[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
           ENSURING THE AVAILABILITY OF FEDERAL STUDENT LOANS

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

                                HEARING

                               before the

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 14, 2008

                               __________

                           Serial No. 110-84

                               __________

      Printed for the use of the Committee on Education and Labor


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                    COMMITTEE ON EDUCATION AND LABOR

                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon, 
    Chairman                             California,
Donald M. Payne, New Jersey            Senior Republican Member
Robert E. Andrews, New Jersey        Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia  Peter Hoekstra, Michigan
Lynn C. Woolsey, California          Michael N. Castle, Delaware
Ruben Hinojosa, Texas                Mark E. Souder, Indiana
Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts       Judy Biggert, Illinois
Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
David Wu, Oregon                     Ric Keller, Florida
Rush D. Holt, New Jersey             Joe Wilson, South Carolina
Susan A. Davis, California           John Kline, Minnesota
Danny K. Davis, Illinois             Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Kenny Marchant, Texas
Timothy H. Bishop, New York          Tom Price, Georgia
Linda T. Sanchez, California         Luis G. Fortuno, Puerto Rico
John P. Sarbanes, Maryland           Charles W. Boustany, Jr., 
Joe Sestak, Pennsylvania                 Louisiana
David Loebsack, Iowa                 Virginia Foxx, North Carolina
Mazie Hirono, Hawaii                 John R. ``Randy'' Kuhl, Jr., New 
Jason Altmire, Pennsylvania              York
John A. Yarmuth, Kentucky            Rob Bishop, Utah
Phil Hare, Illinois                  David Davis, Tennessee
Yvette D. Clarke, New York           Timothy Walberg, Michigan
Joe Courtney, Connecticut            [Vacancy]
Carol Shea-Porter, New Hampshire

                     Mark Zuckerman, Staff Director
                   Vic Klatt, Minority Staff Director

                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on March 14, 2008...................................     1

Statement of Members:
    Bishop, Hon. Timothy H., a Representative in Congress from 
      the State of New York:
        Prepared statement of Dr. Phillip Day, president, 
          National Association of Student Financial Aid 
          Administrators.........................................    27
    McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member, 
      Committee on Education and Labor...........................     4
        Prepared statement of....................................     6
    Miller, Hon. George, Chairman, Committee on Education and 
      Labor......................................................     1
        Prepared statement of....................................     3
        Questions submitted to witnesses on behalf of Mr. Scott..    84
    Petri, Hon. Thomas E., a Representative in Congress from the 
      State of Wisconsin, prepared statement of..................    83

Statement of Witnesses:
    Bauder, Sarah, director of student financial aid, University 
      of Maryland................................................    56
        Prepared statement of....................................    58
    Johnson, Roberta, director of financial aid, Iowa State 
      University.................................................    53
        Prepared statement of....................................    55
        Responses to questions for the record....................    85
    Muilenburg, Terry L., senior vice president, government and 
      industry relations, United Student Aid Funds, Inc..........    48
        Prepared statement of....................................    50
        Responses to questions for the record....................    87
    Sanders, Chuck, president and CEO, South Carolina Student 
      Loan Corp..................................................    61
        Prepared statement of....................................    62
        Responses to questions for the record....................    89
    Spellings, Hon. Margaret, Secretary, U.S. Department of 
      Education..................................................     7
        Prepared statement of....................................     9
    Talbert, Kent D., general counsel, U.S. Department of 
      Education..................................................    12
    Warder, Lawrence A., chief financial officer, U.S. Department 
      of Education...............................................    11
    Wozniak, Paul W., managing director, UBS Securities LLC......    45
        Prepared statement of....................................    47
        Responses to questions for the record....................    91


           ENSURING THE AVAILABILITY OF FEDERAL STUDENT LOANS

                              ----------                              


                         Friday, March 14, 2008

                     U.S. House of Representatives

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The committee met, pursuant to call, at 9:00 a.m., in room 
2175, Rayburn House Office Building, Hon. George Miller 
[chairman of the committee] presiding.
    Present: Representatives Miller, Kildee, Payne, Andrews, 
Scott, McCarthy, Tierney, Kucinich, Holt, Grijalva, Timothy 
Bishop of New York, Sanchez, Sarbanes, Loebsack, Altmire, 
Yarmuth, Hare, Clarke, Courtney, Shea-Porter, McKeon, Petri, 
Souder, Ehlers, Platts, Keller, Wilson, Kline, Price, Kuhl, 
Bishop of Utah, Davis of Tennessee, and Walberg.
    Staff Present: Tylease Alli, Hearing Clerk; Jeff Appel, 
Senior Education Policy Advisor/Investigator; Sarah Dyson, 
Administrative Assistant, Oversight; Carlos Fenwick, Policy 
Advisor, Subcommittee on Health, Employment, Labor and 
Pensions; Patrick Findlay, Investigative Counsel; Denise Forte, 
Director of Education Policy; Gabriella Gomez, Senior Education 
Policy Advisor; Lloyd Horwich, Policy Advisor, Subcommittee on 
Early Childhood, Elementary and Secondary Education; Lamont 
Ivey, Staff Assistant, Education; Thomas Kiley, Communications 
Director; Ann-Frances Lambert, Administrative Assistant to 
Director of Education Policy; Danielle Lee, Press/Outreach 
Assistant; Stephanie Moore, General Counsel; Alex Nock, Deputy 
Staff Director; Joe Novotny, Chief Clerk; Rachel Racusen, 
Deputy Communications Director; Julie Radocchia, Education 
Policy Advisor; Dray Thorne, Senior Systems Administrator; 
Michele Varnhagen, Labor Policy Director; Margaret Young, Staff 
Assistant, Education; Mark Zuckerman, Staff Director; Julia 
Martin, Intern; Stephanie Arras, Minority Legislative 
Assistant; James Bergeron, Minority Deputy Director of 
Education and Human Services Policy; Robert Borden, Minority 
General Counsel; Amy Raaf Jones, Minority Professional Staff 
Member; Alexa Marrero, Minority Communications Director; Susan 
Ross, Minority Director of Education and Human Services Policy; 
Linda Stevens, Minority Chief Clerk/Assistant to the General 
Counsel; Sally Stroup, Minority Staff Director.
    Chairman Miller. The Committee on Education and Labor will 
come to order for the purposes of conducting this hearing on 
ensuring the availability of student loans. The purpose of this 
hearing is to provide information to the committee and to 
students, their families and their schools about our ability to 
assure them that student loans will continue to be made 
available to them and the development of contingency plans in 
the unlikely event that some lenders are unable to continue 
lending in this market.
    In some cases, we have been forewarned that some lenders 
will not lend or will reduce their lending, and in other cases, 
we have been told by some lenders that they will expand their 
lending, and we are trying to balance that information. This is 
really about us making the proper preparations so that in the 
upcoming lending season for students in their school year and 
for their families, we will be able to make sure that there is 
a seamless system in place so that we can use already existing 
legal authority and programs that are on the books, whether 
that is the Lender of Last Resort provisions in the law or 
whether that is the Direct Lending program.
    Senator Kennedy and I sent the Secretary a letter outlining 
why we thought it was necessary to have plans in place so that 
we can deal with these contingencies. Under the existing laws, 
some 35 guarantee agencies around the country are obligated to 
serve as lenders of last resort to avert any possible problem 
in access to student loans and thereby provide a nationwide 
network of back-stop lenders. The Education Department 
established a Lender of Last Resort plan back in 1998 when some 
lenders were indicating they might withdraw from the Government 
Guaranteed Loan program. But the Department did not need to 
have that program implemented at that time because of a change 
in the law. Our interest this morning is whether or not that 
plan has been updated, whether or not meetings have been held 
with the guaranty agencies, whether or not the agreements that 
were arrived at at that time have again been updated for 
today's contingencies, and whether or not all lines of 
operations are in fact clear should the Secretary need to 
impose that authority to continue access to loans for students 
and families.
    In addition, the Federal Direct Loan program is available 
to schools that wish to temporarily or permanently use the 
program to ensure that students can have access to student 
loans. The Direct Loan program does not rely on private credit 
markets for raising capital to originate these new loans. One 
of the questions we asked the Secretary and will ask again this 
morning is whether or not efforts have been made to have 
schools preregister should they decide to use the Direct 
Lending program. Apparently, it is a very small difference from 
the information they provide for the FFELP program and then 
whether or not they are certified, so that they can use that 
program should they decide to use that as an alternative. And I 
would hope that what we would see is that we are not waiting 
for a problem to develop because we have been forewarned. This 
committee's staff and the chairman have held a number of 
meetings with lenders from all sectors of the student loan 
community. The Democratic leadership has held a series of 
meetings over the last several months with economists and the 
investment community from Wall Street. And all of them are 
talking about the unprecedented nature of the credit markets 
that we have seen and that has spilled over into the municipal 
bond market, that has spilled over obviously into both the 
commercial and residential real estate market and to some 
extent in the student loan market as institutions have tried to 
recapitalize their ability to make future loans.
    That is why we are here today, to make sure that if that 
recapitalization does not take place in the volume that is 
necessary, that we have the ability to step in and to make sure 
that these students do not miss classes that are necessary for 
their graduation or for their majors; that they do not miss 
semesters or quarters that will then cause them to have to 
borrow more money to go on and finish their degrees. In today's 
loan-dependent educational environment, it turns out that time 
is money for families and for students. And we should be in the 
position of being able to assure those students and their 
families that they will not have to spend additional time 
because we failed to make the preparations to provide those 
loans in the event that the private markets are unable to do 
so.
    Having said that, again, we have received many assurances, 
both privately and publicly, that the private markets believe 
they will be able to continue to do that. Some have raised the 
issue that they think there may very well be a gap. They do not 
suggest that it is a terribly sizable gap, but it is a gap that 
must be filled in a seamless fashion so that students and 
families are not required to go into deeper debt because we 
couldn't sort out the bureaucratic operations between our 
institutions of higher education, students and families, and 
the Federal programs that are designed essentially for this 
exact situation, whatever that cause may be.
    And with that, I would like to recognize the senior 
Republican on the committee, Mr. McKeon, for his opening 
statement.
    [The statement of Mr. Miller follows:]

Prepared Statement of Hon. George Miller, Chairman, House Committee on 
                          Education and Labor

