[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]





 FEDERAL STUDENT LOAN PROGRAMS: ARE THEY MEETING THE NEEDS OF STUDENTS 
                              AND SCHOOLS?

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

                                HEARING

                               before the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 26, 2005

                               __________

                           Serial No. 109-31

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform



                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida           C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada                BRIAN HIGGINS, New York
KENNY MARCHANT, Texas                ELEANOR HOLMES NORTON, District of 
LYNN A. WESTMORELAND, Georgia            Columbia
PATRICK T. McHENRY, North Carolina               ------
CHARLES W. DENT, Pennsylvania        BERNARD SANDERS, Vermont 
VIRGINIA FOXX, North Carolina            (Independent)
------ ------

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 26, 2005.....................................     1
Statement of:
    Merten, Alan, president, George Mason University; Sarah 
      Bauder, director of student financial aid, University of 
      Maryland; Nancy Coolidge, coordinator, Federal student 
      financial support, Office of the President, University of 
      California; Natala Hart, director of student financial aid, 
      Ohio State University; and Cynthia Thornton, Director of 
      Student Financial Aid, Dillard University..................    64
        Bauder, Sarah............................................    74
        Coolidge, Nancy..........................................    78
        Hart, Natala.............................................    95
        Merten, Alan.............................................    64
        Thornton, Cynthia........................................   102
    Shaw, Theresa S., Chief Operating Officer, Federal Student 
      Aid Office, U.S. Department of Education; and John P. 
      Higgins, Jr., Inspector General, U.S. Department of 
      Education..................................................    27
        Higgins, John P., Jr.....................................    40
        Shaw, Theresa S..........................................    27
Letters, statements, etc., submitted for the record by:
    Bauder, Sarah, director of student financial aid, University 
      of Maryland, prepared statement of.........................    76
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana, prepared statement of..........................   127
    Coolidge, Nancy, coordinator, Federal student financial 
      support, Office of the President, University of California, 
      prepared statement of......................................    80
    Cummings, Hon. Elijah E., a Representative in Congress from 
      the State of Maryland, prepared statement of...............    16
    Davis, Chairman Tom, a Representative in Congress from the 
      State of Virginia, prepared statement of...................     4
    Hart, Natala, director of student financial aid, Ohio State 
      University, prepared statement of..........................    97
    Higgins, John P., Jr., Inspector General, U.S. Department of 
      Education, prepared statement of...........................    42
    Merten, Alan, president, George Mason University, prepared 
      statement of...............................................    67
    Porter, Hon. Jon C., a Representative in Congress from the 
      State of Nevada, prepared statement of.....................   129
    Ruppersberger, Hon. C.A. Dutch, a Representative in Congress 
      from the State of Maryland, prepared statement of..........    24
    Shaw, Theresa S., Chief Operating Officer, Federal Student 
      Aid Office, U.S. Department of Education, prepared 
      statement of...............................................    30
    Thornton, Cynthia, Director of Student Financial Aid, Dillard 
      University, prepared statement of..........................   104
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, prepared statement of.................     9

 
 FEDERAL STUDENT LOAN PROGRAMS: ARE THEY MEETING THE NEEDS OF STUDENTS 
                              AND SCHOOLS?

                              ----------                              


                         THURSDAY, MAY 26, 2005

                          House of Representatives,
                            Committee on Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:25 a.m., in 
room 2154, Rayburn House Office Building, Hon. Tom Davis 
(chairman of the committee) presiding.
    Present: Davis of Virginia, Shays, Souder, Platts, Duncan, 
Brown-Waite, Porter, Marchant, McHenry, Dent, Fox, Waxman, 
Kanjorski, Sanders, Maloney, Cummings, Kucinich, Clay, Watson, 
Lynch, Van Hollen, Sanchez, Ruppersberger, Higgins, and Norton.
    Staff present: Jennifer Safavian, chief counsel for 
oversight and investigations; Robert Borden, counsel/
parliamentarian; Rob White, press secretary; Drew Crockett, 
deputy director of communications; Grace Washbourne, 
professional staff member; Teresa Austin, chief clerk; Sarah 
D'Orsie, deputy clerk; Corinne Zaccagnini, chief information 
officer; Phil Barnett, minority staff director/chief counsel; 
Kristin Amerling, minority deputy chief counsel; Karen 
Lightfoot, minority communications director/senior policy 
advisor; Brian Cohen, minority senior investigator and policy 
advisor; Earley Green, minority chief clerk; Jean Gosa, 
minority assistant clerk; Cecelia Morton, minority office 
manager; and Christopher Davis, minority investigator.
    Chairman Tom Davis. A quorum being present, the Committee 
on Government Reform will come to order. I would like to 
welcome everybody to today's oversight hearing examining 
Federal Student Loan Programs.
    The purpose of this hearing is to discuss the management 
and performance of the Federal Family Education Loan Program 
and the William D. Ford Federal Direct Loan Program. 
Specifically, the committee will focus on the Department of 
Education initiatives to enhance management and delivery of 
services to students and schools, as well as highlight the 
important role of choice in the creation of increased services 
and streamline delivery in both programs.
    Discussions about Federal Student Loan Programs often 
digress into battles over which program is better, and evolve 
into debates centering on complex cost estimates. Along with 
Chairman Boehner on the Education and Workforce Committee, 
Chairman Nussle of the Budget Committee, and other House and 
Senate colleagues, we have asked the Government Accountability 
Office to examine the accuracy of cost estimates so that we 
will have accurate and reliable data.
    With conflicting studies and reports on costs, it is 
imperative that Congress have a thorough and independent 
examination of these factors, and I will await the release of 
the GAO findings in September and the committees of 
jurisdiction with the consideration of reauthorization of the 
Higher Education Act.
    In the meantime, today's hearing will focus on the 
management and performance of both loan programs. We have asked 
our witnesses the fundamental oversight questions. Are schools 
and students well served by the current choice of loan 
programs? Is the Department effectively managing these 
programs?
    Student loan programs must do more than issue loans to 
students. They have to educate parents and students about their 
options, when it comes to paying the high costs for higher 
education. They have to help schools and students comply with 
the complex procedures to apply for and receive student loans. 
We need to know, are these programs doing all that they have to 
do, to make higher education accessible and affordable for all?
    I welcome Ms. Theresa Shaw, Chief Operating Officer of the 
Office of Financial Student Aid, Department of Education; and 
the Honorable John Higgins, Inspector General of the Department 
of Education to discuss their successes and the continuing 
challenges they face in managing Federal Student Loan Programs.
    The Department of Education's Student Loan Programs were 
removed from the GAO's high risk series this past January, and 
I look forward to hearing about the management improvements 
that made this possible.
    We are also honored to have with us a wide range of student 
financial experts from schools whose students rely on Federal 
Student Loans. Each of them has been asked to talk about their 
institution's history with the Federal Student Loan Program, 
and to discuss their working relationship with the Department 
of Education. We also hope they will suggest service 
improvements and reforms to the Student Loan Program.
    During the committee's investigation of Student Loan 
Programs, we found that 75 percent of our Nation's students 
choose the FFELP Program over the Direct Loan Program.
    Why is that? The answer is, the private sector plays a 
pivotal role in making higher education affordable and 
accessible. Lenders, loan guarantors, and other non-profits 
provide many services that not only help students afford higher 
education, but also help students who mistakenly believe higher 
education is otherwise out of their reach.
    They also customize their programs for the specific needs 
of diverse schools and student bodies, and provide financial 
and life skills training.
    For example, the committee has had the opportunity to hear 
from the State of Virginia's guaranty agency, ECMC, whose 
foundation created the Realizing the College Dream Program. 
This program supports teachers, counselors, and community-based 
organizations in their efforts to help low income and first 
generation college students and their families realize that 
higher education is within their reach.
    Through this program, the ECMC Scholars Program, the ECMC 
Foundation provides millions of dollars in financial aid every 
year to students in Virginia.
    The constant refrain that has emerged from the committee's 
findings is that schools want a choice in Student Loan 
Programs, and that the competition between the two main Student 
Loan Programs has resulted in better benefits and services for 
their students.
    Today, we will hear that choice in the Student Loan Program 
has resulted in a healthy, competitive marketplace on student 
financial aid. Choice in Federal student loans has led to major 
investments in technologies by companies and by the Federal 
Government, and that choice gives schools the power to demand 
loan services that best address the financial needs of the 
students that attend their schools. Along with my colleagues, I 
welcome you all here today and look forward to today's 
discussion.
    I would just add that I served in Fairfax County Government 
for 15 years, prior to coming to Congress. We established there 
a county trash pick-up to compete with the privates, and we 
allowed neighborhoods to choose. We found out, when the county 
got in the action, the privates lowered their price and it kept 
everybody more competitive, giving people a wider choice.
    I think, to a great extent, my observations going into this 
is that this competition has been healthy for students and 
consumers. Mr. Waxman.
    [The prepared statement of Chairman Tom Davis follows:]

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    Mr. Waxman. Thank you, Mr. Chairman, and I would like to 
thank you for calling today's hearing on Federal Student Loan 
Programs. The committee does not hold hearings on the 
Department of Education, but the Government's education 
programs are an important area for oversight.
    The Federal Student Loan Program has been a vital resource 
over the last five decades, providing opportunities for higher 
education to millions of Americans. Before they finish school, 
6 out of 10 post-secondary students have borrowed money through 
a Government program to help pay for their education. With 
tuition rates rising much faster than inflation, this Federal 
assistance is becoming an increasingly vital resource.
    The economic return from the student loan investment is 
easy to see. A more educated society has helped propel the 
Nation's productivity over the last half century. The Federal 
Government has two programs to finance student loans: the 
Direct Loan Program, which is run by the Federal Government, 
and the Guaranteed Loan Program, which is run by private 
lenders.
    It is clear that the Direct Loan Program has been a huge 
success. Before its inception, the student loan business was 
characterized by chaos. Students had to wait in long lines to 
get their loan checks, and schools had to deal with different 
forms and procedures for each lender.
    By offering schools a more accessible alternative, the 
Direct Loan Program has sparked reform in the private lending 
community. In its first 3 years, the Direct Loan Program 
enticed a third of the participating schools to switch from 
private lenders. The rapid migration caused private lenders to 
make rapid upgrades in their services that included 
streamlining loan administration and offering beneficial 
financial incentives to borrowers.
    The Direct Lending Program has offered an additional 
benefit to the taxpayer. It is more efficient than its private 
sector counterpart.
    The President's budget shows that when the Government lends 
the money itself, it cost 14 times less in 2004 than when the 
Government guarantees loans through private lenders. Since its 
inception, the program has saved the taxpayer more than $10 
billion in lower subsidy costs.
    I am not opposed to the Guaranteed Loan Program run by 
private lenders. Its existence provides competition to the 
Direct Loan Program, and this competition improves both 
programs.
    But one of the questions we need to resolve is how to 
protect the taxpayers' interest. It does not make sense that 
the Guaranteed Loan Program should cost the taxpayers so much 
more than the Government Loan Program. If the Federal 
Government is overly subsidizing banks and big lenders to offer 
these loans, we should reassess these payments.
    We also need to examine the financial management of the 
Federal Student Aid Program. For 15 years, this program has 
been on GAO's list of programs at high risk of waste, fraud, 
and abuse. This January, GAO took the Student Aid Program off 
the watch list. This positive step was a response to a 
concerted effort at the Department of Education to better track 
outstanding loans and more thoroughly investigate cases of 
fraud.
    The Department should be congratulated for its progress and 
encouraged to ensure that it persists. I am glad that we have 
the Department of Education Inspector General here to tell us 
about their continued efforts to improve financial management.
    I am also pleased that we will hear from a panel 
representing the Nation's colleges. I would particularly like 
to welcome Nancy Coolidge, who will be representing the 
University of California. The U.C. schools have over 80,000 
students receiving loans through Federal programs. Because the 
U.C. schools participate in both the Direct Loan and Guaranteed 
Loan Programs, she will be able to offer us a valuable and 
balanced perspective.
    Mr. Chairman, the Federal Student Loan Program is a great 
example of how the Federal Government can provide a boost to 
low and middle-income families. I thank you for holding these 
hearings today, and I look forward to learning what we can 
about how we can make these programs even more effective.
    [The prepared statement of Hon. Henry A. Waxman follows:]

