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



 
FISCAL RESPONSIBILITY AND FEDERAL CONSOLIDATION LOANS: EXAMINING COST 
          IMPLICATIONS FOR TAXPAYERS, STUDENTS, AND BORROWERS

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

                                HEARING

                               before the

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

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             March 17, 2004

                               __________

                           Serial No. 108-48

                               __________

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



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                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN A. BOEHNER, Ohio, Chairman

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

                    Paula Nowakowski, Staff Director
                 John Lawrence, Minority Staff Director



                                 ------                                
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on March 17, 2004...................................     1

Statement of Members:
    Boehner, Hon. John A., Chairman, Committee on Education and 
      the Workforce..............................................     2
        Prepared statement of....................................     4
    Hoekstra, Hon. Pete, a Representative in Congress from the 
      State of Michigan, Prepared statement of...................    64
    Kildee, Hon. Dale E., a Representative in Congress from the 
      State of Michigan..........................................     6
    Miller, Hon. George A., Ranking Member, Committee on 
      Education and the Workforce, Prepared statement of.........     5
    Norwood, Hon. Charlie, a Representative in Congress from the 
      State of Georgia, Prepared statement of....................    81
    Wilson, Hon. Joe, a Representative in Congress from the State 
      of South Carolina, Prepared statement of...................    78

Statement of Witnesses:
    Ashby, Cornelia M., Director, Education, Workforce and Income 
      Security, U.S. General Accounting Office...................     8
        Prepared statement of....................................    10
    Hamlett, Titus, Student, University of Maryland..............    18
        Prepared statement of....................................    19
    Neubig, Dr. Tom S., National Director, Quantitative Economics 
      and Statistics, Ernst and Young LLP........................    20
        Prepared statement of....................................    22
    Shapiro, Dr. Robert, Chairman, Sonecon, LLP and Senior 
      Fellow, Brookings Institution and Progressive Policy 
      Institute..................................................    48
        Prepared statement of....................................    51


 FISCAL RESPONSIBILITY AND FEDERAL CONSOLIDATION LOANS: EXAMINING COST 
          IMPLICATIONS FOR TAXPAYERS, STUDENTS, AND BORROWERS

                              ----------                              


                       Wednesday, March 17, 2004

                     U.S. House of Representatives

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The Committee met, pursuant to notice, at 10:35 a.m., in 
room 2175, Rayburn House Office Building, Hon. John Boehner 
(Chairman of the Committee) presiding.
    Present: Representatives Boehner, Miller, Petri, Hoekstra, 
McKeon, Castle, Johnson, Greenwood, Biggert, Tiberi, Keller, 
Wilson, Porter, Kline, Carter, Burns, Kildee, Andrews, Woolsey, 
Tierney, Wu, Holt, Davis, Grijalva, Van Hollen, and Bishop.
    Staff present: Kevin Frank, Professional Staff Member; 
Sally Lovejoy, Director of Education and Human Resources 
Policy; Catharine Meyer, Legislative Assistant; Krisann Pearce, 
Deputy Director of Education and Human Resources Policy; Alanna 
Porter, Legislative Assistant; Alison Ream, Professional Staff 
Member; Deborah Samantar, Committee Clerk/Intern Coordinator; 
Kathleen Smith, Professional Staff Member; Jo-Marie St. Martin, 
General Counsel; Ellynne Bannon, Minority Legislative 
Associate; Tom Kiley, Minority Press Secretary; John Lawrence, 
Minority Staff Director; Ricardo Martinez, Minority Legislative 
Associate; Alex Nock, Minority Legislative Associate; Joe 
Novotny, Minority Legislative Staff; Lynda Theil, Minority 
Legislative Associate; and Mark Zuckerman, Minority General 
Counsel.
    Chairman Boehner. The Committee on Education and the 
Workforce will come to order. A quorum being present, the 
Committee meets today to hear testimony on ``Fiscal 
Responsibility and Federal Consolidation Loans: Examining Cost 
Implications for Taxpayers, Students, and Borrowers.''
    Under the Committee rules, opening statements are limited 
to the Chairman and Ranking Member. If other Members have 
statements, we will keep the record open for 14 days to include 
those statements and other extraneous material referred to 
during today's hearing.
    With that, I ask unanimous consent for the record to remain 
open.
    Without objection, so ordered.

   STATEMENT OF HON. JOHN A. BOEHNER, CHAIRMAN, COMMITTEE ON 
                  EDUCATION AND THE WORKFORCE

    Good morning to our witnesses and to all of our guests that 
are here today. Today's hearing is the latest in our ongoing 
series of hearings on the reauthorization of the Higher 
Education Act.
    We are here today to examine the Federal Consolidation Loan 
Program, and how student lending issues fit within our broader 
goal of expanding access to higher education for low and middle 
income students.
    In particular, we have witnesses before us who will help us 
understand the cost of consolidation loans--the cost to 
taxpayers, the cost to graduates repaying their loans, and most 
importantly, the cost to low and middle income students in 
college today, or striving to attend college tomorrow.
    For the past 2 years, our Committee has been holding these 
hearings, meeting with members of the higher education 
community, and moving ahead with legislation to meet one 
central goal: expanding access to higher education for low-to-
middle-income students who strive to attend a university or 
college of their choice.
    Our proposals for reauthorization of the Higher Education 
Act will reflect that goal, and today's hearing will help shed 
light on the role of student loans, and particularly 
consolidation loans, in our efforts to ensure that low and 
middle income students have access to a higher education.
    The Federal Consolidation Loan Program is different than 
other student aid programs, because it doesn't provide 
subsidies to people who are currently students. Rather, it 
provides billions in subsidies to people who are former 
students, most of whom I would imagine are graduates who have 
realized their dream of a college education and who have 
entered the workforce.
    The program was created to help college graduates repay 
their student debt. Consolidation loans allow borrowers with 
multiple loans, held by multiple lenders, to combine their debt 
into a single, often lower, monthly payment.
    While the program has been largely successful in helping 
college graduates repay their debt, changes in how the program 
has been used in recent years raise a number of questions about 
how the program should operate into the future.
    A recent report by the General Accounting Office warned 
that, as the program becomes more expensive, Congress needs to 
consider alternatives. I believe the implication of this report 
is that if we leave the Consolidation Loan Program on 
autopilot, the cost could balloon, taking billions of dollars 
away from the very low and middle income students that we are 
seeking to help.
    Chief among the topics we will examine today is the issue 
of interest rates.
    Unlike other Federal student loan programs, the 
Consolidation Loan Program locks borrowers into a fixed 
interest rate for the life of the loan. Because interest rates 
today are the lowest in the history of the Federal student loan 
programs--and I might add, the lowest interest rates we have 
seen in this country for 50 years--many graduates are choosing 
to consolidate their loans simply to lock in these low interest 
rates. Can't say that I blame them.
    However, the fundamental premise of the program was 
consolidation, not refinancing. This means consolidation loans 
were never intended to be a tool to secure low interest rates--
low interest rates where the Federal Government, I might add, 
over the next 30 years, will take all of the risk and absorb 
all of the additional cost.
    When the consolidation program began, interest rates were 
considerably higher than they are today.
    For example, consolidation loans made before July 1, 1994 
had a fixed interest rate that was determined by the weighted 
average of the loans being consolidated, rounded to the nearest 
whole percent, or 9 percent, whichever was greater. That means 
consolidation loans had an interest rate of at least 9 percent. 
Compare that to today's 3.42 percent interest rate.
    Clearly, when the program began it was never intended to be 
a tool to secure low interest rates, yet today's historically 
low rates have resulted in unprecedented growth in the number 
of consolidation loans, and as a direct result, unprecedented 
growth in the Federal subsidy that is not targeted to helping 
today's students, as opposed to graduates.
    Now, while we are all aware of the budget realities facing 
the Congress, with the limited resources, we must establish 
priorities, and I believe students should be our first 
priority. For that reason, I question whether dramatically 
expanding subsidies to non-students and/or graduates is 
justified.
    The Consolidation Loan Program fulfills an important 
purpose as it exists today, and there are reasonable steps 
Congress can and should consider to strengthen the program, but 
any effort to expand it will likely mean reduced resources for 
the low and middle income students whom we all hope to assist.
    If we are targeting our limited resources toward a 
particular group, I think that group should be students and 
those who are attempting to enter a college or university of 
their choice.
    I am eager to hear from our witnesses and their different 
perspectives on the cost of consolidation loans.
    In particular, this hearing will help us better understand 
how Federal subsidies are being used in the program, and how 
the fixed interest rate structure is different from the 
variable rate structure used for other Federal student loans, 
and the overall impact these issues have on our ability to 
assist current and future students.
    I would also encourage the witnesses to help shed light on 
proposals to change the Consolidation Loan Program. I think 
everyone would agree the program has been successful in its 
mission to help college graduates repay their loans.
    I oppose weakening the Consolidation Loan Program, but I 
also oppose isolating it from positive changes at the expense 
of low and middle income students.
    We should ask whether it would be best to maintain the 
program as it exists today, or make changes to the program in 
order to address questions about how the program itself has 
changed in recent years.
    We should ask whether it would be prudent to expand 
subsidies to non-students, as some have proposed, bearing in 
mind that a massive increase in this program could take 
resources away from the very low and middle income students 
that the Higher Education Act was created to serve.
    I look forward to a detailed discussion on this issue, and 
I am hopeful that this hearing will help us find the right 
balance as we look to reform the Federal student aid programs 
and strengthen the Higher Education Act on behalf of current 
and future students.
    I now yield to the gentleman from Michigan, our good 
friend, Mr. Kildee.
    [The prepared statement of Chairman Boehner follows:]

Statement of Hon. John A. Boehner, Chairman, Committee on Education and 
                        the Workforce Committee

    Good morning. Today's hearing is the latest in our ongoing series 
of hearings on reauthorization of the Higher Education Act. We're here 
today to examine the federal Consolidation Loan Program, and how 
student lending issues fit within our broader goal of expanding access 
to low and middle income students striving for college. In particular, 
we have witnesses before us who will help us understand the cost of 
consolidation loans-the cost to taxpayers, the cost to graduates 
repaying their loans, and most importantly, the cost to low and middle 
income students in college today or striving to attend college 
tomorrow.
    For the past two years, our committee has been holding hearings, 
meeting with members of the higher education community, and moving 
ahead with legislation to meet one central goal: expanding access to 
higher education for low and middle income students who strive for it. 
Our proposals for reauthorization of the Higher Education Act will 
reflect that goal, and today's hearing will help shed light on the role 
of student loans-and particularly consolidation loans-in our efforts to 
ensure low and middle income students have access to a higher 
education.
    The federal Consolidation Loan Program is different than other 
student aid programs, because it doesn't provide subsidies to people 
who are currently students. Rather, it provides billions in subsidies 
to people who are former students--graduates who have realized their 
dream of a college education and have entered the workforce.
    The program was created to help college graduates repay their 
student debt. Consolidation loans allow borrowers with multiple loans-
held by multiple lenders-to combine their debt into a single, often 
lower monthly payment. While the program has been largely successful in 
helping college graduates repay their debt, changes in how the program 
has been used in recent years raise a number of questions about how the 
program should operate into the future. A recent report by the General 
Accounting Office warned that as the program becomes more expensive, 
Congress needs to consider alternatives. I believe the implication of 
this report is that if we leave the Consolidation Loan Program on 
autopilot, the cost could balloon, taking billions of dollars away from 
the very low and middle income students we are seeking to help.
    Chief among the topics we will examine today is the issue of 
interest rates. Unlike other federal student loan programs, the 
Consolidation Loan Program locks borrowers into a fixed interest rate 
for the life of the loan. Because interest rates today are the lowest 
in the history of the federal student loan programs, many graduates are 
choosing to consolidate their loans simply to lock in these low 
interest rates. However, the fundamental premise of the program was 
consolidation, not refinancing. This means consolidation loans were 
never intended to be a tool to secure low interest rates.
    When the Consolidation Loan Program began, interest rates were 
considerably higher than they are today. For example, consolidation 
loans made before July 1, 1994 had a fixed interest rate that was 
determined by the weighted average of the loans being consolidated, 
rounded to the nearest whole percent, or 9 percent, which ever was 
greater. That means consolidation loans had an interest rate of at 
least 9 percent. Compare that to today's 3.42 percent interest rate. 
Clearly when the program began it was not intended to be a tool to 
secure low interest rates. Yet today's historically low interest rates 
have resulted in unprecedented growth in the number of consolidation 
loans, and as a direct result, unprecedented growth in the federal 
subsidy that is not targeted to helping today's students.
    We are all aware of the budget realities facing this Congress. With 
limited resources, we must establish priorities and I believe students 
should be priority number one. Not just one priority of many, but our 
first priority. For that reason, I question whether dramatically 
expanding subsidies to non-students is justified. The Consolidation 
Loan Program fulfills an important purpose as it exists today, and 
there are reasonable steps Congress can and should consider to 
strengthen the program. But any effort to expand it will likely mean 
reduced resources for the low and middle income students we all hope to 
assist. If we are targeting our limited resources toward a particular 
group, I think that group should be students first and foremost.
    I am eager to hear from our witnesses and their different 
perspectives on the cost of consolidation loans. In particular, this 
hearing will help us better understand how federal subsidies are being 
used in the Consolidation Loan Program, how the fixed interest rate 
structure is different than the variable rate structure used for other 
federal student loans, and the overall impact these issues have on our 
ability to assist current and future students.
    I would also encourage the witnesses to help shed light on 
proposals to change the Consolidation Loan Program. I think everyone 
would agree this program has been successful in its mission to help 
college graduates repay their loans. I oppose weakening the 
Consolidation Loan Program, but I also oppose isolating it from 
positive change at the expense of low and middle income students. We 
should ask whether it would be best to maintain the program as it 
exists today, or make changes to the program in order to address 
questions about how the program itself has changed in recent years. We 
should ask whether it would be prudent to expand subsidies to non-
students as some have proposed, bearing in mind that a massive 
expansion of this program could take resources away from the low and 
middle income students the Higher Education Act was created to serve.
    I look forward to a detailed discussion on this issue, and I am 
hopeful that this hearing will help us find the right balance as we 
look to reform the federal student aid programs and strengthen the 
Higher Education Act on behalf of current and future students. With 
that, I would yield to Mr. Miller for any opening statement he may 
have.
                                 ______
                                 
    Mr. Kildee. Thank you, Mr. Chairman, and happy St. 
Patrick's Day to you.
    Chairman Boehner. Thank you.
    Mr. Kildee. I love your tie.
    Chairman Boehner. Everyone, a happy St. Patrick's Day.
    Mr. Kildee. Mr. Chairman, our colleague, Mr. Miller, has 
been temporarily delayed, so I would ask that his opening 
statement be submitted for the record.
    Chairman Boehner. Without objection.
    [The prepared statement of Mr. Miller follows:]

Statement of Hon. George Miller, Ranking Member, Committee on Education 
                             and Workforce

    Thank you Mr. Chairman. I am pleased to join you at today's hearing 
on student loan consolidation.
    I particularly want to welcome Titus Hamlett to the committee 
today. I look forward to your testimony and the testimony of the other 
witnesses, too.
    Higher education has a long tradition of providing opportunities 
towards a better life for millions of Americans. Today, the Higher 
Education Act is more important than ever to succeeding in the global 
marketplace, lifting millions of Americans out of poverty, and keeping 
Americans safe in the post-9/11 society.
    Despite the need to expand access to an affordable education, 
college is fast becoming a pipe dream for too many students. States are 
cutting support for higher education and pushing higher tuition prices 
onto students and their families.
    In addition to budget cuts and rising prices, millions of students 
are taking on high debt levels that discourage college attendance and 
encourage default--which costs taxpayers billions of dollars.
    This year, almost 7 million students will borrow more than $50 
billion in federal student loans--accounting for almost 70 percent of 
all federal financial aid.
    Over the past ten years, student loan debt has nearly doubled to 
$17,000 and about one-fifth of full-time working students spend 35 or 
more hours per week on the job to cover college costs. At the same 
time, student aid is falling further and further behind the cost of a 
college education. In fact, last year the maximum Pell Grant was worth 
$500 less than the maximum grant in 1975-76.
    It is imperative that we return to the original premise of the 
Higher Education Act of 1965--that no college qualified student should 
be denied a college education because he or she is lacks the financial 
resources.
    A key tool to ensuring that millions of students can access a 
college education is the low-fixed rate benefit of consolidation loans, 
which allows students to lock in a low rate and save thousands of 
dollars. In addition, borrowers can eliminate the need for dealing with 
multiple lenders, extend their repayment period, or enroll in payment 
plans based on a percentage of their income when they consolidate their 
loans.
    As more and more students take on high debt levels it is important 
to focus on the financial need of students both as they enter college 
and when they leave. For student borrowers, the cost of college does 
not impact them until they graduate and begin repayment. This is the 
critical time when consolidation can, and does, make repayment 
manageable for student borrowers.
    The benefits of consolidation are particularly important today, as 
graduates face a weakened economy and rising unemployment rates. A 
recent study by the Economic Policy Institute (EPI) found that the 
long-term unemployment among college-educated workers increased by 
nearly 300 percent between 2000 and 2003--almost double the increase of 
non-college graduates in the same time period.
    In addition, the General Accounting Office (GAO) found that the 
average annual income for consolidation borrowers is $47,000 and that 
their debt to ratio income is 9.4 percent--just above the 8 percent 
industry suggested standard for borrowers in repayment to maintain 
financial stability.
    A recent analysis by the State PIRGs' Higher Education Project 
found that the average borrower with $20,000 in debt would be forced to 
pay more than $7,000 in additional interest if the low-fixed 
consolidation rate benefit is eliminated.
    At a time of rising college costs, high unemployment and little job 
growth, we should not be forcing students and their families to pay 
more for a college education.
    As we reauthorize the Higher Education Act, I look forward to 
working with my colleagues on the committee to strengthen loan 
consolidation program and to expand college access to low and middle-
income students.
    Thank you Mr. Chairman.
                                 ______
                                 