    Good Morning. Welcome to today's hearing on ``Ensuring the 
Availability of Federal Student Loans.''
    For months now, the worsening economic downturn has made life more 
difficult for America's workers and their families.
    First the foreclosure signs began sprouting up in front yards. 
Then, in increasing numbers, the pink slips started arriving. Many 
American workers are wondering if they will be able to hold onto their 
homes and their jobs in the months ahead.
    In Congress, our priority has been to help get the economy back on 
track, help workers keep their jobs, and help families keep their 
homes.
    Last month, Democrats and Republicans in Congress acted to give the 
economy a shot in the arm and deliver relief to families in need right 
now.
    By putting money into the hands of low- and middle-income families 
who will spend it quickly, the bipartisan stimulus package we enacted 
will inject demand back into the economy.
    This downturn had its roots in the subprime mortgage crisis, which 
has led to a significant tightening in the credit markets. As a result, 
what began as a challenge for home loan borrowers has also become a 
challenge for other borrowers, like those with credit card debt.
    Recognizing that the financial markets are not functioning well, 
the Federal Reserve has recently announced that it has made $400 
billion available to financial institutions to help provide liquidity 
for, and restore confidence in, the general credit markets.
    Recently, some federal student loan lenders have encountered 
difficulties in accessing the capital market to finance their lending 
activity. While these disruptions have had an impact on some lenders, 
they so far have not negatively affected students' ability to access 
federal loans.
    Some lenders have expressed concern about their ability to continue 
to make loans through the Federal Family Education Loan Program, but 
others are anticipating increasing their student loan business in 
response to changes in the FFELP marketplace, in particular depository 
institutions like JP Morgan Chase who have publicly indicated their 
desire to increase market share.
    While I am hopeful that overall credit market conditions will soon 
improve, it is only prudent to prepare now to ensure that stress in the 
credit markets does not prevent students and parents from continuing to 
have uninterrupted, timely access to federal college loans.
    As we have seen far too often, shocks in the credit and financial 
markets come as a surprise, leaving those affected little time to 
react.
    In the unlikely event that stress in the credit market leads a 
significant number of lenders to substantially reduce their activity in 
FFELP, federal law already includes tools that the U.S. Education 
Secretary can use to ensure that all eligible students continue to have 
uninterrupted and timely access to federal student loans. We will 
examine these tools in today's hearing.
    Specifically, the Higher Education Act allows the Secretary to 
designate the 35 guaranty agencies around the country as ``lenders of 
last resort''.
    Under existing law, these guaranty agencies are obligated to serve 
as lenders of last resort to avert any possible problem in access to 
student loans, thereby providing a nationwide network of backstop 
lenders.
    The Education Department had established a lender-of-last-resort 
plan in 1998, when some lenders were indicating that they might 
withdraw from the guaranteed loan program. The Department never needed 
to implement the plan.
    In addition, the federal Direct Loan program is available to 
schools that wish to temporarily or permanently use the program to 
ensure students can access federal student loans. The Direct Loan 
program does not rely on private credit markets for raising capital to 
originate new loans.
    I look forward to hearing from Secretary Spellings about her 
Department's preparations for implementing a lender-of-last-resort plan 
and for helping schools enroll in the Direct Loan program in the 
unlikely event that such steps are necessary.
    Having plans in place and operational now will help ensure that all 
stakeholders, including colleges and the federal government, can 
respond to any potential loan access problems with the least possible 
delay for students, families, and schools.
    And knowing that the Education Department is fully prepared to act 
if necessary will reassure students and families that they will 
continue to have uninterrupted access to federal student loans.
    One of the key priorities for this Committee has been to make 
college more affordable and accessible for every qualified student who 
wants to attend.
    Last year, we took a truly historic step towards this goal by 
providing more than $20 billion in financial assistance to low- and 
middle-income students and families over the next five years.
    Among other things, this legislation will reduce the cost of 
federal college loans for student and parent borrowers.
    I am confident that, with proper planning by the federal 
government, students and parents will continue to be able to access 
these low-cost loans.
    I'd like to thank all of our witnesses for joining us today, and I 
look forward to your testimony.
    Thank you.
                                 ______
                                 
    Mr. McKeon. Thank you, Mr. Chairman.
    Good morning. Good morning, Madam Secretary.
    Thank you, Mr. Chairman, for holding this hearing to 
examine a looming challenge for our Nation's higher education 
system. We are here today to examine how to ensure the 
availability of Federal student loans. By virtue of holding 
this hearing, we are acknowledging the potential risk to loan 
availability that has developed in recent months. I consider it 
a positive sign that Members on both sides of the aisle 
recognize these challenges. I only hope we can come together in 
the same way to find solutions.
    There are several factors that have contributed to the 
current student loan uncertainty: deteriorating confidence and 
reduced investor demand in the capital markets due to the 
subprime mortgage meltdown; increased financing costs; the 
possibility of higher defaults because of overall economic 
weakness; and the real and perceived impact of the subsidy cuts 
imposed just a few months ago.
    I want to be clear on this point, while the program cuts 
imposed last fall are not the cause of the current market 
instability, they are certainly playing a role. There are real 
questions about whether loan providers will continue to 
participate in the Federal loan program as a result of the cuts 
enacted in the College Cost Reduction and Access Act. Those 
cuts, when coupled with the current instability in the current 
markets, may create the perfect storm where loan providers may 
find themselves unable to finance student loans.
    The Federal Family Education Loan program has used 
innovation to absorb various program cuts and policy changes 
over the years. However, there is a point at which no further 
cuts can be absorbed, and in all likelihood, we will not know 
with certainty that we have reached that point until it is too 
late. Our intention today is not to sound a false alarm. Each 
of us hopes that the predictions of a loan crisis never come to 
pass.
    Part of our purpose today is to identify solutions so that 
we are prepared whether or not the situation grows worse. 
Members on both sides of the aisle have joined together in an 
effort to engage Federal regulators immediately. Letters have 
been sent to the Secretary of Education, who we will hear from 
shortly. They have been sent to the Secretary of the Treasury. 
And a letter will soon be sent to the Chairman of the Federal 
Reserve.
    Our goal in engaging the various Federal agencies now is to 
try to prevent any harm to the Nation's college students before 
it occurs. We are trying to avoid a situation similar to the 
current mortgage crisis by intervening before students are left 
without options. Concerns have been raised by members on and 
off this Committee because the problem is much larger than just 
this Committee. Any real solution needs to be a result of 
extensive discussion with parties who are experts in the 
financial market arena, and I am glad we have an expert from 
Wall Street here today.
    I offered an amendment during the recent consideration of 
reforms to the Higher Education Act. With that amendment, I 
proposed a Sense of Congress that these same Federal agencies 
should be closely monitoring the situation in the student loan 
credit markets and that they should act quickly to notify 
Congress in the event of a problem so that we could act 
quickly. It was disappointing that my amendment was not made in 
order. I am afraid we sent a signal then that we do not care. 
However, by holding this hearing today we are sending a 
powerful signal of our commitment to a robust and healthy 
student loan system that continues to deliver tens of billions 
in federally backed loans that help students achieve their 
college dreams.
    Today's hearing is on a topic of utmost importance, and so 
I will keep my remarks brief. I simply want to note that our 
purpose here is not partisan. It should not be an effort to 
favor one loan program over another. Nor should it be used to 
point the finger of blame. We must look to the future and keep 
our focus squarely on what will be best for students and 
families who are pursuing higher education and the benefits and 
personal enrichment that come with it.
    Once again, I want to thank Chairman Miller for holding 
this hearing. I want to thank Secretary Spellings for being 
here, as well as our panel of expert witnesses, and I yield 
back.
    [The statement of Mr. McKeon follows:]

     Prepared Statement of Hon. Howard P. ``Buck'' McKeon, Senior 
              Republican, Committee on Education and Labor

    Good morning. I want to begin by thanking you, Chairman Miller, for 
holding this hearing to examine a looming challenge for our nation's 
higher education system.
    We are here today to examine how to ensure the availability of 
federal student loans. By virtue of holding this hearing, we are 
acknowledging the potential risk to loan availability that has 
developed in recent months. I consider it a positive sign that members 
on both sides of the aisle recognize these challenges. I only hope we 
can come together in the same way to find solutions.
    There are several factors that have contributed to the current 
student loan uncertainty--deteriorating confidence and reduced investor 
demand in the capital markets due to the subprime mortgage meltdown; 
increased financing costs; the possibility of higher defaults because 
of overall economic weakness; and the real and perceived impact of the 
subsidy cuts imposed just a few months ago.
    I want to be clear on this point. While the program cuts imposed 
last fall are not the cause of the current market instability, they are 
certainly playing a role. There are real questions about whether loan 
providers will continue to participate in the federal loan program as a 
result of the cuts enacted in the College Cost Reduction And Access 
Act. Those cuts, when coupled with the current instability in the 
credit markets, may create the perfect storm where loan providers may 
find themselves unable to finance student loans.
    The Federal Family Education Loan Program has used innovation to 
absorb various program cuts and policy changes over the years. However, 
there is a point at which no further cuts can be absorbed and in all 
likelihood, we will not know with certainty that we have reached that 
point until it is too late.
    Our intention today is not to sound a false alarm. Each of us hopes 
that the predictions of a loan crisis never come to pass. Part of our 
purpose today is to identify solutions so that we are prepared whether 
or not the situation grows worse.
    Members on both sides of the aisle have joined together in an 
effort to engage federal regulators immediately. Letters have been sent 
to the Secretary of Education, who we will hear from shortly; they have 
been sent to the Secretary of the Treasury; and a letter will soon be 
sent to the Chairman of the Federal Reserve. Our goal in engaging the 
various federal agencies now is to try to prevent any harm to the 
nation's college students before it occurs. We are trying to avoid a 
situation similar to the current mortgage crisis by intervening before 
students are left without options.
    Concerns have been raised by members on and off this committee 
because the problem is much larger than just this committee. Any real 
solution needs to be a result of extensive discussion with parties who 
are experts in the financial market arena and I am glad we have an 
expert from Wall Street here today.
    I offered an amendment during the recent consideration of reforms 
to the Higher Education Act. With that amendment, I proposed a Sense of 
Congress that these same federal agencies should be closely monitoring 
the situation in the student loan credit markets and that they should 
act quickly to notify Congress in the event of a problem so that we 
could act quickly. It was disappointing that my amendment was not made 
in order--I'm afraid we sent a signal then that we did not care. 
However, by holding this hearing today we are sending a powerful signal 
of our commitment to a robust and healthy student loan system that 
continues to deliver tens of billions in federally-backed loans that 
help students achieve their college dreams.
    Today's hearing is on a topic of the utmost importance and so I 
will keep my remarks brief. I simply want to note that our purpose here 
is not partisan. It should not be an effort to favor one loan program 
or the other, nor should it be used to point the finger of blame. We 
must look to the future and keep our focus squarely on what will be 
best for students and families who are pursuing higher education and 
the benefits and personal enrichment that come with it.
    Once again, I want to thank Chairman Miller for holding this 
hearing. I want to thank Secretary Spellings for being here, as well as 
our panel of expert witnesses. I yield back.
                                 ______
                                 
    Chairman Miller. Thank you.
    Madam Secretary, welcome to the Committee. You are no 
stranger to this committee. But just for our audience, I would 
say that Margaret Spellings is the U.S. Secretary of Education.
    And we welcome your appearance this morning.
    Prior to being Secretary of Education she was Assistant for 
Domestic Policy to President George W. Bush. And prior to that 
she was a Senior Advisor to then Governor George W. Bush with 
responsibilities for education reform in the State of Texas.
    We look forward to your testimony and thank you for your 
cooperation and our conversations and your making your staff 
available to our Committee to talk about how we put this in 
place.