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    Chairman Tom Davis. Well, thank you very much. Since you 
referred to the second panel, I just would note that we have 
Dr. Alan Merten, who is a visionary leader at George Mason 
University, who will be on that second panel, as well, and we 
look forward to hearing from him.
    Mr. Waxman. Mr. Chairman, you are probably going to mention 
it, but there are people from Ohio State University.
    Chairman Tom Davis. And Maryland, and Dillard University, I 
was going to get that on the second introduction, but as long 
as we are home-towning it. [Laughter.]
    Mr. Waxman. We are looking forward to even hearing from 
them, even though they do not come from our jurisdiction.
    Chairman Tom Davis. Well, we are looking forward to hearing 
from all of them. But you have to recognize that Dr. Merten 
votes in my district, as well, and I did not want to get 
upstaged.
    Mr. Waxman. I give up. [Laughter.]
    Chairman Tom Davis. Are there any other opening statements? 
I know Mr. Souder has an opening statement.
    Mr. Souder. Yes, I appreciate the chairman for yielding me 
a few minutes. As a senior member of the Education Committee, 
and as chairman of the oversight committee that has 
jurisdiction over the subcommittee on this committee on 
education, I wanted to make it absolutely clear that I believe 
it is important to have private sector alternatives.
    We, on the Education Committee, and I was Higher Education 
Subcommittee for 6 years, have declared a truce, Chairman 
Boehner and Chairman McKeon, between those of us who believe 
that direct lending ought to be eliminated, and those who 
believe that the private sector ought to be eliminated. We have 
had a working truce to make sure there is a level playing 
field.
    The statistics show that, in fact, private sector lending 
has been much more effective. I believe that previously, the 
Federal Government gave us misleading, deceitful statistics 
about how mixed and fixed costs were allocated, which made 
direct lending seem cheaper.
    It also shows that when you keep a level playing field, for 
example in my district, 10 of the 12 institutions of higher 
learning are not direct lending. They have moved to the private 
sector and, in fact, have moved to the private sector at an 
increasing rate.
    It is important, as we debate this, that we understand that 
much like when we deal with questions in Postal reform and 
others, when the Federal Government tries to bury their fixed 
and mixed cost, and then claim they are beating the private 
sector, I would hope Members of Congress have enough economic 
sense to understand that difference.
    I yield back.
    Chairman Tom Davis. I thank you very much. Are there any 
other Members? The gentleman from Baltimore.
    Mr. Cummings. Thank you very much, Mr. Chairman, and I 
thank you for holding this very important hearing.
    As Congress considers the reauthorization of the Higher 
Education Act, we must embrace our moral obligation to ensure 
that those who wish to better themselves through a post-
secondary education are able to achieve that goal unobstructed 
by the barrier of financial disadvantage. Federal Student Aid 
Programs reflect our commitment to that obligation by helping 
needy students and families afford a higher education, who 
would otherwise be unable to do so.
    In today's world of global competition, transformation, and 
increased expectations of employee qualifications, there can be 
no doubt of the importance of a post-secondary education. In 
fact, the Bureau of Labor Statistics recently reported that a 
post-secondary education would be essential for 42 percent of 
the jobs created in this decade.
    The U.S. Census Bureau reaffirmed the value of a post-
secondary education, reporting that those with a Bachelor's 
Degree earned, on an average, $1 million more over their 
lifetime than those with only a high school diploma.
    With record budget deficits, dramatic tuition increases, 
and the growing necessity of post-secondary education, the need 
to ensure that our Federal student loan programs are effective 
and efficient has never been greater. The two major student 
loan programs operated by the Federal Government include the 
Federal Family Education Loan Program and the Ford Federal 
Direct Loan Program.
    Under the FFELP or Guaranteed Loan Program, private lenders 
supply the loan capital and the Federal Government assumes the 
risk by guaranteeing the loan against the borrower's default. 
Under the FDLP or Direct Loan Program, loans are financed 
directly to the students, using the U.S. Treasury funds.
    In fiscal year 2004, approximately $52 billion was 
distributed to 12\1/2\ million college students and their 
families through Federal Student Loan Programs. Moreover, 25 
percent of these loans were made through the Direct Loan 
Program, with the larger 75 percent share made through the 
Guaranteed Loan Program.
    It is unfortunate, however, that more institutions did not 
utilize the Direct Loan Program as it is over 10 times less 
costly to the taxpayer than the Guaranteed Loan Program.
    While improvements in the Guaranteed Loan Program such as 
the implementation of standard forms and procedures should be 
recognized, I am deeply troubled that these reforms had little 
impact on the overall cost to the taxpayer.
    The Washington Post reported that the President's own 
budget for fiscal year 2006 shows that ``for every $100 spent 
on student loans, the U.S. Government pays $12.09 of subsidy on 
Government-guaranteed loans, and only 84 cents for direct 
loans.'' In contrast, from 1992 to 2004, the Direct Loan 
Program saved taxpayers approximately $10 billion in subsidy 
costs.
    I believe we have a common goal in following common sense. 
For this reason, I have co-sponsored the Student Reward Aid 
Act, introduced by Representative Petri and Representative 
Miller.
    This legislation would encourage institutions of higher 
education to participate in the Student Loan Program that is 
most cost-effective for taxpayers. If more institutions 
utilized the Direct Loan Program, we would achieve substantial 
cost savings and direct those savings to grant aid such as Pell 
Grants.
    Finally, Mr. Chairman, in the wake of an announcement that 
the University System of Maryland's in-State undergraduate 
tuition would rise in the fall by 5.8 percent, a Towson 
University student in Maryland was quoted in the Washington 
Post as saying, ``You are not offering a higher education to 
everyone. You are only offering it to people who can afford 
it.''
    In clear and plain terms, there is something wrong in 
America when capable and driven students are denied access to a 
higher education for financial reasons.
    By improving Federal Student Aid Programs, we open the door 
of opportunity to more students. Mr. Chairman, by providing 
students in our Nation with access to an affordable, high-
quality, post-secondary education, we help save our children 
and generations yet unborn from the clutches of poverty, crime, 
drugs, and hopelessness. What can be more necessary? What can 
be more important?
    I look forward to the testimony of all of today's 
witnesses, and especially recognize Ms. Sarah Bauder of the 
University of Maryland, my alma mater. I yield back the balance 
of my time.
    [The prepared statement of Hon. Elijah E. Cummings 
follows:]

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[GRAPHIC] [TIFF OMITTED] T1709.012

    Chairman Tom Davis. Thank you very much.
    Yes, Mr. Duncan.
    Mr. Duncan. Mr. Chairman, thank you for once again calling 
a hearing on a very important topic. Several columnists and 
education experts have pointed out that since the start of the 
Federal Student Loan Program in 1965, college and university 
tuition and fees have gone up at about three or four times the 
rate of inflation.
    For many years, there was little opposition to increases, 
because students were told not to worry, they could just get a 
low interest Government loan.
    Now many young people are getting out of school with huge 
student loan debts, especially if they have gone to a private 
school. The average student loan debt is now $18,900. But it is 
not uncommon for those who have gone to private universities or 
colleges to get out with $50,000 debts, or if they go to 
graduate school, too, even $75,000 or $100,000 debts.
    According to College Board and the Bureau of Labor 
Statistics, tuition and fees have increased almost 300 percent 
in the last 20 years. While inflation over that same period has 
been 84.7 percent. If the figures since 1965 are included, the 
increase over the rate of inflation is even greater.
    There is now so much concern, that legislative remedies are 
being considered. In the March 8th U.S. News and World Report 
of last year, Editor in Chief Mortimer Zackman wrote an 
editorial about this problem.
    He noted there was a 14 percent increase in tuition last 
year alone at public 4-year colleges and universities. He said, 
``Only the well off can now afford a college education these 
days.'' Nothing will happen this year. But if these whopping 
increases continue, the Congress will be forced to take action.
    In a new book, called ``Going Broke by Degrees: Why College 
Costs Too Much,'' Richard Vetter wrote this. He said, in 1958, 
the annual tuition at Northwestern University was $795. In the 
fall of 2003, the tuition for new students was $28,404. An 
estimate of the 2003 median family income indicates that 
Northwestern's tuition would be over 53 percent of an average 
family's incomes.
    If the ratio of Northwestern's tuition to median family 
incomes rises by the same rate over the next 45 years, as it 
did over the previous 45 years, the tuition then would 
represent almost 2 years of a median family's incomes. That 
will just be impossible to bear for mini-families.
    I can tell you a very common thing for me, for parents and 
grandparents to bring me their college graduate young people. 
These are good looking young people with good grades, and they 
are unable to find jobs.
    So what is happening, because we have sent so many millions 
of good jobs to other countries for so many years now, many 
students cannot find the good jobs that they used to be able to 
find with just Bachelors Degrees, when I was in college.
    So all the young people are working as waiters and 
waitresses in restaurants, and they are going on to Graduate 
School. But then, sadly, they are finding out that they cannot 
find good jobs, even sometimes with Graduate Degrees and huge 
student loan debts. This is a very serious problem that is 
growing very fast. If colleges and universities do not start 
doing more to hold down these whopping increases, Congress is 
going to have to take action. Thank you, Mr. Chairman.
    Chairman Tom Davis. Thank you very much.
    Does anyone else wish to make a statement? Ms. Norton.
    Ms. Norton. Mr. Chairman, this hearing on the management of 
Education Loan Program could not be more timely. Inflation in 
tuition is outflanked only by inflation in health care in our 
country. We have gotten to the point, of course, where parents 
do not so much pay for college tuition as students do, with the 
effect that millions of young people are not going to college 
at all with the rise in the inflation tuition.
    Those who do go and take these loans find that they are 
retarded in their start in life. Many of them have to take job 
only based on whether the jobs pay enough money to allow them 
to pay their student loans and to make a living. They are 
moving in with their parents. We have to do something about 
this effect on young people.
    The Direct Loan Program has had the desired effect, it 
seems to me, because it has encouraged changes in the 
Guaranteed Loan Fund, and it has encouraged lenders to do what 
the private sector is most capable of doing, and that is to 
engage in innovations that attract even more students and 
parents to their program.
    But the difference in the costs of these two programs, Mr. 
Chairman, is simply indefensible. We have to come to grips with 
that difference. You can explain away this or that part of it. 
But the fact is that these are huge differences, and these 
subsidies do not go to the student. They do not go to 
education. These subsidies go to the private sector.
    We have to demand far greater efficiencies from them than 
they have been able to produce, since the Direct Loan Program 
demonstrated that you can indeed provide this service at a much 
reduced amount than had been done previously.
    Mr. Chairman, I am particularly grateful for the work you 
have done on the D.C. College Access Act. That has caused me to 
follow these costs in a way that I did not before. You and I 
know that despite the fact that Congress has been generous in 
trying to keep up with the costs of this act, that it has 
become almost impossible to do.
    Indeed, tuition in the United States is going up at an 
average rate of 14 percent annually. This is not sustainable. 
Anything we can do to cause a U-turn on these costs, not just 
gradually reduce these costs over the next generation. But a U-
turn on these costs is going to be necessary if, in fact, we 
intend to encourage young people to go to college at the rate 
they will need to go in order to keep our country competitive.
    I am very interested in this hearing, and I am grateful 
that you called it today, Mr. Chairman.
    Chairman Tom Davis. Thank you. Let me just say that we are 
not trying to engage here in a cost issue. But there are some 
issues on costs that we do not have all the facts. That is why 
we have asked GAO to come back and look at this.
    In past reports, GAO has hinted at problems in revenue 
data. The Department of Education data shows that direct 
lending subsidy costs have been underestimated by billions of 
dollars. But we don't really know, and we are going to wait for 
that GAO report to come back in.
    What we are looking at today is not the cost debate, but it 
is an oversight hearing on the management and performance of 
the two largest student programs. I would like to keep the 
emphasis there, because from my perspective, we could throw out 
all the numbers we want, but until we get that GAO report, at 
this point we really don't know what we are talking about.
    Mr. Ruppersberger.
    Mr. Ruppersberger. Very quickly, Mr. Chairman, a lot has 
been said. I think we all agree that students who are 
deserving, regardless of their ability to pay, we need to get 
them educated. The economic viability and long-term success of 
the Nation is dependent upon its ability to enroll, educate and 
graduate students. The Federal loan program is the single 
largest source of student financial aid.
    Unfortunately, with the increase of college tuition, many 
students who enroll in college will not be able to afford to 
stay until graduation. The efforts of the Department of 
Education to bring accountability to its programs are 
essential. If we ensure accountability among the borrowers and 
the programs that are responsible for day to day operations, it 
will send a clear message that these funds should be used for 
educational purposes only.
    The U.S. Department of Education should further its 
programs to teach borrowers about the official use of the money 
and require students to prepare budget plans for any additional 
use. Thank you.
    [The prepared statement of Hon. C.A. Dutch Ruppersberger 
follows:]

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    Chairman Tom Davis. Do any other members wish to make 
opening statements?
    If not, we will move to our first panel. We are expecting 
votes shortly, so I would like to get your testimony in. We may 
have to take about a 15 minute recess, then we will come back 
and finish.
    We have Ms. Theresa Shaw, who is the Chief Operating 
Officer of the Office of Federal Student Aid at the U.S. 
Department of Education, and the Honorable John P. Higgins, 
Inspector General of the U.S. Department of Education. Thank 
you both for being with us.
    It is our policy to swear witnesses in before you testify, 
so if you will raise your right hands.
    [Witnesses sworn.]
    Chairman Tom Davis. Thank you so much.
    Ms. Shaw, we will start with you.