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

    Mr. Kildee. You mentioned that the students are attracted 
to consolidating their loans at a fixed rate. Well, they aren't 
the only ones in this market right now.
    I, for the, I think, third time in 3 years, just refinanced 
my home mortgage--at the solicitation of the lender, by the 
way. They were afraid I might go someplace else. So I did 
reduce it, at a fixed rate also. The economy right now does 
attract people toward consolidation or refinancing.
    Thank you, Mr. Chairman. I want to join you in welcoming 
today's witnesses before this Committee. This is indeed an 
important topic which deserves the attention of the Committee 
today, and I appreciate the fact that you are having this 
hearing.
    Everyone in this room would agree that a higher education 
is critical to future earning potential and the ability to 
provide for your family and your children.
    The reality facing most students, however, is high tuition, 
and grant aid from the Federal Government and state government 
that has lost much of its buying power. Also, student debt now 
is at an all-time high.
    Our economic policies have lost rather than created jobs, 
and worse, outsourced many of our jobs overseas. Students 
graduating from college and looking for employment simply can't 
catch a break right now.
    There are so many people out there who graduated from my 
University of Michigan still looking for a job, even with all 
the talents they have accrued there at the University of 
Michigan.
    On top of all this comes today's discussion about changing 
the interest rate structure on consolidation loans from a fixed 
rate to a variable rate.
    Let us be clear. Once we cut through all of the arguments, 
one fact is undeniable. This proposal will heap thousands of 
dollars in increased interest costs on the backs of students 
and recent college graduates.
    You will hear a lot today about helping current students, 
and that we should be investing in programs which provide 
benefits to students who are entering college, and I couldn't 
agree with that more. However, financing those up-front 
benefits on the backs of those who have consolidated their 
loans I do not think is the proper approach.
    Cutting benefits from one part of the program to finance 
another doesn't increase access. Rather, I believe it short-
changes those who are struggling to find employment in an 
economy which isn't even producing enough jobs to keep pace.
    If members want to reduce origination fees, and consider 
whether we should increase loan limits, we should not be 
robbing Peter to pay Paul. Instead, let us get the resources we 
need to enact these changes.
    The Senate budget resolution includes $5 billion in funding 
to address these types of higher education priorities. Our goal 
should be to expand our higher education programs, not move 
resources around an already paltry pie.
    In closing, I want to again stress what this proposal will 
mean for students.
    A variable rate structure for consolidation loans means 
that the average student will face thousands of dollars in 
increased interest rate cost. When the Bush administration 
proposed this very change just 2 years ago, Mr. Chairman, it 
was met with bipartisan opposition because of its impact on 
students. I hope today's discussion keeps these points in mind.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Boehner. Thank you, Mr. Kildee.
    It is my pleasure to introduce our witnesses today.
    Our first witness will be Ms. Cornelia Ashby. Ms. Ashby has 
served in numerous capacities since she joined the U.S. General 
Accounting Office in 1973. That is a few years ago, Ms. Ashby.
    Currently, Ms. Ashby serves as the Director of Education, 
Workforce, and Income Security, directing studies in numerous 
areas, including higher education. Prior to this position, Ms. 
Ashby was GAO's Associate Director for Tax Policy and 
Administrative Issues.
    In addition to her job as Director, Ms. Ashby is presently 
pursuing her Ph.D. in sociology at American University.
    Then we will hear from Mr. Titus Hamlett. Mr. Hamlett is 
currently a student at the University of Maryland, majoring in 
government and politics. In addition to his studies, Mr. 
Hamlett is also engaged in numerous extra-curricular 
activities. He is an active member of the Student Government 
Association and the Maryland Student Legislature, a non-profit 
organization that organizes delegates from colleges and 
universities across Maryland to research and debate issues of 
local and national importance.
    Then we will hear from Dr. Tom Neubig. Dr. Neubig is a 
partner and also the National Director of Quantitative 
Economics and Statistics in the national tax department of 
Ernst & Young, LLP. He was a consultant to numerous public and 
private clients from Federal and state tax policy issues before 
joining Ernst & Young.
    Dr. Neubig served as director and chief economist at the 
U.S. Treasury Department's office of tax analysis and is the 
top executive branch career economist in tax policy.
    Lastly, we will hear from Dr. Robert Shapiro. Dr. Shapiro 
is a founding partner and current Chairman of Sonecon, LLP, a 
private economic advisory firm. In addition, Dr. Shapiro is a 
non-resident senior fellow of the Brookings Institution and 
also the Progressive Policy Institute. From 1997, Dr. Shapiro 
served as the Under Secretary of Commerce for Economic Affairs, 
providing economic policy oversight for the Commerce 
Department.
    Dr. Shapiro was the principal economic advisor to President 
Bill Clinton in his 1991-1992 Presidential campaign, and also 
served as legislative director and economic counsel to 
Senator--former Senator and late Senator--Daniel Moynihan.
    Let me explain the lights. You will have 5 minutes to give 
your testimony. We are not real rough on people who want to 
talk a little longer than that, unless you get too carried 
away, and then I will gently remind you.
    And with that, Ms. Ashby, you may begin.

STATEMENT OF CORNELIA M. ASHBY, DIRECTOR, EDUCATION, WORKFORCE, 
  AND INCOME SECURITY ISSUES, U.S. GENERAL ACCOUNTING OFFICE, 
                        WASHINGTON, D.C.

    Ms. Ashby. Mr. Chairman and members of the Committee, thank 
you for inviting me here today to discuss issues related to 
consolidation loans and cost implications for taxpayers and 
borrowers. My testimony will focus on recent changes in 
interest rates and consolidation loan volume, and how these 
changes have affected Federal costs for FFELP and FDLP 
consolidation loans.
    My comments are based on our October 2003 loan 
consolidation report done for this Committee. For this 
testimony, we updated our numbers to reflect recent estimates 
made by the Department of Education.
    In recent years, there has been a drop in interest rates 
for student loan borrowers, along with dramatic overall growth 
in consolidation loan volume. From July of 2000 to June 2003, 
the interest rate for consolidation loans dropped by more than 
half, with consolidation loan borrowers obtaining rates as low 
as 3.5 percent as of July 1, 2003.
    From fiscal year 1998 through fiscal year 2003, the volume 
of newly originated consolidation loans rose from $5.8 billion 
to over $41 billion.
    The dramatic growth in consolidation loan volume in recent 
years is due in part to declining interest rates that have made 
it attractive for many borrowers to consolidate their variable 
rate loans at low fixed rates. The chart on the screen shows 
this relationship. Note that the interest rates set on July 1 
of each year corresponds to the loan volume for the following 
fiscal year.
    In addition, increased marketing effort has likely 
contributed to the record level of consolidation loan volume. 
Many lenders, including newer companies that are specializing 
in consolidation loans, have aggressively marketed 
consolidation loans to compete for consolidation loan business, 
as well as to retain the loans of their current customers.
    Recent transit interest rates in consolidation loan volume 
have affected the cost of the FFELP and FDLP Consolidation Loan 
Programs in different ways, but in the aggregate. Estimated 
subsidy and administration costs have increased.
    For FFELP consolidation loans, subsidy costs grew from 
about $650 million for loans made in fiscal year 2002 to over 
$2 billion for loans made in fiscal year 2003. Both higher loan 
volumes and lower interest rates in fiscal year 2003 increased 
these costs.
    Education's estimate of over $2 billion in subsidy costs is 
based on the assumption that the guaranteed lender yield will 
rise over the next several years.
    The effect of this rise is shown on the chart on the 
screen, where the bottom line shows the fixed borrower rate for 
an FFELP consolidation loan made in the first 9 months of 
fiscal year 2003, and the top line shows Education's estimate 
values for the guaranteed lender yield over time.
    In fiscal year 2003, market interest rates were such that 
the guaranteed lender yield was actually below the borrower 
rate. Lenders, therefore, received only the rate paid by 
borrowers. No special allowance payment, or SAP, was paid.
    However, in future years, when the guaranteed lender yield 
is expected to increase and be above the borrower rate, 
Education would have to make up the difference with a SAP. As 
the chart shows, Education's assumptions would call for lenders 
to receive a SAP over most of the life of the consolidation 
loans made in fiscal year 2003.
    Changing interest rates and loan volumes affected costs in 
the FDLP loan consolidation program, as well. In both fiscal 
years 2002 and 2003, there was no subsidy cost to the 
government because the interest rate paid by borrowers who 
consolidated their loans was greater than the interest rate 
education paid to the treasury to finance the lending.
    However, the drop in loan volume and interest rates that 
occurred in fiscal year 2003 contributed to cutting the 
government's estimated gain from $570 million in fiscal year 
2002 to $543 million for loans made in fiscal year 2003.
    Administration cost is not specifically tracked for either 
Consolidation Loan Program, but available evidence indicates 
that these costs have risen, primarily reflecting increased 
overall loan volume.
    In our October 2003 report, we recommended that the 
Secretary of Education assess the advantages of consolidation 
loans for borrowers and the government in light of program 
costs, and identify options for reducing Federal costs.
    We suggested options that include targeting the program to 
borrowers at risk of default: extending existing consolidation 
alternatives to more borrowers and changing from a fixed to a 
variable rate the interest charged to borrowers on 
consolidation loans.
    We noted that, in conducting such an assessment, Education 
should also consider how best to distribute program costs among 
borrowers, lenders, and taxpayers. Education agreed with our 
recommendation.
    Mr. Chairman, this concludes my statement. I would be 
pleased to answer any questions.
    [The prepared statement of Ms. Ashby follows:]

  Statement of Cornelia M. Ashby, Director, Education, Workforce, and 
            Security Issues, U.S. General Accounting Office

    Mr. Chairman and Members of the Committee:
    Thank you for inviting me here today to discuss issues related to 
consolidation loans and their cost implications for taxpayers and 
borrowers. Consolidation loans, available under the Department of 
Education's (Education) two major student loan programs--the Federal 
Family Education Loan Program (FFELP) and the William D. Ford Direct 
Loan Program (FDLP)--help borrowers manage their student loan debt. By 
combining multiple loans into one loan and extending the repayment 
period, a consolidation loan reduces monthly repayments, which may 
lower default risk and, thereby, reduce federal costs of loan defaults. 
Consolidation loans also allow borrowers to lock in a fixed interest 
rate, an option not available for other student loans. Consolidation 
loans under FFELP and FDLP accounted for about 48 percent of the $87.4 
billion in total new student loan dollars that originated during fiscal 
year 2003. FFELP consolidation loans comprised about 84 percent of the 
fiscal year 2003 consolidation loan volume, while FDLP consolidation 
loans accounted for the remaining 16 percent.
    Two main types of federal cost pertain to consolidation loans. One 
is ``subsidy''--the net present value of cash flows to and from the 
government that result from providing these loans to borrowers. For 
FFELP consolidation loans, cash flows include, for example, fees paid 
by lenders to the government and a special allowance payment by the 
government to lenders to provide them a guaranteed rate of return on 
the student loans they make. For FDLP consolidation loans, cash flows 
include borrowers' repayment of loan principal and payments of interest 
to Education, and loan disbursements by the government to borrowers. 
The subsidy costs of FDLP consolidation loans are also affected by the 
interest Education must pay to the Department of Treasury (Treasury) to 
finance its lending activities. The second type of cost is 
administration, which includes such items as expenses related to 
originating and servicing direct loans.
    My testimony today will focus on two key issues: (1) recent changes 
in interest rates and consolidation loan volume and (2) how these 
changes have affected federal costs for FFELP and FDLP consolidation 
loans. My comments are based on the findings from our October 2003 
report for this Committee, Student Loan Programs: As Federal Costs of 
Loan Consolidation Rise, Other Options Should Be Examined (GAO-04-101, 
October 31, 2003). Those findings were based on review and analysis of 
data from a variety of sources, including officials from Education's 
Office of Federal Student Aid and Budget Service, and representatives 
of FFELP lenders; a sample of student loan data extracted from 
Education's National Student Loan Data System (NSLDS)--a comprehensive 
national database of student loans, borrowers, and other information; 
relevant cost analyses prepared by Education; and statutory, regulatory 
and other published information. For this testimony, we updated our 
numbers to reflect recent estimates made by the Department of 
Education. Our work was conducted in accordance with generally accepted 
government auditing standards.
    In summary:
      Recent years have seen a drop in interest rates for 
student loan borrowers along with dramatic overall growth in 
consolidation loan volume. From July 2000 to June 2003, the interest 
rate for consolidation loans dropped by more than half, with 
consolidation loan borrowers obtaining rates as low as 3.50 percent as 
of July 1, 2003. From fiscal year 1998 through fiscal year 2003, the 
volume of consolidation loans made (or ``originated'') rose from $5.8 
billion to over $41 billion. The dramatic growth in consolidation loan 
volume in recent years is due in part to declining interest rates that 
have made it attractive for many borrowers to consolidate their 
variable rate student loans at a low, fixed rate.
      Recent trends in interest rates and consolidation loan 
volume have affected the cost of the FFELP and FDLP Consolidation Loan 
Programs in different ways, but in the aggregate, estimated subsidy and 
administration costs have increased. For FFELP consolidation loans, 
subsidy costs grew from $0.651 billion for loans made in fiscal year 
2002 to $2.135 billion for loans made in fiscal year 2003. Both higher 
loan volumes and lower interest rates available to borrowers in fiscal 
year 2003 increased these costs. Lower interest rates increase these 
costs because FFELP consolidation loans carry a government-guaranteed 
rate of return to lenders that is projected to be higher than the fixed 
interest rate paid by consolidation loan borrowers. When the interest 
rate paid by borrowers does not provide the full guaranteed rate to 
lenders, the federal government must pay lenders the difference. FDLP 
consolidation loans are made by the government and thus carry no 
interest rate guarantee to lenders, but changing interest rates and 
loan volumes affected costs in this program as well. In both fiscal 
years 2002 and 2003, there was no net subsidy cost to the government 
because the interest rate paid by borrowers who consolidated their 
loans was greater than the interest rate Education must pay to the 
Treasury to finance its lending. However, the drop in loan volume and 
interest rates that occurred in fiscal year 2003, contributed to 
cutting the government's estimated net gain from $570 million in fiscal 
year 2002 to $543 million for loans made in fiscal year 2003. 
Administration costs are not specifically tracked for either 
Consolidation Loan Program, but available evidence indicates that these 
costs have risen, primarily reflecting increased overall loan volumes.
    In our prior report, we recommended that the Secretary of Education 
assess the advantages of consolidation loans for borrowers and the 
government in light of program costs and identify options for reducing 
federal costs. Education agreed with our recommendation.
Background
    Consolidation loans differ from other loans in the FFELP and FDLP 
programs in that they enable borrowers who have multiple loans--
possibly from different lenders, different guarantors, \1\ and even 
from different loan programs--to combine their loans into a single loan 
and make one monthly payment. By obtaining a consolidation loan, 
borrowers can lower their monthly payments by extending the repayment 
period longer than the maximum 10 years generally available on the 
underlying loans. Maximum repayment periods allowed vary by the amount 
of the consolidation loan (see table 1). Consolidation loans also 
provide borrowers with the opportunity to lock in a fixed interest rate 
on their student loans, based on the weighted average of the interest 
rates in effect on the loans being consolidated rounded up to the 
nearest one-eighth of 1 percent, capped at 8.25 percent. Borrowers can 
qualify for consolidation loans regardless of financial need. Loans 
eligible for inclusion in a consolidation loan must be comprised of at 
least one eligible FFELP or FDLP loan, including subsidized and 
unsubsidized Stafford loans, PLUS loans, \2\ and, in some instances, 
consolidation loans. Both subsidized and unsubsidized Stafford loans, 
and PLUS loans are variable rate loans. Other types of federal student 
loans made outside of FFELP and FDLP, which may carry a variable or 
fixed borrower interest rate, are also eligible for inclusion in a 
consolidation loan, including Perkins loans, Health Professions Student 
loans, Nursing Student Loans, and Health Education Assistance loans 
(HEAL).\3\
---------------------------------------------------------------------------
    \1\ State and nonprofit guaranty agencies receive federal funds to 
play the lead role in administering many aspects of the FFELP program, 
including reimbursing lenders when loans are placed in default and 
initiating collection work.
    \2\ Both subsidized and unsubsidized Stafford loans are available 
to undergraduate and graduate students. The interest rates borrowers 
pay on these loans adjust annually, based on a statutorily established 
market-indexed rate setting formula, and may not exceed 8.25 percent. 
To qualify for a subsidized Stafford loan, a student must establish 
financial need. The federal government pays the interest on behalf of 
subsidized loan borrowers while the student is in school. Students can 
qualify for unsubsidized Stafford loans regardless of financial need. 
Unsubsidized loan borrowers are responsible for all interest costs. 
PLUS loans are variable rate loans that are available to parents of 
dependent undergraduate students. The interest rates on these loans 
adjust annually, based on a statutorily established market-indexed rate 
setting formula, and may not exceed 9 percent. Parents can qualify for 
PLUS loans regardless of financial need.
    \3\ Perkins Loans are fixed rate loans for both undergraduate and 
graduate students with exceptional financial need. Perkins loans are 
made directly by schools using funds contributed by the federal 
government and schools; borrowers must repay these loans to their 
school. The Health Professions Student Loans and Nursing Student Loans 
are fixed rate loans for borrowers who pursue a course of study in 
specified health professions. The HEAL program provided loans to 
eligible graduate students in specified health professions. HEAL was 
discontinued on September 30, 1998.
[GRAPHIC] [TIFF OMITTED] 92613.032


