in response to a question the 
status quo is best. When you're trying to package financing 
deals to sell, the lenders would like to know that forever out 
into the future nothing is going to change, it would just 
continue on and that way, then, they could take everything into 
account before they make their investment?
    Mr. Wozniak. From the front end investment side, yes, that 
would be on the lender side, and then on the investor side as 
well they, too, would be benefited by saying I know what to 
expect because we've been going through this process for some 
period of time, stability, just like the Tax Code as well as 
the Higher Education Act. It's good to have something that's 
stable for a period of time because that gives a much better 
opportunity for people to get their arms around everything.
    I don't think there's any question that the number of 
investors in the student loan marketplace, if you look over the 
last couple of years where there has been relative stability 
and especially after the fixes to the interest rate issue that 
the Committee--Subcommittee did so well previously, that has 
made a number of--it's just been a doubling of the number of 
investors who have come into this marketplace, so that's a 
positive.
    Changes, obviously, will reshift the marketplace and the 
question is how will people view it, how will they be affected. 
Very difficult to tell until everything is put into the final 
rubric but clearly there would be some that would drop out.
    Chairman McKeon. Depending on what changes are made.
    Mr. Wozniak. Depending on what changes are made; 
absolutely. I mean, obviously there are changes that wouldn't 
have much implication. In that case, the investor doesn't have 
an issue.
    But to the extent that there are significant changes that 
are made, that obviously would have a much more dramatic impact 
and, as I said, probably in certain cases it could actually--
again, you have to look at it on a case by case basis to see if 
there were particular items.
    I can't possibly know every financing out there, but 
certainly there would be certain parties who, on the assumption 
that they had a particular fixed rate, you have that, fixed 
rate, that's set, OK.
    I'm supposed to act prudent. I'm going to do my assets and 
liabilities appropriate, yeah, I know some things will happen 
but I wasn't expecting that.
    Chairman McKeon. They don't have a problem with a variable 
rate or a fixed rate. Their question is more what it's going to 
be, just so it's not going to be changed from one to the other, 
back and forth, or if they have a contract especially they 
wouldn't want to change.
    Mr. Wozniak. Right. Well, in the reconsolidation case, 
effectively, if I had $100 of assets and they were at a 6 
percent rate and I locked in my financing at 5 percent saying, 
well, you know, I'm supposed to be prudent, the rates might 
rise. I don't know what the rates are going to do but they 
might rise tomorrow so I'll lock this in and I'll lock it in 
for the average life of the loan portfolio based on my prior 
history, knowing how those loans will actually pay down.
    Then what happens is effectively if all of a sudden a new 
option--because, of course, loans can be paid down. People have 
been refinancing their mortgages and taking the money--I mean, 
basically what they've been doing is taking money out of their 
homes. That's over $300 billion has come out of the mortgage 
market, actually an increase in the amount of debt, and 
basically been used to pay down debt and do other things.
    So there has been some pay down but to basically put an 
option on that now says hey, I can take this out, is kind of 
like if you were a bond investor and you bought a 5-year bond 
that had no call provisions, you know, at 6 percent and 2 years 
into it somebody says hey, I'm going to call the bond because 
now I can.
    If you were holding that security, you wouldn't feel good 
about it and effectively what that can do is it would change 
the--potentially the credit quality of that particular 
portfolio. But as to variable or any type of variable or fixed, 
how does that go forward? That is--ultimately the marketplace 
will be able to finance that knowing what the new loan looks 
like. It's just a question of what happened to the old loan, 
how that affects what the expectations are.
    Chairman McKeon. So student loans have been around long 
enough that the investors know that every 5 years there's a 
reauthorization process and we're going to look at these 
things, assuming no change is made in between. I remember when 
we did the last reauthorization in '98, one of the big debates, 
one of the big concerns was the rate.
    Remember the debate we had on setting the rate and we tried 
to get all the lenders--we tried to get everybody together in 
the room to come up with a compromise and they wouldn't do it 
and we finally had to settle on a rate. And the concern was if 
the rate--the margin was set at a rate sufficiently low, that 
the lending institutions would not have--many of them not have 
a desire stay in the business. The concern was that we would 
drive people from the business.