     STATEMENT OF HON. MARGARET SPELLINGS, SECRETARY, U.S. 
                    DEPARTMENT OF EDUCATION

    Secretary Spellings. Thank you very much, Mr. Chairman. 
Thank you for inviting me here today.
    Thank you, Congressman McKeon, as well.
    I welcome the opportunity to discuss what the Department is 
doing to ensure that students and families can access and 
afford higher education. I share your concern and I appreciate 
your vigilance on this issue. Many of you have written to me 
regarding your concerns. Today I am responding to you in a 
letter. Much of my response will also be captured in my 
remarks.
    First of all, let me assure you and especially students and 
families that Federal student aid will continue to be 
available. As your recent letter noted, Mr. Chairman, 
disruptions in the private lending market have so far not 
negatively affected students' ability to access student loans. 
That is what we are seeing also.
    Student loans constitute a more than $400 billion 
enterprise involving multiple Federal agencies, guaranty 
agencies and secondary markets. Federal loans and other Federal 
aid comprise one piece of this sector, about 26 percent in 
dollar terms. In student terms, more than 10 million of 18 
million college students receive financial aid from my 
Department. The two sources of Stafford loans are the Direct 
Loan program and the Federal Family Education Loan program, 
what we all called FFELP. More than 2,000 originating lenders 
participate in FFELP.
    As recent media reports have noted a small number of these 
lenders have reduced their participation or stopped originating 
new loans. As you know, these actions are largely a result of 
broader stress across credit markets and the economy as a 
whole. Even in the limited cases where lenders have reduced 
participation in FFELP, other lenders have stepped in to meet 
student needs.
    My Department is in regular contact with schools. In our 
extensive outreach, no institutions have indicated that any 
eligible student has been denied access to Federal loans. And 
earlier this week, the Consumer Bankers Association reaffirmed 
that banks plan to continue making both guaranteed and private 
loans in the coming school year.
    Of course, we all understand the anxiety that students and 
families experience when they hear news accounts suggesting 
that Federal student loans could be at risk. We also understand 
that credit markets are under stress and conditions may change 
rapidly. For that reason, the Department of Education, in 
consultation with other offices and agencies across the 
executive branch, including the Domestic Policy Council, the 
National Economic Council at the White House and the Treasury 
Department, is taking the following steps.
    First, we are monitoring the situation closely, just as you 
are doing. We are examining market conditions on a daily basis 
and working with the lending community, including the many 
stakeholders involved in Federal aid to assess any potential 
impact on students. This monitoring will provide us with 
information on how best to proceed. For example, we are 
tracking the volume of loan originations for both FFELP and the 
Direct Loan program against previous years. We know that 
originations will peak, as they always do, in July and August 
before the school year starts. If origination trends shift, we 
will be prepared to act. We are also tracking inquiries daily 
into the Direct Loan program to be prepared for any significant 
shift in loan volume between the programs. Again, rest assured 
that we will be ready should such a shift occur.
    Second, we are engaging our customers, students, families 
and institutions, by helping them understand all of their 
options. Recently we sent letters to college presidents and 
financial aid officers to assure them of the continued 
availability of Federal loans and to ask for their help 
tracking developments, including any reduction of lender 
participation. In cases where the institutions are relying 
heavily on a single lender that chooses to reduce participation 
in FFELP, we will help identify other lending options.
    Third, we are reviewing the options and tools available 
should the situation warrant their use. For example, some have 
suggested shifting more of the Federal aid volume to the Direct 
Loan program. Whether to participate in the FFELP or Direct 
Loan programs is a choice that schools make. The administration 
continues to support having two strong Federal student loan 
programs. Currently 850 schools already authorized to make 
direct loans have chosen to remain with FFELP as their primary 
program. We stand ready to support them in whatever choices 
they make now and in the future. We are also reviewing Lender 
of Last Resort provisions that ensure eligible students in the 
FFELP program can access loans if they are turned down by 
lenders. Currently, the FFELP and Direct Loan programs continue 
to meet student needs. Lender of Last Resort provisions remain 
available, and we are closely reviewing the readiness of 
guaranty agencies to play their role. Private loans can also be 
an important resource for students and families. However, many 
who use private loans haven't fully exhausted their Federal aid 
options. To inform them about these, we have created materials 
like this Federal Aid First brochure, a user-friendly guidance 
on how to apply for and receive aid.
    It is also worth noting that concerns about the 
availability of student loans are related to anxiety about the 
growing cost of attendance. To pay for higher education 
families must rely upon numerous funding sources while 
navigating a Byzantine and often burdensome financial aid 
system. It is like a family having to buy a new car every year 
for each student in the family with different terms and 
conditions for each one each year. Working together we can help 
ease these families' burdens.
    Already we have worked together to dramatically increase 
Pell Grants. We have achieved the largest increase in budget 
authority in 30 years, and the President has once again asked 
to increase the maximum annual award in his 2009 budget to 
$4,800 per year. As early as 2006, my Commission on the Future 
of Higher Education called for streamlining the financial aid 
system by addressing the interrelated issues of cost, financing 
and consumer information. As you work to reauthorize the Higher 
Education Act, I hope we can take this opportunity to simplify 
the system and make it more responsive to students and 
families. Postsecondary education grows more important by the 
day in our global knowledge economy. Times of economic 
uncertainty are all the more reason that Americans will look to 
higher education to acquire new skills and knowledge. Together 
we can help more of them do so.
    Federal student loans are an important part of this effort, 
and the steps my Department is taking will help ensure that 
they remain available. Market conditions are dynamic, not 
static. As you said in your letter, Mr. Chairman, while we 
expect that overall credit market conditions will soon improve, 
it is only prudent to prepare now to ensure that these 
conditions do not negatively impact students. In the coming 
weeks and months I look forward to working with you to help 
students continue to access and afford the invaluable 
opportunities of higher education.
    And Mr. Chairman, here today with me is Larry Warder, who 
leads our Federal student aid operation, as well as my General 
Counsel, Kent Talbert.
    [The statement of Secretary Spellings follows:]

    Prepared Statement of Hon. Margaret Spellings, Secretary, U.S. 
                        Department of Education

    Thank you for inviting me here today. I welcome the opportunity to 
discuss what the Department is doing to ensure that students and 
families can access and afford higher education. I share your concern 
and appreciate your vigilance on this issue.
    First of all, let me assure you, and especially students and 
families, that Federal student aid will continue to be available. As 
your recent letter noted, Mr. Chairman, disruptions in the private 
lending market have ``so far not negatively affected students' ability 
to access federal loans.'' That's what we're seeing also.
    Student loans are more than a 400 billion dollar enterprise, 
involving multiple federal agencies, guaranty agencies, and secondary 
markets.
    Federal loans and other federal aid comprise one piece of this 
sector. Of eighteen million college students, more than ten million 
receive financial aid from my Department.
    The two sources of Stafford loans are the Direct Loan program and 
the Federal Family Education Loan program--what we call FFEL. More than 
2,000 originating lenders participate in FFEL. As recent media reports 
have noted, a small number of these lenders have reduced their 
participation or stopped originating new loans.
    As you know, these actions are largely a result of broader stress 
across credit markets and the economy as a whole. Even in the cases 
where lenders have reduced participation in FFEL, other lenders have 
stepped in to meet student needs. My Department is in regular contact 
with schools. In our extensive outreach, no institutions have notified 
us that any eligible student has been denied access to federal loans. 
And earlier this week, the Consumer Bankers Association reaffirmed that 
banks plan to continue making both guaranteed and private loans.
    Of course, we all understand the anxiety that students and families 
experience when they hear news accounts suggesting that federal student 
loans could be at risk. We also understand that credit markets are 
under stress, and conditions may change rapidly.
    For that reason the Department of Education--in consultation with 
other offices and agencies across the executive branch such as the 
Domestic Policy Council, the National Economic Council, and the 
Treasury--is taking the following steps:
    First, we are monitoring the situation closely--just as you are 
doing. We're examining market conditions on a daily basis and working 
with the lending community, including the many stakeholders involved in 
federal aid, to assess any potential impact on students.
    This first step will provide us with information on how best to 
proceed. For example, we are tracking the volume of loan originations 
for both FFEL and the Direct Loan program against previous years. We 
know that originations will peak, as they always do, in July and August 
before the school year starts. If origination trends shift, we will be 
prepared to act.
    We are also tracking inquiries daily into the Direct Loan program 
to be prepared for any significant shift in loan volume between the 
programs. Again, rest assured that we will be ready should such a shift 
occur.
    Second, we're engaging our customers--students, families, and 
institutions--by helping them understand all their options. Recently, 
we sent letters to college presidents and financial aid officers to 
assure them of the continued availability of federal loans, and to ask 
for their help tracking developments, including any reduction of lender 
participation at their schools.
    In cases where the institutions are relying heavily on a single 
lender that chooses to reduce participation in FFEL, we have actually 
communicated with these institutions to ensure that their students will 
continue to be served, be this either a single lender or other new 
lenders.
    Third, we're reviewing the options and tools available should the 
situation warrant their use. For example, some are suggesting that we 
shift more of the federal aid volume to the Direct Loan program. 
Whether to participate in the FFEL or Direct Loan programs are choices 
that schools make. The Administration continues to support having two 
strong Federal student loan programs. Currently, 850 schools already 
authorized to make Direct Loans have chosen to remain with FFEL as 
their primary program. We stand ready to support them in whatever 
choices they make, now and in the future.
    Congress included the Lender of Last Resort provisions in the 
Higher Education Act to provide a way for the Federal Government to 
ensure, should the need arise, that students and families can continue 
to access FFEL loans. These provisions are called ``last resort'' for a 
good reason--they're the final option for eligible students unable to 
access federal loans. At present, the FFEL and Direct Loan programs 
continue to meet student needs. Lender of Last Resort provisions remain 
available, and guarantee agencies are already using their authorities 
as needed.
    Private loans can also be an important resource for students and 
families. However, many who use private loans haven't exhausted their 
federal aid. To inform them of the more affordable Federal options, 
we've created materials like this Federal Aid First brochure--user-
friendly guides on how to apply for and receive Federal aid.
    As early as 2006, my Commission on the Future of Higher Education 
called for streamlining the entire financial aid system by addressing 
the interrelated issues of cost, financing and consumer information. As 
you work to reauthorize the Higher Education Act, I hope you will take 
this opportunity to simplify the current system, which is burdensome 
and complex, and make it more responsive to students and families.
    Already, we've worked together to dramatically increase Pell 
Grants, to address the needs of 5.8 million low-income students. We 
achieved the largest increase in budget authority in 30 years, and the 
President has once again asked to increase the maximum annual award in 
his 2009 budget, to $4,800 per year.
    Postsecondary education grows more important by the day, and ever 
more necessary in our global knowledge economy. Times of economic 
uncertainty are all the more reason that Americans will look to higher 
education to acquire new skills and knowledge. Together, we can help 
more of them do so.
    Federal student loans are an important part of this effort, and the 
steps my Department is taking will help ensure that they remain 
available. Market conditions are dynamic, not static. As you said in 
your letter, Mr. Chairman, while ``we expect that overall credit market 
conditions will soon improve * * * it is only prudent to prepare now to 
ensure that these conditions do not negatively impact students * * *'' 
I look forward to working with you to ensure that students can continue 
to access and afford the invaluable opportunities of higher education.
                                 ______
                                 
    Chairman Miller. Thank you very much.
    Welcome, Mr. Warder, also.
    Under a previous agreement, Mr. McKeon and I will both be 
allowed to exceed our initial 5 minutes but not by more than 10 
minutes. So hopefully it will be somewhere between 7 and 8 
minutes to ask more extensive questions on these two programs.
    I think we all agree that we hope that the FFELP program 
stays in place and it meets the demand and it sorts out the 
difficulties that have been imposed upon the various lenders by 
the rather dramatic shift in the credit markets. But I would 
like to run through the Lender of Last Resort program with you 
because that is where we have had some experience in the sense 
of preparation back in 1998 when we thought that some lenders 
might leave the field. Then-Secretary Riley put in place a 
program and an agreement with the guaranty agencies for those 
loans to be made if necessary.
    And maybe, Mr. Warder, you can tell me, has that agreement 
been reviewed, and has that agreement been updated with the 
guaranty agencies?