    The Federal Credit Reform Act (FCRA) of 1990 helps define federal 
costs associated with consolidation loans and was enacted to require 
agencies, including Education, to more accurately measure federal loan 
program costs. Under FCRA, Education is required to estimate the long-
term cost to the government of a direct loan or a loan guarantee--
generally referred to as the subsidy cost. Subsidy cost estimates are 
calculated based on the present value of estimated net cash flows to 
and from the government that result from providing loans to 
borrowers.\4\ For FFELP consolidation loans, cash flows include, for 
example, fees paid by lenders to the government \5\ and a special 
allowance payment by the government to lenders to provide them a 
guaranteed rate of return on the student loans they make. For FDLP 
consolidation loans, cash flows include borrowers' repayment of loan 
principal and payments of interest to Education, and loan disbursements 
by the government to borrowers. Unlike FFELP, FDLP involves no 
guaranteed yields or special allowance payments to lenders because the 
program is a direct loan program. The subsidy costs of FDLP 
consolidation loans are also affected by the interest Education must 
pay to Treasury to finance its lending activities. Another type of cost 
pertaining to consolidation loans is administration, which includes 
such items as expenses related to originating and servicing direct 
loans.\6\
---------------------------------------------------------------------------
    \4\ Present value is the value today of the future stream of 
benefits and costs, discounted using an appropriate interest rate 
(generally the average annual interest rate for marketable zero-coupon 
U.S. Treasury securities with the same maturity from the date of 
disbursement as the cash flow being discounted).
    \5\ For consolidation loans, FFELP loan holders must pay, on a 
monthly basis, a fee calculated on an annual basis equal to 1.05 
percent of the unpaid principal and accrued interest on the loans in 
their portfolio.
    \6\ Under FFELP, a large portion of the administration cost is 
borne by the private lender. The federal government pays many of these 
costs in its subsidy payment to lenders--specifically, in the 2.64 
percent add on paid over and above the 3-month rate on commercial 
paper.
---------------------------------------------------------------------------
    In estimating loan subsidy costs, Education first estimates the 
future economic performance (net cash flows to and from the government) 
of direct and guaranteed loans when preparing its annual budgets. These 
first estimates establish the subsidy estimates for the current-year 
originated loans. The data used for the first estimates are reestimated 
in later years to reflect any changes in actual loan performance and 
expected changes in future performance. Reestimates are necessary 
because projections about interest and default rates and other 
variables that affect loan program costs change over time. Any increase 
or decrease in the estimated subsidy cost results in a corresponding 
increase or decrease in the estimated cost of the loan program for both 
budgetary and financial statement purposes.
Borrowers' Rates Have Dropped, and Loan Volume Has Risen
    Recent years have seen a drop in interest rates for student loan 
borrowers along with dramatic overall growth in consolidation loan 
volume. From July 2000 to June 2003, the interest rate for 
consolidation loans dropped by more than half, with consolidation loan 
borrowers obtaining rates as low as 3.50 percent as of July 1, 2003. 
From fiscal year 1998 through fiscal year 2003, the volume of 
consolidation loans made (or originated) rose from $5.8 billion to over 
$41 billion. Over four-fifths of the fiscal year 2003 loan volume is in 
FFELP. While overall volume rose in 2003, the trends differed by 
program. FDLP consolidation loan volume for fiscal year 2003 decreased, 
but loan volume in the larger FFELP increased, resulting in total 
consolidation loan volume of well over $41 billion.
    The dramatic growth in consolidation loan volume in recent years is 
due in part to declining interest rates that have made it attractive 
for many borrowers to consolidate their variable rate student loans at 
a low, fixed rate. Figure 1 shows the relationship between these two 
factors. When interest rates are low, some borrowers may find it in 
their economic self-interest to consolidate their loans so that they 
can lock in a low fixed interest rate for the life of the loan, as 
opposed to paying variable rates on their existing loans, regardless of 
whether they need a consolidation loan to avoid difficulty in making 
loan repayments and avert default.
[GRAPHIC] [TIFF OMITTED] 92613.033


    Underscoring the potential attractiveness of these loans to 
potential borrowers, many lenders, including newer loan companies that 
are specializing in consolidation loans, have aggressively marketed 
consolidation loans to compete for consolidation loan business as well 
as to retain the loans of their current customers. Their marketing 
techniques have included mass mailings, telemarketing, and Internet 
pop-ups to encourage borrowers to consolidate their loans. This 
increased marketing effort has likely contributed to the record level 
of consolidation loan volume.
Changes in Interest Rates and Loan Volume Affect FFELP and FDLP Costs 
        in Different Ways but in the Aggregate, Estimated Costs 
        Increased
    While the estimated future costs for consolidation loans can vary 
greatly from year to year, low interest rates and recent loan volume 
changes have resulted in substantial increases in overall costs to the 
federal government. However, in light of the differences between how 
FFELP and FDLP operate, the subsidy costs within these two programs 
were affected in very different ways. For FFELP, the result was a 
substantial increase. For FDLP, the result was a narrowing of the net 
difference between the estimated interest payments paid by consolidated 
loan borrowers to Education and the costs paid by Education to Treasury 
to finance direct loans.
FFELP Subsidy Costs Affected by Increased Special Allowance Payments to 
        Lenders and Increased Loan Volume
    Estimated subsidy costs for FFELP consolidation loans rose from 
$0.651 billion for loans made in fiscal year 2002 to $2.135 billion for 
loans made in fiscal year 2003. The increase is largely due to the 
higher interest subsidies the government is expected to pay to lenders 
to ensure they receive a guaranteed rate of return on student loans and 
the result of greater loan volume. The interest subsidy, which is 
called a special allowance payment (SAP), is based on a formula 
specified in law and paid by Education to lenders on a quarterly basis 
when the ``guaranteed lender yield'' exceeds the borrower rate. This 
guaranteed lender yield is currently based on the average 3-month 
commercial paper \7\ interest rate plus an additional 2.64 percent. 
When this guaranteed yield is higher than the amount of interest being 
paid by borrowers, Education makes up the difference. If the borrower's 
interest rate exceeds the guaranteed lender yield, Education does not 
pay a SAP, and the lender receives the borrower rate.
---------------------------------------------------------------------------
    \7\ Commercial paper is short-term, unsecured debt with maturities 
up to 270 days. It is issued in the form of promissory notes, primarily 
by corporations. Many companies use commercial paper to raise cash for 
current transactions and many find it to be a lower-cost alternative to 
bank loans.
---------------------------------------------------------------------------
    Education's estimate of $2.135 billion in subsidy costs for FFELP 
consolidation loans made in fiscal year 2003 is based on the assumption 
that the guaranteed lender yield will rise over the next several years, 
reflecting Education's assumption that market interest rates are likely 
to rise from the historically low levels experienced in fiscal year 
2003. The effect of this rise is shown in figure 2, where the bottom 
line shows the fixed borrower rate for a FFELP consolidation loan made 
in the first 9 months of fiscal year 2003, and the top line shows 
Education's estimated values for the guaranteed lender yield over time. 
In fiscal year 2003, market interest rates were such that the 
guaranteed lender yield established under the SAP formula was actually 
below the borrower rate. Lenders, therefore, received only the rate 
paid by borrowers; no SAP was paid. However, in future years, when the 
guaranteed lender yield is expected to increase and be above the 
borrower rate, Education would have to make up the difference in the 
form of a SAP. As figure 2 shows, Education's assumptions would call 
for lenders to receive a SAP over most of the life of the consolidation 
loans made in fiscal year 2003.
[GRAPHIC] [TIFF OMITTED] 92613.034


    An increase in loan volume also played a role in the subsidy cost 
increase from fiscal years 2002 to 2003. However, the effect of the 
increased loan volume was not as large as that of the higher interest 
subsidies the government is expected to pay to lenders in the future.
FDLP Loans also Affected by Changing Interest Rates
    Subsidy costs can occur within FDLP as well, but in a different 
way. FDLP's consolidation program is a direct loan program and, 
therefore, involves no guaranteed yields to private lenders. Still, the 
program has potential subsidy costs if the government's cost of 
borrowing is higher than the interest rate borrowers are paying. The 
government's cost of borrowing is determined by the interest rate 
Education pays Treasury to finance direct student loans, which is 
equivalent to the discount rate.\8\ The difference between borrowers' 
rates and the discount rate--called the interest rate spread--is a key 
driver of subsidy estimates for FDLP loans. When the borrower rate is 
greater than the discount rate, Education will receive more interest 
from borrowers than it will pay in interest to Treasury to finance its 
loans, resulting in a positive interest rate spread--or a gain 
(excluding administrative costs) to the government. Conversely, when 
the borrower rate is less than the discount rate, Education will pay 
more in interest to Treasury than it will receive from borrowers, which 
will result in a negative interest rate spread--or a cost to the 
government.
---------------------------------------------------------------------------
    \8\ While the discount rate is the interest rate used to calculate 
the present value of the estimated future cash flows to determine 
subsidy cost estimates, it is also generally the same rate at which 
interest is paid by Education on the amounts borrowed from Treasury to 
finance the direct loan program.
---------------------------------------------------------------------------
    For FDLP consolidation loans made in fiscal years 2002 and 2003, no 
such negative interest rate spreads were incurred in either year, based 
on the methodology Education uses to determine these costs. In both 
years, borrower interest rates for FDLP consolidation loans were 
somewhat higher than the discount rate, resulting in a net gain to the 
government. However, while Education continued to benefit from lending 
at interest rates higher than its cost of borrowing for FDLP 
consolidation loans made in fiscal year 2003, the size of this benefit 
declines from $571 million in fiscal year 2002 to $543 million in 
fiscal year 2003.
    The smaller net gain that occurred in fiscal year 2003 reflects 
both a decrease in the loan volume and a narrowed difference between 
the discount rate and the borrower rate. Loan volume in fiscal year 
2003 was $6.7 billion, a decrease from $8.8 billion in fiscal year 
2002. In fiscal year 2003, this difference narrowed in part because 
borrower rates dropped more than the discount rate. The borrower rates 
for FDLP consolidation loans dropped 1.2 percentage points, from 6.3 
percent in fiscal year 2002 to 5.1 percent in fiscal year 2003. The 
discount rate, on the other hand, dropped by only 0.88 percentage 
points, from 4.72 percent in fiscal year 2002 to 3.84 percent in fiscal 
year 2003. The resulting interest rate spread decreased from 1.59 
percent to 1.22 percent (see table 2). In other words, each $100 of 
consolidated FDLP loans made in fiscal year 2002, will result in $1.59 
more in interest received by Education than it will pay out in interest 
to the Treasury. A similar loan originated in fiscal year 2003, 
however, will generate only $1.22 more in interest for the government.
[GRAPHIC] [TIFF OMITTED] 92613.035

Administration Costs also Increase, Mainly because of Loan Volume
    Loan volume affects administrative costs, in that cost is in part a 
function of the number of loans originated and serviced during the 
year. As a result, when loan volume increases, administration costs 
also increase. Education's current cost accounting system does not 
specifically track administration costs incurred by each of the student 
loan programs. Consequently, we were unable to determine the total 
administration costs incurred by Consolidation Loan Programs or any 
off-setting administrative cost reductions associated with the 
prepayment of loans underlying consolidation loans. However, based on 
available Education data, we were able to determine some of the direct 
costs associated with the origination, servicing, and collection of 
FDLP consolidation loans. For fiscal year 2002, these costs totaled 
roughly $52.3 million. This does not include overhead costs, which 
include costs incurred for personnel, rent, travel, training, and other 
activities related to maintaining program operations. For fiscal year 
2003, the estimated costs for the origination, servicing, and 
collection of FDLP consolidation loans is projected to increase to 
$59.5 million. While we similarly were unable to determine Education's 
administration costs directly related to FFELP consolidation loans, 
they are likely to be smaller than for FDLP consolidation loans. This 
is because a large portion of FFELP administration cost is borne 
directly by lenders, who make and service the loans. The special 
allowance payments to lenders, which rise and fall as interest rates 
change, are designed to ensure that lenders are compensated for 
administration and other costs and provided with a reasonable return on 
their investment so that they will continue to participate in the 
program.
Concluding Observations
    As the discussion of both FFELP and FDLP loans shows, interest 
rates have a strong effect on whether subsidy costs occur and how large 
they are. The movement of subsidy costs for consolidation loans made in 
future years will depend heavily on what happens to interest rates. As 
we have shown, subsidy cost estimates for FFELP consolidation loans can 
increase substantially, depending on how much the guaranteed lender 
yield rises above the fixed rate paid by borrowers, which, in turn, 
requires the federal government to pay subsidies to lenders. 
Conversely, if borrowers obtained consolidation loans with a fixed 
interest rate at a time when rates were expected to decrease in the 
future, federal subsidy costs could be lower, than is currently the 
case, because the borrower rate could exceed the rate guaranteed to 
lenders, and the federal government might not be required to pay lender 
subsidies. For FDLP consolidation loans, allowing borrowers to lock in 
a low fixed rate might result in decreased federal revenues if the 
variable interest rates on those loans borrowers converted to a 
consolidation loan would have otherwise increased in the future. The 
exact effects of FDLP consolidation loans, however, depend on a number 
of factors, including the length of loan repayment periods, borrower 
interest rates, and discount rates.
    We noted in our prior report \9\ that borrowers' choices between 
obtaining a fixed rate consolidation loan or retaining their variable 
rate loans can significantly affect federal costs. While consolidation 
loans may be an important tool to help borrowers manage their 
educational debt and thus reduce the cost of student loan defaults, the 
surge in the number of borrowers consolidating their loans suggests 
that many borrowers who face little risk of default are choosing 
consolidation as a way of obtaining low fixed interest rates--an 
economically rational choice on the part of borrowers. If borrowers 
continue to consolidate their loans in the current low interest rate 
environment, and interest rates rise, the government assumes the cost 
of larger interest subsidies. Providing for these larger interest 
subsidies on behalf of a broad spectrum of borrowers may outweigh any 
government savings associated with the reduced costs of loan defaults 
for the smaller number of borrowers who might default in the absence of 
the repayment flexibility offered by consolidation loans.
---------------------------------------------------------------------------
    \9\ GAO-04-101.
---------------------------------------------------------------------------
    In our October 2003 report, we also discussed the extent to which 
repayment options other than consolidation loans allow borrowers to 
simplify loan repayment and reduce repayment amounts. We found that 
other repayment options that allow borrowers to make a single payment 
to cover multiple loans and smaller monthly payments are now available 
for some borrowers under both FFELP and FDLP, but these alternatives 
are not available to all borrowers. In that report, we concluded that 
restructuring the Consolidation Loan Program to specifically target 
borrowers who are experiencing difficulty in managing their student 
loan debt and at risk of default, and/or who are unable to simplify and 
reduce repayment amounts by using existing alternatives, might reduce 
overall federal costs by reducing the volume of consolidation loans 
made. In addition, making the other nonconsolidation options more 
readily available to borrowers might be a more cost-effective way for 
the federal government to provide borrowers with repayment flexibility 
while reducing federal costs. An assessment of the advantages of 
consolidation loans for borrowers and the government, taking into 
account program costs and the availability of, and potential change to, 
existing alternatives to consolidation, and how consolidation loan 
costs could be distributed among borrowers, lenders, and the taxpayers, 
would be useful in making decisions about how best to manage the 
Consolidation Loan Program and whether any changes are warranted.
    In our October 2003 report, we recommended that the Secretary of 
Education assess the advantages of consolidation loans for borrowers 
and the government in light of program costs and identify options for 
reducing federal costs. We suggested options that could include 
targeting the program to borrowers at risk of default, extending 
existing consolidation alternatives to more borrowers, and changing 
from a fixed to a variable rate the interest charged to borrowers on 
consolidation loans. We also noted that, in conducting such an 
assessment, Education should also consider how best to distribute 
program costs among borrowers, lenders, and the taxpayers and any 
tradeoffs involved in the distribution of these costs. Furthermore, if 
Education determines that statutory changes are needed to implement 
more cost-effective repayment options, we believe it should seek such 
changes from Congress. Education agreed with our recommendation.
    Mr. Chairman, this concludes my prepared statement. I would be 
pleased to respond to any questions that you or other members of the 
Committee may have.
GAO Contact and Acknowledgments
    For further contacts regarding this testimony, please call Cornelia 
M. Ashby at (202) 512-8403. Individuals making key contributions to 
this testimony include Jeff Appel, Susan Chin, Cindy Decker, and 
Julianne Hartman-Cutts.
    [Attachments to Ms. Ashby's statement follow:]
                                ------                                

[GRAPHIC] [TIFF OMITTED] 92613.023

    Chairman Boehner. Thank you, Ms. Ashby.
    Mr. Hamlett, you may begin.