    I'm really not concerned about the banks. I think banks 
will always do fine. I helped start one. I know how they 
function and they will always make a profit because there is 
some phase of the market they can go into and if student 
lending became less attractive, they would move out of it into 
another area and the feeling was that those who were able to 
control their costs, the large businesses probably that were 
able to control their costs the best would stay in the 
business.
    And I remember that debate very specifically. The concern 
was if the smaller people got out of the business, those who 
went to community colleges and those who really needed the help 
the most, because a loan had to be about $7,000 before they 
made money and those who needed $500 or needed a thousand would 
be left out, that was a big concern in setting that rate.
    And on the one side we'd get hit, well, you're helping the 
banks too much, you're making the rate too high and they're 
going to make too much money, and I kind of got painted like 
that and that was not my concern at all. The concern was 
keeping enough lenders in that everybody would have an 
opportunity of being served.
    Time has changed. It's 5 years later and that probably 
isn't as big a concern but I think it's still a part of the 
concern because we have to always, I think, from our side try 
to make sure that there's going to be enough people in the 
business that enough students are being to be able to be 
helped.
    The thing that's really driving me on this reauthorization 
is access. I think we have--that was the original intent of the 
law, to make sure that we helped those who needed the help the 
most and as many as possible. We've been beat up a little bit 
because we haven't increased the Pell grant limit but actually 
we put a lot more money into Pell grants. The limit has 
remained the same but a lot more people are benefiting from it.
    And so when we're talking about having so much money--just 
so much money to use, we try to say how can we put it to where 
it's going to help the maximum number of people to have the 
most opportunity. And I'm sorry, Ms. Wasserman, but we're--I 
think in that debate we end up looking at who we can help get 
into the system rather than those who have already have and are 
benefiting from the system.
    And anyway, this is going to be one of the things that 
drives us through this whole process. We'll have time to--we'll 
have some visits. You and I will have some talks.
    Mr. Kildee.
    Mr. Kildee. Thank you, Mr. Chairman. I really think we have 
a great panel here. At one time they had difficulty electing a 
Pope so they put all the Cardinals in a room and gave them no 
food and they quickly decided who the Pope would be and I think 
that we could put you all in one room--I'd feed you, though--
and have you agree--if you could agree on a bill--I do think we 
have a good cross section of people with a great deal of 
knowledge, a great deal of experience and I think have been 
very helpful to this Committee.
    So I don't think we will lock you in that room but I do 
think we have the people who could probably reach an agreement 
on something that would be beneficial to both the lender and 
the borrower. You know, you can't have borrowers unless you 
have lenders. That's a very important factor and we arrived at 
that agreement fairly early at one of our breakfast meetings, I 
think, several years ago. We didn't know where to put the 
figure but we need both and I think--I really do appreciate the 
cross section we have here today.
    Let me ask you one question, Mr. Morrow. Your testimony 
mentions that about 50 percent of graduating college students 
aren't even aware of their ability to consolidate. What can we 
do to address that?
    Mr. Morrow. Well, I think there are a number of things we 
can do. We can strengthen the exit interview process which is a 
required step that students have to go through once they leave 
college. It's done now. I'm not sure that it's done to the best 
that it could be done.
    For example, we actually send people, as does Sallie Mae 
and others, out to universities to walk graduating students 
through what options they have about repayment. I firmly 
believe, and again I've had three children put through college 
who have gone on to--I've paid the first four, they paid 
anything beyond that, and they took their loans.
    And of course, having been in the business for 20 years, 
I'm always interested in what they're getting in the mail. Not 
one, not one lender ever talks about consolidation as a 
repayment option. They talk about flat repayment, they talk 
about graduated repayment, but when they get to repayment 
disclosure after that 6 months of grace, very seldom is it laid 
out as an option, if ever. I've never seen it.