STATEMENT OF LAWRENCE A. WARDER, CHIEF FINANCIAL OFFICER, U.S. 
                    DEPARTMENT OF EDUCATION

    Mr. Warder. Yes. We have asked all of the agencies--we have 
gone out to all of the 35 guaranty agencies and asked them to 
submit to us what their current plans are. We have reviewed 
those, and we are in the process of issuing guidelines on how 
you would implement Lender of Last Resort in the instance that 
it is needed. So those guidelines will be going out in the 
coming week, along with any suggestions on how to improve the 
agreements that they currently have. Again, this has been a 
rarely used program over the last few years, so what we are 
doing is updating it, making sure they are consistent, in the 
best interest of both the tax payers and the students.
    Chairman Miller. And you expect those guidelines to be in 
place when?
    Mr. Warder. We are sending them out next week, so we would 
expect them to be in place in the near future.
    Chairman Miller. And then how will you determine whether 
they are operational or not?
    Mr. Warder. We will go out and meet with the GAs either 
collectively or individually to review the program and make 
sure that they have the financing capability to in fact act as 
Lender of Last Resort or have another lender who can do that.
    Chairman Miller. Well, Lender of Last Resort, as I 
understand the program, is the Secretary in that case?
    Mr. Warder. Actually, the Lender of Last Resort in the 
current environment, since there is no longer a national, the 
Lender of Last Resort is the guaranty agency. Our relationship 
is with them.
    Chairman Miller. But they turn to you to be capitalized?
    Mr. Warder. Generally, no. That would be only in an 
absolute last resort.
    Chairman Miller. That is what I want to talk about.
    Mr. Warder. Their obligation is to have the financing 
capability in place and use it.
    Chairman Miller. As I understand the 1998 agreement, that 
agreement was in place, so then the Secretary, if necessary, 
turned to the Treasury to fund them so that they could make 
those loans. That is not your understanding?
    Mr. Warder. Let me ask our general counsel who can probably 
respond to that better than I.