 STATEMENT OF TITUS M. HAMLETT, STUDENT, UNIVERSITY OF MARYLAND

    Mr. Hamlett. Thank you, Chairman Boehner and distinguished 
Committee members, for inviting me here today to speak on 
consolidation loans and financing a college education.
    I just wanted to mention that this is my first time 
testifying. I am a little nervous and I am also feeling a 
little under the weather today, so please bear with me.
    My name is Titus Hamlett. I am a senior at the University 
of Maryland, College Park. I will graduate this May with a 
degree in government and politics, and I plan to pursue a 
career in public service. I will be the first person in my 
family to graduate from college, which is a major 
accomplishment, and I am very proud of that.
    I currently work at the U.S. Department of Justice as a 
student paralegal. I am actually in the Civil Division and I do 
work with the U.S. attorneys. I do a lot of research and 
different things for them.
    Basically what I want to talk about is the effects of 
student loans on students, and the effects of tuition increases 
on students.
    As you all know, many students like myself struggle to pay 
for higher education today. In the University of Maryland 
system, tuition prices have risen by 20 percent in the last 
year alone. Despite rising prices, growing student loan debt, 
and more students working to pay for college, the Governor in 
Maryland has continued to cut funding for higher education, 
unfortunately.
    The real impact has been that, along with thousands of 
other University of Maryland students, I have had to take out 
more loans and work longer hours for these unexpected, and they 
are unexpected, tuition increases. I am currently working 20-
plus hours a week while balancing an 18-credit course load, 
which is tough, but it's what I have to do, because I have to 
graduate, and I have to pay for my college education.
    My mother, who is a single parent, works two full-time 
jobs, but even with her two jobs, she cannot afford to pay a 
significant amount toward my college education, so I rely on 
some help from my mother--financial help, that is.
    I work during the summer; as I mentioned, I work throughout 
the school year; and I have also received Pell Grants, which 
have helped a lot. However, I primarily rely on student loans 
to pay for my college education.
    When I graduate this May, unfortunately, I will have about 
$41,000 in Federal education loan debt. I have taken out 
$22,000 in subsidized Stafford loans, and $19,540 in 
unsubsidized Stafford loans.
    When I graduate, I plan to consolidate my loans in a locked 
low interest rate, hopefully, to save thousands of dollars, and 
to make repaying my college loans manageable.
    In addition to my loans, working through school and 
receiving scholarships and grants have made it possible for me 
to attend college. However, as I near graduation, I worry that 
I am not going to be able to manage the $41,000-plus that I am 
going to have in undergraduate loan debt.
    I would like to pursue a career in public service, because 
I feel that it's important for me to give back to my community 
and my country, but if my monthly student payments are too high 
once I graduate, I may have to reconsider whether or not I want 
to go into the public sphere or into the private sector.
    I really, really like--my heart is into public service. 
It's what I want to do. But I may have, you know, more debt 
than I would make in my first year as a graduate, and I have to 
take that into consideration when I apply for a job once I 
graduate.
    I believe the grants and the loans that I received while I 
have been in college have been key to making my education 
possible.
    As I mentioned before, given that both tuition prices and 
student debt has been constantly rising, I was shocked to learn 
that Congress may consider eliminating the low fixed rate 
benefit for student borrowers.
    Eliminating this benefit will push higher prices on 
thousands of students like myself, and increase the numbers of 
student borrowers who simply won't be able to manage repaying 
their student loans.
    When I graduate this spring, I plan to continue working at 
the Department of Justice because, like I mentioned before, I 
really want to work in public service and give back to my 
country. I know that this is possible for me, because 
consolidation will allow me to save thousands of dollars on my 
loans overall and make my monthly payments a lot lower.
    I strongly support making college more affordable by 
allowing student borrowers to consolidate their loans to a low, 
fixed interest rate.
    Chairman Boehner and Ranking Members of the Committee, I 
urge you to retain the low fixed interest rate for student 
borrowers, and I oppose any efforts to raise costs on student 
loans.
    Thank you for allowing me to testify today.
    [The prepared statement of Mr. Hamlett follows:]

     Statement of Titus M. Hamlett, Student, University of Maryland

    Thank you Chairman Boehner, Ranking Member Miller and distinguished 
committee members for inviting me here to speak today on the issue of 
student loan consolidation and financing a college education.
    My name is Titus Hamlett and I am a senior at University of 
Maryland College Park. I will graduate this May with a degree in 
Government and Politics and I plan to pursue a career in public 
service. I will be the first person in my family to graduate from 
college. I currently work at the U.S. Department of Justice in the 
Civil Division as a part-time paralegal.
    As you know, many students like myself struggle to pay for higher 
education today. In the University of Maryland system tuition prices 
have risen by 20 percent, or over $1000 (for in-state students), in the 
last year alone. Despite rising prices, growing student loan debt and 
more students working to pay for college, The Governor of Maryland has 
continued to cut funding for higher education. The real impact has been 
that along with thousands of other University of Maryland students, I 
have had to take out more loans and work longer hours to pay for these 
unexpected tuition increases. I am currently working 20 plus hours a 
week while balancing an 18-credit course load.
    My mother, who is a single parent, works two full-time jobs, but 
even with her two jobs she cannot afford to pay for my college 
education. I rely on some financial help from my mother; I work during 
the summer and throughout the school year, and I also received a 
$4050.00 Pell Grant this year. However, I have primarily relied on 
student loans to pay for my college education.
    When I graduate this May I will have $41,540.00 in federal 
education loan debt. I have taken out $22,000.00 in subsidized Stafford 
loans and $19,540.00 in unsubsidized Stafford loans. When I graduate I 
plan to consolidate my loans and lock in a low interest rate to save 
thousands of dollars and to make repaying my college loans manageable.
    In addition to my loans, working through school and receiving 
scholarships/grants have made it possible for me to attend college. 
However, as I near graduation I am worried that I will not be able to 
manage the $41,000.00 that I have in undergraduate loan debt. I would 
like to pursue a career serving my community and country. I am counting 
on the benefit of a low-fixed rate consolidation loan, which would save 
me thousands of dollars, to help make my career in public service 
possible. Otherwise, I may have no other choice but to go into the 
private sector.
    I believe that the grants and loans that I received while I was in 
college were key to making my college education possible. However, the 
impact of my loans won't really hit me until I graduate and have to 
make monthly payments. It's important to have financial assistance at 
both points for students with need.
    If I were not able to consolidate my loans under a fixed rate, I 
would have to pay thousands more for my education. Higher total and 
monthly payments would dictate where I work, when or if I am able to 
purchase a home, and various other important life choices.
    Given that both tuition prices and student loan debt have been 
rising rapidly, I was shocked to learn that Congress may consider 
eliminating the low-fixed rate benefit for student borrowers. 
Eliminating this benefit would push higher prices on thousands of 
students and increase the number of student borrowers who cannot afford 
to repay their loans.
    When I graduate this spring, I plan to continuing working at the 
Department of Justice, because I believe that it is important to give 
back to the community and my country. I know that this is possible for 
me because consolidation will allow me to save thousands of dollars on 
my loans overall and lower my monthly payments.
    I strongly support making college more affordable by allowing 
student borrowers to consolidate their loans and lock in a low-fixed 
interest rate. Chairman Boehner, Ranking Member Miller and all of the 
distinguished members here today I urge you to retain the low-fixed 
rate benefit for student borrowers and oppose any efforts to raise the 
cost of student loans. Thank you for allowing me to testify here today.
                                 ______
                                 
    Chairman Boehner. Thank you, Mr. Hamlett.
    Dr. Neubig.

STATEMENT OF THOMAS S. NEUBIG, NATIONAL DIRECTOR, QUANTITATIVE 
 ECONOMICS AND STATISTICS, ERNST & YOUNG, LLP, WASHINGTON, D.C.

    Dr. Neubig. Mr. Chairman and members of the Committee, 
thank you for inviting me to testify on the results of two 
recent studies I prepared on the costs and benefits of the 
consolidation student loan program. The results of both reports 
rely heavily on Congressional Budget Office interest rate 
projections, and I have included some updated estimates based 
on CBO's most recent projections.
    In today's hearing, you are going to see large differences 
in the cost estimates of the Consolidation Loan Program, and if 
I can leave you with two takeaways, I would like you to 
understand why the cost of the program has changed over time, 
and also why different cost methodologies show vastly different 
results.
    When I trained to be an economist, I did not want to be a 
crystal ball gazer, forecasting GDP, employment, interest 
rates. At the U.S. Treasury Department, we estimated tax 
revenue and tax policy changes, taking the macroeconomic 
forecasts of CBO and OMB as a given.
    Economists rarely agree on future projections, especially 
interest rates. Even OMB and CBO disagree on the magnitude and 
timing of the interest rate changes. One advantage of using CBO 
interest rate projections is that they underlie all 
congressional budget estimates.
    Since accurate forecasting of the future is impossible, 
budget numbers should at least be consistent across programs. 
The principal reason for the varying costs of the Consolidation 
Loan Program is that the cost is tied to the direction of 
interest rate movements. As interest rates change over time, 
the cost of each year's loans also changes.
    I like to think of the consolidation loans as falling into 
three buckets.
    The first bucket includes loans consolidated before 2003. 
That's when interest rates were high, but then fell sharply.
    Due to that pattern of interest rate changes, lender-paid 
fees on these loans will exceed the cost of the interest 
subsidy to the tune of almost $4 billion over the entire life 
of those loans.
    The second bucket includes loans consolidated between 2003 
and 2006, and those loans have low interest rates for the 
students, and interest rates are projected to increase.
    Based on the CBO projections of increasing interest rates, 
I estimate that those loans consolidated in those 4 years will 
cost Federal taxpayers $6 billion over the life of the loans. 
That is a 180-degree cost change, but it is due to the shift 
from stable, or falling interest rates, to a rapidly rising 
interest rate environment.
    The third bucket includes loans consolidated after 2006, 
when future interest rates stabilize. In this stable interest 
rate period--you know, again, based upon the CBO interest rate 
forecast--consolidation loan fees will again exceed the 
interest subsidy for a positive $2 billion benefit to the U.S. 
Treasury between 2007 and 2010.
    When you look at the cost of the Consolidation Loan Program 
over the 16-year period between 1995 and 2010, and you combine 
all three buckets of loans, the program is positive in the 
initial years. It's quite costly for today's loans, and then it 
is positive again once interest rates stabilize. If you look at 
the program over 16 years, it is essentially cost-neutral. 
Lender-paid fees roughly match the interest subsidy.
    Now, if you are uncomfortable with people forecasting 
future interest rates, you can look at the actual budget cash-
flow experience of the program to date.
    From 1995 to 2003, the government collected $2.6 billion in 
fees and only spent $400 million in special allowance payments. 
That's a net positive of $2.2 billion. You can see those actual 
budget numbers on Page 3 of my testimony.
    The cost estimates I have provided the Committee follow the 
Federal Credit Reform Act requirement to discount future cash-
flows from Federal loan guarantee programs to current dollars. 
This recognizes that a dollar in 2024 is worth much less than a 
dollar today. If future cash-flows are not discounted, the 
estimates will be inflated and also inconsistent with other 
loan guarantee program cost estimates.
    Up to this point, I've focused on the cost side, but let me 
briefly describe one of the benefits of the current program. 
That is the one-time ability to lock in a fixed interest rate.
    Similar to mortgage refinancing, consolidation loans have 
become very popular at the current low interest rate. Changing 
the consolidation loan interest rate formula from a fixed rate 
to a variable rate would roughly double the interest cost paid 
by students taking out a consolidation loan today, based on the 
CBO interest rate forecast.
    Whether student borrowers or the Federal taxpayer should 
bear the risk of future interest rate increases is a key public 
policy question.
    I hope my testimony is helpful in the Committee's 
deliberations.
    Thank you.
    [The prepared statement of Dr. Neubig follows:]

  Statement of Dr. Thomas S. Neubig, National Director, Quantitative 
              Economics and Statistics, Ernst & Young LLP

    I am the National Director of Ernst & Young LLP's Quantitative 
Economics and Statistics practice. I was previously the Director and 
Chief Economist of the U.S. Treasury Department's Office of Tax 
Analysis.
    I appreciate the invitation to testify before the Committee to 
discuss the results of two studies on the costs and benefits of the 
Federal Family Education Loan (FFEL) consolidation student loan 
program. The two reports, ``The Net Incremental Cash Flow and Budget 
Effects of the FFEL Consolidation Loan Program, fiscal year 2005-
FY2010'' and ``The Effect on Student Borrowing Costs if Consolidation 
Loans Were Variable Rate Loans Rather Than Fixed Rate Loans,'' are also 
submitted for the record. Both reports were prepared at the request of 
Collegiate Funding Services LLC. My testimony summarizes the key 
findings from the reports, with estimates updated for the most recent 
loan volume and interest rate projections.
Two Key Considerations
    Two key considerations for policymakers considering the cost 
implications of consolidation loans during the coming Higher Education 
Act reauthorization are:
    1.  Consolidation student loans are not all alike from a cost 
perspective. The cost of future consolidation loans will be much less 
than the estimated cost of the current 3.5% loans.
    Depending on the interest rate environment, a year's issuance of 
consolidation loans could bring in significant fee revenue to the U.S. 
government or could require significant expenditures. Three groups of 
consolidation loans should be distinguished:
      Loans made before fiscal year 03 have already generated 
$1.7 billion of consolidation loan fees from lenders to date with only 
$0.3 billion of government payments to lenders. The estimated net cost 
of the Consolidation Loan Program for loans originated in fiscal year 
1995-2002 is a positive $3.7 billion over the life of the loans.
      Loans made between fiscal year 03 and fiscal year 06 are 
expected to have significant future subsidy costs if the predicted 
sharp increase in interest rates occurs. Consolidation loans made at 
historically low interest rates during this four-year period are 
estimated to cost $6.1 billion over the life of the loans in net 
present value.
      Loans made after fiscal year 06, when the interest rate 
forecast is relatively stable, are estimated to have fees that will 
exceed expenditures. The estimated net cost of loans made in fiscal 
year 2007-2010 is a positive $2.3 billion.
    The large estimated cost of current consolidation loans is due to 
current historically low interest rates combined with projected higher 
future interest rates. These loans will provide significant interest 
savings to student borrowers if the projected interest rate increases 
occur. The costs and benefits of these loans have already been 
committed. This is why the August 2003 report focused primarily on 
future loans.
    2.  The real cost of the Consolidation Loan Program is its 
additional cost over and above the cost of the underlying Stafford/Plus 
loans (i.e., its ``incremental'' net cost) less lender-paid 
consolidation fees.
    Measuring the real cost of the Consolidation Loan Program is not 
easy, and its further complicated by the many different types of 
estimates that are possible. I believe the appropriate cost for 
policymakers to consider will include:
    Fee offset. The cost of the Consolidation Loan Program from 
defaults and special allowance payments is partially offset by the 0.5% 
origination fee and the annual 1.05% consolidation loan holder fee. 
These lender-paid fees are generated from consolidation loans and 
reduce the net cost of those loans.
    Incremental cost. If fewer consolidation loans were made, there 
would be more interest subsidy paid on the Stafford/Plus loan program. 
The cost of consolidation loans is the cost over and above the interest 
subsidy on the underlying Stafford/Plus loans, less the lender-paid 
consolidation fees.
    Discounted present value of future cash flows. The Federal Credit 
Reform Act (FCRA) of 1990 requires the budget effect to be calculated 
as the net present value of the future cash flows over the life of the 
loans issued in each year. Simply adding future dollars without 
discounting is inconsistent with the FCRA and overstates the costs of 
the consolidation program.
    Future interest rate projections. Interest rate forecasts, like 
interest rates, change over time as the economy changes. For budgeting 
purposes, the Congressional Budget Office and Office of Management and 
Budget forecast interest rates over the next 5-10 years. These 
forecasts underlie not only student loan costs, but also the 
government's interest expense, the macroeconomic forecast of GDP, 
employment and tax revenues. Extreme scenarios of interest rate 
increases are inconsistent with every other budget forecast.
    Estimates that do not take these issues into account will overstate 
the cost of the FFEL Consolidation Loan Program.
The Budget Cost of Consolidation Loans
    The August 2003 report on ``The Net Incremental Cash Flow and 
Budget Effects of the FFEL Consolidation Loan Program, fiscal year 
2005-FY2010'' showed that on a cash flow basis the program has been a 
net plus to the federal government since 1995. I have updated the 
numbers for the most recent Department of Education budget numbers and 
loan volume forecasts, plus the CBO's most recent interest rate 
projections.
    Consolidation loan fees have totaled $2.6 billion through fiscal 
year 03 while gross special allowance payments have been only $0.4 
billion. Based on the most recent Department of Education fiscal year 
05 Budget numbers, the FFEL Consolidation Loan Program will bring in an 
additional $2.2 billion of lender-paid fees, with only $0.5 billion of 
expenses in fiscal year 04 and fiscal year 05. These cash flow numbers 
represent the actual fiscal experience to date of the program, but they 
are not the full cost, which requires projecting future interest rates 
and the future cash flow for the entire life of the loans.
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    The figure below shows the estimated cost of the three groups of 
FFEL consolidation loans based on the latest loan volume estimates and 
CBO interest rate projections. These estimates take into account both 
special allowance payments and fees, the incremental cost of 
consolidation loans in excess of Stafford/Plus loans, and the 
discounted present value of the future cash flows.
    The cost of the Consolidation Loan Program varies over time with 
different interest rate environments. When loan rates at the time of 
consolidation are high and then interest rates fall (fiscal year 1995-
2002), the program is estimated to have a net effect of positive $3.7 
billion. When loan rates at the time of consolidation are low and 
interest rates are expected to rise (fiscal year 2003-06), the cost is 
estimated to be $6.1 billion over the four years. When interest rates 
are relatively stable (fiscal year 2007-10), consolidation loans will 
again return to a positive net effect of $2.3 billion. Over the 16-year 
period, the FFEL Consolidation Loan Program is estimated to be 
essentially cost neutral (less than negative $0.2 billion).
    When the HEA reauthorization occurs, only changes to the 
Consolidation Loan Program will be scored for budget purposes. The 
expected cost of the current loans has already been included in prior 
budgets, and will not affect the HEA reauthorization budget.
[GRAPHIC] [TIFF OMITTED] 92613.025

The Benefit Side
    The FFEL Consolidation Loan Program was enacted to provide student 
loan borrowers with a simpler loan repayment plan, plus a one-time 
opportunity to lock in a longer payment term and a fixed interest rate 
to reduce the likelihood of default. A lower, fixed monthly payment was 
thought to result in lower default rates for student borrowers. How 
much of the lower default effect is due to the extended repayment 
period, the fixed interest rate, or the type of student refinancing the 
loans, has not been studied, but that information would be helpful for 
policymakers to know.
    One benefit, particularly during the current low interest rate 
environment, is the ability of student borrowers to lock in a fixed 
interest rate. This is similar to what has happened in the residential 
mortgage market, where there has been an explosion of refinancing to 
lower families' mortgage interest expense and monthly payments. Recent 
developments in the mortgage market to allow borrowers to choose fixed 
rate or variable rate loans with different maturities have been a major 
benefit to both borrowers and the residential housing market. Private 
market lenders are willing to lend money at 4-6% interest rates for 15-
30 years. If interest rates go up as the CBO projects, many mortgage 
lenders will experience lower returns on those fixed mortgages, while 
the borrowers will view them as very beneficial.
    Similarly, the potential cost of the FFEL Consolidation Loan 
Program for loans originated between July 1, 2002 and June 30, 2004 
could be large if interest rates rise as the CBO projects. The total 
net incremental cost of those two years of loans is an estimated $3.4 
billion in net present value terms. On the borrower side, the student 
loan borrowers will benefit significantly from the low 3.5% fixed 
interest rate. The March 2004 study, ``The Effect on Student Borrowing 
Costs If Consolidation Loans Were Variable Rate Loans Rather Than Fixed 
Rate Loans,'' shows the effect on borrower costs if those consolidation 
loans had not been available at a fixed rate.
    Using a $30,000 20-year consolidation loan originated in July 2003 
at 3.5%, and the CBO interest rate projections, the monthly payment 
would increase 34% from $174 under a fixed rate loan to $233 in 2008 if 
it had been a variable rate loan. The total interest expense would 
increase from $11,800 to $22,900 over the life of the loan, a 95% 
increase. The variable rate loan would have the same total interest 
cost as a comparable 6.32% fixed rate loan, 2.72% above the current 
fixed consolidation loan rate.
    The benefits of the fixed interest rate include potentially lower 
default rates and the ability to lock in a lower rate. Congress has 
limited the ability of student borrowers to refinance their student 
loans more than once. The budget cost, which provides the interest rate 
subsidy for the borrower's benefit, is one reason for the limitation on 
student loan refinancing.
Conclusion
    The FFEL Consolidation Loan Program is an important part of the 
Higher Education Act reauthorization. The Consolidation Loan Program's 
benefits and costs are not easily measured, and continually revised 
interest rate projections and different methodologies result in a 
myriad of numbers. I hope these two reports and these updated estimates 
provide the Committee with useful information for your deliberations, 
particularly the important considerations that:
      Consolidation student loans are not all alike from a cost 
perspective. The net cost of future consolidation loans will be much 
less, even positive, compared to the estimated cost of the current 3.5% 
loans.
      The reported cost of the Consolidation Loan Program will 
be overstated unless lender-paid loan fees, the net cost above the cost 
of the otherwise underlying Stafford/Plus loans, the discounted present 
value of future cash flows, and government interest rate projections 
are included in the analysis.
    That concludes my testimony. I would be happy to answer any 
questions about my testimony and the two consolidation loan studies.
    [Attachments to Dr. Neubig's statement follow:]
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    Chairman Boehner. Thank you, Dr. Neubig.
    Dr. Shapiro.