STATEMENTS OF THERESA S. SHAW, CHIEF OPERATING OFFICER, FEDERAL 
 STUDENT AID OFFICE, U.S. DEPARTMENT OF EDUCATION; AND JOHN P. 
 HIGGINS, JR., INSPECTOR GENERAL, U.S. DEPARTMENT OF EDUCATION

                  STATEMENT OF THERESA S. SHAW

    Ms. Shaw. Good morning, Chairman Davis, Ranking Member 
Waxman, and members of the committee. Thank you for inviting me 
to testify today.
    I am Terri Shaw, the Department of Education's Chief 
Operating Officer for Federal Student Aid. I am pleased to be 
here representing Secretary Spellings, the Department, and the 
very talented and dedicated Federal Student Aid staff.
    The Department of Education's grant, loan, and work 
programs represent the largest source of student aid for post-
secondary education in the United States. In 2004, these 
programs provided approximately $69 billion to more than 10 
million students and their families.
    Federal Student Aid, under the direction of the Secretary, 
is charged with operational responsibility for oversight and 
administration of all the Department's Federal student 
financial assistance programs and as one of the Government's 
few performance-based organizations, upholds high standards of 
operational efficiency, innovation, and customer care.
    To carry out these purposes, Federal Student Aid is focused 
on delivering world-class customer service, developing award-
winning products and services, effectively managing the 
programs to ensure fair and effective oversight, and providing 
service delivery at the lowest cost without sacrificing 
quality.
    I would like to share some statistics that illustrate the 
size and scope of our enterprise. We receive and process over 
14 million FAFSA aid applications each year. We have 
dramatically transformed the FAFSA process from a 100 percent 
paper to nearly 90 percent Web-based.
    We are the single largest lender of student loans, annually 
originating nearly $13 billion in new loans. We service the $87 
billion outstanding portfolio of Direct Loans. The Department, 
through Federal Student Aid, provides over $12 billion in 
Federal Pell Grants to more than 5 million undergraduate 
students each year. We are responsible for collection on the 
$17 billion defaulted student loan portfolio, and we manage and 
monitor $500 million in contracts under which our major 
business processing functions are performed.
    We are particularly proud of the Department's and Federal 
Student Aid's recent achievement of a major President's 
management agenda, Government Accountability Office and 
departmental objective by reducing the vulnerability of the 
Federal Student Aid programs to risk. In January 2005, GAO 
removed the Federal Student Aid programs from its high risk 
list. Additionally, in March 2005, we achieved all green status 
on the scorecard used by the Office of Management and Budget 
for monitoring our progress and status.
    You asked me to highlight some of the initiatives that 
resulted in these achievements. Simply stated, the Department 
made reducing vulnerabilities in the programs and the removal 
of the Student Aid Programs from the High Risk List a top 
priority. We institutionalized sound financial management and 
received clean audit opinions for the past three fiscal years. 
Working with all participants across the program, the cohort 
default rate was reduced from an all-time high of 22.4 percent 
to an all-time low of 5.2 percent.
    We implemented ongoing processes to identify risk and have 
several initiatives underway, including a joint task force with 
the Department's Office of Inspector General to identify real 
or potential risks. We developed a multi-year sequencing plan 
for system and business process integration. Our two principal 
initiatives re-engineer our front end and back end systems and 
business functions, and together will save taxpayers an 
estimated $1\1/2\ billion.
    Our independent customer satisfaction scores for our 
electronic FAFSA are comparable to UPS, Mercedes Benz, and 
Amazon.com; for our direct loan servicing, better than Wachovia 
Bank and similar financial services institutions. And for our 
Pell Grant and Direct Loan origination, better than e-Trade. 
The Department is committed to ensuring the integrity and 
viability of both the Federal Family Education Loan and Direct 
Loan program. The availability of choice has made both programs 
stronger through competition, has been the catalyst for 
innovation, has forced standardization of data exchange 
methods, and most importantly, has appropriately directed the 
focus on service to students and parents and to the higher 
education institutions who are on the front lines serving them.
    Your invitation asked me to suggest recommendations for 
legislative changes needed to improve the management of the 
Federal Student Aid program. Changes may be necessary in the 
Performance-Based Organization authorizing legislation. The 
Department is in the process of developing its legislative 
recommendations for the upcoming reauthorization of the Higher 
Education Act. Any changes related to human capital management 
will complement the administration's Government-wide Civil 
Service reform, announced in the fiscal year 2006 President's 
budget.
    I believe that in order for Federal Student Aid to be made 
most effective, it must be able to operate more like a private 
sector business than a traditional Government agency. I am 
fully aware of however, of our special responsibilities to 
taxpayers, employees and our business partners.
    I would also like to highlight a legislative proposal that 
the administration has supported for several years: an 
amendment to Section 6103 of the Internal Revenue Code that 
would allow for the matching of student aid applicant data with 
IRS tax information. We believe that if this change is enacted, 
we could eliminate many burdensome processes that are currently 
used to verify student aid applicant data and further simplify 
the process for applicants, their families and schools.
    Additionally, we could significantly reduce improper 
payments due to inaccurate income reported by applicants. For 
example, reducing these improper payments could lead to 
significant cost savings of approximately $300 million annually 
in the Pell Grant program.
    In closing, I am honored to be part of Secretary Spellings' 
team and the Department of Education, an organization that 
plays such a central and essential role in our Nation. We 
ensure that all eligible Americans can benefit from federally 
funded financial assistance for education beyond high school, 
and we consistently champion the promise of post-secondary 
education for all Americans and its value to our society.
    On behalf of the Secretary, the Department, and the Federal 
Student aid staff, thank you all for the opportunity to share 
with you our performance and accomplishments. I would be 
pleased to answer any questions the committee may have.
    [The prepared statement of Ms. Shaw follows:]

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    Chairman Tom Davis. Thank you very much.
    Mr. Higgins.

               STATEMENT OF JOHN P. HIGGINS, JR.

    Mr. Higgins. Mr. Chairman and members of the committee, 
thank you for the opportunity to appear before you today to 
discuss the management and the performance of the Federal and 
Direct Loan Programs.
    As you know, these loan programs are large and complex and 
through the Department disperses or guarantees tens of billions 
of dollars every year. Like these and other student aid 
programs that were recently removed from the GAO high-risk 
list, an accomplishment for which Ms. Shaw and her staff should 
be commended, nevertheless, they continue to present 
significant management and oversight challenges.
    Last December, Terri and I initiated a joint effort to 
identify patterns of fraud and abuse in the Student Aid 
programs and to recommend improvements. We called this the OIG-
FSA Joint Fraud Initiative. Working in collaboration, our staff 
has identified 11 risk categories that represent areas in the 
life cycles of the programs that are vulnerable to fraud and 
abuse. We have established work groups to focus on the three 
categories that begin the student aid process and that have 
been the subject of frequent audits and investigations. I will 
focus on these three risk areas today.
    The first risk area is the falsification on the pre-
application for Federal student aid. Information contained in 
this application determines an individual's initial 
eligibility. False information on the application, particularly 
under-reporting of income, often results in an applicant 
receiving student aid to which he or she is not entitled.
    The Department has not estimated the effect of mis-
reporting of income on the student loan programs. However, it 
has estimated that $365 million in Pell Grants were over-
awarded in fiscal year 2003, because applicants understated 
their income. This problem has grown since my office first 
identified this in 1997 an estimated amount to be $177 million 
of over-awards in fiscal year 1996.
    The second risk area category is identity theft. Identity 
theft typically occurs when a person intentionally uses someone 
else's name, Social Security Number and date of birth to 
fraudulently obtain student aid. People who obtain loans 
through identity theft almost always default on these loans.
    Our investigations continue to aggressively pursue 
individuals who steal by mis-using the identities of others. 
For example, we found an individual in Arizona who used more 
than 50 identities, typically those of inmates serving long 
prison terms, to obtain over $316,000 in loans and grants. This 
scheme was unraveled when a sharp financial aid administrator 
at a local community college recognized the thief as the person 
who had previously picked up another loan check belonging to 
another identity.
    As a part of his plea agreement, the individual described 
his scheme in an interview with us. We have included his 
interview in this educational DVD intended to increase 
awareness of i.d. theft. We have provided copies of this DVD to 
Department officials, campus police, Members of Congress and 
your committee staff. I would be happy to supply more if you 
would like.
    The third risk area is school fraud and abuse. Over 6,000 
schools participate in the student aid programs and the 
Department relies upon these schools to properly account for 
and administer the funds. Fraud and abuse by school owners and 
officials has been a longstanding problem for the Department. 
While fraud and abuse does occur at non-profit and public 
sector schools, historically the majority of my resources has 
been devoted to fraud and abuse involving proprietary schools. 
In fact, over the last 6 years, 74 percent of the schools 
involved were proprietary schools.
    In my written testimony I provided you with information on 
the other risk areas of the fraud initiative. I also discussed 
my work plans for the following year and recommended 
legislative changes. This concludes my statement. I would be 
happy to answer any questions.
    [The prepared statement of Mr. Higgins follows:]