    Now, they might have changed--although I still have a 
daughter paying loans; I haven't seen it on her stuff. But that 
to me is--particularly if--back to the point about keeping 
customers. I mean, if you're doing a good job with your 
customer base--and I said this to a group of people a couple 
years ago and they weren't very happy with me, but the fact of 
the matter is it's a hundred times harder to get a new customer 
than to retain a customer.
    If you're being fair to that customer and you've had them 
day one as a freshman, you're probably going to have them 
through 20 years or 10 years or whatever it is of their life. 
There's a lot of things about disclosure. In the written 
testimony I talk about we should beef up disclosure rules. 
There's a lot more information we could give to graduates about 
their full array of options on repayment.
    Mr. Kildee. Dallas, you mentioned the support of your 
organization for making Pell grants an entitlement. Why make it 
an entitlement? How would that--can you go into why that would 
give greater help to the students? I think I know the answer 
but I'd like to have you give it, for the record.
    Mr. Martin. Well, Mr. Kildee, I guess we have felt for a 
long time that--for very needy students that loans can be 
helpful but grants make the difference with most of those 
students in terms of whether or not they're going to choose to 
go on with education. There's a lot of research that shows that 
for very low income families, many of them are very skeptical 
about taking out debt and so loans is really the access point 
for those families.
    Our feeling is that the Pell grant program has been 
tremendously successful and what we would like to see is not 
only it be restored to its original purchasing power, which 
would be close to a doubling of what the maximum grant is now, 
but we would like to see it locked in as an entitlement so that 
it's predictable.
    So when I could say to a young family or a student that's 
in middle school now that if you stay in school and you work 
hard and do this and press yourself by taking these kinds of 
challenging courses and so on, regardless of the fact that you 
have the financial means, when you graduate there will be an 
assurance that this grant will be there to cover this amount of 
your education and it would be indexed accordingly to give that 
predictability.
    And I think that would be a great American promise to those 
kinds of young people that need that, that without that kind of 
assistance could not obtain a postsecondary education.
    Mr. Kildee. You know, the original GI Bill, that was a 
grant and we know that was successful. You've heard me say 
this, Dallas you've probably heard me say it hundreds of times, 
that on the east side of Flint no one went to college. That's 
where I was raised. No one went to college until the GI Bill of 
rights came around and it was a grant. It wasn't a loan, it was 
a grant and it enabled--it changed the future for those people.
    Thank you very much.
    Mr. Martin. You're welcome.
    Chairman McKeon. Thank you. Mr. Tierney.
    Mr. Tierney. Thank you. I want to just ask Ms. McCormack to 
help me clear up one thing that I'm not certain on.
    When Sallie Mae originates a loan, there's a cost obviously 
to that. Can you ballpark what that is on a particular loan?
    Ms. McCormack. There are multiple costs associated with 
those originating numbers. There's the actual cost--
    Mr. Tierney. No, the total cost. What does it cost you to 
originate say a $10,000 loan?
    Ms. McCormack. I would have to get that information 
specifically to you but it's a combination of our investment 
and technology and infrastructure as well as the people 
processing of origination of the loan, the web technology as 
well as the funding costs associated with that.
    Mr. Tierney. But you've got all that stuff in place 
already, right?
    Ms. McCormack. We do make significant investments.
    Mr. Tierney. So we're talking about an additional loan 
comes in, the cost is a much lesser amount than trying to 
divide all of that--
    Ms. McCormack. On a prorated basis, that's correct.
    Mr. Tierney. Now, during the period of time from when a 
student takes out a loan through the course of their college 
career, whatever, they do not make any payments on that, 
correct?
    Ms. McCormack. That's correct.
    Mr. Tierney. Sallie Mae still makes a profit during that 
period of time; you still make some money, don't you?
    Ms. McCormack. We make interest spread on the loans during 
that period of time. That's correct.
    Mr. Tierney. And if that's a 4-year loan, how much will 
that interest spread that you make exceed the amount that you 
invested in terms of originating that loan?
    Ms. McCormack. It depends on the size of the loan, the 
interest rate on the loan.
    Mr. Tierney. Is it a healthy amount?