  STATEMENT OF ROBERT J. SHAPIRO, CHAIRMAN, SONECON, LLP AND 
  SENIOR FELLOW, BROOKINGS INSTITUTION AND PROGRESSIVE POLICY 
                  INSTITUTE, WASHINGTON, D.C.

    Dr. Shapiro. Mr. Chairman and members of the Committee, 
it's an honor to be here today. I have come to discuss a new 
study which my colleague Dr. Kevin Hassett and I conducted to 
analyze the long-term costs of the current student loan 
consolidation program.
    There is no doubt that Federal student loans are a great 
success. More than 62 percent of high school graduates go on to 
higher education, and one of the reasons is that we provide 
more than 7 million students and parents, like Mr. Hamlett, 
more than $50 billion a year in Federal assistance.
    The loan consolidation program, however, is different, and 
not only because it doesn't actually help anybody go to 
college.
    To limit public costs, and so maintain strong public 
support, underlying student loans carry interest rates that are 
adjusted annually. This limits the subsidy and ensures a stable 
relationship between the price of the funds to the students and 
the cost of the funds to lenders.
    But under the consolidation program, former student 
borrowers consolidate their loans at a subsidized rate that 
remains fixed for up to 30 years. This fixed interest rate is 
the source of a problem which could well cost taxpayers tens of 
billions of dollars over 20 years, perhaps much more.
    The greatest costs occur when market interest rates have 
fallen sharply, as they did over the last 3 years, and then 
rise again.
    Unless our economy enters a sustained period of economic 
stagnation, it is virtually certain that over the next three, 
five, or seven years, market interest rates will return to the 
levels of the 1990's, or worse, the 1980's, if serious 
inflation were to occur.
    When that happens, those who consolidated their loans in 
2002, 2003, and this year, will still pay interest based on the 
1 percent Treasury bill rates of this period, while those who 
lent them the funds will receive payments from the government 
based on market rates that have become much higher. The gap 
between the locked-in fixed rate and the potential future 
commercial paper rate is what determines the additional cost of 
this program.
    Estimating the taxpayer's liability here is 
straightforward--apply a baseline projection of interest rates 
to the stock of outstanding consolidated debt--but it's not 
simple.
    For example, loan consolidations are not distributed 
evenly. They rise when interest rates are low, and decline when 
rates are relatively high. From 1995 to 2001, about 211,000 
students a year consolidated FFELP loans. In 2002 and 2003, 
with low interest rates, the average jumped to 964,000 a year.
    From 1995 to 2001, when the interest rate for a typical 
consolidation loan was 7.9 percent, consolidations averaged 
about $5 billion a year. As the interest rate fell to about 4 
percent in 2002 and 3.5 percent in 2003, the total jumped to 
almost $23 billion and $35 billion, respectively, rising from 
$5 billion a year to $35 billion.
    To analyze these costs systematically, we applied 
simulation procedures to generate the most likely paths of 
future interest rates, based on historical experience.
    Let me say we would have preferred to use CBO. 
Unfortunately, the CBO forecast ends 5 years out, and then 
simply assumes a stable interest rate environment at that 
level.
    We also constructed estimates of the likelihood of possible 
deviations from these paths.
    The results show that the commercial paper rate will likely 
rise to more than 5 percent in the next 4 years, and then range 
from 5.6 to 5.9 percent. Let me say that for the years in which 
CBO was estimating, and we were estimating, our approach 
produced an interest rate path entirely consistent with CBO's 
forecast.
    We also found that the stock of outstanding debt for 
consolidated loans is more than $100 billion today. It's 
expected average lifetime is nearly 21 years, and the average 
fixed rate is 5.52 percent.
    With these results, we could calculate the cost to 
taxpayers.
    Given the most likely future path of interest rates, 
taxpayers will pay almost $14 billion over the next 20 years to 
subsidize the interest on the existing stock of consolidated 
loans, and if interest rates are 2 to 3 percentage points 
higher than that--that is what economists call one standard 
deviation, an outcome consistent with historical experience--
taxpayers will pay more than $48 billion to service the current 
stock of loans.
    We can also estimate the cost of future loan 
consolidations, assuming that the program is unchanged. 
Remember that the high cost associated with the current stock 
of consolidated debt came about because interest rates fell 
after rising sharply, and then rose again. This will occur 
again, and it will affect future loans, and when it does, those 
costs will also be high.
    We estimate that loans likely to be consolidated over the 
next 8 years will cost taxpayers another $36 billion in subsidy 
payments over a 20-year term.
    One final point:
    While student loan programs generally provide equal 
subsidies to all students, the consolidation program produces 
very large inequities.
    The basic problem is that, since the interest rate on these 
loans rises or falls each year and then remains fixed for the 
life of the loan, the long-term cost of the consolidated loan 
to the former student depends on when he or she happens to 
consolidate. This produces large disparities in interest costs.
    For example, $22,000 in student loans consolidated in 1995 
or 1996 will cost a former student borrower $25,000 in interest 
over 20 years. That's three times the 20-year interest cost of 
$8,600 for the same debt consolidated in 2003. It simply 
depends on the moment you consolidate, which is usually the 
year you happen to graduate from college.
    The current program will generate tens of billions of 
dollars in taxpayer costs, along with significant equities. You 
can address both problems by shifting the program from a fixed 
interest rate to annually adjusted rates, and if the program is 
not reformed, taxpayers may not be the only ones bearing the 
cost.
    As government payments for consolidations rise sharply, as 
they certainly will, these costs could squeeze out some of the 
underlying loan programs. At a minimum, reforming the loan 
consolidation program so that the interest rates on these loans 
adjust annually, as they do for all other student loans, will 
save billions of dollars that could be available for future 
college students.
    Thank you.
    [The prepared statement of Dr. Shapiro follows:] 
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                                ------                                

    Chairman Boehner. Let me thank all of our witnesses for 
their excellent testimony.
    Mr. Hamlett, we appreciate your coming in, not feeling up 
to speed, and let me assure you that you will have no problem 
consolidating your loans. I'm sure you're getting all types of 
marketing phone calls already getting you all set up for the 
day you graduate, and you can go ahead and lock in these 
historically low rates.
    Now, before we get too far into this, my good friend, Mr. 
Kildee, in his opening statement, talked about, well, we need 
to do a lot on access, but, you know, we also need to help all 
of those who are out of school, as well. While we would all 
like to be Santa Claus, you know, we can't be. We got elected 
to Congress to be decisionmakers in the public policy arena, 
and regardless of what the size of that pie is, there is some 
limit to the size of the pie, and we're elected to make 
choices.
    So if, in fact, our goal with the Higher Education Act is 
to help low to moderate income students attend a college or 
university of their choice, we need to make sure that we are 
meeting our goal in providing the tools for those qualified 
students to attend an institution that they wish to attend, and 
that means that we need to make choices as we begin to 
reauthorize this program.
    Ms. Ashby, you pointed out in your testimony that these 
consolidated loans do, in fact, receive considerable subsidies.
    Dr. Neubig, in his testimony, said, in effect, and I will 
paraphrase this--if I am incorrect, Dr. Neubig, certainly 
correct me--that the fees paid by lenders are, in the short 
term, outweighing the subsidies, and long-term, that it's 
basically a wash.
    Are you in agreement with this?
    Ms. Ashby. Well, I am not sure about the wash and the long-
term.
    It is true that the fees--and we're talking about the 
annual 1.05 percent, I presume--that the annual fees do reduce 
the net outflow to the government and, in that way, reduce the 
taxpayer's ultimate cost. But based on the work we did, we 
didn't--we took the Department of Education's numbers, and we 
looked basically at loans that were consolidated in fiscal year 
2003, and we looked at the difference between the subsidy cost 
for those and loans consolidated the prior year, prior fiscal 
year.
    So I really can't comment on Dr. Neubig's study.
    Chairman Boehner. Ms. Ashby, Dr. Neubig, Dr. Shapiro, do 
you, any of you, disagree with the fact that interest rates are 
likely to rise?
    Dr. Shapiro. No. Certainly not.
    Chairman Boehner. Dr. Neubig?
    Dr. Neubig. I guess I don't take a position, you know, in 
terms of what's going to happen. I guess I am buying inflation 
index bonds at the moment, and clearly OMB and CBO both 
forecast higher interest rates.
    Ms. Ashby. I am certainly in no position to disagree with 
the experts.
    Chairman Boehner. So we all agree that interest rates are 
going to rise, and we know that if interest rates rise, someone 
has to bear that risk. Nobody disagrees with that?
    So the question is, who should bear the risk? And whether 
the loan was made in 2001, 2002, 2003, or, for that matter, 
2006, there is risk that someone has to bear, and there are the 
three parties that could bear that risk.
    They could be the government, they could be the lender, or 
they could be the graduate, the student--not the student, the 
post-student years. Those are the three categories.
    Now, it will not be the lenders, because they sell off 
these, they are pretty well insulated, and if they are not--if 
they are exposed to this risk, they probably will not make the 
loans. So we can take them out of the equation pretty quickly.
    So now we are down to two parties who are going to bear 
this risk. Is it going to be the Federal Government and/or, 
let's be honest, the taxpayers, or is it going to be people who 
have graduated from college bearing that risk?
    Now, for those who have received student loans, let us 
review the bidding.
    The Federal Government provided them, in many cases, a 
student loan, whether it be subsidized or unsubsidized. In many 
cases, we bore the interest for those subsidized loans during 
the life of that student being in school, or at least deferred 
the interest for those unsubsidized loans.
    After they are out of school, we provide a 6-month grace 
period, where there are no payments required, and if the 
student wants to, and has multiple loans with multiple lenders, 
we allow the student to consolidate those loans to make one 
payment.
    We also provide for extended repayment in many of those 
cases, especially for large loans, over a longer period of 
time.
    Not only has the Federal Government provided all of this 
while the student is in school and for a short time after they 
are at school, all the way through these guarantees--these are 
all guaranteed loans.
    You do not have to apply for them, you do not get rejected, 
they are guaranteed, and there is a cost for that guarantee, so 
we have subsidized all of this for students until such time as 
we believe that most of them are out of school and into the 
work force.
    I guess the question I am asking the panel is, is it fair 
to expect the student to bear that risk of what interest rates 
may be in the future--that graduate to bear those risks--or 
should the taxpayers continue to bear that risk?
    Dr. Shapiro?
    Dr. Shapiro. Well, I just want to note that students bear 
the risk if they happen to consolidate when interest rates are 
high.
    That is, there are--the reason that the program has thus 
far shown a generally positive cash-flow is because, every year 
except one, the consolidation loan rate has been falling. The 
problems arise in this program after the rates have fallen and 
then they begin to rise again.
    So, of course, if you only look at a period in which 
interest rates are falling, have been falling, and the 
consolidation loan rate has been falling, you're going to get a 
kind of rosy scenario.
    The fact is, we are subsidizing consolidation loans as well 
as the underlying student loans. The fact is that students are 
not bearing an even risk today.
    When Dr. Neubig said that, based on the CBO interest rate 
forecast, that moving to a variable rate would double the 
interest costs of students who are consolidating today, the 
implication of that is that students who consolidate later will 
be paying double the interest of those today, which is, indeed, 
what's happened in the past.
    We have the interest burden paid by someone consolidating 
this year is one-third the level of the interest payment borne 
by someone who consolidated 6 years ago. So, students are 
bearing a risk, depending on when they happen to graduate. In 
fact, the risk would be equalized if everyone's consolidation 
loan rate were to be adjusted annually.
    Chairman Boehner. Dr. Neubig?
    Dr. Neubig. I guess I do not have a view, in terms of who 
should bear the interest rate risk. I guess I think there is 
the possibility that it's more than just a choice between 
taxpayers and the government.
    Currently in the residential mortgage market, we have 
private sector lenders offering both variable rate and fixed 
rate 15-year and 30-year mortgages, and as a result of advances 
in the mortgage markets, they have been able to, you know, 
hedge those risks to people who are willing to accept those 
risks.
    So I think it's more than just a choice between taxpayers 
and the government.
    Chairman Boehner. Are home mortgages, are those subsidized? 
Are they guaranteed?
    Dr. Neubig. No, they are not, in most cases, but even on 
the private sector side, there are advances in the markets, you 
know, that allow some of this interest rate risk to be taken by 
people who are willing to accept the risk.
    Chairman Boehner. The chair recognizes the gentleman from 
Michigan.
    Mr. Kildee. Thank you very much, Mr. Chairman.
    We have a vote going on over in the House, and I will have 
to leave shortly, as all of us will, but let me ask this, so we 
can get this on the record.
    For students who will consolidate their loans in the next 
few years--and without using your crystal ball, just your own 
best guesstimate--would changing consolidation interest rates 
from a fixed to a variable rate make student loans more costly 
for students?
    Let me start with Dr. Shapiro and go down.
    Dr. Shapiro. It would make them more costly for students 
who consolidated today, and probably less costly for those who 
consolidated later, when interest rates were high, as interest 
rates fell again.
    Mr. Kildee. Dr. Neubig?
    Dr. Neubig. Again, based upon the CBO projections, it would 
increase the cost of students taking out consolidation loans 
probably in 2003, 2004, and probably 2005, 2006. At some point, 
you know, they will stabilize.
    Mr. Kildee. Mr. Hamlett?
    [No response.]
    Mr. Kildee. You can pass if you want. We do that around 
here, too.
    Mr. Hamlett. I'm not really an expert on this particular 
issue, so I'm just going to speak from my personal experience. 
Having a fixed low interest rate would definitely help me, in 
particular, and a lot of other American families.
    I think that changing it from a fixed interest to a 
variable interest rate is going to cost families money, and to 
me that's just something that you wouldn't want to do to middle 
to lower income families.
    Mr. Kildee. Ms. Ashby?
    Ms. Ashby. In the simplest case, without considering all 
the various factors, and presuming that the experts are right 
that interest rates are not likely to go much lower than they 
are today, and that they will increase in the future, going to 
a variable rate will increase the costs for students.
    But one of the other factors is the length of time the 
student holds that loan, and one of the advantages, for some 
students anyway, is a longer payment period, and of course, 
over a longer payment period, you're paying more interest over 
the life of that loan.
    Mr. Kildee. Thank you, Mr. Chairman.
    I believe I will go over and cast my vote now.
    Chairman Boehner. Well, we do have several votes on the 
House floor, interrupted by 10 minutes worth of debate. I would 
suggest that the earliest we would be back here would be about 
noon.
    So the Committee will stand in recess until about 12.
    [Recess.]
    Chairman Boehner. The Education and the Workforce Committee 
will come to order.
    Sorry for the delay. Unavoidable, though.
    The chair recognizes the gentleman from Wisconsin, Mr. 
Petri.
    Mr. Petri. Thank you very much.
    Thank you all for your testimony, and the work that went 
into your prepared statements, as well.
    I wonder if it would be possible to explore an area that 
was hinted at in Dr. Neubig's recent answer.
    We probably--do you agree or disagree that there is a 
problem with the consolidation in that there is a mismatch 
between a long-term repayment and a short-term number, and in 
the mortgage area and others, they peg a long-term block into a 
longer-term bond, so that it's anyone's guess what interest 
rates are going to be, but that guess is not made by the 
financial institution or the lender, they lay that off on the 
market and collect their margin to stay in business.
    Would that be a more appropriate fix of this problem, or 
what would the implications of trying to emulate, you know, the 
student loan consolidation lock-in area, what is done in the 
rest of the world, be?
    Borrowers are familiar with the options they have now with 
refinancing and mortgages and various periods of time.
    I don't know what the average student loan repayment is, 
but that wouldn't be hard to determine. It's probably somewhere 
between--around 10 years, or something like that.
    So we could pick a number in the Treasury world and add 
some points for overhead or whatever, and let them lock it in 
at that, and then, well, it wouldn't be subsidized by the 
Treasury or the taxpayer. We could figure out a way of it being 
subsidized by an insurance company or whoever buys the parallel 
private bond.
    Would you care to comment on whether that would be an 
appropriate way to approach this?
    Dr. Neubig. I think as you identified, there is some 
mismatching, you know, between sort of the asset and liability 
side in the current program which is causing, you know, the big 
positive, big negative, big positive, and there are ways of 
addressing it beyond just moving to a variable rate.
    Things that are being done in the financial markets are 
something that I think the Committee should perhaps explore. I 
haven't analyzed, you know, what those might be, but I think it 
isn't just, you know, a win-lose situation between the Federal 
taxpayer and the student.
    Mr. Petri. How would you suggest we go about getting some 
help in doing this appropriately? Dr. Shapiro, do you have a 
comment?
    Dr. Shapiro. Well, you know, I do. You know, I think your 
comment about the mismatch is very apt.
    It is--part of what we did in our study was to look at a 
most likely, what we considered a most likely case, and then 
less likely, and nightmare scenarios--how bad can it get--and 
there is a range.
    When it gets very bad, it is--and indeed all the costs here 
arise out of this mismatch--it is essentially the same problem 
in form that we saw in the S&L crisis, and that we saw in the 
Asian financial crisis, and that is borrowing short and lending 
long.
    Over interest rate cycles, it might even out if 
consolidations occurred evenly, but of course, they don't.
    That is, they rise enormously when the rates are very low, 
in order to lock in the rate, and that's what causes this 
disproportionate problem. It does go positive, negative, 
positive, negative, but the negatives are a lot bigger, because 
the volume is so much greater at the low rates than of 
consolidation than at the high rates.
    Mr. Petri. Dr. Neubig, did you have a further comment?
    Dr. Neubig. Well, this is an area I would certainly be 
eager to explore, because we do have one solution, but it may 
not be the optimal solution from the point of view of the 
students and the government and the taxpayer. We are in the 
business of not just saving the taxpayer money, but trying to 
make this a user-friendly program.
    I think people would understand they had to pay a higher 
rate for locking in a longer-term mortgage, because they face 
that every day in the marketplace, and they can make the choice 
and decide what is most appropriate in their own--given their 
own financial circumstances, but denying a long-term lock-in to 
students as one option seems to me to be giving up something 
that is beneficial to a lot of people.
    Chairman Boehner. The chair recognizes Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman.
    I would like to thank the panel for its patience during our 
vote.
    Mr. Hamlett, let me say you did great, you did not sound 
nervous at all, and as a student at the University of Maryland, 
I am sure that you are aware of the fact that the reason for 
the Terrapins' recent basketball success is because their 
coach, Gary Williams, grew up in South Jersey, in my 
congressional district.
    [Laughter.]
    Chairman Boehner. And trained as a good coach in Ohio.
    [Laughter.]
    Mr. Andrews. Well, Ohio is where you go to train, and New 
Jersey is where you go to excel.
    [Laughter.]
    Mr. Andrews. That may just cut my time. I am sure that does 
not come off my time, Mr. Chairman.
    Chairman Boehner. If I recall, there are some games this 
weekend that we may want to discuss.
    [Laughter.]
    Mr. Andrews. OK. We may discuss, but never wager, because 
that is illegal.
    Chairman Boehner. Not between friends, it is not.
    Mr. Andrews. That is true, and that would be a legal wager 
based on that principle.
    I very much appreciate the witnesses' testimony on this 
very complicated subject.
    Ms. Ashby, I had a chance to read the GAO report that you 
wrote, or led the authorship of. As usual, it was exceptionally 
excellent from the GAO. I wanted to ask you to characterize a 
couple of conclusions that I think I drew.
    Is it accurate to say from your report that people who 
consolidate their loans as a whole are higher-income, when 
compared to the student lending population generally? Is that 
correct?
    Ms. Ashby. Well, we are looking at consolidators versus 
non-consolidators.
    Mr. Andrews. Right.
    Ms. Ashby. So yes, those who consolidated their loans 
tended to be higher income.
    Mr. Andrews. I think I read that 39 percent of the 
consolidators had incomes in excess of $50,000 a year. That is 
in your report?
    Ms. Ashby. I don't have the numbers, but my colleague is 
saying yes.
    Mr. Andrews. The other thing I think I read in your report 
is that consolidators are more likely to be people that went to 
graduate school than people who did not, relative to the rest 
of the lending population.
    Ms. Ashby. For consolidators, a larger percentage, yes, had 
gone to graduate or professional schools.
    Mr. Andrews. I believe it was 28 percent had done some 
graduate school borrowing, as compared to 12 percent of the 
non-consolidators, if I read the report correctly. So that's a 
fair characterization of the people who were consolidating.
    If I were writing the budget resolution, which I am not, I 
would have a very different set of choices here.
    I would not have a tax cut nearly as big as the one that we 
have, and I would choose to fund a very liberal consolidation 
program, as well as significant increases in support for 
students who are in school, and if that were the budget 
resolution before us, that's what I would do. It isn't.
    Realistically, the choice in front of us is what to do with 
very scarce mandatory spending higher education dollars, and I 
particularly want to focus on that choice with respect to 
minority students and the consequences of the choice we have 
between liberal consolidation and other choices that we might 
make.
    Dr. Shapiro, first of all, I appreciate the great work you 
did in the Clinton administration over all those years, and I 
wonder, do you have a number on your projected cost over the 5-
year future that we're legislating for for the present 
consolidation regime?
    In other words, if we didn't change it, just left it where 
it was, how much do you think that costs the Federal Treasury?
    Dr. Shapiro. Well, we have an estimate of the lifetime cost 
of loans which we believe will be consolidated over the 
following 7 years, and that estimate is about $21 billion.
    Mr. Andrews. About $21 billion.
    Is it accurate to say that if we made a change to variable 
rate consolidation, if, that most of that $21 billion would 
then, in effect, be saved, would be recaptured?
    Dr. Shapiro. The majority, and it would depend on how you 
designed the variable rate program.
    Depending on how you designed it and how you adjusted the 
fees paid by consolidators, you could go anywhere from a system 
which converted it all to savings to one which converted part 
of it to savings.
    Mr. Andrews. If, as I suspect, we are in a position where 
we have to design a bill that is budget-neutral, that doesn't 
increase mandatory outlays for higher education, in effect that 
gives us a pool of money somewhere short of $21 billion that we 
could look at spending by making the reduction in outlays, 
which could be offset by an increase in outlays, one of the 
increases in outlays I would be interested in would be an 
abolition of the origination fees that students pay.
    Mr. Hamlett, you have done some extensive borrowing. You 
are aware of the fact that there is a 3 percent origination fee 
each time you borrow a student loan that you tack on, which is 
a lot of money.
    I did some research on origination fees, looking at 
subsidized loans, and one of the striking statistics is that 
86.8 percent of African American students get a subsidized 
loan, and 86.8 percent of Hispanic students get a subsidized 
loan; so one of the consequences of eliminating origination 
fees is, it would have a substantially positive impact for 
minority students who are in school.
    Dr. Shapiro, would you agree or disagree with that 
characterization?
    Dr. Shapiro. I would absolutely agree with that.
    It is--there are--the student loan consolidation program 
does not affect all kinds of students equally.
    It is--consolidators tend to be people with larger student 
debt, as GAO established. They tend to be people who have gone 
to graduate school, because those are the ones who pile up the 
largest debt.
    The average debt of the current stock of consolidated 
loans, which includes loans which have been half paid off, for 
example, is $22,000. That is greater than the maximum an 
undergraduate could borrow under the FFELP program.
    Mr. Andrews. In the difficult choices the Committee faces, 
and there are no easy answers to this, one of the things I'm 
going to be looking for and paying attention to is which 
expenditure of these scarce dollars does the most to help 
moderate income students generally, minority students who have 
traditionally not had the access that other people have had to 
higher education.
    I favor the abolition of origination fees. I favor the 
expansion of income-contingent and income-sensitive repayments, 
so that students like Mr. Hamlett, who may want to take a 
career in public service, would not be penalized for doing so, 
and frankly, I also think we have to look at higher loan limits 
as a way to help people bridge the gap between the shortfall in 
Pell aid and the realities of rising tuition.
    You know, again, in a world that I would create, we could 
do both that and very liberal consolidation, but in a world 
where we have to choose how to allocate the scarce dollars, I 
think those are issues that we have to focus on.
    Thank you, Mr. Chairman.
    Chairman Boehner. The chair recognizes the gentleman from 
Michigan, Mr. Hoekstra.
    Mr. Hoekstra. Thank you, Mr. Chairman.
    I have a statement I would like to just submit for the 
record.
    Chairman Boehner. Without objection.
    [The prepared statement of Mr. Hoekstra follows:]

