[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
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
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______
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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.
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\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.