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    Chairman Tom Davis. Thank you both very much.
    Let me start, Ms. Shaw, with you. Paraphrasing your written 
statement, the availability of choice has made both loan 
programs stronger through competition. It has been the catalyst 
for innovation, has forced standardization of data exchange and 
directed focus on service to students, parents and schools.
    Can you give us more specifics on the enhanced services to 
students, parents and schools that you are talking about?
    Ms. Shaw. Yes. I mentioned, for example, the fact that we 
have converted what was a paper process, the Federal 
application, pre-application for Federal Student Aid, which was 
100 percent paper-bound. We have now migrated that to nearly 90 
percent electronic via our Web services. Practically every 
provider out there has Web-based services now under both 
programs, either the Pell or the Direct Loan. It all begins 
with the FAFSA form and application process and goes all the 
way through the back end on the servicing side where you can do 
online payments, you can do electronic debiting, and basically 
self-service to borrowers on the back end.
    So all throughout the entire life cycle of the borrower's 
experience with student aid, everything has been migrating 
toward Web-based services and streamlined processes for 
everybody.
    Chairman Tom Davis. I was looking at how much money was 
being spent on the administration of these student aid 
programs. These numbers I have gotten from the Department of 
Education show that prior to the beginning of direct lending, 
the Department was spending about $120 million on administering 
student aid programs. Last year it was $720 million, a sixfold 
increase.
    Why has the spending gone up so much? Is it the amount of 
loans going out? Do you know the reason?
    Ms. Shaw. The way, what we do in Federal Student Aid, I try 
to look at our budget numbers from three aspects. One, our 
staffing expense; two, what I call our baseline operation, or 
operating expenses, everything from travel to our equipment, to 
our contracts for IT and services, and down to other 
administrative expenses, that being the account maintenance 
fees, subsidies and contract collection costs.
    Yes, things are driven by volume. We have had roughly since 
2000 I believe around a 60 percent increase in loans coming 
into the system that go all the way through the application 
process, through the various delivery models and mechanisms, 
either through the Direct Loan process or through the Pell 
process.
    So yes, some of it is volume-based, for sure. We in Federal 
Student Aid, in particular in the past several years, have been 
making investments of dollars to modernize our systems, to 
integrate our different processes and systems together. For 
example, I mentioned in both my written and verbal testimony, 
we have two major initiatives underway right now to basically 
overhaul all our back-end processes, direct loan servicing, 
direct loan consolidation, our collection processes, into a 
single solution.
    We just launched a new project to do the very same thing on 
the front end part of our business processes to bring together 
everything from aid awareness to application processing to Pell 
Grant delivery, origination and disbursement of those funds 
under direct loans as well. Those things require money to make 
investments, but they also deliver savings over time.
    Those two initiatives alone will save taxpayers over a 
billion and a half dollars over the 10-year terms of those 
contracts, over what would have been spent, had we not 
undertaken those initiatives. So some of it is investment. Some 
of it is driven by volume growth. Some of it is down to us 
being, staff costs growth, for example, our staff has been 
reduced over 19 percent, but the costs are higher, even though 
our staffing is lower. So it is a combination of factors, Mr. 
Chairman.
    Chairman Tom Davis. Are there problems with schools 
reconciling accounts under the Direct Loan Program?
    Ms. Shaw. No, in fact, we substantiate disbursement of 
dollars through our common origination and disbursement system, 
within 30 days of those funds being delivered at close to 100 
percent level.
    With that said, when the common original and disbursement 
system was first rolled out in 2002, there were some typical 
system roll-out issues that have been worked through. For the 
most part, I believe that schools are able to use that system 
to appropriately reconcile their funds. We have put into place 
systems and processes and internal controls so that, in fact, 
we do substantiate those funds at nearly 100 percent each 
month.
    Chairman Tom Davis. I have been told that several hundred 
schools have left the Direct Loan Program, since they joined 
it. Do you know why schools have left it? Is it based on size, 
location, or type of school, or are there any regulatory 
barriers. Is this going to cause a problem in sustaining the 
Direct Loan Program?
    Ms. Shaw. The outflow of schools stayed fairly steady 
around 25 percent. We have around 1,100 schools participating 
in the program right. Our volume is actually up this year, even 
though the net school in and out remained relatively constant 
over the past few years.
    Now we deliver $13 billion of loans annually. That was our 
2003 delivery. It will be similar this year and maybe slightly 
higher. I do not see that the number of schools, per say, as it 
stands right now, is a threat to the viability of the program.
    Chairman Tom Davis. Has there been a decrease in the number 
of schools?
    Ms. Shaw. Oh, from the inception, yes. We are about 1,100 
now. I believe at its peak, it was slightly over 1,300. I 
believe it was 1,365 in the first and second year of the 
program.
    Chairman Tom Davis. OK, thank you.
    Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chairman, and thank 
you very much for holding a hearing on an issue that I think 
concerns middle class families from one end of this country to 
the other.
    But before we turn to the loan programs that are the 
subject of this hearing, let me, if I might, speak a little bit 
outside of the box. That is, to make the point that I think 
everybody in this room knows, that over the last many years, 
there has been a significant shift in terms of Federal programs 
from Direct Grant Programs, such as the Pell Grant, to loan 
programs.
    Mr. Chairman, before we get too much into the nitty-gritty 
of this or that loan program, I think somebody up here should 
say that there is something wrong when the United States of 
America is the only major industrialized country on Earth, 
which forces its students and its families to pay so much to go 
to college, and leaves so many people deeply in debt.
    In my office right now, there is a young lady who has 
incurred a $100,000 debt for college. We have several who have 
gone to law school. It is the same thing.
    Now if we are going to be competitive with the rest of the 
world, if we are going to utilize the intellectual expertise 
with the capabilities of our young people we want to encourage 
people to go to college. With an economy in which the middle 
class is shrinking, people are having a hard time surviving. 
What we are seeing is a lot of low income and middle income 
kids saying, gee, I do not want to go to college. I am not 
going to be able to go to college.
    So Mr. Chairman, let me be on the record right now in 
making a very simple statement. I think the United States of 
America and this Government have to guarantee the right of 
every young person in America who has the ability, and not 
everybody does, who wants to go to college, to be able to go to 
college, regardless of their income. That is what we should be 
doing.
    We should be moving away from loans and moving back into 
grants. A government which can provide hundreds of billions of 
dollars in tax breaks to the wealthiest 2 percent of our 
population can surely guarantee that every family in America is 
able to send their kids to college, without going deeply into 
debt.
    Mr. Chairman, my understanding is that of the two main 
student loan programs that provide essentially the same loans 
and interest rates to students, one costs American taxpayers 
billions more every year than the other. The Federal Direct 
Loan Program is, by any measure, a huge success. It secures 
loan capital at a lower rate. It eliminates the middlemen, and 
cuts out billions of unnecessary subsidies to banks.
    The other, the Federal Family Education Loan Program, has 
taxpayers underwrite and subsidize loans issued by private 
lenders and banks. These loans bear virtually no risk for 
private banks, yet have an assured rate of return and are 
guaranteed by the Government.
    According to President Bush's 2006 education budget, for 
every $100 spent on student loans, the U.S. Government pays 
$12.09 of subsidy on Government-guaranteed private loans. That 
is over 12 percent of subsidy, and only 84 cents for Direct 
Loans. I think that is the issue that we are going to have to 
address today.
    Chairman Tom Davis. Is that a question to the panel?
    Mr. Sanders. Yes, my question is, what is the debate about 
when one program costs over $12 to maintain in administrative 
costs, and one costs 84 cents?
    Chairman Tom Davis. Does the IG want to hit that today? I 
know we have a GAO study, looking at those numbers to see if 
they are accurate.
    Mr. Sanders. This is what the President of the U.S.' people 
have said.
    Mr. Higgins. I do not know where those figures came from.
    Chairman Tom Davis. We will ask IG what he thinks.
    Mr. Sanders. They came from OMB. That is my understanding.
    Mr. Higgins. OK, I only can tell you that my office, in 
1997, tried to make a comparison of the administrative costs 
between the two programs. Because the Department does not have 
a cost accounting system, it was very difficult to do that.
    We did come up with the conclusion though that the Direct 
Student Loans administrative cost, back in 1997, was about $17 
per loan, while there was a Treasury study that said that with 
a large bank, it cost $13 a loan to administer. We have done no 
other work since then on this.
    Mr. Sanders. But do you disagree with the President, in his 
own education budget, which gives the facts that I have given 
you?
    Mr. Higgins. I do not disagree or agree, because I do not 
know what is behind it.
    Mr. Sanders. I understand that the CBO has come up with a 
similar conclusion.
    Chairman Tom Davis. Ms. Shaw, do you have any information 
on this?
    Mr. Sanders. Ms. Shaw.
    Ms. Shaw. No, I agree with the Inspector General. I have 
not studied the numbers in the President's budget. In fact, 
what Federal Student Aid does, we operationally administer the 
programs. My job, in running Federal Student Aid, is to ensure 
that it operates efficiency for all of the programs we 
administer, and to reduce costs and manage costs wherever we 
can, be it the Direct Loan Program, the Pell Grant Program, the 
FELL Program, Work Study Programs.
    So my job is to operationally make Federal Student Aid as 
efficient as possible. Granted, numbers come from our operation 
that feed into everybody's studies.
    Mr. Sanders. Mr. Chairman, sorry, I would just conclude by 
saying that the numbers that I have given come from the 
President of the United States' 2006 education budget. That is 
all that I would say.
    Chairman Tom Davis. Let me say, we have asked GAO to look 
at this. GAO has hinted in the past that there are some 
problems and that the numbers were based on assumptions. Nobody 
has ever checked the assumptions over several years. Now being 
in operation, we will have a better handle on it when, I think, 
the report comes back in September, at that point.
    Basically, we are trying to look at the efficiencies today. 
We will just know more about the costs. Maybe, Mr. Sanders, it 
will be borne out and maybe there will be different numbers 
when we come back in September. I think our panelists here who 
work with these really are not prepared to say, either way, 
because you do not know how to measure that. Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman. Mr. Chairman, thank you 
for having this hearing, and thank you to both our first panel 
and our second panel. I always appreciate the work of 
Government officials who are serving our country, and thank 
you.
    I just want to say, I have less trouble with students 
having debt for graduate school than I do for under-graduate 
school. I just hired a young man, an under-graduate, who has 
$90,000 worth of debt. I would be less concerned about his debt 
if it were for law school or for medical school and so on.
    I also will just say that when I was on the Budget 
Committee for 10 years, one of the most interesting facts was, 
as we increased grants to schools, the students did not get 
them. The schools either raised their tuition, or gave less of 
a discount to the students. So if they were giving a $3,000 
discount or $4,000, they gave $2,000. They said the student had 
more money and qualified.
    So the unintended consequence, frankly, was we were seeing 
college costs go up significantly, without the students' 
benefit. I realize that is not really the subject of the 
hearing. But I just want to put it on the table.
    I want to know how the Department of Education recognizes 
or certifies foreign schools. Is there a list of foreign 
schools that are pre-qualified? How do you know that they are 
for real?
    I would also say, I have that same issue on online 
education. I want to know how we know this online education is 
for real, and whether this is not somewhat of a sham that 
students get caught up in. I will start with you, Ms. Shaw.
    Ms. Shaw. On the foreign school topic, actually working 
with the Inspector General, they issued a report to us. We 
bolstered our processes and procedures around that.
    We try to do onsite visits, you know, eye ball sites, to 
see if there is really an institute there, bricks and mortar, 
if you will. For foreign institutions, we do a variety of other 
reviews and checkpoints with other Government agencies.
    Mr. Shays. Does that result in your decertifying a school?
    Ms. Shaw. I am sorry, I did not hear the first part.
    Chairman Tom Davis. Just 1 second.
    Mr. Shays. Does that result in the decertifying of a 
school? Has it? I mean, are there cases that you decertified 
schools?
    Ms. Shaw. I do not have that information at my disposal 
today. I can check on that and get back to you on that in a 
written format.
    If we find out that, for example, when a school is in the 
application phase, that there is nothing there, and they do not 
meet the criteria, they are not going to get certified to 
participate in the programs. If, in a regular review of a 
school that has been approved to participate in a program, we 
find that there are issues substantial enough to limit their 
participation, then we will do that, as well. I can check on 
the numbers for you, though.
    Mr. Shays. Yes, if you would provide it to the committee.
    Ms. Shaw. Sure.
    Ms. Shays. You have many applications, so you do a 
preliminary. But once a school has been approved, do you ever 
de-certify?
    Ms. Shaw. Have we ever decertified schools?
    Ms. Shays. Yes.
    Ms. Shaw. Yes, as a general statement, we do decertify 
schools. With respect to foreign schools, I do not recall off 
the top of my head if we have decertified any during my tenure 
there, but I could double check.
    Mr. Shays. The question would be, and I do not need an 
answer now if you do not know, once you have certified a school 
overseas, do you periodically go back and check?
    Ms. Shaw. Oh, yes, we do program reviews and other checks, 
yes.
    Mr. Shays. Site visits?
    Ms. Shaw. Where appropriate, we do site visits, yes.
    Ms. Shays. Mr. Higgins, can you respond to these questions?
    Mr. Higgins. Yes, my office has done a lot of work in the 
foreign school area. We have done a lot of work in that area, 
and as a result, we have made some recommendations to Terri's 
office, which she has implemented. We recommended that the 
guaranty agencies, before they make a disbursement, they ensure 
themselves that the student has matriculated at the school.
    I also have two recommendations in my testimony to strength 
that also, where the second disbursement is not until there 
they know that this student is actually going to school. That 
is also a recommendation. We also have a recommendation that 
payment does not go to the student until after the 
matriculation is confirmed.
    Mr. Shays. Let me just conclude by saying, I appreciate the 
Department of Education working with our Inspector General. I 
think that there is much to be learned from our Inspector 
Generals in the GAO reports. When we do that, we provide better 
programs. So thank you for doing that.
    Chairman Tom Davis. Thank you.
    Mr. Van Hollen.
    Mr. Van Hollen. Thank you, Mr. Chairman, and I thank you 
for holding this hearing. I also serve on the Education Work 
Force Committee, so I am pleased that Government Reform is also 
looking into this issue.
    I think we would all agree that we want to make sure that 
Federal taxpayers' dollars go as far as possible in providing 
our students with help in the form of grants and loans in their 
education.
    In that connection, I would like just to talk about the 
9\1/2\ percent loans. You are familiar with that issue, I 
assume. Is that right?
    Ms. Shaw. Yes.
    Mr. Van Hollen. For the benefit of the committee, these are 
loans that are essentially guaranteed return for the lender at 
9\1/2\ percent. There are a number of lenders that are still 
taking advantage of this program. Last year, the Congress 
passed an amendment. It was a 1-year legislation that addressed 
a part of the issue. But it did not deal with the whole issue. 
We still allow recycling of these 9\1/2\ percent loans.
    The Congressional Budget Office has made it clear that if 
we close this loophole, we would save the taxpayer over $1 
billion over 5 years. Mr. Chairman, you referenced GAO reports. 
The GAO looked at this and made it clear that we could have 
substantial savings to the Education program if we closed this 