Statement of Hon. Pete Hoekstra, a Representative in Congress from the 
                           State of Michigan

    Mr. Chairman, I want to thank you for convening this hearing today. 
The issue of a strong loan consolidation program has been very 
important to me for many years. We should make no mistake; federal loan 
consolidation is an essential tool for making higher education more 
affordable for students. It is a program with proven results for 
students.
    As we've heard from our witnesses today, federal consolidation 
loans allow recent graduates to refinance their multiple underlying 
student loans into a single, fixed rate loan with a lower monthly 
payment. The federal student loan consolidation program benefits 
borrowers in all walks of life, and public support for this program is 
broad.
    With the cost of higher education growing, today's college students 
graduate with an average student loan debt 66% greater than 6 years 
ago. The problem can be even more acute for those completing 
postgraduate and professional programs, many of whom graduate with debt 
in excess of $100,000. As a result, a significant number of graduates 
at all levels see their debt as unmanageable, and consequently, as 
imposing limits on their career choices. A more manageable monthly 
repayment obligation is an important factor both in opening up those 
choices and in averting student loan default. Loan consolidation is 
especially essential in removing the barriers that student loan debt 
presents to those college and professional school graduates who want to 
work in the public and non-profit sectors of the economy. It is 
noteworthy that nurses and teachers combined were the largest group 
taking advantage of loan consolidation during the last 5 years.
    The widely popular federal student loan consolidation program 
(utilized last year by more than 726,000 student borrowers) has proven 
beneficial to the federal government as well. In the last fiscal year, 
the 0.5% lender-paid origination fee on consolidation loans generated 
$210 million to the federal government. Consolidation lenders are also 
required to pay a 1.05% portfolio fee/tax each year to the federal 
government on the outstanding principal of all consolidation loans held 
by the lender. That is, each outstanding consolidation loan generates a 
lender-paid fee each year to the federal government. This fee does not 
apply to other student loans. Over the past 7 years, the revenue to the 
federal treasury from these origination and portfolio fees has totaled 
nearly 2 billion dollars.
    Fixed rate consolidation loans work for student borrowers. We 
should not attempt to change the program to variable rates without 
seriously considering the impact of this change on students. It is 
imperative that the loan consolidation program be preserved and 
expanded as a vital element in graduates' efforts to cope with student 
loan debt. I thank the Chairman for this hearing and pledge during our 
Reauthorization of the Higher Education Act to work closely with the 
Chairman and my Committee Colleagues to ensure that the Committee's 
legislation includes a strong federal student loan consolidation 
program.
                                 ______
                                 