STATEMENT OF KENT D. TALBERT, GENERAL COUNSEL, U.S. DEPARTMENT 
                          OF EDUCATION

    Mr. Talbert. Mr. Chairman, as I understand the 1998 plan 
that the prior administration had, it had a list of eligible 
lenders, entities that would be able to make loans of last 
resort should the need arise. But, again, it is the guaranty 
agencies and then eligible lenders if the guaranty agencies are 
not providing Lender of Last Resort loans who make the loans 
available.
    Chairman Miller. But the guaranty agencies, as I understand 
the 1998 agreement, turn to, if necessary for capitalization to 
make those loans, turn to the Secretary of Education who then 
turns to the Treasury.
    Mr. Talbert. Certainly the Lender of Last Resort statute 
provides for advances, that advances can be made should the 
need arise when certain criteria are met.
    Chairman Miller. We are working on the scenario where the 
need arises. What I want to know from you is if you understand 
that that is your legal authority and you have the ability to 
do that?
    Mr. Talbert. Yes, we understand the statute, yes.
    Chairman Miller. And you have the ability to do that?
    Mr. Talbert. Certainly, the administration has the ability 
to make----
    Chairman Miller. Have you road tested it? Have you turned 
to the Treasury and said, if we have to make a demand on you 
for $100 million or for $5 billion, will we be able to have 
that demand met so that we can give it to the guaranty agencies 
to make these loans if that is the shortfall that exists at 
that time?
    Mr. Talbert. Certainly, again, the authority is----
    Chairman Miller. I know the authority exists, sir. I am 
asking whether or not if you have asked the operational 
question? We had a lot of authority going into Katrina, but 
nobody asked whether or not we could do it, whether we could do 
it in the sense--could we physically get people out of there, 
people there, water, all the rest of it? I am asking you, 
operationally, have you sat down with the Treasury Department 
and asked them, if we turn to you and make a demand on short 
notice, because most of the things that have taken place around 
the credit markets have come to a surprise to everyone, 
including those involved, could you do this?
    Mr. Talbert. We are having ongoing discussions within the 
administration, including----
    Chairman Miller. So you have not received an answer to that 
question of whether or not, if you make a demand, that demand 
can be met?
    Mr. Talbert. Again, Mr. Chairman, we are having ongoing 
discussions in the administration about this particular matter.
    Chairman Miller. Well, I hope you are not standing in 8 
feet of water and a lot of students around you looking for 
relief and you are having ongoing discussions. The purpose of 
this hearing is to push those discussions so an agreement and 
an operational plan is arrived at.
    Mr. Talbert. Well, again, our position now is that, again, 
no borrower has been unable to obtain loans.
    Chairman Miller. I understand that. This isn't about the 
environment.
    Madam Secretary, we have been through this. This isn't 
about a well operated system. We hope that the FFELP program is 
in place. We have been notified by lenders that they will not 
participate. We have been notified by lenders that they hope 
they will be able to continue to participate. We have been 
notified by lenders they expect to participate but are not 
quite sure how long. And all of them have said they suggested 
there would be a gap. Rather than operating on the theory that 
nobody has notified you, what will you do in July and August if 
in fact the gap appears, and how seamless will it be?
    Secretary Spellings. As you know, Mr. Chairman, the 35 
guaranty agencies exist. We have reached out to them. We are 
looking at their plans. They have been uneven. They need to be 
made current. That is the guidance that is going to them next 
week. We will evaluate their capacity to seek financing should 
that case occur, and obviously, if not, we are the lender of 
very last resort.
    Chairman Miller. Have you spoken to the Treasury about 
that?
    Secretary Spellings. We have; my staff has. I have spoken 
with Secretary Paulson once, and I will be meeting with him 
next week. I can assure you I will be asking him that very 
question, very specifically. I think at the moment, we are 
getting a beat on the capacity of the guaranty agencies who are 
now updating their plans accordingly. Yes, I will ask him that.
    Chairman Miller. And do you need to arrive at an agreement 
with those agencies?
    Mr. Talbert. Well, the agencies have their plans and 
procedures in place now. Again, we are reviewing those to make 
sure that they are adequate and good to go.
    Chairman Miller. Let me just suggest that if you look at 
the 1998 agreement, there was just a modest little modification 
for that agreement with the law. Today a borrower has to run 
around and find out that two lenders have turned that borrower 
down. A suggestion was made in 1998 that an institution could 
stand in the shoes of that borrower and make that decision and 
turn to the Federal Government and therefore be able to invoke 
the Lender of Last Resort. A modest change, but could be very 
important in terms of being able to answer the question from a 
student or family, will the money be here so I can start school 
this coming semester? It is those kinds--you know, a number of 
these agencies, they prepared for this. A number of the people 
who were there in 1998 are still here today. And somehow, I 
think, rather than sort of this arms distance length, you ought 
to get in the same room and say, what are the agreements we 
need so this plan will be operational if you pick up that phone 
at 3:00 in the morning and have to call one of them. That is 
the best I can come up with. I want to know they say, we are 
ready to go.
    Secretary Spellings. As you know, none of that was needed 
in 1998.
    Chairman Miller. I know that. That was because it was 
solved by a change in the law. We can change the law until hell 
comes home, and it is not going to unfreeze the credit markets 
from this Committee.
    Secretary Spellings. We will be ready.
    Chairman Miller. And then with respect to the direct lender 
program. My understanding is that essentially, if you are 
making--if you are eligible for Pell Grants as an institution, 
you are eligible for the DL program, but you still have to sort 
of make application and be certified?
    Secretary Spellings. That's correct. And 850 institutions, 
if you will, sort of have that franchise.
    Chairman Miller. Right. And they sort of leave it over 
there in reserve, and they continue in the FFELP program?
    Secretary Spellings. That is correct.
    Chairman Miller. I am just asking whether it would be 
prudent or not to suggest that other institutions may want to 
be precertified. Again, if they don't need it, they can leave 
it over there, continue in the FFELP program and go on about 
their business. Because, again, you know, schools have 
deadlines for applications, for receiving funds and all the 
rest of this and very small glitches can be leveraged into 
major disruptions in students' lives. I have suggested to the 
institutions in my area that is what they may want to consider; 
that, one, they clearly understand what the arrangement is with 
their guaranty agency, and they clearly understand if they 
want, how they get certified and eligible for the Direct 
Lending program, and then we hope that this gap will not exist.
    Secretary Spellings. I think they do understand that. There 
is, and frankly the private sector has led the way on 
establishing inoperability and protocols. We are updating our 
system in the Department so that those transitions can be made 
if necessary. I would also say, and I know you are well aware, 
that institutions, were they to turn to Direct Loan, obviously 
that places additional sort of an administrative burden on them 
that now you know lives in the marketplace. And so I think they 
are evaluating those issues now. They make those choices, and 
we are ready to support them in whatever choice they make.
    Chairman Miller. Also in our discussions with some of the 
guaranty agencies they are very concerned about whether or not 
this system will--they believe this should be prepared on an 
electronic basis; that if the Lender of Last Resort programs 
are necessary, that they reflect an electronic processing 
environment. And, again, I don't know if you have run the 
traps, operationally, whether or not you can do that or not, 
because you may have to handle a significant volume of loans in 
a very short period of time, and that is not going to work 
absent an electronic environment.
    Secretary Spellings. As I understand it, there is 
increasing interoperability across this sector, including our 
work at the Department of Education.
    Chairman Miller. Mr. Warder, is that your understanding?
    Mr. Warder. Yes, it is. The institutions that are FFELP 
institutions generally can switch from lender to lender very 
easily. We are in the process of putting in place, and this 
will take a few months, the ability to tap into that same 
network so we can look like a lender just like the other FFELP 
lenders. Currently, today, we have a process that can get 
somebody ready and certified within one to two weeks. Then it 
is how long, how sophisticated is the institution in 
implementing whatever changes they need to make in order to 
access direct loans.
    Chairman Miller. So, again, if they make that demand in 
July, you say it takes about two weeks?
    Mr. Warder. It is two weeks to get the authorization. Then 
it is whatever their implementation time frame is to get their 
own procedures and processes in place.
    Chairman Miller. I think I will stick with my advice to my 
institutions; they ought to consider doing that now since you 
are talking about several months to be electronically able to 
do this. That sounds like June. And if they make a demand, it 
is two weeks for the application and then for whatever 
negotiations. I would suggest they may want to do it now.
    I thank you, and my time has expired.
    Mr. McKeon.
    Mr. McKeon. Thank you, Mr. Chairman.
    Chairman Miller. Could we just have the counsel state your 
full name for the record? I am sorry.
    Mr. Talbert. Kent Talbert.
    Chairman Miller. Thank you.
    Mr. McKeon. Thank you, Mr. Chairman.
    I came to Congress in 1992, the same time as President 
Clinton. One of the things he campaigned on was Direct Lending, 
and that was quickly put into place. And a lot of the schools 
jumped into Direct Lending, and I think they got up to 30, 35 
percent of the loan volume. And then, over the years, we did 
the reauthorization in 1998, and one of the things we did was 
adjust the interest rate. And one of the concerns I had was 
that FFELP lenders would be dropping out of the program, and 
that has happened. And then we tried to have a level playing 
field. I know Mr. Kildee and I agreed on that. The Secretary at 
the time, the administration, didn't, and there were things 
done during that administration that pushed people into Direct 
Lending.
    But over the years, the market has reacted, and FFELP had 
about 80 percent of the business and Direct Lending about 20. 
We had problems with Direct Lending back when they had to shut 
the program down because they couldn't keep up with demand. And 
we have seen this kind of a problem over the years. In 1995, we 
cut the FFELP lenders $18 billion out of their subsidies. More 
lenders dropped out of the program. And then, last year, the 
same thing was done, another $18 billion. And now we are 
looking at, gee, maybe we have a problem. I think it doesn't 
take a lot to realize that if you cut the subsidies to the 
point where lenders no longer can make a profit, why should 
they stay in the business. There are other things they can 
lend.
    One thing that is helping us right now ironically is, 
because of the problem in the housing market and the lack of 
funds, there is less interest for the banks to move in to 
making home loans, and so there is still some interest in 
staying with making student loans. But the loan consolidation 
companies have gone out of that business. FFELP lenders I know 
have laid off a lot of people because they are getting out of 
the business. I am hearing from schools, it is like there is a 
disconnect.
    Madam Secretary, you say that you are not hearing from 
schools that there is a problem. I am hearing from schools that 
there is a problem. And I am hearing from schools that they 
have been told that lenders will not make loans to their 
students, especially in the proprietary area; that the cost of 
direct or of private loans is a lot more to students than the 
federally backed loans. And so, where we passed this bill to 
cut the cost of college, we have actually increased what 
students are going to be paying in interest for their loans. 
Have you heard from any proprietary schools that they have been 
told that their students will not be able to get loans?
    Secretary Spellings. Well, as I said, Congressman, we have 
reached out to every institution. We have heard some limited 
cases of contraction where they have been able to readily find 
another lender in those cases to date.
    Mr. McKeon. Well, okay. I am glad we are having this 
hearing because I think a few months from now, we are going to 
look back on it and say, you know, where did all this stuff 
come from? I think the question that the chairman just asked, 
can you come up with $1 million or $5 million, we are talking 
$60 billion that we are expecting the FFELP lenders to make 
this year this summer and fall for students to get into school. 
And if that has to all of a sudden be found, I just see a very 
serious problem coming down the pike. And I hope this hearing 
is soon enough that there is a wake-up call that you are able 
to work together with the Treasury and are able to come up with 
substantial funds that students that don't have a clue what is 
coming down the pike when they go in to meet with their Federal 
financial aid officer, that you are able to make sure that 
there is sufficient money in the pipeline that either through 
FFELP or through Direct Lending, they will not have a glitch 
and that the interest rate will not be such that it drives up 
the cost of their education. Do you feel confident that this 
will be the case?
    Secretary Spellings. We are taking every step possible to 
ensure that that is the case. As I said, we have reached out. 
We have plans. We are meeting regularly with Treasury. As I 
said, I am going to be meeting with Secretary Paulson next week 
and, you know, will provide additional assurances and ask them 
those very questions. We are still in the fact-finding mode 
about what the capacity, what the potential gaps might be. As 
you are also aware, lenders have likewise stepped forward and 
said that they do intend to and will make FFELP loans this 
year.
    Mr. McKeon. It is my understanding that you are talking and 
have talked to Secretary Paulson and other officials within the 
administration to help you monitor the credit markets. Can you 
tell me about those conversations and whether officials outside 
of the Department of Education are concerned about students' 
access to lending?
    Secretary Spellings. Well, clearly, Congressman, we are 
talking very regularly, daily with our colleagues within the 
administration, obviously, about all these provisions. And 
likewise, as you are reaching out to the community more 
broadly; guaranty agencies, institutions, banks, lenders, all 
of those affected. So, yes, we are monitoring regularly.
    Mr. McKeon. Mr. Chairman, thank you.
    I will yield.
    Chairman Miller. Thank you.
    Mr. Andrews.
    Mr. Andrews. Thank you, Mr. Chairman.
    Thank you, Madam Secretary, for working with us to solve 
what I hope is a hypothetical problem that never comes. But the 
virus that spread throughout the credit markets in this country 
counsels us to pay attention. And I know you are. And I wanted 
to walk through with you some of the Chairman's questions about 
the Lender of Last Resort program. I hope we don't need it. But 
if we do, there is a couple of mechanical steps that I want to 
see if you would be willing to be supportive of. I know you 
have the authority. I think we have established that. The 
question is whether you would be willing to embrace certain 