loophole. My question is very simple. Does the Department of 
Education support closing the 9\1/2\ percent loan loophole?
    Ms. Shaw. I believe the Department of Education does.
    Mr. Van Hollen. In its entirety?
    Ms. Shaw. To the best of my knowledge. The question might 
be better answered by the Office of Post-Secondary Education. 
The Department supported the recent amendment, the Cunningham 
amendment, that closed it. I know there is more work to be 
done. I have read all the materials, and to the best of my 
knowledge, yes. We monitor the billings on a quarterly basis by 
all lenders in the program. We are watching it very closely.
    Mr. Van Hollen. All right, well, Mr. Chairman, I would hope 
that we could take a position as a committee on a bi-partisan 
basis, that we should shut down this subsidy. There is no point 
in continuing the recycling of these funds.
    Let me ask you a question with respect to the other loan 
programs. I agree with the chairman, that it is important to 
have a healthy competition between the FFELP Program and the 
Direct Loan Program. However, there is a provision in law that 
essentially prohibits the FFELP Program participants from 
offering inducements to colleges and universities to switch. In 
other words, using special incentives and, for example, 
promises to pay private loans to students who otherwise would 
not qualify. Are you familiar with those provisions?
    In fact, I believe it was in 2003 the Inspector General's 
Office did a study of this issue. We have a memo here, Mr. 
Chairman, that I would like to submit for the record on that 
issue, where you looked into that question, and made a 
recommendation that the Department clarify its guidelines on 
that issue.
    You specifically looked at a situation where Sallie Mae had 
negotiated a deal with Pace University. You looked into the 
different facts and concluded that this was an area that needed 
further clarification and made a recommendation to that effect. 
Do you know whether the Department followed the recommendations 
of the IG in that regard?
    Mr. Higgins. No, I do not know whether they did or not.
    Mr. Van Hollen. Were you at the Department at the time?
    Mr. Higgins. Yes, I was.
    Mr. Van Hollen. Is there any mechanism for followup here? I 
mean, there have been a number of serious issues in connection 
with this. I am just wondering whether the Department took any 
action following your recommendations?
    Mr. Higgins. I do not know. I can check on it and get back 
to you for the record, if you want me to.
    Mr. Van Hollen. If you could, I mean, you would agree, 
would you not, that the law prohibits this kind of inducement 
to switch programs?
    Mr. Higgins. On the part of--yes. What we also found was 
that colleges and universities were out there soliciting 
incentives. So we found the opposite of what the law was 
prohibiting. The players switched places.
    Mr. Van Hollen. All right. I just would ask, in your 
capacity as Inspector General, that you let Members of Congress 
know if the Department is now following through on your 
recommendations. I appreciate getting some feedback on that. I 
would hope that the Department, if it has not taken action, 
would do so quickly.
    Thank you, Mr. Chairman.
    Chairman Tom Davis. OK, thank you, I think what we will do 
at this point is recess and be back in about 15 minutes, if you 
can hang around for some additional questions, thank you.
    [Recess.]
    Chairman Tom Davis. Ms. Shaw, I'll just start while waiting 
for other Members to come back. My understanding is that most 
of the money for administering student aid programs is money 
that is provided in an entitlement account.
    Ms. Shaw. I am sorry, I could not hear you.
    Chairman Tom Davis. Most of the money is from entitlement 
accounts that administer student aid programs. Is that right?
    Ms. Shaw. From the 458 account, if that is what you are 
referring to?
    Chairman Tom Davis. Yes.
    Ms. Shaw. Yes.
    Chairman Tom Davis. So the salaries and expenses are 
considered entitlement spending. In other words, whatever it 
is, it is, and it is paid for, and if the President's budget 
makes a change in that, to move it to appropriated funds. In 
other words, you have a ceiling under appropriated funds, 
entitlement funds. The cost is what it is, and it is paid for 
out of the program. Is that correct?
    Ms. Shaw. Mr. Chairman, I am not the budget expert in all 
of the funding and the movement of funds behind the scenes. I 
can find out the answers.
    Chairman Tom Davis. Here is my understanding. It is 
mandatory. Do you know the answer to that, Mr. Higgins?
    Mr. Higgins. I think you are right.
    Chairman Tom Davis. OK, and my understanding is that 
mandatory administrative money is like a slush fund. I mean, if 
you do not spend it in 1 year, you roll it over and you can 
spend it in the next. Is there oversight on these expenditures, 
do you know, Ms. Shaw and Mr. Higgins?
    Ms. Shaw. Oversight on the expenditures and money that is 
used 1 year?
    Chairman Tom Davis. No, in the entitlement fund.
    Ms. Shaw. Mr. Chairman, I am not the budget expert.
    Chairman Tom Davis. OK.
    Ms. Shaw. We certainly manage the money that we use in 
Federal student aid to deliver aid to students. We run our 
operation more like a business that you would find in the 
private sector. I look at the operating expense, much like a 
business would. The budget services group within the Department 
of Education does all the budget wizardry behind the scenes.
    But with that said, we clearly monitor and oversee all 
spending from the Federal Student Aid Office. In fact, we talk 
about it regularly. We have a regular budget meeting in my 
office to examine every spend out of our office.
    Chairman Tom Davis. From your testimony, I understand that 
FSA contracts with an estimated 6,000 contract staff. Is that 
about right?
    Ms. Shaw. Yes, we have about a half a billion dollars in 
outsourced agreements with the various providers that do our 
business functions under our monitoring.
    Chairman Tom Davis. In Inspector General Higgins' written 
testimony, he referred to two audits that found FSA lacked 
oversight of contract deliverables, and did not ensure a 
continuation of service and adequate audit access to the 
systems.
    Ms. Shaw. Yes, he did.
    Chairman Tom Davis. The interface problems between systems 
has caused some problems. Can you comment on what you are doing 
to correct this?
    Ms. Shaw. What we have done, the specific audit you are 
referring to, our contracts, one of them was our common 
origination and disbursement system. That particular contract, 
which is nearing completion at the end of 2006 was a share and 
savings contract. That contract was atypical in that regard.
    What we have done with all of our contracts is, we have 
bolstered our contracts and acquisitions management team, 
including pricing experts and the Federal acquisition 
regulation experts. We do regular contract reviews. We work 
very closely with the Office of the Chief Financial Officer in 
the department and the Chief Acquisition Officer within the 
department, to make sure that we are totally in compliance with 
all rules and regulations.
    With that said, we also, within Federal Student Aid, have 
Federal staff closely monitoring all agreements at this point. 
I think the Inspector General, in some of his prior year 
findings, was probably accurate that we could be better in that 
regard, and I believe we put in new process and procedure and 
focus on that. I believe that we are better.
    Chairman Tom Davis. Mr. Higgins, let me ask you, how much 
money does the Student Loan Program lose to waste, fraud, and 
abuse annually, and what is the main cause?
    Mr. Higgins. We do not have that figure. We do know that 
the department reported in the PELL grant program improper 
payments of $365 million in 2003. Then there was $131 million 
of audit and program liabilities that they also reported. But 
we do not know what that figure is.
    Chairman Tom Davis. What is the collection ratio on loans 
from the Direct Lending Program, have there been any problems 
with that?
    Ms. Shaw. I am sorry?
    Chairman Tom Davis. The collection, in terms of being able 
to collect on the loans under the direct lending program.
    Ms. Shaw. No, actually, under the Direct Loan Program, we 
are in possession of all of the data with respect to each loan. 
Actually, it is a little easier for us, because we have all of 
that data. When loans are subrogated to us for collection from 
the Pell Program, we do not necessarily have the depth and 
breath of data that we have on the Direct Loan Program, because 
have originated a direct loan.
    Chairman Tom Davis. But my question is, how are you 
collecting it? Are there any problems?
    Ms. Shaw. No.
    Chairman Tom Davis. You are doing just great.
    Ms. Shaw. Well, we certainly are doing better than we ever 
have. We contract out our services to around 13, I believe, 
private collection agencies. They compete with each other, with 
respect to collections.
    Chairman Tom Davis. Is that a share and savings contract, 
or is that on an hourly basis?
    Ms. Shaw. No, it is not a share and savings contract. They 
earn based on their performance, which is different than a 
share and savings contract. So those collection agencies are 
doing quite well, and that incentivized process that we have 
and the contracts that we have in place have bolstered our 
collections across the direct loan portfolio.
    Chairman Tom Davis. How much money do you lose annually, in 
direct lending, on loans that are uncollected?
    Ms. Shaw. I do not know the answer to that question. I will 
have to get back to you on that.
    Chairman Tom Davis. Obviously, you lose whatever you pay 
out to the private sector to collect. That is a loss, right?
    Ms. Shaw. Right, but for every dollar we spend in 
collections, I believe we recover another $7 or $8.
    Chairman Tom Davis. Right, so my question is, what does it 
cost you annually, as you outsource this to other areas in the 
amounts uncollected, do you know?
    Ms. Shaw. We spend, I believe, in the area of $200 million 
to $250 million a year in private collection costs. I believe 
it was last year that we recovered, on our portfolio, meaning 
the $17 billion portfolio, about $1\1/2\ billion.
    Chairman Tom Davis. You do not know how much just never 
gets collected, even after you outsource the collections, 
right?
    Ms. Shaw. No, I could get that figure for you. I do not 
have it.
    Chairman Tom Davis. It may not be important, but it is at 
least a quarter of a million you are paying to collect it, and 
then on top of that. I do not know if the GAO has that. I think 
if you are really comparing the two, you need to understand, on 
one side, you are eating up the cost of collecting the loans. 
On the other side, the taxpayers are paying that. That has to 
be part of the equation.
    Because we get a lot of numbers thrown around here, in 
terms of this being more efficient than the others, the 
estimates, and nobody really knows what the numbers are. Even 
if you give me that, that gives me a piece of the pie. But I 
think that would be interesting.
    Ms. Shaw. I can get that for you.
    Chairman Tom Davis. Mr. Higgins, first, I want to commend 
you on your efforts to analyze patterns of fraud and abuse in 
the Student Financial Assistance Programs, and you are reaching 
out to the FSA staff to coordinate those efforts.
    One of the areas you mentioned in your written testimony 
involves FAFSA, the Free Application for Federal Student Aid. 
You estimate that under-reporting of income on these 
applications resulted in $365 million over-awards in Pell 
Grants in 2003, which was up from previous years, and state 
that the Department has not estimated the effect of mis-
reporting of income on Student Loan Programs.
    How might they better contain this? I mean, I have filled 
out a FAFSA loan, too. I am like many parents, suffering from 
``mal-tuition.'' [Laughter.]
    You know, you kind of take their word for it when they fill 
out the loan.
    Mr. Higgins. Well, there are not a lot of matches made 
around eligibility. But we think the most effective match would 
be the IRS match. The authority for that was given to the 
Department of Education. But Treasury has not been given the 
authority to perform this match with us. All we are looking to 
do is confirm the income that is reported to us.
    Chairman Tom Davis. That makes sense. That is not your 
fault. That is Treasury's fault for not giving you the numbers 
so you can cross-reference everything. Is that correct?
    Ms. Shaw. Right, we cannot do a match with them right now, 
as we would like to do.
    Chairman Tom Davis. That is probably the easiest way to 
find out if these numbers are accurate. That is something that 
the committee can look at, since we have a piece of 
jurisdiction on that. That is all for right now. I am going to 
ask Mr. Clay if he has any questions.
    Mr. Clay. Thank you, Mr. Chairman.
    Let me start with Mr. Higgins. Your office has looked into 
waste and abuse in federally funded loan guaranty agencies, 
such as USA Funds and PHEAA. One concern that the IG has 
expressed is the existence of conflicts of interest on the part 
of guaranty agencies.
    In 1993, the IG found that many of the guaranty agencies 
that they investigated were affiliated with loan service 
providers that they are required to monitor. The IG concluded 
that billions of dollars of the Nation's guaranty loan 
portfolio are at risk because many guaranty agencies have a 
clear conflict of interest.
    I am curious about the current status of these conflicts of 
interest. Has your office continued to monitor guaranty 
agencies for the existence of conflicts of interest, or are 
there still problems in this area?
    Mr. Higgins. That audit, initially, the Department 
sustained our finding in that audit, and it was overturned in 
appeal. The Department thought that because the sub that we 
were talking about had its own tax identification number, there 
was enough separation and it was not a conflict of interest. I 
think that is the report you are speaking to.
    Mr. Clay. Yes, I still encourage you to vigilantly monitor 
the issue. Conflicts of interest are a problem that could 
potentially cost the taxpayers millions of dollars.
    In 2003, you audited 9 of the 35 guaranty agencies and 
identified $164 million in waste and abuse. For instance, at 
one agency alone, you received over $100 million in excess 
Federal funds that the Department of Education did not even 
know it had overpaid. Your findings regarding the nine agencies 
audited suggest that a comprehensive audit of the guaranty 
agency might find significant additional waste and abuse. Since 
2003, have you audited additional guaranty agencies?
    Mr. Higgins. No, we have not looked at more than the 
original nine. But we did recommend to the Department that they 
look at the additional guaranty agencies.
    Mr. Clay. Have you conducted followup audits of those 
original nine?
    Mr. Higgins. We are monitoring the status of the resolution 
of the nine audits. All those nine have not been resolved. To 
my knowledge, they have not done the followup audits as far as 
the split on the Federal expense account.
    Mr. Clay. Are they part of your work plan for this year?
    Mr. Higgins. Part of Ms. Shaw's work plan or my work plan?
    Mr. Clay. Ms. Shaw's.
    Ms. Shaw. We have a work plan to do program reviews and 
audits of schools, lenders, and guaranty agencies, the 
servicers that participate in the programs. Yes, we are 
focusing in on the guaranty agencies, and our oversight of 
them, and doing onsite reviews.
    I do not recall off the top of my head the specific nine 
that you are referencing. But yes, we do have plans for not 
only this year, but in 2006 to do onsite reviews at guaranty 
agencies, as well as other participants in the program.
    Mr. Clay. Well, I would hope so. Because the fact that you 
uncovered $164 million in abuse in an audit of only a quarter 
of the guaranty agencies suggests to me that it would be 
worthwhile to take a deeper look.
    Ms. Shaw. Certainly.
    Mr. Clay. Mr. Chairman, that is all that I have for now.
    Chairman Tom Davis. Well, thank you very much. I know Mr. 
Kucinich wanted to ask questions, but he is not here. So we 
will move on to the next panel. I want to thank you both. 
Particularly after the GAO audit is out, we may want to get you 
back here. But we will coordinate that with the Education and 
Workforce Committee on that. Thank you very much.
    Ms. Shaw. Thank you.
    Chairman Tom Davis. We will take a 2-minute recess before 
we call our next panel.
    [Recess.]
    Chairman Tom Davis. This is a distinguished panel, and I 
want to thank them all for coming to Washington today and 
sharing their wealth of experience. We have Dr. Allen Merten, 
who is the president of George Mason University. We have Ms. 
Sarah Bauder, who is the director of student financial aid at 
the University of Maryland.
    We have Nancy Coolidge, the coordinator of Federal student 
financial support, Office of the President, University of 
California, who was already introduced by Mr. Waxman. We have 
Natala Hart, who will be back in a minute, and Cynthia 
Thornton, the director of student financial aid at Dillard 
University.
    Let me just say, we are happy to have all of you here, and 
Dr. Merten, particularly, I am happy to have you here. We are 
just proud of the job you are doing at George Mason. I am 
really pleased that you are in my district.
    I am very proud of the fact that George Mason has two Nobel 
Prize winners now. I will just let everybody know that. It 
heads up a lot of the very basic research in a number of areas, 
from computer science to brain surgery. We are just very happy 
to have you here.
    It is our policy that we swear everyone before you testify. 
So let me start with you, and I will get Ms. Hart when she 
comes in. If you will just raise your right hands.
    [Witnesses sworn.]
    Chairman Tom Davis. Dr. Merten, we will start with you. 
Thank you for your patience, and just again, we are very happy 
to have you here today.