    Ms. McCormack. The bulk of the earnings for us are actually 
on the repayment side of the business--
    Mr. Tierney. I understand that but, please, work with me 
here, will you? I mean, we can play tactic all day long but you 
know where I'm going and I'd like your help getting there just 
so we can have an honest discussion about this.
    So what is the spread roughly on a loan of $10,000 between 
what you really spend on origination, not all your capital 
costs spread out forever, and what you get during that period 
of time on the spread?
    Ms. McCormack. I don't have that particular number at the 
top of my head but I will tell you that we--when we make 
investments in the student loan program we assume the 
investment for the asset for the life of the loan and we assume 
a certain amount of prepayment risk on it.
    Mr. Tierney. We're going to play tactic no matter what we 
do here, aren't you? I really would like you to work with me on 
this, try to get to a point instead of, you know, being 
argumentative but if we could go--
    Ms. McCormack. What is it you would like me to say?
    Mr. Tierney. I'd like you to just give me an answer without 
giving me a lot of explanation and a tall tale. But the bottom 
line is there is money being made by somebody like Sallie Mae 
during that period of time. Am I correct?
    Ms. McCormack. Yes. Absolutely.
    Mr. Tierney. So earlier when you told me that, gee, 
everybody is going to get out of the market and nobody will 
make these loans anymore, it makes it a little--a stretch for 
me to believe that somebody won't find it profitable to get 
into that market should you decide that all Sallie Mae wants to 
do is reconsolidate or consolidate.
    Ms. McCormack. Mr. Tierney, I would venture to say that 
someone would try to enter that piece of the business. However, 
Sallie Mae would be incented to work in the back end of the 
business in reconsolidation--
    Mr. Tierney. You said that, but you also implied that 
nobody else would get in there and I don't think that's 
correct. I think that somebody else would go in there because 
there is some degree of money to be made on that and I wanted 
to clarify that because I think that's the case.
    I mean, you may decide that you want to get out and go 
somewhere else but there is money being made and we can 
anticipate that somebody--
    Ms. McCormack. What will happen is the investment in 
helping students understand how to pay for college, educating 
them on the forms of financing available for college, the kinds 
of things that really cost a lot of money for a company like 
Sallie Mae will not be made as investments if the major benefit 
is on the back end of the program in terms of reconsolidation.
    There definitely will be less money spent to help borrowers 
get into school and to stay in school.
    Mr. Tierney. We can assume others might step forward and do 
that, too, right?
    Ms. McCormack. I don't know.
    Mr. Tierney. Mr. Morrow, does that create a problem for 
you, Sallie Mae going into the reconsolidation market and 
students being left without any advice?
    Mr. Morrow. Would that be a problem for me?
    Mr. Tierney. Well, for students. What do you say to that?
    Mr. Morrow. I tend to agree that if competition is allowed, 
that people will find a way to make it happen. People said a 
few years ago that we were going to destabilize the business by 
direct to consumer market of the consolidation options. I don't 
think we've seen any destabilization of the market.
    There are many people in the business today who do just the 
in-school lending as you're saying and sell as it moves into 
repayment at the back end. That's a fairly common practice in 
this business, has been for the 20 years that I've been in this 
business, so I think people are making something. If they don't 
want to stay in the repayment business, they're selling out on 
the secondary market and still making fairly healthy margins. I 
don't see--
    Mr. Tierney. Mr. Wozniak, is that because--you can confirm 
that, Mr. Wozniak?
    Mr. Wozniak. I think what Mr. Morrow is talking about is 
the lenders in the marketplace originating loans and selling to 
the secondary market. In part that's what just about any of the 
top holders do--do acquire loans in the secondary market.
    Mr. Tierney. Thank you. Dr. Martin, do you want to add 
anything?
    Mr. Martin. You know, Mr. Tierney, I think the question 
is--and I think you're right. There's no--I don't know what the 
spread is and I suspect if you look at different lenders you're 
going to find that, depending on their volume and their level 
of sophistication, that their margins are going to be different 
but yes, they are making some profit.