    Mr. Hoekstra. I want to build off a little bit of what Mr. 
Petri was talking about.
    Why couldn't student loans be worked much like you work the 
home mortgage?
    For somebody who is willing to take the risk, you get a 
variable rate mortgage. For those who, you know, want a lower 
interest fixed rate, they may go to a 15-year, and for somebody 
else they go to a 30-year. Why couldn't the same kind of 
formula plan be put in place for student loans?
    For anybody on the panel.
    Yes.
    Dr. Shapiro. You could, Congressman. It would maximize the 
budgetary costs.
    Mr. Hoekstra. Why would it maximize the budgetary costs?
    Dr. Shapiro. People consolidating at a time of high rates 
would choose variable rates, which would reduce their payments 
as interest rates came down, and those consolidating in a low 
interest rate environment would pick fixed rates.
    Mr. Hoekstra. I do not think you are understanding what 
the--
    Dr. Shapiro. OK.
    Mr. Hoekstra. I mean, if you consolidated a low interest 
rate, where it says, ``This will be your interest rate for 7 
years,'' it is not going to be adjusted. My 15-year mortgage at 
home is not adjusted every year.
    So that then becomes the fact of life for the person who is 
loaning the money, that you have agreed to the loan at this 
rate for 15 years.
    Dr. Shapiro. Right.
    Mr. Hoekstra. So why would that maximize the cost to the 
Federal Government? It would no longer cover the difference.
    Dr. Shapiro. Where the Federal Government would no longer 
cover--if the interest rates go up, the payments to the lenders 
rise with interest rates. Whether or not--
    Mr. Hoekstra. No, that is not what I am saying. They would 
not rise to the lender.
    Dr. Shapiro. Oh. Well, then I think you would have--I do 
not know. I would guess that you would have some difficulty 
getting private lenders into this market.
    Mr. Hoekstra. Why? I mean, you do not have trouble getting 
people into the mortgage market.
    Dr. Shapiro. Yes, but students have traditionally, 
typically, very few assets--
    Mr. Hoekstra. But it is a Federal guarantee.
    Dr. Shapiro. --no salary history. They are not good credit 
risks, which is why, in the private market--which is why we 
subsidize it in a public market.
    Mr. Hoekstra. But I mean, it is still a guaranteed loan, in 
terms of for the principal.
    Chairman Boehner. If the gentleman would yield?
    Mr. Hoekstra. Yes.
    Chairman Boehner. Think about it this way.
    We would still have the guarantee for the lenders, the 
guarantee, but if the variable rate or the fixed rate floated 
at market levels, it would seem to me it would take away the 
risk in the marketplace, and the lender could choose.
    Is there a way that that would work?
    Now, Ms. Ashby, maybe you could shed some light on this.
    Ms. Ashby. Well, I am speculating, of course, because no 
one has done a study of this, as far as I know.
    I don't know. I mean, it is possible that it would work if 
lenders, as Dr. Shapiro said, if there were lenders that were 
willing to accept such a system, and to make it clear, there 
would be no guaranteed lender yield, then.
    Is that what you are saying, that there would be the 
government guarantee as we currently have, but no guaranteed 
lender yield for the FFELP program?
    I don't know. It is possible that this might work.
    Mr. Hoekstra. I mean, what happens in mortgages is, you 
know, you shift the risk, and if we're interested in shifting 
the risk from the Federal Government, this is one way of doing 
it.
    Ms. Ashby. Then lenders would--yes. I mean, currently the 
taxpayer or the Federal Government is the only group that has 
risk, really.
    Students with the current low interest rates have very 
little risk, since it is very unlikely the rates will go lower, 
and lenders bear almost no risk, because of the guarantee and 
their guaranteed yield--
    Mr. Hoekstra. Right.
    Ms. Ashby.--and the guarantee of repayment, so it might 
shift the distribution somewhat.
    Dr. Neubig. I think, Congressman, that you have a number of 
different policy instruments or variables that you could make 
adjustments to that might mitigate some of the risk.
    I guess, looking over the last 16 years, we found that the 
current fixed rate of consolidation loans probably is cost-
neutral, and the reason is because there is also a lender fee 
that offsets that.
    Now, I thought I heard you perhaps suggesting that in the 
residential mortgage market, people who take out a fixed rate 
mortgage currently do pay maybe 100 basis points more than 
someone taking out a variable rate.
    Mr. Hoekstra. Right.
    Dr. Neubig. Currently, you know, consolidation loans only 
have the option of a single fixed rate, and it's exactly the 
same, other than the one-eighth of a percent rounding up, to 
the variable Stafford loan.
    So I think both in terms of the rates and also, you know, 
the fee, you have got to factor those into the analysis and the 
options that you have, in terms of trying to make improvements 
to the program.
    Mr. Hoekstra. Yes, but I am--yes.
    I think the bottom line is, you could go to some type of 
more market-based access for the dollars, and students at that 
point in time, depending on what lenders made available, you 
know, they could at that point in time choose whether they 
wanted to go variable rate or whether they wanted to go to a 
fixed rate for a certain period of time.
    Chairman Boehner. The gentleman's time has expired.
    Mr. Hoekstra. Thank you, Mr. Chairman.
    Chairman Boehner. Mr. Miller?
    Oh, Mr. Tierney is recognized for 5 minutes.
    Mr. Tierney. I am happy to yield to the Ranking Member, if 
he wants.
    Thank you, Mr. Chairman.
    You know, I listened to all of the conversation, and it 
seems that the only choice that is being presented is to cut 
the support for subsidies and increase the cost for students 
that graduate so that now we will have, you know, students that 
graduate paying enormously higher loan rates on their loans 
over a period of time, as well as having difficulty having 
children or students fund their way through college to begin 
with.
    This is a fairly profitable area. I mean, look at Sallie 
Mae, who deals primarily in student loans. They are a pretty 
big bank, and they make a lot of money.
    So I am wondering a little bit why we do not look at the 
element of dealing with the people that are making the money as 
lenders, why aren't we looking at their aspect of this, so that 
perhaps there is money to be had there from the situation, 
instead of just cutting the subsidies.
    What do people think about that, going at that end of it?
    We can start--anybody that wants to step forward, we can 
start from right to left or left to right.
    Sir?
    Dr. Neubig. Well, I guess looking over the last 16 years, 
the lender-paid fees roughly equal the special allowance 
payments, and--
    Mr. Tierney. The special what payments? I'm sorry?
    Dr. Neubig. The special allowance payments, the interest 
subsidy.
    So over the long term, there are lender-paid fees, and that 
has been profitable to the U.S. Treasury for the last 8 years 
and will be, you know, profitable probably for the next two or 
3 years. It has sort of averaged out over the cycles.
    So they already--you know, there is a potential risk, but 
part of the interest rate risk is that interest rates are 
unlikely to go up to double-digit levels for extended periods 
of time.
    They might go up for--they did go up during the oil shocks 
of 1973 and 1979, but it looks like the current program, with 
its lender fees, does get payments that are offsetting the 
interest subsidies.
    Mr. Tierney. Wouldn't we want to move in a direction to 
make sure that that is ensured as we go forward, and not run 
the risk of having that fall into a contrary situation?
    Dr. Neubig. I guess part of the question is we are using 
the CBO interest rate projections in terms of looking at the 
future for the next 5 years, and looking at it over the life of 
the loans.
    You know, if you think that things are going to get, you 
know, much worse than what CBO and OMB are predicting, then 
perhaps you should consider some additional things, but a lot 
of other things will get enormously worse if we have, you know, 
double-digit short-term interest rates for, you know, the next, 
you know, 15 or 20 years.
    Ms. Ashby. As the discussion always gets around to in this 
area, it depends on what you believe will happen to interest 
rates and what assumptions you make about various payments and 
what's likely to happen.
    Given what you have proposed, assuming that lenders would 
still be--and assuming that we continue with two programs, the 
direct loan and a guaranteed loan program--that lenders would 
be willing to loan money to students and their parents in the 
market without, either without a guaranteed yield or with a 
guaranteed yield that is somewhat different than the current 
one, and that is--
    Mr. Tierney. Well, given how profitable they are, I think 
it is a pretty fair assumption that they will continue in the 
game.
    Ms. Ashby. Well, that is the issue, and the work we did, of 
course, did not address this directly because we were not 
looking at that.
    But we certainly, in recommending that the Department do an 
assessment of the consolidation programs, that is certainly an 
option and something that should be considered.
    Mr. Tierney. Well, I mean, why hasn't anybody looked at 
that, I guess?
    We are sitting here, we are testifying here today. It seems 
to me that that would be an area that we would hone in on. This 
is a profitable area.
    We have one of the largest bank institutions in the world 
doing primarily this type of loan, and no matter how much 
people want to complain that it's a bad deal, it seems to be a 
pretty good deal, so it seems to me that we would look at that 
and talk about what could be done there.
    If they are not willing to do it, then we could do direct 
loans, but my feeling is there will be more than enough people 
lining up for this market. Everybody is just doing what 
businesses do, trying to make sure they get as much profit as 
possible.
    Mr. Miller. Will the gentleman yield?
    Mr. Tierney. I will yield.
    Mr. Miller. Just on that point and Mr. Hoekstra's point 
earlier, there have been a number of suggestions--I am sorry, I 
have been in and out of this hearing.
    But in the time I have been here, there have been a number 
of suggestions from different members about, isn't there a way 
that the students could have more choice, or they could--this 
thing could look more like the mortgage market.
    But what is before us, I guess, is sort of a suggestion 
that we are going to take this program and we are going to 
convert it to a variable rate program, and we are going to go 
on about our business, and there will be some huge savings, and 
that would be converted to help other students as opposed to 
the graduating students.
    I am kind of struck each time these questions get asked.
    Ms. Ashby, you keep suggesting we really do not know, 
because we have not looked at the particulars of the impact of 
this over a period of time.
    You can tell us what has happened historically, but if you 
were to change the mix, the suggestion is that there are only 
two groups of people here. You can shift the cost between those 
in school and those out of school, and somehow that is the 
choice--or the taxpayer.
    But there is also, as Mr. Tierney pointed out, there is the 
question of the fee structure. Should that be modified or not 
modified?
    It's modified so a student can have a choice and make those 
decisions and decide, based upon what they think their career 
opportunities are going to be, or what their immediate 
lifestyle. They can take a choice. One might be higher than 
another, one fee might be different than the other. I do not 
know.
    All I see is, I think the group of lenders are saying, ``We 
want to hold onto this the way it is, and it will not work any 
other way.''
    Well, you are just deciding to dump thousands of dollars of 
additional interest cost on the backs of people, depending on 
where they show up, which is a decision they do not make.
    That, you know, that is not just a ``Well, I am out of 
school now, so now I am going to make a fresh decision,'' when 
people look at, ``Am I going to school, what is my lifetime 
cost, what is my lifetime opportunity, what is my lifetime 
revenues, does this make sense for me?''
    So to pretend like these are two different audiences, these 
are just the same people at a different place in their life, 
and they have got to make those adjustments.
    We spend a huge amount of time here talking about forgiving 
loans to people because they can't make choices to become 
policemen, firemen, teachers, nurses, and what have you--we 
really do not do that, we talk about it more than we do it--but 
we recognize that the cost of paying off loans impacts people's 
decisions and works against the public interest.
    So why is it we are just now, without a lot of evidence, 
suggesting we are just going to throw this onto these people 
after they graduate?
    And I think the answer is, we do not know. Maybe we should 
be asking the department or somebody else.
    I mean, we sort of have dueling studies here, both of which 
each side can raise questions about, but we ought to be asking 
something else before we decide we are going to saddle these 
students with, with apparently very little notice, that all the 
sudden the cost of their education could increase dramatically.
    As you pointed out, you are buying interest index bonds. 
You know, somebody thinks this is going in the other direction, 
and so their costs are going up. They have already incurred the 
debt. We are now just restructuring what the cost of that debt 
is going to be to them.
    I think we ought to know a lot more about this before we 
just dive off this cliff and we start ruling out who is a 
participant and who is not a participant. We do not know enough 
about this, at least from what I see, in terms of the questions 
from the members.
    Maybe you do, and maybe I am wrong, but it seems to me the 
answers keep coming back from that side of the table, ``We need 
more information. We would have to know more about this if you 
want to structure it this way or not.''
    That is a comment, you do not have to respond to it, but I 
think this hearing has pointed out a real dearth of information 
here that could be helpful to the members.
    Chairman Boehner. The chair recognizes the gentleman from 
California, Mr. McKeon.
    Mr. McKeon. Thank you, Mr. Chairman.
    Actually, the students that graduate this year, probably 
when they started school four or 5 years ago, were looking at 
an 8 percent interest rate. Now they are looking at a much 
lower interest rate. So this varies with time and with the 
cycle of lending and borrowing.
    Back to that mortgage comparison again. I think we need to 
clarify that a little bit.
    If you tried to compare a student loan with a--that is a 
subsidized loan that is a government loan, for the most part--
with a mortgage that really is free market, I mean, any of us 
can go out at any time and refinance our mortgage.
    We might have to pay points, depending on what we get, and 
we could get a fixed rate or we could get a variable rate, and 
again, that would vary. There are all kinds of options, but 
there is no government subsidy on any of that.
    Now, when we talk about a student that graduates and then 
wants to refinance or consolidate his loan, then it just seems 
like there is not much of a comparison there.
    Can you address that?
    Dr. Shapiro. Well, the reason the comparison is hard to 
make is that the interest rate, the fixed interest rate for 
consolidated loans is not set by the market, it is set by the 
government, it is set by law, and then there is, in addition, a 
guarantee and a subsidy built into that rate.
    Mr. McKeon. It has a rate and it has a top that it cannot--
    Dr. Shapiro. Yes.
    So that if I understood the proposal which was described 10 
minutes ago by your colleague, sir, that you would have a 
choice of a fixed or a variable rate, but that the subsidy to 
the lender for the fixed rate would be reduced or eliminated, 
then the lender would simply charge the borrower a higher fixed 
rate.
    Mr. McKeon. I am not sure I understood that, either. I do 
not think he was--I cannot speak for him, but I do not think he 
meant to eliminate the subsidy, but if you eliminate the 
subsidy, then you are just going out and refinancing your loan 
on the open market.
    Dr. Shapiro. Right. Then it is a market.
    Mr. McKeon. And then--
    Chairman Boehner. Will the gentleman yield?
    Do not forget, there is a guarantee here. There is a 
guarantee on the part of the government to the lender that they 
are going to get paid. Now, that is worth something.
    Mr. McKeon. Yes, but what I was getting at is, if you 
eliminate that guarantee, then you should be able to, you know, 
go to the open market and refinance your loan; and I don't 
think anybody has any quarrel with that. It is where you want 
to refinance that loan and keep the guarantee and keep the 
lower rate.
    In other words, then the government and the taxpayers are 
left on the hook for that cost.
    Dr. Shapiro. We can certainly provide the guarantee and the 
subsidy and a very, very low fixed rate. There is no way to 
provide that without it having significant cost consequences.
    I do want to make one point, and that is that--one 
additional point.
    We have not really been through a full interest rate cycle 
with the consolidation program. We have only been--we have--
with 1 year of the last 8 years, the rate has been consistently 
falling, so we have not had the experience yet of what happens 
when you have very large rates of consolidation at very low 
rates, what happens when the rates rise.
    So when the--I guess I do not agree that we have seen that 
there is a wash over the cycle, because we have not had the 
whole cycle. We are about to enter it over the next three to 4 
years.
    Mr. McKeon. That was a question I wanted to ask Dr. Neubig.
    We have had--the chart that we had up here from GAO showed 
that as the interest rates have gone down, consolidation has 
been really a big thing these last couple of years, and I was 
wondering how you can guarantee these numbers going out into 
the future.
    Say that it is going to cost the government a lot in the 
next couple of years, but then it will change. I guess that is 
what you were talking about, Dr. Shapiro, about we have not 
gone through that cycle and we really do not know how these 
numbers are going to be until we complete that cycle.
    Dr. Neubig. I definitely cannot guarantee these numbers.
    I can tell you that they are based on the, you know, volume 
forecasts of the consolidation loans, you know, from the 
Department of Education and the CBO's interest rate 
projections, and so it is linked to what the government is 
assuming, and those assumptions affect a lot of other programs 
besides the Consolidation Loan Program.
    This is sort of the best estimate, based upon the CBO 
interest projections. Clearly, interest rates do fluctuate, and 
CBO does keep their rates stable at historical levels out 
beyond 2010, 2011, and we know that they are going to bounce 
around.
    I guess, you know, part of a sensitivity analysis is 
showing not only what happens on the upside, or the bad news, 
but also what would happen on the downside, the good news, and 
there is sort of a 50 percent chance that things would go worse 
than the CBO projects and a 50 percent chance things would go 
better than CBO projects, and so these numbers going out into 
the future might be both too low, if things go south on us, or, 
you know, the cost might be too high, you know, for these 
current loans if interest rates were to stay at rates below 
what CBO is projecting.
    And you know, there are some forces in the economy, in 
terms of, you know, concern about deflation, that might make 
the, you know, interest rates be lower than what CBO--
    Mr. McKeon. Wouldn't that argument lend itself, then, to go 
to a variable rate, which would fluctuate with those changes?
    Dr. Neubig. Well, that is one of the possibilities that you 
have.
    Chairman Boehner. The chair recognizes Mr. Miller.
    Mr. Miller. Thank you, Mr. Chairman.
    Ms. Ashby, in your testimony on if you consolidate through 
the direct student loan program, that we earn--what is it, for 
every $100 the government earns $1.12, or something? Is that 
right?
    Ms. Ashby. Yes. We did have an example in the testimony. I 
have to look at it to get the exact numbers. Are you referring 
to Table 2 in our testimony?
    Mr. Miller. I had it here, but I do not have it.
    Ms. Ashby. And we have updated the numbers in the 
testimony, so they will be slightly different than what is in 
the report.
    Mr. Miller. Are we better off directing students to 
consolidate through the direct program?
    Ms. Ashby. Are we better off in terms of the taxpayer, the 
government? Well, as with everything else, it depends on what 
is going to happen with interest rates. It looks like today we 
are, but depending on what happens in the future, in terms of--
and with the direct loan program, there are a number of 
variables. There is the rate that the government pays to borrow 
from the Treasury. There is the rate that is charged to 
students.
    I cannot give you a definitive answer on that. It would 
depend on what happens with these various rates and how much 
the interest spread is, and so forth. But with this example, 
yes, $1.22 is lower than $1.59, but this is only for one cohort 
at one point in time.
    Mr. Miller. You are saying that to read your information 
correctly, again, we have to know a lot more about the various 
moveable parts in terms of the cost of borrowing money, and the 
rest of that?
    Ms. Ashby. Correct.
    Mr. Miller. But potentially, in some environments, interest 
rate environments, it would appear that it is better for the 
taxpayer to have people consolidate through the direct program?
    Ms. Ashby. Well, given the current interest rates and what 
the rate was to borrow from Treasury at the time that these 
numbers were calculated--and this is based on a Department of 
Education re-estimate, we should have a report in October--that 
would appear to be true, but as I said, the volume of loans 
makes a difference. There are at least two interest rates that 
come into play here.
    So there is not a definitive answer to your question.
    Mr. Miller. No, and I appreciate that.
    I think that is part of the point I am trying to make here, 
is that to make this single sort of dramatic shift, I am just 
not convinced that we have the evidence that suggests that that 
is the--that that should be done without further examination of 
what truly makes sense for all the parties involved.
    We are each presenting the scenario from one point of view, 
saying, ``This is kind of the good way to go, based upon our 
needs here and our needs here.''
    But I think at some point the policymaker has got to kind 
of look at all the parties and play out a number of different 
scenarios. If low interest rates continue for a decade, or if 
the interest rates move back to--if they tend back to norm, I 
guess which they will over various periods of time, you would 
want to know that.
    Ms. Ashby. That's right, and that is why we recommended 
that the Department do an assessment of the consolidated loan 
program--
    Mr. Miller. We are getting the bill ahead of the assessment 
a little bit here. That is my problem.
    Thank you.
    Chairman Boehner. The chair recognizes the gentleman from 
Florida, Mr. Keller.
    Mr. Keller. Thank you, Mr. Chairman.
    I kind of watch this debate as sort of like an umpire here. 
I don't have a dog in this fight. I have kind of dedicated 
myself on this Committee to focusing on Pell Grant-related 
issues, and after reading your complicated testimony, I think I 
am going to stay with the Pell Grant-related issues.
    [Laughter.]
    Mr. Keller. But as I sit here as sort of a layman, I kind 
of see three issues from where I sit.
    One, do we allow consolidation or not? Two, if so, should 
it be fixed or variable? And three, will there be a second bite 
of the apple through reconsolidation?
    And to tell you my two cents analysis, having sat through 
this--and I do not pretend it to be worth that--on the first 
issue, do we allow consolidation, I know that there is some 
powerful interest against it. I am near certain that we are 
going to allow consolidation. That is just too valuable a tool.
    As someone who is in his thirties and not that far removed 
from college and law school, I remember how valuable a tool 
that is to be able to take various diverse loans and put them 
into one source and extend the payments. That is really helpful 
to a young person when you are first coming out of college, 
when you can least afford it. So that is going to happen.
    We are not going to--I can't imagine, I am not leadership 
here, but I cannot imagine that we are not going to allow 
consolidation.
    The second issue, fixed versus variable, if I was sitting 
where Mr. Hamlett is and someone told me the choices between a 
long-term fixed rate or an unlimited variable rate, I of course 
would say essentially what he said. I would like the long-term 
fixed rate. On the surface, that seems to be the best thing.
    But I think what we are looking at is the scenario on the 
variable side, where you would give young people the benefit of 
the low variable rates. Like right now, they are at 3.42 
percent, but you would cap their exposure at, like, 8.25 
percent, so you are never going to pay the super jacked-up 
rate.
    If you look at, in fact, what the law is, that effective 
2006 the fixed rates are going to go to 6.8 percent, and you 
are faced with 6.8 percent versus the variable rate of 3.42 
percent with a cap slightly above the 6.8 percent, you may well 
be better off with a variable rate.
    So I do not know what we are going to do there, but I am 
pretty sure it is going to be in the strike zone. Either we are 
going to give you a pretty good fixed rate, or we are not going 
to expose you to unlimited rates, we are going to cap it at 
some amount.
    On the reconsolidation, the second bite of the apple, I do 
not know what the Committee is going to do there, but even if 
the Committee does not allow the second bite of the apple on 
reconsolidation, you still have the option to go to your 
private sources.
    If you have a home, you may be better off getting a home 
equity loan and paying off that student loan so you can write 
off your home equity loan.
    So I think there is good news, no matter what we do for 
students here in the future. I am not pessimistic at all. But 
again, I look at this as sort of an amateur here.
    Let me start with you, Dr. Shapiro.
    Isn't it the current situation that we are set to go to a 
fixed rate, effective 2006, of 6.8 percent?
    Dr. Shapiro. We are set to go to a cap. That is not a--that 
is the capped rate, not the--yes, as I understand it.
    Chairman Boehner. Well, that is in a basic program he is 
referring to.
    Mr. Keller. Yes.
    Dr. Shapiro. Right.
    Mr. Keller. The basic loan, yes, of 6.8 percent.
    So if you were a student and you had to choose between a 
variable rate of essentially half that versus the 6.8 percent 
cap, there could be scenarios where it is beneficial to go with 
a variable rate. Is that right?
    Dr. Shapiro. Yes, certainly.
    Mr. Keller. Dr. Neubig, I know you have had kind of 
competing reports.
    What is your opinion on that same question?
    Dr. Neubig. My understanding of the 6.8 percent fixed rate 
is that that would be for loans that are taken out in 2006--
    Mr. Keller. Right.
    Dr. Neubig.--and beyond. If someone is taking out a loan in 
2003, you know, they are--or in 2004--they are going to lock in 
the 3.5 percent, you know, for the life of that loan, and it is 
only if they take out a loan after 2006 that it would be 6.8 
percent.
    Mr. Keller. Well, as I understood your testimony, it is 
essentially you believe it's better for the existing graduates 
now to go with a long-term fixed rate, that they would save 
more money than if you switched to variable, but my question to 
you, what about the students who graduate or who are in college 
after 2006?
    If they were faced with the fixed rate of 6.8 percent 
versus whatever the market is for variable rates--and at 3.42 
now--wouldn't there be scenarios that they would be better off 
with a variable rate, provided there is a cap?
    Dr. Neubig. We are definitely seeing CBO interest rate 
projections, the variable rate would be very close to the 6.8 
percent in 2006 and beyond.
    Mr. Keller. OK. Mr. Chairman, I will yield back.
    Chairman Boehner. The chair recognizes the gentleman from 
Oregon, Mr. Wu.
    Mr. Wu. Thank you very much, Mr. Chairman.
    I am going to make a couple of general comments, probably 
inquiring as much of the Chairman and the staff as of our 
witnesses.
    We perhaps--or I, perhaps--along with others had, you know, 
brought up a concept of permitting variable rates under certain 
scenarios, partially to address inequities going forward, and 
partially to address inequities looking backward, and so like 
Mr. Keller referred to, in multiple bites of the apples and in 
reconsolidation, and the desire was to eliminate or to permit 
people who had consolidated once at high interest rates to 
reconsolidate, and to reconsolidate perhaps multiple times, and 
as a quid pro quo for that reconsolidation, to reconsolidate at 
a variable rate to reduce the cost to the Federal taxpayer 
going forward.
    Sitting where I am today, I do not know if this 
reconsolidation or potential multiple reconsolidation concept 
is on life support, or beyond consideration.
    Chairman Boehner. Will the gentleman yield?
    Mr. Wu. I certainly would.
    Chairman Boehner. It is deader than a doornail, and let me 
explain why.
    We allowed people who had consolidated their loans to make 
that choice, to consolidate them at a fixed rate, and they made 
that decision based on their own economic viability.
    Now that paper is issued. It is out there in the 
marketplace, at some rate, you know?
    We've got a staffer over here who did hers at 9 percent. 
She would probably like to have--sorry, Kathleen--she would 
probably like to have another bite at the apple at 3.42 
percent, but she made that election herself. But somebody holds 
that paper.
    Now, when you talk about reconsolidation at a lower rate--
fixed rate, market rate, pick your rate--somebody loses, 
somebody. Either we stick the investor, who has loaned the 
money to the loan program, we stick it to the lender, or we 
stick it to the taxpayer. Those are the three options, and I, 
frankly, do not understand why.
    If you look at your proposal, $6 billion, $8 billion, $10 
billion cost, who is going to pay that?
    I do not think we want the lenders to do it, because if 
they do, guess what? They are not going to loan money to the 
program. We will run them away. I do not think we want to stick 
the taxpayers with that.
    And the fact is that those graduates made those choices 
when, in fact, they took out their consolidation loan.
    Probably another argument why we ought to be looking at 
something more like a variable rate is, because if we had had a 
variable rate over the last eight or 9 years we would not have 
this problem with people making an election to consolidate at 9 
percent, 8 percent, et cetera.
    Mr. Wu. Well, reclaiming my time, Mr. Chairman. The 
proposal we had would have substantially--first of all, we have 
not been able to get an accurate scoring, so I do not know how 
much it costs, and I am not sure that anyone does, but with the 
origination fees and reconsolidating at a variable rate, all of 
that was intended to reduce the cost of reconsolidation, and 
the variable had a cap on it of 6.8 percent.
    We are looking at a proposal today of a cap which is higher 
than that, and part of the argument for having this variable 
rate is to prevent inequity by cohort, depending on when you 
fixed, and if you permit a variable rate instead, then you 
eliminate that inequality by cohort, by when you fixed, and I, 
as one member, would find it more appealing to try to fix the 
future inequality, while at the same time addressing some of 
the past inequality, based on when someone chose to consolidate 
that one time, and perhaps if your staffer at 9 percent wants 
to move over to this side of the aisle, she would be very, very 
welcome.
    Chairman Boehner. Would the gentleman yield?
    Mr. Wu. Yes, absolutely.
    Chairman Boehner. I appreciate the gentleman yielding.
    And the way your proposal is structured to allow for a 
reconsolidation--or we will call it a second bite at the 
apple--and going to a variable rate, the variable rate part of 
it I think makes a great deal of sense.
    The problem is--you have got two problems. You have got 
there is a cost associated with it, and I would suggest to you 
there is a real cost, you know, the paper that is out there and 
who is going to lose.
    Secondly--and I think maybe even the bigger cost you cannot 
quite calculate--and that is the undermining of the paper for 
the student loan program in itself. If you look at the student 
loan program and the capital that comes to it, it is a very 
thin market, as opposed to home mortgages. There are very few 
players out there that are--I am talking about investors--that 
bring capital into this loan program, and frankly, we are 
dependent upon that capital in order to lend out to students.
    Over the last two higher ed reauthorizations, there were 
serious cuts in fees and yields to lenders. There was a lot of 
money saved going after the lenders and after the servicers in 
order to spend it somewhere else.
    I have to tell you, I have grave concerns. It came up 
earlier about going after lender yields. I think Mr. Miller 
brought up the subject.
    You don't see people clamoring to get into this business. 
As a matter of fact, since the last reauthorization, you have 
seen an awful lot of people leave. You have seen an awful lot 
of originators--originators, people who originate loans--
leaving the system. Of course, there are a lot of people in the 
consolidation business there today. But we have to be concerned 
about undermining the very paper, or the very foundation of the 
loan program, and that is the real huge under-estimated cost of 
reconsolidation.
    I have to tell you, I have looked at--I have been looking 
for 2 years, trying to find a way to deal with reconsolidation. 
Now, I have not found one. I have not found one that does not 
cost billions and billions of dollars. As a result, really, I 
am kind of at a standstill.
    Now again, I said this earlier, but let us go back to who 
these people are. These are the people that we guaranteed them 
a loan, guaranteed. There is a cost associated there.
    It could have been a guaranteed subsidized loan, where we 
ate the interest for four or 5 years, or at least we deferred 
the interest for four or 5 years.
    We gave them a deferment after they were out of school for 
6 months. We gave them a chance to extend their payments based 
on their income. We gave them a chance to consolidate, if they 
wanted to. And now we are suggested THAT maybe we want to give 
them another bite at the apple.
    My question is, what is fair?
    If we are going to spend a lot of money at the back end of 
this program to reconsolidate at the expense of poor kids and 
moderate income kids who are trying to get into school, you 
know, as a public policymaker I would suggest that that does 
not seem to be fair, and as you all know, what we are trying to 
do here is to find a fair balance for students and those who 
are out of school. It is a tough choice. Go ahead.
    Mr. Wu. Mr. Chairman, reclaiming my time.
    We have tried to propose this in a workable, responsible 
way, which holds costs down as much as possible to the taxpayer 
with a sense that that is ultimately where the cost is going to 
go. That is why the origination fee is there, that is why the 
proposal is made with a variable rate and with a cap.
    If we wanted to take a further step toward limiting the 
cost of reconsolidation or multiple reconsolidations, another 
concept that we could put on the table is limiting the multiple 
reconsolidations to those who have loans above a certain 
interest rate.
    My understanding is that those cohorts are relatively 
small--that is, those people who have a big difference between 
the loans that they are holding and what is currently available 
on the market.
    By doing that, we certainly hold down the cost, and I think 
that it is, in many situations, difficult to justify large 
inequities in the system, and for that consideration alone, 
perhaps we should look at those folks who have large deltas, 
large margins between what they are currently holding and what 
the market is, and that would further reduce the cost.
    Chairman Boehner. Well, if the gentleman will yield?
    Mr. Wu. Yes.
    Chairman Boehner. There is nothing that prevents someone 
who has already consolidated and does not like their interest 
rate, there is nothing to prevent them from going out and 
borrowing money in the real world, whether it be a home equity 
loan, borrowing any--there are all kinds of ways of financing 
all kinds of products.
    But what you are suggesting is a Federal guaranteed loan. 
That means money, because our guarantee means that we are 
guaranteeing the lender they are going to get paid, and do not 
forget the serious problem we have of undermining the existing 
paper that is out in the market place, and I'm not sure anybody 
could calculate what that is worth.
    The last point I would make is this. Let us say it cost $1. 
Let us just say it cost $1. That is $1 that could go to 
lowering origination fees, increasing loan limits, maybe 
something even on an enhanced Pell for kids.
    It is--again, let us get back to this fairness question, as 
to what is fair for all who are part of the system. The chair 
would recognize Mr. Miller.
    Mr. Miller. No, I would just say you can argue this round 
or square, but the point is--I think Mr. Wu has raised it--if 
we are going to argue the fairness question, I think you have 
also got to incorporate in that the cost of the program.
    You know, we have increased the subsidy in this program. We 
guarantee the loans. You know, I think if we are really going 
to talk about changing the program, we've got to lay all of the 
costs, all of the benefits down on the table--
    Chairman Boehner. Which program?
    Mr. Miller.--and decide how you want to apportion this--
    Chairman Boehner. Which program are we talking about?
    Mr. Miller.--between the cost of all the programs, whether 
it is the reconsolidation or it is the person getting out and 
making a choice of where they are going to enter. I mean, that 
is what has got to be done. I do not think you can look at one 
segment of this program and say, ``Well, the costs of this are 
such that we are going to shift them over onto this 
population,'' you know.
    Chairman Boehner. Well, if the gentleman will yield, you 
know, the proposal that--as most of you know--that I have been 
looking at is going to a variable rate for both the 
consolidation programs and the basic program itself. That is 
the marketplace.
    The idea that the government can fix a rate, we can, but 
because it is guaranteed we take all of the risk, and the fact 
is that most of the marketplace is the variable rates for 
everything.
    Yes, you can get a fixed rate on your mortgage, your home 
mortgage, and if you do, you are going to pay a much higher 
percentage, a much higher interest rate, because you want a 
fixed rate, and you want to lock it in.
    But my goal here is to try to put this program, the entire 
student loan program, on a solid financial foundation for the 
long term, where we can control what our costs are, we know 
what our costs are, we know what the benefits are, and I think 
we can do that, but if there are other proposals that people 
want to pursue, I am happy to look at them.
    I think the idea offered by Mr. Hoekstra, and personally, 
by Mr. Petri, to say in a consolidation program, ``All right, 
you can have a choice, you can have fixed or you can have 
variable without the subsidy,'' and that fixed would be based 
on a market rate, means that someone who wanted to consolidate 
on a fixed basis, there would be a different rate, I'm sure, 
for 10 years, probably a little higher rate for 15, and maybe 
even a little higher rate for 30.
    That is what the marketplace would probably dictate, 
because the longer you go, the more risk that you take and the 
higher the rate is going to be, and they may decide that makes 
sense. They may decide, ``Well, let's go with a variable.''
    But the market should set the rates, and if the market sets 
the rates and people make choices, I think in the long run 
students, graduates, the government, and taxpayers are all 
better off.
    I'm sorry. I forget that Mr. Wilson had not asked any 
questions yet. Would you like to ask questions, Mr. Wilson? You 
are recognized for 5 minutes.
    Mr. Wilson. Thank you, Mr. Chairman. I, at this time, would 
like to submit a statement for the record.
    [The prepared statement of Hon. Joe Wilson follows:]