STATEMENTS OF ALAN MERTEN, PRESIDENT, GEORGE MASON UNIVERSITY; 
SARAH BAUDER, DIRECTOR OF STUDENT FINANCIAL AID, UNIVERSITY OF 
    MARYLAND; NANCY COOLIDGE, COORDINATOR, FEDERAL STUDENT 
   FINANCIAL SUPPORT, OFFICE OF THE PRESIDENT, UNIVERSITY OF 
  CALIFORNIA; NATALA HART, DIRECTOR OF STUDENT FINANCIAL AID, 
   OHIO STATE UNIVERSITY; AND CYNTHIA THORNTON, DIRECTOR OF 
           STUDENT FINANCIAL AID, DILLARD UNIVERSITY

                    STATEMENT OF ALAN MERTEN

    Mr. Merten. Thank you, Mr. Chairman.
    With approximately 29,000 students, George Mason is the 
largest university in Virginia. As a State university, our 
mission is to provide excellent educational opportunities to 
our students, while maintaining high quality and affordable 
access. Twenty-five percent of our freshman are first in their 
families to attend college.
    George Mason has had experience with both the FFELP and the 
Federal Direct Loan Program. Therefore, I feel we have a unique 
viewpoint to share, since we left FFELP to become a direct 
lending school in 1995, and returned to FFELP in 2004.
    The Federal loan programs are critical to our ability to 
provide affordable access to higher education. Approximately 
one-third of our students benefit from the Federal loan 
programs. Federal loan programs constitute $60 million of the 
overall $99 million in aid awarded to our students last year, 
which is consistent with the national average of 59 percent.
    George Mason has a $500 million annual budget, of which 
$141 million comes from tuition revenue, so Federal loans 
account for over 40 percent of our tuition revenue.
    Approximately 3,500 of our students receive a Federal Pell 
Grant, while over 10,000 receive some type of Federal loan. 
George Mason's Federal loan borrowing has increased by over 5 
percent in the last 5 years. Sixty percent of our financial aid 
applicants are from families with income of less than $50,000.
    The university takes pride in the sense of responsibility 
that our students have demonstrated. Mason's overall cohort 
default rate is very low. It is 2 percent, which is less than 
one-half of the national average of 5.2 percent. In addition, 
our Office of Student Financial Aid has received a Model of 
Quality Award from the Department of Education.
    In the 1995 and 1996 academic year, George Mason joined 
1,200 other institutions to become a direct lending school. The 
major viable that made direct lending the obvious choice for us 
was the inefficiency of FFELP at that time.
    Under FFELP, our students were borrowing from hundreds of 
different lenders and guaranty agencies. Although we had 
electronic funds transfer with the Virginia lenders, all of the 
other lenders used paper checks. Because of multiple loan 
servicers, the efforts and costs investigating loan status or 
even determining whether a check had been delivered was very 
high. This processing was time consuming and frustrating for 
our students.
    At that time, direct lending eliminated most of the paper 
processing. All direct loan funds were electronically released 
to George Mason, and the Aid Office was able to respond quickly 
to students' requests. This was a major improvement at that 
time over FFELP. However, over the 8 years that we were a 
direct lending school, many changes occurred in FFELP.
    The FFELP community increased the efficiencies of Federal 
loan funds delivery. Schools now can easily work with multiple 
lenders and even multiple guaranty agencies, and still deliver 
Federal loan funds in a timely manner to our students.
    Technological improvements and data systems, spearheaded by 
the Department of Education, were paramount in creating a more 
streamlined electronic processing of Federal aid funds.
    Mason again began a cross-campus review of its 
participation in direct lending in 1999/2000. Much of this 
review was initiated because many of our students and parents 
wanted to borrow from private lenders. There was an increasing 
number of complaints about the level of customer service 
received from the Direct Program.
    Private lending institutions also offered other incentives 
and borrower benefits that the direct loan program did not 
equal. While direct loans did offer an up-front loan rebate in 
anticipation of future timely payments, that single benefit did 
not come close to the other borrower benefits.
    Students and their parents increasingly could receive 
reduced origination fees and reduced interest rates from the 
private lenders, after they began their loan repayment.
    Effective with the 2004/2205 academic year, we left the 
direct program and returned to FFELP. We now have one point of 
contact at both the guaranty agency and the servicing center to 
address any systems issues.
    Our students and parents who are Federal loan borrowers are 
happy with the changes and benefits that have become available 
because of our return to FFELP. They much appreciate the fact 
that they are given a choice in lending institutions. The 
benefits to our students and parents were the deciding factor 
in choosing to utilize direct lenders.
    There continues to be new benefits to our students from 
FFELP in addition to the Federal loan repayment/discharge 
options. For example, effective next academic year, in 
Virginia, the newly established Teach for Virginia and Care for 
Virginia loan programs will grant added benefits to teachers 
and nurses who stay in Virginia.
    The competition among private lenders has provided savings 
and other benefits to parents and students that direct lending 
cannot match. Improvements in processing loans through the 
FFELP system have decreased the administrative burdens that 
existed in the 1990's.
    Finally, while we are excited about providing options to 
our students and parents, the sources of money have become 
increasingly limited when it comes to assisting students in 
financing their post-secondary education.
    We rely heavily on the State and Federal Government 
financial aid funds. The reductions in the Federal Campus Based 
Programs and the elimination of the Federal Perkins Loan 
Program are of great concern to us. Our country's college 
student population is going to increase, and so are the overall 
costs of education.
    We encourage you to do all that you can to provide programs 
and funds that encourage our youth to learn through the dream 
of higher education, thank you.
    [The prepared statement of Mr. Merten follows:]

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    Chairman Tom Davis. Thank you very much, Dr. Merten.
    Ms. Bauder, thanks for being with us.

                   STATEMENT OF SARAH BAUDER

    Ms. Bauder. Mr. Chairman, I want to thank you for inviting 
me to speak here today on why the University of Maryland has 
chosen the FFELP program. My name is Sarah Bauder, and I am the 
director of financial aid at the University of Maryland.
    In the 15 years I have been in higher education, I have 
noticed an evolutionary change in the loan industry, most 
notably when direct lending was introduced in 1994.
    If we step back and look at the Higher Education Act and 
its fundamental purposes, we will notice that it is there to 
ensure access, affordability, and choice. FFELP and direct 
lending both offer access and affordability. FFELP is the only 
one that offers choice, and that is why we have chosen it. We 
have different lending options.
    The University of Maryland is home to 24,000 undergraduate 
students and 9,000 graduate students. We process approximately 
$90,000 million in Federal student loans for 19,000 students. 
We have 28 different staff guidance counselors that can work 
with our students. Over the years, we have built great 
partnerships with our lending institutions.
    Our lenders provide many value-added services to our 
students that I do not think can be underscored enough. We 
basically can offer a zero fee loan to our students. So a 
student who borrows $5,000 actually receives $5,000.
    Our lenders provide flexible repayment options on the back 
end. They provide delinquent and default initiatives for our 
students and financial management awareness. They provide 
training and workshops for our staff, so that we have education 
all around. We fully understand that the University of Maryland 
is not only for educating within the classroom, but we have to 
educate outside the classroom, as well.
    Our default rate is 1.4 percent, which is significant. The 
lenders know that we are a low risk, and so our students are 
going to pay back their loans when they lend to our students. 
That is because we communicate with them, and they have a 
personal relationship with their lender.
    Lenders also provide scholarships, and I do not think that 
has been mentioned. That helps defer the cost of students 
attending college and also from borrowing.
    Now the University of Maryland, our culture is really one 
of research and development. So over the years, we have been 
able to enhance our technologies. We have a fully paperless 
loan process. That is significant, because we have been able to 
cost save on mailing and on communications to our students. 
That cost savings then can be reallocated into other 
educational benefit for our students. The only way that we 
could have done that is to build partnerships with our lenders.
    We do not have the administrative burden of reconciliation. 
Our lenders do that on a daily basis. So once again, we have 
cost savings on the administrative side.
    I think the advent of technology has definitely helped us. 
I think that has been brought out today. If we look at the 
legislation of the Higher Education Act, it recognizes the need 
for Federal support of higher education today, as well as equal 
access. That commitment holds true.
    What I have seen in higher education is that the attitudes 
of families have shifted over the few 15 years that I have been 
there. It used to be that higher education was really a 
privilege, to get an undergraduate degree. Now it is considered 
a right.
    So financing in education is extremely important, and 
parents and students really do trust the financial aid office 
and the information that we give them. We hold that 
responsibility sacred. We want to make sure we are giving them 
the best financial information that we can give them, and the 
best options and the best choices.
    I applaud direct lending. I was there when direct lending 
was introduced. It really did create a wonderful atmosphere of 
competition and effectiveness. It woke up the FFELP industry 
and the lenders to say, hey, we have to improve here.
    But choice is essential. The Higher Education Act gives 
students the option of choosing a lender. If you have only one 
program, you eliminate that choice.
    There are two things I will say in closing here. One, I 
think if you ever get an opportunity to really visit a 
university and sit just 1 day in a financial aid office, I 
think it is really enlightening. I do think reauthorization 
would happen if you could spend time there in a university. I 
do think that we need to increase loan limits. We need to 
increase Pell appropriations for our needy students.
    In closing, students and parents finance a new car, they 
finance a home equity loan. They comparison shop for credit 
cards. I think they also need the choice when it comes to 
student loans, as well, thank you.
    [The prepared statement of Ms. Bauder follows:]

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    Chairman Tom Davis. Thank you very much.
    Ms. Coolidge, your entire statement is in the record.

                  STATEMENT OF NANCY COOLIDGE

    Ms. Coolidge. I can assure you I am not going to read the 
whole thing. I think that it is excellent that you are having 
this hearing today, and I thank you for doing it.
    I represent 200,000 students, almost half of whom get 
financial aid from the Federal sources, and quite a number of 
those also get Federal student loans. I am also representing 10 
campuses, with lots of financial aid administrative 
professionals on them, who send their messages through us. We 
are a central administrative office.
    I want to just say that there are three principles that the 
University of California observes. I can stipulate today, we 
are not here, and I do not think anybody is here actually, to 
argue for one program, that one program should win and the 
other program should go away. In fact, the comments we have to 
make today have to do with improving the choice between 
programs, so that schools have equal level playing fields from 
which to choose.
    The core mission of this loan program is a social mission. 
It is to make it possible for low income students to attend 
college. To the extent that we can devote resources to that 
activity, we should do so.
    What I am going to focus on today is what we consider at 
our institutions with six in direct lending, four in the FFELP 
Program, to be non-level playing fields for the two kinds of 
programs, and why administrators struggle.
    It has built into them some differences, some fundamental 
differences. At the moment, the playing field is not level. The 
schools that are in the FFELP Program have available a feature, 
and in my institutions it matters, because we have lots of 
graduate and professional students who would quality.
    There is a provision called the School as Lender. This is 
used, and we are under a fair amount of pressure, to think of 
using it. We are not at the moment, but certainly we are being 
asked to do feasibility studies and look at it, to bleed out 
Federal subsidy out of the FFELP Program for uses by students, 
and in this case it could be by low income students certainly, 
or to give the borrowers even better loans than they are 
getting right now.
    So the School as Lender would allow a school to become a 
lender and to share the profits of doing so with a recognized 
lender/partner.
    There is no equivalent to that in the direct loan program. 
Frankly, our reading of the Star Act proposal is that they are 
capturing that concept. What they are saying is, let us do 
something like that in the other program to try to equalize the 
playing fields in these two loan options for schools.
    It is the case that the students at the other end of this 
that would get the subsidies are not being treated fairly if a 
school gets a lot more resources to spend, and another kind of 
school that chooses a different loan program has fewer 
resources to spend.
    So only in the FFELP can you become a school lender, and 
schools are being asked to look at FFELP, even if they are very 
happy with their direct loan participation, because it is a way 
of tapping into Federal subsidy.
    These kinds of adjustments in the two programs are going to 
require ongoing management. It is not something that you can 
sit down 1 day and just--it is going to require nuanced 
legislation over time to try to keep the two programs more 
similar in their benefits to students.
    At the moment, you pay an amount to lenders that includes 
enough to pay, as you pointed out, the collection costs out of 
what they get. Also, obviously, you are going to hear today 
about many wonderful services that are offered. That comes out 
of the revenue they get by being a lender.
    The questions really are that because you have these two 
very differently financed programs, are they similar enough to 
treat students fairly? My argument today is that they are not 
there yet, and they still need adjustment.
    But the Direct Loan Program does not have the same level of 
resources to spend on student and, in some cases, on other 
coordinated benefits that we are going to talk about today. 
There will be some testimony about counseling, about resources 
for the campus. Those are not possible under direct lending.
    The University of California has thoughts about how money 
can be saved if we are looking at Government reform issues. One 
is, and you mentioned it earlier, to look at the 9\1/2\ minimum 
yield on loans that were made with tax-exempt funding. The 
President's budget estimated that over a 10 year window, this 
could save $5.4 billion.
    If that kind of savings is significant, and since you are 
under great pressure to produce savings, we are certainly 
recommending that you look at that kind of opportunity before 
you look at taking it away from students, specifically.
    It is always the case that some of this money is shared 
with students. These organizations, as was pointed out, give 
scholarships and other things. But they are not shared 
according to the Federal goals. They are not using the 
principles and themes of access, necessarily. They have choices 
about how they spend it.
    Right now, under the current law, the lenders are allowed 
to get a guaranteed return on their capital money that they put 
into the program, and they get the difference in what borrowers 
pay in interest. So they get what we consider to be a windfall. 
Capturing that for student benefit is really something that is 
also needed.
    Finally, guaranty agencies are being paid right now on a 
model that is essentially like an insurance company. We are 
going to recommend that you look again at guaranty agency 
competition and make them Federal contractors, and pay them for 
their services directly. What they do for you, they should be 
paid for. But the model now is a different kind of model, and 
it is being used for other purposes that are not Federal 
principles and purposes.
    Thank you for your consideration today.
    [The prepared statement of Ms. Coolidge follows:]

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    Chairman Tom Davis. Thank you very much.
    Ms. Hart, I am going to need to swear you in.
    [Witness sworn.]
    Chairman Tom Davis. Thank you very much, and thank you for 
being with us.