    The question is, however, if we change this around too 
much, it's not that some may not step in. The question is will 
we have enough capacity to take care of all the students that 
we need. I mean, we have spent a lot of years trying to very 
carefully work through the student loan industry to build it up 
so that we have a system now that--you know, I think it's a 
great system from the standpoint that there's no problem with 
people being able to go out and get loans.
    And I remember the days when we were struggling and had 
shortfalls of when not everybody could or certain students in 
certain sectors could not get loans. So I think there is a fine 
balance and I would hate to see us turn it all over on the back 
end, even though I think there's some benefits.
    I think there are some other things that we ought to look 
at along with consolidation. I do think that graduates have 
trouble many times when they're first coming out of school 
about being able to meet their loan payments. And it's not that 
they can't maybe the third or fourth year out. It's that first 
two or 3 years that they're getting settled that they have the 
most difficulty.
    I think there are some other things that we can look at 
through repayment terms and so on as a part of the programs 
that might help soften that a little bit so it would make it 
easier on graduates that had those high debts.
    I also think--and we've recommended this to you and Mr. 
Miller, I think, has proposed this same thing. One of the 
things that we looked at, we talked about the interest 
deduction. The problem is interest deduction doesn't work real 
well for a lot of borrowers when they first come out of school 
because they're not making enough to itemize their income tax 
to be able to deduct the interest.
    What we would propose is turning that into a credit so that 
the interest that they pay would become a refundable credit 
that actually could go to help pay part of their loan. Now, 
that's--in my opinion, something like that might be more 
feasible in terms of spending the money than some of this money 
that we'd be spending with the other part of it on the 
subsidies that we're paying in consolidation.
    But I would like to have more discussion and look at all of 
the alternatives and I hope that that's what is going to occur 
during this reauthorization so that we come out with the best 
public policy that there is.
    The other thing I was going to remind Mr. Morrow of was--I 
thought it was interesting because I agreed with him about the 
young lady that he was talking about that wanted to come back 
and work for him but had all this student loan debt. Well, if 
she was going to work with them over at the Department of 
Education, they have the ability there to give loan 
cancellations to people that come to the government agencies. 
If she had wanted to come to work for me, I wouldn't have had 
that provision because I don't have such an authority under my 
agency that's a non-profit. But maybe that was the variable--
    Mr. Morrow. No. She wanted to stay in Boston.
    Mr. Tierney. She also had--
    Chairman McKeon. Time has expired.
    Mr. Tierney [continuing]. Had to pay on the value of that 
on taxes so we have to deal with that problem, too. Thank you 
all.
    Chairman McKeon. Mr. Burns.
    Mr. Burns. Thank you, Mr. Chairman. I have no further 
questions and appreciate the input from the panel.
    Chairman McKeon. That will then terminate our panel this 
morning. We thank you for being here for your testimony and ask 
you to stay involved as we go through this process because 
we'll have a lot of discussion as we go forward and we will get 
that question to you in writing and I'd appreciate if you could 
respond.
    Thank you very much. This Committee stands adjourned.
    [Whereupon, at 1:24 p.m., the Subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

  Statement of Hon. Joe Wilson, a Representative in Congress from the 
                        State of South Carolina

    Mr. Chairman, I want to thank Mr. Regula and Ms. DeLauro for taking 
the time to testify on these important issues. Earlier this year we 
successfully passed two pieces of legislation that will help teachers 
to pay for their education. Loan forgiveness is a key step to 
attracting highly qualified teachers. For those who will continue to 
need student loans, we need to make sure those loans are as affordable 
as possible. Student loans have never in the history of the program 
been more affordable than they are today. Low fixed rate consolidation 
loans are a key component to that effect. For most student loan 
borrowers, they need to make their monthly rent and other payments. 
Consolidation loans make their student loan burden affordable. As I 
said two weeks ago, one of the major hindrances to affordability is the 
Single Holder Rule. It simply gets in the way of recent college 
graduates from accessing the full array of competitive student loan 
programs. For that reason, I am asking this Subcommittee to repeal the 
Single Holder Rule. Additionally, I am concerned about borrowers who 
locked in interest rates two or three years ago and cannot 
reconsolidate that debt. This Subcommittee should attempt to remedy the 
problem of reconsolidation as quickly as possible. We must help 
consumers where we can. Mr. Chairman, thank you for your leadership.