principles to get this up and running, should it be needed.
    First, how about school-based qualification rather than 
student-based? The existing procedure is that a student has to 
demonstrate that he or she has been turned down by at least two 
lenders. What do you think of the idea of having some 
threshold, or if we hit that threshold, that the whole school 
is eligible and every student at that school is eligible for a 
loan under the Lender of Last Resort program; do you support 
that?
    Secretary Spellings. Well, again, we are engaging with the 
guaranty agencies about those sorts of thing. As you may or may 
not know, various lenders and schools have different types of 
approaches for different types of students. So, for 
undergraduates, they may seek one route; for graduate students, 
they may seek another. And so I don't think we know enough yet 
to answer that question.
    Mr. Andrews. When do you think you might know? Because here 
is what I am worried about, you get a student from--a first in 
a family to go to college, and it is July 15th, and she goes to 
a bank and fills out these papers and the bank says, sorry, we 
are not making any more student loans. There is a very high 
probability she just stops, because she is not someone who is 
used to dealing with bureaucracy and these kind of things, she 
just stops and doesn't go to school. I just think, as happened 
in 1998, that some metric ought to be established that says, if 
this happens to a certain critical mass of people, then let us 
switch to a deal where the school can apply for LLR 
participation and everybody at the school is eligible if they 
fit the other criteria. I would urge you to do that and think 
that through. Second is, how about electronic loan processing? 
If we are mailing documents back and forth on August 25th, 
there is going to be a lot of people who don't go to school. 
Not to mention, by the way, the technical and career schools 
which have a revolving calendar. This is already happening at 
some of the schools that are trying to enroll people for 
courses that start April 1st or March 25th. It isn't just with 
courses with a traditional calendar that starts up around Labor 
Day. How many of the guaranty agencies and schools are ready to 
process these loans in an electronic processing context? Do we 
know? How many of the agencies are ready to do that?
    Mr. Warder. Are you asking about the GAs, are they prepared 
to do it?
    Mr. Andrews. The guaranty agencies, yes.
    Mr. Warder. I don't know. We are looking at their 
capabilities around Lender of Last Resort as we speak.
    Mr. Andrews. When do you think we would know? I think there 
are 36 guaranty agencies, you said, right? I think the optimal 
situation would be that all 36 could originate, process and 
fund loans electronically to the extent possible. If that--do 
you agree that that is a standard?
    Mr. Warder. I would agree that is an objective. In fact, 
the schools through their normal FFELP program or DL program do 
process them electronically. However, we do need to look and 
see how well prepared the GAs are on the LLR----
    Mr. Andrews. That is right, because, frankly, the schools 
being able to do it is only half the battle, and that is 20 
percent of the schools, right, that are in the Direct Lending 
program? So, again, if we are using 1965 technology to send 
these documents back and forth, and we have a huge spike in 
loan volume, it isn't going to happen.
    The third thing I would urge you to consider is permission 
for the guaranty agencies to sell these loans, these LLR loans, 
if a marketplace exists, to be able to sell those loans in that 
marketplace to be liquid again. My sense is they already have 
the legal authority to do that and for purposes of keeping them 
viable. What is your position on that, that if they have a 
bundle of LLR loans, we think they have the legal authority to 
turn around and sell them to cash them out? Do you, and if so, 
would you support that?
    Mr. Talbert. There is no prohibition on selling the loans. 
Now, if advances are made, the guaranty agency would need to 
hold onto the loans because the Department can demand that they 
be assigned back to the Department.
    Mr. Andrews. I would urge you to rethink that, because as 
long as the Federal taxpayer interest is protected I think 
increasing liquidity in the system is a huge value. The 
following thing, I would say, is I would urge you to take a 
look at the testimony from the witness from the University of 
Maryland who is about to come up, the financial aid director. 
And she lays out the case of a first-year residential student 
that falls $3,600 short of what she is going to need, even 
after she maxes out on the Federal programs. I would urge you 
to think about how we are going to capitalize PLUS and private 
gap loans in this environment should that eventuality occur as 
I think it already is.
    Secretary Spellings. Clearly that is the sort of thing that 
we are describing in the new materials that we are making 
available. Congressman, one thing that strikes me about your 
various questions is the need for us to, and certainly I commit 
this to Chairman Miller, to communicate regularly with you 
about what we find as we survey guaranty agencies as to their 
electronic capacity or lack thereof.
    Mr. Andrews. I see my time is up. I certainly hope that is 
the case. I think you heard from both the Chairman and Mr. 
McKeon a bipartisan interest in working this problem through, 
not assigning blame, but avoiding the problem and trying to 
solve whatever comes along. Thank you very much.
    Chairman Miller. Mr. Keller.
    Mr. Keller. Thank you, Mr. Chairman.
    And I am very concerned about the impact of the credit 
market on the student loan programs and on the ability of 
students to gain access to college.
    Madam Secretary, let me ask you a couple of questions 
relating to the FFELP and the direct loan program. As you know, 
four out of five schools use the FFELP program rather than the 
direct loan program, I believe, because there are many 
advantages that the FFELP program has in terms of the ability 
of these lenders to offer low origination fees, lower rates, 
better repayment benefits, if they so choose. On the other 
hand, there are many good advocates in government for the 
direct loan program as well.
    In your testimony, you said that you have been tracking 
inquiries daily into the direct loan program. Have you seen any 
increase in the number of inquiries from schools considering 
switching to the direct loan program?
    Secretary Spellings. A small number, Congressman.
    Mr. Keller. You mention that there are 850 schools 
authorized to make direct loans, but they have chose to remain 
with the FFELP program. You are not suggesting, are you, that 
those schools who are authorized to be in the direct loan 
program but currently use FFELP should switch to the direct 
loan program are you?
    Secretary Spellings. Absolutely not. And I do think it is 
important to--you know, obviously, financing is not the core 
mission of higher ed institutions. And they enjoy having the 
capacity of service and other features that benefit students, 
you know, live in the private sector as opposed to having to 
create those structures internally themselves.
    Mr. Keller. We have heard about the Lender of Last Resort 
program. Just by the way that that is set up with the Federal 
Government having to turn around and pay the guarantors to make 
the loans, while there certainly seems to be a benefit of 
having that last safety net there, isn't it also true that if 
we were to go to the Lender of Last Resort model, it would in 
fact be even more costlier for the taxpayers than either the 
FFELP program or the Direct Lending program?
    Secretary Spellings. That is correct, as we would be liable 
for 100 percent of the default. We are also working with OMB to 
calculate the potential costs of those issues at various levels 
should that occur, and we will share that with you as we do.
    Mr. Keller. Now, as we look at this potential crisis there 
doesn't seem to be yet a crisis from your testimony, it seemed 
that there are different levels of exposure right now in the 
student lending world. For example, and I want to ask your 
opinion, if you were at a school that has the FFELP program or 
direct loan program, pretty good graduation rates, low default 
rates, chances are you are going to be in good shape in getting 
your federally backed student loan this year; correct?
    Secretary Spellings. I would think that would generally be 
true, yes. Large public institutions, that sort of thing.
    Mr. Keller. Now, let us go to the other extreme. Let us say 
that you were at a private career college that has a pretty 
high tuition and your federally backed student loan doesn't 
cover everything, so you have to go out and get a private loan 
to cover the difference. If you have----
    Secretary Spellings. As is currently the case, of course.
    Mr. Keller. Right. And obviously, in that scenario, they 
look at your credit score, or your mom and dad's credit score; 
there is no Federal backing. And if you happen to be at a 
school with a high default rate and a low graduation rate and 
you or your parents don't have a pretty good credit score, you 
are exposed in terms of your ability to get a competitive low 
interest loan; is that right?
    Secretary Spellings. Well, obviously, there is a guaranty 
agency that surrounds that type of institution. And as you 
know, there is no credit check when that Lender of Last Resort 
provision is invoked. So, ultimately, that student gets 
financing.
    Mr. Keller. Right. But at a higher rate just because the 
market determines the financing. And if money is tight and your 
credit score is low, inevitably those students in this type of 
credit crunch are going to be faced with higher student loan 
interest rates?
    Secretary Spellings. In the private sector, in the private 
market, yes.
    Mr. Keller. Correct. From your conversations with the 
Treasury, Secretary Paulson, and other officials within the 
administration, what is your level of optimism that, at least 
with respect to the next 12 months, the existing federally 
student backed program will be sound moving forward for young 
people in America?
    Secretary Spellings. My level of optimism is high, and my 
level of hope is higher, obviously. But even notwithstanding 
that we are going to be fully prepared to react to whatever 
situation confronts us. Obviously, it is completely in the 
context of the overall economic picture. And you know, as such, 
student loans will be implicated if situations worsen 
generally. But you know, I think we are taking all necessary 
steps, not only in this arena but in the administration more 
broadly, to stem that.
    Mr. Keller. Thank you, Madam Secretary.
    My time is expired.
    Chairman Miller. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Madam Secretary, let me follow up on that because I was a 
little confused by the answer. Whatever school you go to, if 
you apply for a loan, I thought you indicated that no one so 
far has been denied a loan that is looking for a loan. Is that 
right?
    Secretary Spellings. To our knowledge, that is correct.
    Mr. Scott. And wherever you go, the interest rate you will 
pay on that guaranteed loan will be the same whether it is a 
fancy school or not?
    Secretary Spellings. What Congressman Keller was asking 
about, I believe, was loans in the private sector. Certainly 
that is true up to the limits within the Federal financial aid 
system. Obviously, private loans, interest rates, can and do 
vary.
    Mr. Scott. But up to that limit, credit worthiness is not a 
factor?
    Secretary Spellings. That is correct.
    Mr. Scott. Traditionally student college assistance has 
been in the form of loans, Pell Grants and work study. It seems 
to me that we are leaning much more heavily on loans than we 
traditionally have. Can you comment on the direction we are 
going in and whether that is a healthy direction?
    Secretary Spellings. Well, as you know, together we have 
worked hard to raise that Pell Grant. And I agree with you; I 
mean, with tuition rising as rapidly as it is, we are having a 
hard time keeping up with those increases. And I think the 
system, while we are obviously talking about a critical symptom 
today and certainly at this time, there are certainly bigger 
issues throughout the entirety of the system about 
affordability and transparency and levels of aid and so on and 
so forth. But, yes, I think we have to continue to work to 
increase need-based aid, and we have.
    Mr. Scott. How many students are participating in the 
income contingent repayment plan?
    Secretary Spellings. How many students?
    Mr. Warder. I don't know. We will have to get you that. I 
am not sure how many are.
    Mr. Scott. Many?
    Mr. Warder. It is a reasonable number, but I couldn't even 
give you an estimated percentage.
    Mr. Scott. What about the loan forgiveness plan which 
passed, several bills that allow loan forgiveness if you go 
into certain professions? Have those plans shown any evidence 
of encouraging students to get into those fields?
    Secretary Spellings. We are in the process of implementing 
those. As you know, they are fairly recently passed and are in 
the rule-writing process. And we can certainly get you the 
numbers of people who get teacher loan forgiveness and some of 
the things that are on the books. I don't have that off the top 
of my head, but we can get that for you.
    Mr. Scott. I yield.
    Mr. McKeon. Back to the question you were asking and the 
question Mr. Keller was asking. If a student has used all their 
help, the Pell grant, and they get the full Federal financial 
aid loan, and they still need a gap loan, the Lender of Last 
Resort doesn't kick in there. That is a private loan, and they 
would be--and if they can't get that loan, they are out. And 
that is one of the students that I am really concerned about.
    Mr. Scott. I reclaim my time. If you have used up all your 
Pell grant, all your loan eligibility, you are on your own to 
find the rest of the money. Your credit worthiness and 
everything else comes into play.
    Secretary Spellings. That's right.
    Mr. Scott. That is why we need to make sure that the Pell 
grants cover more of a portion and work study covers more of a 
portion so that the loan amount will in fact cover their full 
education.
    Secretary Spellings. What we are engaged in today is a 
discussion around 26 percent of the full financing of 
education. That is our discussion. The other 24 percent of 
those resources come from States, from families, from home 
equity loans, often credit cards, on and on. We are talking 
about this slice of the pie that we have jurisdiction over.
    Mr. Scott. We measure the school's effectiveness in loan 
repayment on a default rate. If a school has a high default 
rate, they may become ineligible for participation in the 
student loan program; is that right? If you exceed the default 
rate, is that right?
    Mr. Warder. Well, there is a threshold on default rates on 
the 2-year cohort default rate that if they exceed it, the 
schools are out of the program.
    Mr. Scott. It seems to me that that is a poor measure of 
how well a school is doing in having the payments repaid, 
because it seems to be more a function of who you admitted than 
how hard you are working to get the payments back. If you had a 
first generation college student, low income, someone with 
marginal grades, you are discouraging colleges from opening 
their doors and giving people a second chance and limiting them 
to those who are credit worthy when they walk in. Is there some 
other measure that we could use other than a default rate?
    Mr. Warder. Well, we do use a number of measures, that 
being one of them. Certainly they need to be accredited and 
have an appropriate amount of their financing coming from other 
than Federal sources. So there are multiple measures.
    Mr. Scott. But the default rate, if you exceed the default 
rate, you are out, period?
    Mr. Warder. But very few have exceeded the default rate. 
With a change to a 3-year default rate, that may be different. 
But currently, there has been very few suspended for default 
rate.
    Secretary Spellings. Congressman also, as you know, through 
the accreditation process, issues of financial management, 
financial solvency, are absolutely part of that gateway. That 