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

    Mr. Chairman, I want to thank you for convening this hearing today 
and I commend you for examining solutions on how to make college more 
affordable for every American. Many parents and high school students in 
South Carolina and around this great country are concerned that college 
is no longer affordable and students leave school with too much debt. 
The consolidation program alleviates much of this concern.
    As we all well know, the cost of higher education has grown and 
today's college students will graduate with significantly more debt 
than when we last examined this issue 6 years ago. As a result, a 
number of graduates see their debt as unmanageable, and consequently, 
as imposing limits on their career choices, further depleting the pool 
who want to work in the public and non-profit sectors of the economy.
    The federal student loan consolidation program benefits borrowers 
from a wide spectrum of professions. It is especially attractive to 
those graduates wishing to enter into public service, as evidenced by 
the fact that nearly 20% of student loan borrowers who choose to 
consolidate their student loans are nurses, teachers and civil 
servants. Further, by lowering monthly payments, the program gives the 
borrower more flexibility and decreases the probability of default.
    This widely popular program has proven beneficial to the federal 
government as well. While consolidation loans are less profitable to 
lenders than the underlying student loans, the 0.5% origination fee and 
1.05% portfolio fee paid to the federal government by consolidation 
companies have generated significant revenue for the federal treasury. 
These fees do not apply to other student loans.
    Fixed rate consolidation loans provide a great benefit to recent 
college graduates. For many students, the cost of college is only 
realized after they graduate and start repaying their student loans. 
Changing the program to variable rates could double the cost of a 
college education. I thank the Chairman for this hearing, and I pledge 
during our Reauthorization of the Higher Education Act to work closely 
with him and my Committee Colleagues on this Consolidation portion of 
the legislation.
                                 ______
                                 
    Mr. Wilson. Additionally, I would like to thank all of you 
for being here today, and Mr. Hamlett, in particular, I want to 
commend you, at your age, for being here. I am excited for you, 
as an undergraduate student, to be with such distinguished 
persons as you have to your right and to your left, and so 
thank you for coming.
    Additionally, I have enjoyed the topic. I was a real estate 
attorney for 25 years, until 2 years ago when I was elected, so 
these issues--I have been at closings and seen the discussions, 
and with contracts of sale for decades now, and it is 
interesting to see how this relates, and I appreciate the 
Chairman educating me on the difference between a mortgage and 
a student loan which is subsidized.
    So with that in mind, Dr. Shapiro, in your study--direct 
quote--``As a general proposition, economists usually favor 
adjustable interest rate debt instruments over fixed interest 
rate instruments because they make the economy more 
efficient.'' And can you just tell us what would be the 
decision factors as to which route to go, say as an economist, 
as a consumer, or as an individual?
    Dr. Shapiro. The reason that economists generally prefer 
variable interest rate instruments over fixed rate instruments 
is that they reduce certain kinds of risk, and in particular, 
they reduce what economists call the wealth risk--that is, the 
value of the asset, of the loan, which changes if inflation 
changes in unexpected ways.
    We have a projection of inflation which we build into long-
term interest rates. Those are our inflationary expectations. 
We are sometimes surprised, and inflation is greater or less.
    We had the kind of positive inflationary surprise in much 
of the 1990's, when we had less inflation than we expected, for 
various reasons. A variable rate instrument eliminates that 
risk, because it is adjusting at some regular interval to 
changes, whether they were anticipated or not, and 
consequently, it means that the resources can be distributed 
more efficiently.
    Mr. Wilson. And how does this relate, say, to the consumer? 
What should they be looking at? Obviously, the short-term 
monthly payment, but how would the consumer look at this, or 
student?
    Dr. Shapiro. Well, for a student, there is a--we say there 
is a risk associated with variable rates as well. It is called 
an income risk, rather than a wealth risk.
    I think for a student, a student getting out of school, the 
most important economic consideration with respect to a 
consolidation loan is, frankly, not whether the rate is fixed 
or variable.
    The most important consideration is that the loan, the 
duration of the loan is increased significantly, and that 
reduces the monthly payment; and most students, most new 
graduates are most concerned with their monthly payments, as 
are most new homeowners.
    What is most attractive about a consolidation loan is it 
takes a 10-year loan and makes it a 15 or a 20, or a 25, or a 
30-year loan, depending on the size of the total debt being 
consolidated. That advantage, from the point of view of the 
student, is there at any time.
    I think the advantage of a variable rate, as opposed to a 
fixed rate for a student, there is an obvious advantage if they 
are consolidating at a time of high interest rates. When the 
interest rate goes down, their payment is going to go down.
    The other advantage is that it is a--it means that the 
burden is, in some sense, predictable.
    That is, it will increase or fall with the entire economy, 
and if changes in interest rates reflect changes in economic 
activity, which reflect--which lead to changes in income, then 
a variable rate allows an individual to feel some security that 
they will be able to adjust, that as conditions change they 
will be able to afford the interest payment on their loan.
    Mr. Wilson. One final question, and it would relate again 
to variable interest rate loans. Is there a concern there may 
be more borrower defaults with the variable rate, or how would 
you address that?
    Dr. Shapiro. Well, one of the primary purposes of the 
consolidation program was to reduce defaults, and the way it 
primarily did that, again, was by reducing the monthly payment 
by stretching, by extending the duration of the loan, and I 
think that it depends on when you consolidate it, sir.
    Mr. Wilson. Right.
    Dr. Shapiro. If you consolidated at 9 percent or 8.25 
percent, which is the cap since 1997, you may be much more 
inclined to default in an interest rate environment of 3 
percent. You are continuing to carry relatively high payments.
    If, look, if we offer, you know, large numbers of people 
the opportunity to consolidate a large amount of loans at 3.5 
or less, I mean, if you do it in the 6-month grace period 
today, something I would recommend to Mr. Hamlett, you get 
another benefit, and it is actually, the interest rate is about 
2.8 percent on current consolidated loans if you do it in the 
first 6 months after leaving school.
    Chairman Boehner. Mr. Hamlett, have you got that?
    Mr. Wilson. Thank you very much. And I noticed Mr. Hamlett 
wrote notes.
    Chairman Boehner. OK. Well, let me thank our witnesses for 
their patience and their valuable information, and all of those 
who have come today for your patience. It was a long day, but I 
think that the information that was presented was very helpful 
to the Committee, and I thank you.
    This hearing is adjourned.
    [Whereupon, at 1:38 p.m., the Committee was adjourned.]
    [Additional material submitted for the record follows:]

 Statement of Hon. Charlie Norwood, a Representative in Congress from 
                          the State of Georgia

    Mr. Chairman I thank you for holding today's hearing to examine the 
future of the Federal Consolidation Loan Program. I look forward to the 
testimony of our witnesses, and as always, I appreciate their expertise 
in shedding light on this critical issue the Committee must consider as 
we continue to strengthen American Higher Education policy.
    More and more students each year are attending institutions of 
higher learning. As a result, the demand for student loans and 
financial assistance to help pay for the rising cost of an education at 
an American university is increasing as well. This rising demand for 
assistance in an era of economic change has created new challenges for 
the federal government, and we must therefore examine all aspects of 
our policy regarding federal aid; including the Consolidation Loan 
Program (CLP).
    Born during the reauthorization of the Higher Education Act in 
1986, the CLP provides an opportunity for borrowers with more than one 
loan holder and a high debt level to consolidate that debt into one 
monthly payment under one lender. This gives borrowers the ability to 
stretch out a loan repayment period to a maximum of 30 years, which 
lowers their monthly payment, at a fixed interest rate determined by 
the weighted average of the loans being consolidated.
    Since the inception of the CLP in 1986, and especially since 1994, 
graduates have increasingly taken advantage of the program as interest 
rates have declined--spurred on by new organizations that exist 
specifically to aggressively market consolidated loans by way of mail, 
phone, and the Internet.
    And while the proliferation of the consolidated student loan 
certainly has allowed borrowers to save considerable sums over their 
loan repayment period at a low fixed rate, the savings do not come 
without cost to the American taxpayer. In fact, the government pays 
subsidies (in the form of deferments interest paid on behalf of the 
borrower and allowances paid directly to vendors) to cover the cost of 
these consolidated loans over the life of their repayment period. This 
amounts to yet another burden on the American taxpayer to cover the 
cost of consolidated loans, even when it is unclear that a borrower 
needs to consolidate their loans.
    Mr. Chairman it is important for this Committee to take these 
considerations to heart as we continue the Reauthorization process for 
the Higher Education Act. Is the CLP fulfilling its original intent in 
light of recent trends in light of recent trends? Should the taxpayer 
continue to finance and subsidize the CLP at a fixed rate; or should 
Congress explore a variable rate structure to make the system more 
equitable? More importantly, should taxpayers continue to subsidize 
borrowers at a low fixed rate at the expense of providing access to 
students entering and attending post secondary education?
    It is critical to find commonsense answers to these questions if 
Congress is to ensure the future of the CLP in a fiscally responsible 
way. Borrowers must continue to enjoy access to consolidated loans over 
the lifetime of a long-term repayment period; but Congress must also 
ensure that students seeking access to higher education have the 
resources necessary to achieve their dreams.
    Mr. Chairman I look forward to hearing our witness' thoughts on how 
Congress can achieve both of these worthy goals as we continue to work 
towards Reauthorization of the Higher Education Act, and thank you for 
providing continued leadership on this very important issue.
    I respectfully yield back the remainder of my time.

                                 
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