                                 ______
                                 

    Response of June McCormack to Questions Submitted for the Record

                   Questions from Hon. Pete Hoekstra
    I have heard from Sallie Mae and others that consolidation will 
have significant taxpayer cost in the out years. As a former member of 
the House Budget committee and a fiscal conservative, this is something 
that concerns me.
    I was impressed by the Ernst & Young work that indicates that 
Consolidation Loans will be a net Federal payor while it is clear that 
Stafford loans, and in particular Stafford Loans with extended 
repayment, will require huge taxpayer subsidies.
    With that said, isn't it true that the Higher Education Act 
proposal signed on to by Sallie Mae calls for expanding extended 
repayment?
    And, as we know, increasing the availability of Extended Repayment 
lessens the need for Consolidation Loans and reduces the taxes paid in 
by lenders.
    Why should this Committee increase extended repayment and spend 
more than $1 billion in lost revenue?
    Response: While we have not reviewed the Ernst & Young work, we 
have reviewed the claim that on a cash basis the consolidation program 
has returned $1.4 billion to the Treasury over the past seven years. 
However, $1.4 billion only represents the fees generated by the 
consolidation program. It does not count the costs to the government of 
interest subsidies, default claims, and collection costs. The net cost 
of the consolidation program has been $1.5 billion over the past seven 
years. Further, while consolidation loans have been 26% of the loan 
volume over the past seven years, consolidation fees have only 
represented 21% of the total fees collected.
    Quoting the cash cost of the consolidation program is extremely 
misleading because it does not reflect the cost the government will 
incur from today's low-rate consolidation loans. The cost of these 
loans will show up as the federal government subsidizes payments over 
the next 20 to 30 years. For just the consolidation loans made at last 
year's interest rates, the cost will be between $3 and $5 billion, 
depending on how many loans actually consolidate.
    While we have not reviewed the Ernst & Young work, we would note 
that whether or not extended repayment saves or costs really depends on 
the interest rate environment. In the current interest rate 
environment, the federal cost would be greatly reduced if borrowers had 
greater choices to extend repayment with the Stafford loans rather than 
consolidating and shifting their interest costs to the federal 
taxpayer. Further, Sallie Mae does support expanding extended repayment 
terms to borrowers for good policy reasons. The standard ten-year 
repayment period has been in place since student loan program was 
created in 1965. As loan balances have increased, we are finding the 
ten-year term to be insufficient for some borrowers and believe that 
more repayment flexibility is needed. During the last reauthorization, 
extended repayment was made available only for new borrowers with loan 
balances above $30,000. We support expanding this to align it with the 
tiered repayment-terms contained in the Higher Education Act (HEA) 
current law for consolidation loans.
    We believe that borrowers should be encouraged to repay their loans 
as quickly as possible. Unfortunately, today the only option many 
borrowers have for extending their repayment term is through the loan 
consolidation program, which often extended borrower repayment longer 
than is necessary, increasing total cost of the loan to a borrower. 
Introducing more repayment flexibility into the loan program will help 
keep extra borrower interest rate expense to a minimum and would add 
much needed flexibility to the program.

    Additionally, why did Sallie Mae leave the consolidation program 
during the second half of 1997 and the first half of 1998?
    Response: For a brief period--November 1997 through September 
1998--Sallie Mae suspended its participation in the loan consolidation 
program. This suspension was due to a temporary legislative change made 
in consolidation program, which changed the interest rate formula but 
failed to adjust the fee structure, making the program uneconomical 
from our perspective. Congress recognized the flaw in the consolidation 
structure at the time and moved to resolve the matter as part of the 
1998 HEA reauthorization. Once this legislation was enacted, we 
immediately reentered the loan consolidation market place.