is what gets you a proxy of eligibility for Title IV aid in the 
first place. And so I think that is probably more appropriate 
for the accreditation discussion or is implicated more in the 
accreditation discussion than in this arena.
    Chairman Miller. The gentleman's time has expired.
    Mr. Hare?
    Mr. Hare. Thank you, Mr. Chairman.
    Welcome, Madam Secretary.
    You stated in your testimony that you and your department 
are monitoring the situation, the student loan industry, and 
you are in contact with schools and students, et cetera. By 
these actions, you say you will be prepared to act, should 
there be a shift in the origination trends.
    Could you maybe explain a little bit more about what you 
mean here? In other words, what would be the first steps you 
would take if you see a shift?
    Secretary Spellings. Well, as you know, it would be largely 
fact-specific. But I think the tools that are available to us I 
have described as support for the Direct Loan program should it 
become necessary, use of the Lender of Last Resort provisions 
should that become necessary. Those are obviously the main two 
tools that are available to us, the Department of Education, 
should such a situation arise.
    Mr. Hare. Are there any other resources or authority that 
we, the Congress, can provide you to yield quicker and more 
aggressive responses should we find ourselves in a major-league 
crisis here?
    Secretary Spellings. We believe that the statute that you 
all have described is adequate to respond to this situation. 
But I reserve the right to come back and tell you otherwise in 
the near term if it is not. But we believe, as you indicated in 
your opening statement, Mr. Miller, that it is, that we do have 
the tools available.
    Mr. Hare. And then just lastly, you said, in addition to 
the Lender of Last Resort in the Higher Ed Act, are there other 
measures that you are aware of, that are authorized in the law, 
that allow you to respond to a certain crisis that you may 
encounter in the student loan industry?
    Secretary Spellings. Are there other tools available 
besides the ones I described?
    Mr. Hare. Right.
    Secretary Spellings. Well, I know some have suggested 
things that reflect in the credit market more broadly that are 
issues that Treasury would have jurisdiction over with respect 
to the Federal Home Loan Bank or the Federal Reserve or other 
mechanisms like that, but not that are within the discrete 
discretion of the Department of Education.
    Mr. Hare. And lastly, my colleague Mr. Andrews's 
suggestions that he laid out--I thought every one of them made 
perfect sense. And I think they would go a long way toward 
helping, should we have a problem here. And who knows whether 
we are going to have one or not, but I think it is better--you 
know, the old adage is, better to be safe than sorry.
    So I would hope that you take those into consideration, 
because I think Mr. Andrews is right on point with each one of 
these three that he brought up specifically, you know, to you 
as recommendations. And I would hope that you take a look at 
them and maybe get back with us and see if those can't be 
implemented. I think they make a lot of sense and go a long way 
toward helping if we have a problem here.
    Secretary Spellings. May I say--and I fully expect to do 
this--that, as we gather information about capacity and gaps 
and so forth as we interface with these guaranty agencies and 
the like, this guidance we are issuing next week and so forth, 
I look forward to sharing this. This is very much an iterative, 
organic, dynamic situation. And we will be in close 
communication between now and August, I assure you, Mr. 
Chairman.
    Mr. Hare. If I could, I would like to yield the balance of 
my time to my friend, Mr. Andrews.
    Mr. Andrews. I appreciate it. I just wanted to ask one 
quick follow-up question. I thank my friend for his compliment 
and appreciate his help.
    Madam Secretary, do you think some sort of Federal 
guarantee facility is necessary for the gap loan situation that 
Mr. McKeon talked about, that others have raised? The person 
who is $2,000 or $3,000 short under the Federal programs, has 
read your brochure, but is maxed out? How do we attract capital 
into the system to help that person who is in the subprime 
market borrow money?
    Secretary Spellings. You mean essentially a guarantee of 
private loans that would work like that? You could certainly--
--
    Mr. Andrews. I am asking what you think the strategy would 
be to help attract capital to that market for those gap loans. 
What would work?
    Secretary Spellings. Well, I would say, you know, I think 
that we have a great deal of work to do, frankly, on the cost 
side before we talk about, you know, additional supports for 
private lenders. I think we have not done enough to make 
transparency about cost, to make information available about 
how to maximize Federal aid. I mean, lots of kids with private 
loans still have money on the table federally. So I think we 
have some work to do.
    Mr. Andrews. But many do not. But many do not. I 
appreciate----
    Chairman Miller. If the gentleman would yield just for a 
second?
    Mr. Andrews. Yes.
    Chairman Miller. Just to the last point the Secretary made, 
I think we have looked at one and maybe a couple of studies 
that have suggested about 50 percent of the students have not 
maximized their access----
    Mr. Andrews. Right.
    Chairman Miller [continuing]. To government loans, but they 
are under intense marketing pressure sometimes, and they turn 
to the private loans prematurely.
    Mr. Andrews. Right.
    Chairman Miller. And, of course, then they find out that 
they could be in trouble.
    So we are not quite clear yet. I mean, clearly there are 
students who need that private loan to fill that gap, to make 
that tuition and cost. But there is a good number of students 
and families who have turned to private loans without 
maximizing the Federal program. And that is a matter of 
educating people, to make sure that they do that.
    Secretary Spellings. And simplification. I mean, I think 
one of the things that you can see from this chart----
    Chairman Miller. That is in the conference committee.
    Secretary Spellings [continuing]. Is this is a very 
difficult system to interface with. And I think we could do a 
lot on the simplification side that would help students 
maximize the rate.
    Chairman Miller. It has been suggested it is easier if 
these students and families went to the World Bank, they would 
be more likely to get a loan, than if they accessed this system 
of banking.
    Secretary Spellings. I sometimes say it is like we are 
trying to keep them out.
    Chairman Miller. With Mr. McKeon's help, we are going to 
sort that out in the conference committee.
    Mr. Davis?
    Mr. Davis of Tennessee. Thank you, Madam Secretary, and 
thank you for understanding the pressure that students and 
families are under.
    One of the things that we need to do, as they are looking 
for money to pay for higher education, is understand that we 
need to do everything we can to lower the cost of higher 
education. Because one of the things I see is, as we put more 
money in, the cost of higher education goes up. And then there 
is a need to put more money in, and then the cost of higher 
education goes up. And that's where families are really feeling 
it, back in my district in east Tennessee. And thank you for 
understanding that.
    And, with that, I would like to yield the remainder of my 
time to Mr. McKeon.
    Mr. McKeon. I thank the gentleman for yielding.
    Madam Secretary, can you describe how you plan to monitor 
the market beyond waiting for responses from college presidents 
and their financial aid offices?
    Secretary Spellings. Larry can speak to that, as well.
    But, as I said, we have written every single one of them 
and asked for a response if they saw any problems. We have 
heard from about 60 to date.
    Mr. McKeon. You have heard from 60?
    Mr. Warder. Yes.
    Mr. McKeon. Out of?
    Secretary Spellings. More than 4,100.
    Mr. Warder. We are doing some other monitoring, as well. 
Obviously, we read the newspapers, as you do, and when we hear 
of a lender discussing either withdrawing, reducing or whatever 
their FFEL support, we immediately contact all of those schools 
that have 50 percent or more of their volume with that lender. 
And every time we have run into one of those, we have contacted 
them and they have been able to line up another FFEL lender. So 
we continue to monitor those situations. Any wind we get, we 
are on the phone with the schools to see what their intent is.
    Also, we monitor every month the originations that occur, 
both in FFEL and in DL. And so far there has been--I mean, it 
looks just like every other year. But we are watching our data, 
as well.
    Mr. McKeon. In your statement, you state that the 
Department supports both the FFEL program and the Direct Loan 
program. Haven't we already failed the FFEL program if you find 
that the Lender of Last Resort provision needs to be 
implemented?
    Secretary Spellings. Well, I don't believe so, Congressman. 
I think that this industry is--and, obviously, people with far 
greater expertise, like Chairman Bernanke, have asserted this 
also--this is a viable sector of the financial market. 
Obviously, it is impacted by, you know, broader things in the 
credit market. But we look forward to that being, sort of, 
stabilized over time and that it will continue to be and has 
been a very financially viable sector.
    Mr. McKeon. Do you have any reports or information as to 
how many people have been laid off as a result of the--you 
know, working in the FFEL program, that have been laid off 
because of companies pulling back?
    Secretary Spellings. I don't have a total number. I, too, 
have seen anecdotal reports of that, but I do not a have a 
total number in the industry.
    Mr. McKeon. The last report we have is it is over 2,000 
people. And those people were working in making those loans. 
And if they are not now working in that, I am sure there has 
been a pull-back that--you know, where you are monitoring loans 
being made right now. We are not in the season of loans being 
made. It would be interesting to see----
    Secretary Spellings. Right.
    Mr. McKeon [continuing]. What starts happening by June, 
July. And then if we find out there is a serious problem in 
August, it is too late.
    It is my understanding that the Pennsylvania Higher 
Education Assistance Authority, PHEAA, has stopped making loans 
in Pennsylvania.
    Secretary Spellings. Originating.
    Mr. McKeon. Originating. And do you know of an example of 
how the Department is assisting institutions within the State 
to find other lenders? Do you know how successful they are 
being?
    Secretary Spellings. There are about 40-some-odd or so that 
have--17 institutions are new entrants. In other words, they 
are just now becoming eligible for Title IV aid and so forth; 
they are new to the program. There are some other double-digit 
number, 40 or so, I believe--do you want to speak to that, 
Larry?
    Mr. Warder. Again, PHEAA being another lender, we have 
contacted all of the schools that have 50 percent or more of 
their origination volume with PHEAA. And, so far, they have 
continued to be able to find another FFEL lender, or, in the 
case of one large institution, they switched to DL. They 
already had the DL authorization, and they have announced that 
they are going to switch to DL. And that will be a fairly large 
increase for DL.
    Mr. McKeon. I guess that is the ultimate goal anyway, for 
some of us.
    Chairman Miller. Not for you.
    Mr. McKeon. Not for me. I am not included in that ``us.''
    Secretary Spellings. Neither am I.
    Mr. McKeon. Thank you very much.
    Secretary Spellings. Thank you, Congressman.
    Chairman Miller. Thank you.
    Mr. Bishop?
    Mr. Bishop of New York. Thank you, Mr. Chairman.
    First, let me ask unanimous consent that I can enter into 
the record a statement on this subject from Dr. Phillip Day, 
the president of NASFAA.
    Chairman Miller. Without objection.
    Mr. Bishop of New York. Thank you.
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    Mr. Bishop of New York. Madam Secretary, thank you very 
much for coming this morning and for working with us to try to 
address this issue.
    I can't escape the feeling that we are working at cross-
purposes with this issue. And let me be specific. We are 
concerned about some difficulty in accessing student loans, 
which is just a piece, as you said, of the overall student 
financial aid delivery system. And yet, while we are concerned 
about that, the administration's budget proposal to Congress 
eliminates SEOG and recalls the Perkins Student Loan Revolving 
Fund. SEOG is about $750 million a year; Perkins Loan Revolving 
Fund is around $700 million a year.
    And so I am perplexed as to why, when we have this concern 
that students will be able to access funds to finance their 
education, that we are taking things away from them that they 
have relied upon for years and have worked reasonably well.
    And so, whenever I have asked this question before, the 
response is, ``Well, we want to put our resources into Pell.'' 
But when you come to an individual student, that just doesn't 
work. I mean, the Pell grant maximum is $4,731. We are going to 
increase it to $4,800. So a fully needy student will get $69 
more from Pell, but could easily lose $1,500 in SEOG, could 
easily lose $1,500 in Perkins. We are going to drive that 
student more to private loans, which we all agree are something 
that we need to shape up.
    So just tell me what the logic is of an elimination of 
round numbers, a billion and a half, of campus-based money that 
we have relied upon for years and students have relied upon for 
years, and we are replacing it with $69 in Pell. So explain to 
me how that helps the student access his or her educational 
school of choice.
    Secretary Spellings. Part of this, Congressman, as you 
said, is an effort to strive to increase Pell.
    However, the other part of this is that we must simplify 
the system. To have 16 different programs with different types 
of eligibilities for students, for institutions, and to try to 
navigate that kind of system makes it very difficult for 
students to interface--in fact, so difficult, that many do not 
access.
    Mr. Bishop of New York. Respectfully, respectfully, let me 
just say the campus-based system is a very straightforward 
system that requires no separate application on the part of the 
student. The student submits one form, the very same form that 
they need to file to get Pell, the very same form that they 
need to file to get other forms of financial aid. But the 
financial aid officer at their school has available to them a 
pool of resources that they can then use.
    So it seems to me that if the goal is to simplify, what we 
are really doing is erecting obstacles. And I just don't 
understand--and I know you share the goal of helping students 
realize their dreams. But how is it, if we are going to take a 
billion and a half dollars out of the system, even if we think 
the system is complicated, how does that help students access 
their dreams?
    Secretary Spellings. Well, as you said, you know, by 
increasing Pell--now, obviously there is not a one-to-one 
correlation about particular students who may lose aid and so 
forth. But I think in a general construct that Pell ought to be 
greatly enhanced--we have asked for it to be again this year--
and that we ought to simplify the system.
    Mr. Bishop of New York. And we are enhancing Pell. And we 
are on a path to get us to $5,400.
    Let me focus just on Perkins, if I may. Clearly, we are 
having this hearing because we are concerned about whether or 
not FFEL program will remain as available for students as has 
historically been the case.
    If, in fact, FFEL does become less available, would the 
Department rethink its position on Perkins? Would you say, here 
is a perfectly reasonable alternative, low-cost alternative, 
infrastructure is in place to deliver it, all we need to do is 
allow schools to continue to maintain and administer and award 
from the revolving loan fund? Would the Department rethink 
their position on their desire to eliminate Perkins?
    Secretary Spellings. Well, Congressman, obviously, these 