                    STATEMENT OF NATALA HART

    Ms. Hart. Mr. Chairman, members of the committee, and 
respected colleagues and guests, my name is Tally Hart. I am 
the director of student financial aid at the Ohio State 
University. We serve as the Nation's largest direct lending 
institution. In the last fully completed year, we offered and 
administered $246 million in direct loans to nearly 29,000 
students.
    Prior to 1994, when direct lending was introduced and 
available, and I had already by that point worked 20 years in 
public financial aid offices, we at Ohio State were essentially 
like other institutions of a national scope, taking the same 
student loan data, sorting it into 60 different formats, 
shipping it and trying to figure out where the student loan 
proceeds were in the process.
    It took us, on average, 8 weeks into the beginning of the 
term, after the full summer's hard work on student loans, to 
actually deliver the proceeds to students.
    As the result of direct lending, we were able to have loans 
follow a single path and to deliver virtually student loans to 
our students in time to be matriculated in class, have their 
books, and not begin their challenging academic curriculum 
worried about, will I have a place to live at the end of this 
week, and will I have a meal. Their loan proceeds were in hand.
    We did begin the Direct Lending Program in what some would 
conclude was a very shaky mode. We did not have much automation 
and we literally hung a PC from our mainframe system to deliver 
this huge amount of money to our students.
    But the risk was worth it, and the Department of Education 
has certainly improved the back end processes since that time. 
So earlier claims that you might have heard about 
reconciliation and other administrative functions, I believe, 
operate very smoothly. We do not believe that we spend a great 
deal of administrative time or waste in taking care of those 
functions.
    We, above all, have used the time effectively that the 
students used to spend in our office waiting for their loan 
funds in very productive ways. There are two major things that 
we have done with the freed-up time. First and foremost, we 
have become financial literacy educators. This last year, we 
delivered more than 3,000 hours of personal financial skills 
information to our students. This was everything from how to do 
a budget and balance a checkbook. Every class includes 
instruction about good and bad uses of credit cards. We teach 
identity theft, how to avoid it, of course, and savings and 
investing.
    Our students have really benefited from this opportunity. 
Our staff benefit from the opportunity to be proactive with our 
students, rather than to wait until they have difficulties or, 
as we found previously, incurred more loans, because they did 
not understand how to manage their money correctly.
    Direct lending has served us extremely well, and the people 
who have benefited most, without question, are the neediest 
students. Assuredly, middle income students borrow and need 
these funds. But the administrative efficiency gives us time to 
focus on students with the highest level of need.
    One of the issues that you asked me to comment about is the 
continued efficiency of the program. I would encourage, as your 
colleagues consider reauthorization of the Higher Education 
Act, continuation of the Perkins Loan Program and no cost, 
important options, such as the Quality Assurance Program, an 
experimental sites program.
    These activities, drawn together, enabled Ohio State to do 
cutting edge research on our student population. The chart that 
you see before you, and it is displayed on the overheads, shows 
our success. The bottom blue line shows the rate of 
matriculation, through the fall of 2000, of our lowest income 
students. Those are students who have ability to pay for 
college of about $100 a month. They are, on average, families 
with less than $30,000 of income.
    Through our research, which started to focus on what 
created student loan defaults, we found important findings 
about retaining and then attracting, as well, our neediest 
students. The results from fall 2001 were considered a success, 
and 2002 and beyond--I love to describe as a financial aid 
administrator's nirvana--that we have our lowest income 
students matriculating at the highest rate of all.
    Importantly, if you begin to follow the data 4 years after, 
you would see that our retention and graduation rates are now 
following a similar plan. So not only are our lowest income 
students coming to college at good rates, they are remaining 
and graduating.
    This has been a direct benefit of the combined effort of 
the efficiency of direct lending, the availability of Perkins 
loans to mitigate against the low student loan limits in the 
freshman and sophomore year under Stafford Programs, and to 
have research incentives through quality assurance and 
experimental sites to figure out these problems and apply the 
outcomes.
    I would point out that our results are regularly shared 
back to the Department of Education and with colleagues, 
whenever asked. So we think this creates best practices and 
knowledge that helps benefit not only Ohio State students, but 
the Nation's students as a whole.
    Thank you again for this opportunity to testify. I want to 
especially thank you for all of your efforts on behalf of the 
35,000 students who, at Ohio State, benefit from your efforts 
to support and invest in them. They will prove the best 
investment you can make, thank you.
    [The prepared statement of Ms. Hart follows:]

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    Chairman Tom Davis. Thank you very much.
    Ms. Thornton, thanks for being with us.

                 STATEMENT OF CYNTHIA THORNTON

    Ms. Thornton. Thank you and good afternoon, Chairman Tom 
Davis and members of the House Committee on Government Reform. 
On behalf of Dillard University, its faculty, staff, and 
students, I thank you for the opportunity to testify on Dillard 
University's participation in the Federal Family Education Loan 
Program and the William D. Ford Federal Direct Loan Program. I 
am Cynthia Thornton, director of financial aid.
    It is my desire that at the conclusion of this testimony, 
you would clearly understand the contributions of private 
lenders and continue your support of the Federal Family 
Education Loan Program.
    Dillard University is a private Historically Black 
University located in New Orleans, LA. Last year, more than 
2,000 of our 2,200 students utilized private lenders to fund 
their education. Our student loan volume is $18 million, or 60 
percent of the total $34 million awarded in financial aid.
    Dillard University entered the Federal Direct Loan Program 
in 1995 after the program was 2 years old. We were relatively 
satisfied with the Direct Loan Program, until we experienced 
problems that halted the delivery of funds to our students.
    At the time, the Department of Education made a transition 
to a new Government contractor. This transition was difficult 
on behalf of the Department of Education and our school. Our 
student loan services were interrupted for an extended period 
of time, which created a financial crisis for both the school 
and loan recipients awaiting funds to meet their financial 
obligations. After evaluating these challenges, Dillard 
University made a decision to return to private lending in 
1997.
    We prefer private lending versus Government lending because 
of the value added services and benefits that the students, the 
school, and the community receives. These services are offered 
at no additional cost to the school. The Government contractors 
are for profit and offer no additional services to the higher 
education community.
    On the other hand, many private lenders return a huge 
investment to higher education by providing community outreach 
and scholarships. For example, over the past 2 years, seven 
Dillard University students have applied for and received 
scholarships from the Sallie Mae fund. Dillard University's 
preliminary cohort default rate is 4 percent. By utilizing USA 
Funds Financial Literacy Program and its default management 
software, we except even lower default rates.
    Through the assistance of private lenders, Dillard 
University has received complimentary printing of pamphlets, 
forms, brochures, flyers, and such. In addition, private 
lenders offer innovative technology solutions to help us 
deliver aid to students in a seamless manner. This is important 
to us because budgets are tight and resources are scarce for 
many Historically Black colleges and universities.
    I urge your support also for increased loan limits. The 
current annual Federal loan limits do not cover our tuition 
costs of $11,760. Our students, like students nationwide, 
supplement Federal loans with private loans offered by private 
lenders. The Department of Education does not offer a private 
loan program.
    Had we continued in the Direct Loan Program, many students 
would have had to participate in both Government lending and 
private lending to meet their educational cost. This is another 
reason why Dillard University chose to return to the Federal 
Family Education Loan Program. We needed a streamlined process, 
and the FFELP Program does that for us.
    I will now just take an opportunity to express my 
opposition for House bill 1425, the Student Aid Reward Act, or 
the STAR Act, for the following reasons. It promotes inequity 
among financial aid recipients. It shifts expenditures to the 
Federal Pell Grant Program. There has been recent controversy 
surrounding the Federal Pell Grant Program that makes this act 
tenuous, at best.
    The value of the Federal Pell Grant has not increased in at 
least 3 years. Proponents of the STAR Act believe that it will 
save the Government billions of dollars. I am no economist, but 
I do believe that this may be misleading. If one saves a dollar 
in the Federal Direct Loan Program and spends a dollar in the 
Federal Pell Grant Program, has the Government really saved?
    I have worked in the higher education industry for over 19 
years. All of my experiences have been at minority-servicing 
institutions that suffer from budget cuts and scarce resources. 
It has been beneficial to Dillard University to partner with 
private lenders who offer services to bridge the resource gap. 
For this reason, I urge your support of private lending.
    Dillard University and other institutions that chose to 
participate in the Federal Family Education Loan Program prefer 
the flexibility and value-added services that this program 
offers.
    Competition between both private and Government student 
loan programs has resulted in lower student loan costs and 
specialized loan services that best meet the needs of schools, 
students, and parents.
    I would also disagree with the notion that the Federal 
Family Education Loan Program is costing taxpayers millions of 
dollars. I believe that private lenders actually save money for 
both the Federal and State Government and taxpayers. As the 
cost of education continues to increase, more and more schools 
will continue to depend on the assistance of private lenders to 
help subsidize the cost associated with higher education.
    Please continue to give students, families, and schools a 
choice in student lending that offers equity and access. Please 
oppose the STAR Act. Thank you on behalf of Dillard University.
    [The prepared statement of Ms. Thornton follows:]