    During this period, we insured that our borrowers continued to 
receive repayment relief. Borrowers who needed consolidation loans were 
referred to other FFELP lenders or the Direct Loan program. We also 
developed a new repayment product to assist borrowers who needed 
payment relief, called a FLEX Repay account. Under the terms of this 
program, we were able to extend the borrower's repayment term from 
three to five years, enabling borrowers to lower their payments. 
Importantly, this also insured that borrowers avoided locking in the 
high rates, which were in effect at that time, and permitted them to 
take advantage of our borrower benefits.

                     Questions from Hon. Joe Wilson

    I want to congratulate Ms. McCormack and Sallie Mae. Yesterday, 
Sallie Mae reported that for the six months ending June 30, the 
company's earnings were $789 million. I also saw that consumer reporter 
Michael Singletary recently ran an article on reconsolidation. I know 
that the Special Counsel to the Consumer Bankers'' Association was 
quoted as saying lenders ``have high yielding assets that they do not 
want to lose.'' I have a question for Mr. Morrow and Ms. McCormack. 
Shouldn't Congress support wide ranging competition including repeal of 
the single holder rule and allowing borrowers access to these low 
rates?
    Response: We support vigorous competition in the student loan 
program to make sure that students and their families have access to 
the best services and products possible. Repeal of the single holder 
rule has nothing to do with providing students either of these. Because 
consolidation rates are determined by statute, all lenders offer the 
same rate. Repeal of the single holder rule has nothing to do with the 
eligibility to consolidate one's student loans. Anyone who wants to 
consolidate his or her student loans today can do so.
    Consolidation marketers who are promoting the repeal of the single 
holder rule do very little to invest or compete in the program where it 
is needed most--when students entering college need access to financial 
aid. The financial aid community and Congress depend on us and other 
student loan lenders to provide capital, to pay up front fees, and 
invest in a technology network that processes loans and data in 
seconds. Most of this investment takes place four years before the 
average student makes the first payment. Loan providers make this 
investment because there is some level of certainty that we will have 
the return on the asset of earning interest after the student 
graduates. Without such assurance, lenders would be rewarded to be in 
the consolidation business, not the student loan business.
    The single holder rule assures that lenders provide those critical 
services to students and schools. Further, the rule was designed to 
protect borrowers from predatory telemarketing efforts. That has turned 
out to be a prophetic fear. We, along with our school clients, hear 
from borrowers who have been told misleading, confusing or inaccurate 
information from certain consolidation marketers. Repeal of the single 
holder rule will do nothing for the student loan program, or existing 
students other than unleash an avalanche of spam, junk mail and 
telemarketers, some pushing misleading information. Attached for the 
record is a recent posting from FINAID.

    I know that some of the stakeholders in the student aid programs 
have encouraged Congress to go back to ``first principles'' in the 
Consolidation Loan Program. The early version of the consolidation 
program was less competitive and less attractive to borrowers. It was 
created more than 20 years ago at a time of low student loan debt. 
However, borrowers have much higher debt and a large desire for 
consolidation loans, so much so that they are seeking to consolidate 
and in some cases refinance. If we went back to first principles in the 
student loan program it would be a paper driven program with as much as 
a month before loans were to fund. This is really a question for all of 
the witnesses. Rather than go back to a forgone era, shouldn't we try 
and make all the programs better and more borrower friendly?
    Response: We do not believe that bringing the loan consolidation 
program back to its intended purpose would in any way turn back the 
advancements made in the student loan program. Today's student loan 
program serves more students, more efficiently at the lowest cost to 
the taxpayer in the history of the federal student loan program. Sallie 
Mae, like most of today's loan providers, has invested in Internet-
based services that provide fast, reliable services for borrowers. 
Thanks to these investments, students can now receive their loans on 
the same day they apply--all at the click of a mouse. Only a few years 
ago, this same process took weeks. Loan providers are also adding web-
based tools and services every year that allow students to quickly and 
easily estimate their college costs, compare repayment options, check 
their loan status, learn about managing debt and obtain information on 
debt counseling.