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    Chairman Tom Davis. Well, I want to first thank all of you. 
I think there is always a divide here on the parties in how we 
look at this. Our side is traditionally like the private 
lending. The other side is traditionally like the Government 
lending.
    The one thing I hear from this is that private lending has 
improved a lot because the Government got into this business. 
Now it looks like in many cases, there is a momentum back to 
private lending, because of the improvements made in the 
competition offer. Is that a fair comment?
    Mr. Merten. Yes, I think it is very fair.
    Chairman Tom Davis. Ms. Bauder, do you think that is a fair 
comment?
    Ms. Bauder. Yes.
    Chairman Tom Davis. Do you think that is a fair comment, 
Ms. Coolidge?
    Ms. Coolidge. Well, I think it is fair to say that the 
private sector has more money to spend. They are spending it in 
ways that maybe people appreciate, and that is good.
    Chairman Tom Davis. They would not have done that probably, 
if you did not have direct lending. That is my point.
    Ms. Coolidge. That is correct.
    Chairman Tom Davis. You can always argue about the 
Government, that we ought to give Government more money to do 
the same kind of things or back and forth.
    Ms. Coolidge. One could say that, or one could instead 
refocus these resources on the neediest students. That is sort 
of the heart of the argument, whether the level of support for 
the two programs is reasonable, given these vast needs of poor 
students.
    Chairman Tom Davis. I will tell you what, I represent the 
wealthiest district in the country, and it is hard to find many 
families that do not need the aid.
    Ms. Coolidge. Yes, that is right.
    Chairman Tom Davis. College education is expensive.
    Ms. Coolidge. That is right.
    Chairman Tom Davis. I wrote out, the year before last, 
$72,000 in tuition checks. So even at our salary, that is a 
hefty amount. So when it comes to the higher education today, 
everybody needs it.
    For low income, in particular, as you know, I authored the 
D.C. College Access Act that allows District students to go 
anywhere in the country and pay in-State tuition.
    But when it comes to aid for college, everybody needs it. 
There are very few families that this does not impose some kind 
of hardship.
    Ms. Coolidge. You might want to try a Plus Loan. If you are 
writing checks for $17,000, you can get a Plus Loan financed at 
4.17 this year. I have four children and I am doing that. 
[Laughter.]
    Chairman Tom Davis. Well, unfortunately, I got the cash, so 
I would just as soon get it out and not owe it. I hear you, but 
thank you very much. Maybe I could get one of my kids to go to 
George Mason or an in-State school.
    Mr. Merten. We will give you a special deal.
    Chairman Tom Davis. OK. [Laughter.]
    Listen, every student who goes to George Mason gets a 
special deal. Is that not right, Dr. Merten?
    Mr. Merten. Yes, they do.
    [Laughter.]
    Chairman Tom Davis. That is just for the record here.
    Do I understand that one of the benefits added is that 
sometimes under one of the advantages that the private loans 
have is that colleges can participate and actually make money 
on it? Is that correct?
    Ms. Coolidge. Yes, we did a feasibility study at the 
University of California, where we have six campuses and direct 
loans, and four in FFELP. We could make about $4 million a 
year, and most of that would be used to provide very 
competitive loan benefits to the borrowers themselves.
    But there would be approximately $1 million to $2 million, 
depending on how it was spent, of resources that move would 
generate for other financial aid at the campuses from Federal 
subsidies that we would get, just by partnering with a Federal 
lender.
    While we have six campuses that definitely do not want to 
do it--they are very pleased with the Direct Loan Program and 
they do not want to leave it--we are under pressure to say, why 
are you not doing that? If that money is out there and 
available to schools, why are you passing it up?
    Then when we see the STAR Act being proposed, it looks like 
that is what they are thinking about. Let us bleed some of this 
resource away for students. That is what I think they are 
after.
    Ms. Hart. Mr. Chairman, if I could also respond.
    Chairman Tom Davis. Yes, Ms. Hart.
    Mr. Hart. I served as head of a guaranty agency in my 
former State of residence. That provision, of school as lender, 
I believe, is really antiquated.
    It was placed in the law at a time that there were 
significant issues of capital formation for student loans. It 
was critical at that point that institutions that were having 
trouble with capital formation, especially for graduate and 
professional students, might want to use the FFELP Loan Program 
to provide educational dollars to their students.
    That simply is not the status today. That kind of unfair 
playing field, we also at Ohio State have had enormous pressure 
to move to that option. We have elected not to, for a very 
sound set of reasons. But I simply believe that provision is no 
longer needed and should be eliminated from the law, in my 
opinion.
    Chairman Tom Davis. Well, I guess, you know, the unfair 
playing field depends on where you sit on this thing. I think 
if you are a college administrator, you are just looking for 
the best deal for your kids. I am not really trying to take 
sides in this debate, one way or the other. We are just trying 
to get information here on how efficiently it has been run. 
That is our focus.
    We are going to get an audit back in September that will, I 
think, be more inclusive in terms of what the real costs are. 
We have not had a handle on this. Because all we have worked 
out are some estimated costs that go back a decade, and nobody 
has come back to look at. We will have, I think, a better 
handle there, yes?
    Mr. Merten. Every time you look at this issue, there are 
three players. There are the institutions, and what is in our 
best interest, and how we need to operate, and how do we act 
and operate in a business-like fashion. Second, it is the 
students and their parents. What are the best services that can 
be provided to them? Then third, what is the cost to the 
Federal Government?
    I think when we move forward in this, we have to look at 
all three of those. Sometimes you make decisions, and I think 
we make decisions, that we have picked an option that might not 
have been in our own best interests, but it was in the best 
interests of the students and their parents. So we are always 
making those kinds of tradeoffs, in all the issues in higher 
education, but specifically in this one.
    Chairman Tom Davis. I understand, and I think we will have 
a better perspective on the costs when we get the GAO back.
    Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman, and I also thank you for 
holding this hearing. I started at the University of Maryland 
as a freshman. When I started, the per-credit hour was $15 per 
hour. So I could go throughout my 4 years of college and pay it 
out of my pocket. But the costs have really risen.
    I have a 4-year old and an 11 year old. So my wife and I 
realize we will probably have to give our arms and legs to get 
them through college.
    But let me ask, and this is for Ms. Coolidge. I will start 
with you. We have heard a little bit about how private lenders 
market their loan products to schools. My understanding is that 
private lenders use a variety of inducements, such as taking 
schools administrators out to dinner and on trips and offering 
school computer systems and software packages.
    U.S. News reported on the lavish benefits that some private 
lenders offer to school administrators when they are marketing 
their loan program. I am concerned about the potential abuse in 
these situations. How can we ensure that marketing approaches 
by private lenders do not involve kick-backs? I will start with 
you and would like for anyone else on the panel to comment, if 
they care to.
    Chairman Tom Davis. May I just intervene? I would just ask 
this question. There is nothing wrong with taking somebody out 
to dinner. Are you talking about direct payments?
    Mr. Clay. Those were the examples.
    Chairman Tom Davis. Yes, that would be fine.
    Mr. Clay. I am not saying there is anything wrong with 
going out to dinner.
    Chairman Tom Davis. You are worried about the next step.
    Mr. Clay. Right.
    Chairman Tom Davis. OK.
    Ms. Coolidge. I think if you are asking how can we remedy 
this kind of thing, that is what I was talking before, about 
trying to make a more level playing field between the two 
programs.
    If the profits are associated, even after all costs which 
are obviously reinvested and are considerable with people here 
talking about the wonderful services they get--even after 
consideration of those great things, the profits that are made 
in the FFEL Program are extreme enough so that the school 
lenders can make as much as we calculated. By trimming that, 
you can reduce that kind of temptation. Because there will be 
enough in there to do the proper things for the loan programs 
and not enough for really lavish sorts of things that you are 
alluding to.
    A great number of dollars are spent on things that schools 
highly value and appreciate, that do not have that personal 
quality of sort of kick-back or payoff or that type of thing. 
So I think those are sort of collateral benefits that come from 
paying extra for this program. But the question is whether it 
is too much, and whether we need to modify the reimbursement 
model, so that it is closer to the other model.
    Mr. Clay. Thank you for that response.
    Mr. Merten. In our case, the purpose of getting something 
from the lender is to provide something to the student. That is 
what we are there for. I mean, that is the place where we play 
the intermediary role. The student needs something. The 
student's tuition has gone up, and in many cases has gone up 
because of the lack of State support. So we have to do whatever 
we can to help that student. If it is to get something extra 
from the lender, that is where we go.
    Mr. Clay. Thank you for that answer.
    Ms. Thornton. I would also agree that if a lender offers a 
service that would help us streamline our process for students 
then, in the end again, the student benefits from the service 
and it is not necessarily an inducement for the school. It is a 
service that benefits the student.
    At the end of the day, we are all trying to do our jobs 
more efficiently and more effective, and deliver the aid to the 
student. So sometimes, we need a little help, and private 
lenders offer that service to help us deliver the aid to the 
student in a timely manner.
    Mr. Clay. I appreciate that clarification. Let me ask Ms. 
Bauder this. We have heard about how the competition between 
the two loan programs has had important benefits for students 
and colleges. But we have also heard about how taxpayer dollars 
are being wasted because of high subsidies and inefficiencies 
in the Guarantee Loan Program.
    All of you have significant knowledge of student financial 
needs. Can you provide us with some insight into how we can 
maintain competition between the two loan programs, while also 
ensuring that taxpayers get a good deal? After Ms. Bauder, 
anyone on the panel can comment.
    Ms. Bauder. I think the point here is that we need to do 
what is in the best interests of the students. Who knows better 
really than the institution?
    I mean, I will look at the University of Maryland. Because 
we have partnerships with our private lenders, we are able to 
reallocate funding into different educational programs. We know 
that financial aid is not a one-size-fits-all program. So we 
developed Maryland Pathways. So students who have a zero 
expected family contribution, who are an in-State resident, can 
come to our institution and not borrow a dime in 4 years.
    So I think it is really becoming where we are starting to 
profile our students, rather than saying, OK, everybody has to 
take on a loan. The word ``loan'' may conjure up images of a 
creditor knocking on a door for one student, where it may be 
considered a gift for others.
    I think the competition between the two programs is 
necessary. I think direct lending has done a great benefit for 
the FFELP Program and vice versa.
    Mr. Merten. If you look at the three different legs, as I 
mentioned before, one of the question now in front of you and 
in front of all us as taxpayers is, what really is the 
difference? The idea of having the GAO study and to make sure 
that it is a full costed study--too many times in studies that 
we see done by the Federal Government, it is a marginal cost 
study. It is not a full cost of the program.
    So you need the full cost on both sides. Then it is 
something that obviously not only should you be interested, but 
we in higher education and as individual taxpayers should be 
interested in the full cost.
    Mr. Clay. Thank you for that response.
    Ms. Thornton. I also think it is important, too, to 
remember that some of the subsidies used by the lenders is 
returned to the community in the form of scholarships, they are 
still helping the students. They are helping the communities. I 
think it is important that you guys really consider that 
option, as well.
    Mr. Clay. Thank you for that.
    Ms. Coolidge. There is a bit of cost difference in the 
sense of full cost consideration. The Federal program, the 
Direct Loan Program, should have in it the borrowers who are 
the highest risk and who are the most likely to fail. That is 
the social mission of the program.
    That is going to be an additional cost. If they are in the 
Income Contention Repayment Program and making less than their 
interest in forms of payment, that is one of the purposes of 
these programs, to make it possible for access to occur. Then 
if at the back-end, they are not able to repay, we have a 
program that suits them and it is not just considered a 
default. It is really a way of dealing with the students who 
took the chance we invited them to take and did not succeed.
    So in taking into account the costs of the programs, it is 
really important to calculate the value associated with placing 
really high risk students into a repayment model that does not 
cause them to be dropouts from society, that they have a way of 
being acceptable, not defaulters. I think that is an extra 
cost.
    So when you do this comparison, it really needs to be 
calculated that we need to have a place, a repository, for the 
students who cannot pay. I am not talking about the will-not-
pays. I am talking about the can-not-pays.
    Ms. Hart. Mr. Clay, I hope that my summary will be helpful. 
But I think that it is consistent with all the other comments. 
In trying to avoid some of abuses that you describe, which I 
have heard of as well, that if we focus, and we would be glad 
to assist you if that would be useful, on the benefits to the 
students, and I include Ms. Thornton's definition about 
efficiencies. But if that were the distinction, I think there 
would be far less concern about the appropriate use of whether 
they are profits or dedicated services through direct lending. 
That is the distinction, I think, that we could all agree would 
be useful.
    Those of us who have labored long in these professional 
vineyards would love to avoid any onus to our profession of 
things that we certainly would never accept, and yet find great 
benefits to our students.
    For example, Ms. Thornton mentioned the U.S. A Funds 
Default Prevention Programs and Financial Literacy programs. We 
use those too, even though we are a direct lender. I would 
really regret seeing important student benefits, important 
educational benefits of that eliminated. But saying that those 
are the types of benefits that could accrue from the program, I 
think, is very reasonable and it would avoid the concerns which 
you have, which I certainly share.
    Mr. Clay. I would be very interested in you all sharing 
that information with us. I thank you, Mr. Chairman.
    Chairman Tom Davis. All right, Ms. Coolidge, let me just go 
back you, the ``will not pays'' versus the ``cannot pays,'' 
when you give a student a loan when they are going to school, 
is there not an assumption in every case that they are going to 
be able to get an education, improve their income, and pay it 
back?
    Ms. Coolidge. That is the assumption, and it is certainly 
the case that most do. But there are students who have health 
problems, who have mental health problems, who have tragedies 
in their families who, for various reasons are not able to. It 
is usually people who do not finish. People who have taken out 
loans.
    Chairman Tom Davis. But you do not know that. Do you know 
that when you are making the loan?
    Ms. Coolidge. No, we cannot know.
    Chairman Tom Davis. So those would be handled equally by 
the private sector and the public sector, would they not?
    Ms. Coolidge. Except that in the case of the income 
contingent repayment plan, it is a non-producing asset. It is 
something where the Federal Government winds up taking a loss, 
basically, on the amount the student cannot repay.
    The question is, do you want that loan maintained in a 
environment where you are paying basically a premium on the 
asset, for someone to take care of and maintain it in the 
private program, or do you want it moved to the least costly 
repository.
    That is why I was speaking of moving those borrowers--
whatever program they borrowed from originally--moving them 
into a Federal environment, where the Feds can, first of all, 
check their income-contingent repayment against their taxes 
each year, to find out if they are legitimately getting this 
treatment, if they are earning more. They can check with the 
Social Security Administration to see if they are getting more.
    So having that kind of borrower's repayment in the 
Government program makes a great deal of sense. It is not a 
huge number. It is just that I wanted to say that the cost of 
this is a legitimate cost, and should be considered when 
comparing the two programs.
    Mr. Merten. I learned something in the preparation for the 
testimony, and that is that our default rate was low. So I 
asked the financial aid staff why. The big issue that I got 
back was: counseling, counseling, counseling.
    That is for the borrower to understand what he or she is 
getting into, and to make sure they are borrowing as little as 
they need as opposed to as much as they can get. If you have 
that kind of a philosophy, then I think we have the opportunity 
to make sure people are borrowing close to where they should be 
and there will be problems later on. But those problems are 
based on a rational loan, as opposed to an irrational loan.
    Chairman Tom Davis. Again, a lot of the incentives that the 
private sector offers today would not have been there, but for 
the Direct Loan Program and so on. As we look at this, we want 
to continue to keep that competition.
    But my instinct is that Government is never able to keep up 
and be competitive with the private markets and their ability 
to be flexible, because they are just different motivations. 
Private markets, they operate on a very competitive bottom-line 
basis. The Government does not. I mean, how many years does it 
take us to get an audit to just see what the real costs are.
    Ms. Coolidge. But in fact, this is not clearly the private 
market versus the Government market. That model is too extreme. 
In fact, the Government market, as Ms. Shaw testified, uses 
competitive bidding to outsource quite a few of their tasks. 
Therefore, they are using the private market as part of their 
model.
    Chairman Tom Davis. They do for collections, yes.
    Ms. Coolidge. It is not just for collections. They do it 
for all kinds of processing. They use the private industries.
    Chairman Tom Davis. But they do not have the same 
competitive arena that they are out there competing in. The 
competition level is different in the private sector than it is 
in the Government sector.
    Ms. Coolidge. Well, let me just speak to that. The private 
sector is actually heavily subsidized. This a heavily regulated 
and heavily subsidized Federal program. So the thought that is 
the free market and this is the Government is actually much 
more muted than that. There is not as big a difference.
    Chairman Tom Davis. But in private sector companies, the 
culture is different than the Government sector.
    Ms. Coolidge. Certainly, it is culturally different, and 
that is to our benefit. They also, however, to our detriment in 
some cases, have stockholders and highly paid executives. So 
there is both aspects of the good parts and the bad parts that 
go with that. But the fact is, they are making their money on a 
Government subsidy, much as some of the agriculture points are. 
It is not a clear distinction between liaise a fare and 
Government restriction.
    Chairman Tom Davis. Well, I think Dr. Merten put it well, 
when he said there are three legs to this that you need to 
examine. There are the schools' perspective, the students' and 
the parents' perspective, and that is where I sit. You know, 
what is the best deal? Then finally, there is the taxpayers' 
perspective, and we also have to look at all three of these.
    I think this discussion has been very, very helpful to this 
committee, as we take a look at what is going on. I hope it has 
been to Ms. Shaw, for the Department of Education. She has 
stayed here for the whole thing.
    We have a Direct Lending Program, and we want to make it 
work. Because we understand that competition has made the 
private sector better. On the other hand, the private sector is 
getting more flexible and getting more ingenuity every day as 
they get better. I appreciate everybody's comments as we move 
forward on this.
    So thank you all very much. Is there anything else that 
anybody wants to say before we leave, that maybe you did not 
get in?
    [No response.]
    Chairman Tom Davis. Well, thank you very much. This was 
well worth it. The hearing is adjourned.
    [Whereupon, at 12:49 p.m., the committee was adjourned.]
    [Note.--The Department of Education: Federal Student Aid 
Packet and additional information is on file with the 
committee.]
    [The prepared statements of Hon. Dan Burton and Hon. Jon C. 
Porter and additional information submitted for the hearing 
record follow:]

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