                                 ______
                                 

     Response of Barry Morrow to Questions Submitted for the Record

                     Questions from Hon. Joe Wilson

    I know that some of the stakeholders in the student aid programs 
have encouraged Congress to go back to ``first principles'' in the 
Consolidation Loan Program. The early version of the consolidation 
program was less competitive and less attractive to borrowers. It was 
created more than 20 years ago at a time of low student loan debt. 
However, borrowers have much higher debt and a large desire for 
consolidation loans, so much so that they are seeking to consolidate 
and in some cases refinance. If we went back to first principles in the 
student loan program it would be a paper driven program with as much as 
a month before loans were to fund. This is really a question for all 
the witnesses. Rather than go back to a forgone era, shouldn't we try 
and make all the programs better and more borrower friendly?
    I couldn't agree with you more, Congressman Wilson. As I noted in 
my prepared testimony, the situation college students and graduates 
face today is strikingly different from that in 1986, when the current 
consolidation program was authorized. Back then, when computers were in 
their infancy, the average debt level was a small fraction of today's 
$19,000 for a graduate with a bachelor's degree. Back then, federal 
grants paid a greater portion of college costs than loans for needy 
students. Today, loans are a necessity for Pell recipients along with 
all others.
    Some have testified that, once students graduate, our obligation to 
help them pay for college is over. The reality is that we have created 
a system for paying for higher education that shifts the day of 
reckoning to the years following graduation. We have convinced millions 
of students that a college degree is essential, and that it is worth 
going into debt over. To say to them after they graduate ``Too bad--
you're on your own'' would be to perpetrate a cruel hoax on America's 
youth. The word would soon get out that a college degree is NOT worth 
the financial distress that follows. Consolidation is the mechanism 
Congress fortuitously created that allows graduates to cope.
    Perhaps in 1986, the era of ``first principles,'' consolidation 
could be viewed as a convenience for a small category of graduates. In 
2003, it is, for many, an essential tool for making ends meet. The 
program should be as widely available and borrower-friendly as Congress 
can make it.

    I want to congratulate Ms. McCormack and Sallie Mae. Yesterday. 
Sallie Mae reported that for the six months ending June 30, the 
company's earnings were $789 million. I also saw that consumer reporter 
Michael Singletary recently ran an article on reconsolidation. I know 
that the Special Counsel to the Consumer Bankers' Association was 
quoted as saying lenders ``have high yielding assets that they do not 
want to lose.'' I have a question for Mr. Morrow and Ms. McCormack. 
Shouldn't Congress support wide ranging competition including repeal of 
the single holder rule and allow borrowers access to these low rates?
    I totally agree with you, Congressman Wilson. Congress should 
indeed support wide-ranging competition in loan consolidation--the same 
level of competition that exists for the Stafford and PLUS loan 
programs, where students and their parents are guaranteed, by law, the 
right to deal with the lender of their choice. We have been promoting 
repeal of the single holder rule as long as our company has been in 
existence. We believe that college graduates should be able to deal 
with the consolidation lenders of their choice. If one lender offers 
better borrower benefits (e.g., a lower interest rate) to a student 
loan borrower wanting to consolidate, then that consumer should be able 
to consolidate with that lender--no matter how few or how many lenders 
he has loans with. If another company is offering a better product, the 
customer should be free to consolidate with them.
    There are many factors that may influence graduates'' desire to 
deal with someone other than their current lenders. For instance, as 
you may know, the nation's largest holder of student loans recently 
admitted it has erroneously calculated the payment plans of over 
800,000 of its customers. Many of those borrowers are being required to 
pay drastically increased monthly payments as a result in order to pay 
their loans off in the time permitted by law. Consolidation is a way 
many of those consumers could find someone to better manage their 
student loans--but not for those having all of their loans at that 
company.
    With regard for reconsolidation, as I mentioned in my prepared 
testimony, we are prepared to substitute a lower-yielding asset for a 
higher-yielding asset if that is what is best for students. The student 
loan programs are there to allow students to get college educations in 
the most cost-effective manner possible, not to provide lifetime profit 
guarantees to the lenders that make and hold the loans.

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