all have budgetary implications. And, you know, obviously, we 
work with OMB as we take positions over time. That is a 
theoretical question that is not before us and, obviously, not 
mine alone to make.
    Mr. Bishop of New York. I understand that, and I thank you.
    I see my time has expired. Thank you, Mr. Chairman.
    Chairman Miller. Mr. Loebsack?
    Mr. Loebsack. Thank you, Mr. Chairman.
    I don't have any questions as such. I just want to make a 
couple of comments, following up, at least in one case, on Mr. 
Davis's comment.
    First, I was a long-time college teacher at a small college 
in Iowa, at Cornell College. And also I am someone who came 
from pretty humble backgrounds, grew up in poverty, and was 
able to access what was then the National Defense Student Loan 
Program--3 percent interest, had grants, that sort of thing as 
well. And without all that financial aid, I clearly wouldn't be 
here, sitting in Congress, as a freshman member from Iowa.
    So I am very concerned about some of the issues also that 
were just brought up by my friend from New York. But as someone 
who was on an institution's faculty, I want to caution everyone 
that, while I am very concerned, obviously, about student 
access to college and achieving the American dream, I also want 
to make sure that we don't go too far in terms of, sort of, 
blaming the institutions themselves too. And I realize that is 
not what you are doing. But, being on this committee, I have 
heard a number of comments since I have been here about 
institutions. Obviously, some institutions have raised their 
costs pretty exorbitantly beyond inflation, what have you, but 
I am not at all convinced that in every instance they are to 
blame, necessarily, for that, because I think they have very 
good reasons for increasing their costs.
    So I just want to, sort of, lay that on the table now for 
the public record, that I think sometimes some members of this 
committee, and perhaps both sides of the aisle, have unfairly 
bashed institutions since I have been here. And I hope no one 
here takes any offense at that comment. But at any rate, I 
think that is important to keep in mind.
    On the other side, as far as the students are concerned at 
least, I have great concerns also about the administration's 
budget. I just want to echo what my friend from New York has 
said. I simply don't understand how it is the case that, in the 
name of simplification, that reducing assistance for 
potentially millions of students makes any sense. It makes 
absolutely no sense to me.
    I realize that is sort of a broader issue that is not 
directly related to what we are talking about today, but I do 
think it is really important to keep that in mind, sort of, the 
bigger picture here. You know, we are talking about loans 
today, but I think we need always to keep in mind, sort of, the 
larger goal, which is for students to have access to higher 
education so they can achieve the American dream, so they can 
do things that I have been able to do, fortunate enough to do 
in this country.
    And I just want to caution the administration when it comes 
to making cuts in the Perkins program or any other cuts in the 
name of simplification or whatever the case may be, especially 
if it is, in fact, going to reduce access to higher education, 
which I think, in fact, is what will happen.
    So I don't really have any questions as such. If you want 
to comment on the comments I just made, that is fine.
    Thank you.
    Secretary Spellings. I would like to react to the first 
part of your observation. And that is, I agree with you, I 
think we do have sort of a mixed bag of understanding of what 
the costs, you know--why do we have such rapidly rising tuition 
costs. And I think this area begs out for more information and 
more transparency and more understanding by our publics.
    And, again, I think, as you all debate the Higher Education 
Act, that is certainly something that can be, I think, really 
addressed in that context.
    Mr. Loebsack. I yield back the rest of my time, Mr. 
Chairman. Thank you.
    Chairman Miller. Thank you.
    Mr. Tierney?
    Mr. Tierney. Thank you, Mr. Chairman.
    Thank you, Madam Secretary, for being here with us this 
morning.
    I would like to just clarify a couple of points, if I 
could. One is you talked a little bit earlier about the Lender 
of Last Resort situation and the possible need of going to the 
Secretary of the Treasury to discuss with them, in the ultimate 
last resort, whether there would be resources available for the 
Department of Education to work with guarantors.
    Have you had that conversation with the Secretary? And if 
you have, in what detail?
    Secretary Spellings. We are having conversations about all 
available options.
    Mr. Tierney. Specifically that option have you discussed 
with the Secretary?
    Secretary Spellings. About specific levels of resources?
    Mr. Tierney. Whether you have had any at all, whether he 
makes them available, and levels.
    Secretary Spellings. I certainly intend to.
    Mr. Tierney. But you have not yet?
    Secretary Spellings. I have not yet. We are in the process 
of finding out what are our resources, how much do they cost, 
what is the order of magnitude--fact-gathering before we sit 
down and reach conclusions.
    Mr. Tierney. Okay. But you expect to have that conversation 
with him in the relatively near future?
    Secretary Spellings. I do.
    Mr. Tierney. The other clarification I wish to ask was, in 
the plan, in 1998, it provided for a school--Mr. Andrews 
mentioned this earlier--a school that was unable to locate a 
lender willing to lend to its students to be able to notify the 
guaranty agencies, certify its students that have been unable 
to obtain loans, and then being able to work on behalf of the 
students through the institution, as opposed to requiring each 
student to run around and get two lenders to refuse them.
    Is that something you are actively entertaining?
    Secretary Spellings. Issues as it relates to the Lender of 
Last Resort being implicated?
    Mr. Tierney. Right.
    Secretary Spellings. Well, as I have said, we are looking 
at, through the guaranty agencies, the various procedures that 
they have in place and whether they are adequate to be able to 
respond timely to situations such as that.
    Mr. Tierney. Okay. And have you contemplated what 
Representative Andrews mentioned, the fact that instead of 
having the student, individual students going around and 
getting two rejections, that it might be something we consider 
having the institution be able to make a certification to the 
guarantor and then get the loans for all the students at that 
school?
    Mr. Talbert. Certainly, Congressman, we are looking at that 
issue, particularly with respect to the letter that goes out 
next week to the guaranty agencies. The statute speaks in terms 
of individual borrowers. But I understand, administratively and 
so forth, the issues. And we are looking at that for purposes 
of the guaranty agency letter that goes out next week.
    Mr. Tierney. And so, are you seriously contemplating this 
may be a path you want to take?
    Mr. Talbert. We are discussing it. We are having 
consideration of it. And no final decision has been made yet.
    Mr. Tierney. All right. Thank you.
    Chairman Miller. Would the gentleman yield?
    Mr. Tierney. Yes, I will yield.
    Chairman Miller. Just on that point, my understanding was 
that, in 1998, that arrangement was made. Do you differ with 
the legal ability to do that?
    I know what the statute says, but apparently they reached 
an agreement where----
    Mr. Talbert. Yes, I mean, we certainly have the letters 
that you do that went out in 1998, and we also are aware of 
what the statute says now, which legally seems to say it is a 
borrower-by-borrower consideration. But, again, looking at the 
administrative issues and so forth, we certainly have that 
under consideration.
    Chairman Miller. Okay. Thank you.
    Mr. Tierney. Yield back.
    Chairman Miller. Thank you.
    Mr. Sarbanes?
    Mr. Sarbanes. Thank you, Mr. Chairman. Thanks for having 
the hearing.
    Thank you to the panel.
    Mr. Warder, can you just tell me again, you said, I think, 
that you have some communication or notice to institutions in 
instances where 50 percent of the loans are coming from one 
lender. Can you just go back through that?
    Mr. Warder. Yes. One of the things when we get notification 
that a lender is either reducing their origination in FFEL or 
saying they will not participate in the next year, we have the 
information in our system that lets us know what percentage of 
loans are made through a FFEL lender at a school. So if they 
have 50 percent or more of their volume, we immediately reach 
out to them to assure that they are able to replace that 
volume.
    Mr. Sarbanes. And how does the reach-out work? What is it 
you are----
    Mr. Warder. We call the aid office.
    Mr. Sarbanes. And what is the discussion?
    Mr. Warder. The discussion is around, ``We have heard that 
your lender is not originating. Is that true with you? And what 
have you done to replace it? And what other lenders have you 
gone to?'' And they have all said they have been able to 
replace that volume with another lender.
    Mr. Sarbanes. I guess I am curious why you would only 
initiate that with respect to institutions where 50 percent of 
the loans originate with that lender as opposed to, say, 25. I 
mean, 50 percent is a pretty high threshold to establish before 
you reach out to the institutions to make sure that everything 
is okay.
    I am wondering, why is it 50? Is 50 percent an internal 
protocol that is established? Does it originate someplace in 
particular?
    And could it be moved to, say--I mean, this whole hearing 
is about trying to get ahead of the curve and see the trends 
coming early and take preventative steps. So, I guess, I would 
just imagine that you could move that to, say, 25 percent, 
again, just to get a little bit ahead of the curve. Maybe you 
could respond to that.
    Mr. Warder. We could do that. The reason we haven't is that 
if you picked a 25 percent, for example, it says that the 
school already has lenders lined up for the other 75 percent or 
less and that they generally have enough relationships with 
other lenders that they are probably okay.
    We have also asked them, if they are concerned about their 
capacity, their FFEL capacity, to get in touch with us. So we 
have also asked all of them to get back to us with any concerns 
they have about their FFEL origination capacity.
    Mr. Sarbanes. Fair enough. I guess I would just----
    Mr. Warder. But we are not waiting when it is 50 percent or 
more.
    Mr. Sarbanes. Again, I would urge you to have a trigger 
system or a tickler system that might make you reach out 
earlier than that. You know, even, again, if 75 percent is in 
the okay category, the way we have seen this credit tightening 
happen is it can accelerate very, very quickly. And in light of 
that, I would think you would want to be getting some trends 
identified faster and be having those conversations even 
earlier.
    In other words, I guess what I am saying is the 75 percent 
that are, quote, ``okay'' might--you might wake up tomorrow and 
find out that there are three lenders in there that yesterday 
thought they were fine or were going to stay in the business, 
today have decided to get out of it, and they represent 50 
percent, between them, of what that institution is relying on. 
And now, all of a sudden, you are at 75 percent that are in a 
precarious position. So I would just urge you to find an 
earlier trigger point for having the conversations.
    Thank you.
    Chairman Miller. Thank you.
    Mr. Ehlers?
    Mr. Ehlers. Thank you, Mr. Chairman.
    I would like to zero in on a specific problem and get away 
from some of the global issues that have been discussed. The 
specific problem is that of medical students, particularly 
medical residents.
    I have a communication here from the American Medical 
Association and from others, and I have a major medical center 
in my district. It is a major problem for the medical students, 
particularly the residents who had a certain process for 
keeping their payments very low while they were residents, 
because, as you know, they get paid very small amounts and have 
substantial debts at that point, particularly if they are 
facing a 7-year residency.
    The College Cost Reduction Act of 2007 will, I think, 
eventually help solve this, but there is a bridging problem. 
There was a debt-to-income pathway, the so-called 20/220 
pathway, which has sort of disappeared. And we need something 
to bridge that.
    I just wonder, is the Department working on this, or do you 
have an answer prepared?
    Secretary Spellings. Yes, Congressman, we have retained 
this test by regulation through November of this year as a 
bridge until the new provision becomes fully implementable. At 
that time I know you are well aware that those payments will be 
much less than the normal full amount. But we do have a bridge 
to segue, which is essentially the previous system.
    Mr. Ehlers. I hope it is not the bridge to nowhere.
    Secretary Spellings. No, sir.
    Mr. Ehlers. Is this in effect already?
    Secretary Spellings. Yes, we have retained that test by 
regulation.
    Mr. Ehlers. And will that stay in place until----
    Secretary Spellings. Until the transition is made, yes.
    Mr. Ehlers. So everything is solved, it is all in place?
    Secretary Spellings. Yes, sir.
    Mr. Ehlers. That is a refreshing answer. Very seldom do I 
get that answer from the Federal Government.
    Thank you very much.
    Secretary Spellings. Thank you, Congressman.
    Chairman Miller. Thank you.
    Mr. Altmire?
    Mr. Altmire. Thank you, Mr. Chairman.
    Madam Secretary, nobody, certainly on this committee or 
even in this Congress, is looking forward to the scenario in 
the fall where we have hundreds of parents and students calling 
our office every day who didn't realize that they weren't going 
to be able to qualify for loans and now can't seek higher 
education at this time as a result. And we appreciate the fact 
that you have come in the spirit of helping us avert this 
problem from the beginning and avoid that happening. So we 
appreciate you being here.
    And then, trying to work through it--I am from 
Pennsylvania. We have the situation with PHEAA, which Mr. 
McKeon touched on earlier. And you know what has happened 
there. We have Penn State University, which has now gone to the 
Direct Loan program in response to that situation. And in the 
second panel we are going to have somebody who is going to talk 
about their experiences from, I believe, Iowa State, and they 
made the switch.
    I am just curious if you had any advice to people in 
Pennsylvania, specifically. You know, with the largest dominant 
loan agency now unable to participate, you know, the largest 
university in the State making the decision to go to the Direct 
Loan program, I would assume there are going to be others to 
follow. It really appears that it is pretty unstable ground 
right now, with regard to student loans in that State.
    What advice would you have to students and parents, as far 
as the stability of the program moving forward and what the 
expectations will be for parents who have children that are 
about to go into the higher education system?
    Secretary Spellings. Well, as I said, Congressman, we have 
new material that is timely for the situation that we are in 
that encourages them to maximize their aid. I would suggest to 
students and families, particularly as we approach April 1, 
which is the timing that institutions make acceptances known to 
students, that they look at these issues early and that they 
seek those resources as early as they possibly can; don't wait.
    Mr. Altmire. Thank you.
    And do you think that what has happened in Pennsylvania 
because of PHEAA being so big and Penn State being a big 
school, that that is unique compared to what other States in 
the country are facing? Or would you expect that those problems 
are going to be similar across the country?
    Secretary Spellings. I think it is somewhat unique. I think 
with Penn State, as you know, they had previously been a Direct 
Loan institution. They had familiarity with it. And so I think 
they may have had an acceptance and adapting process that might 
be more streamlined than others.
    Mr. Altmire. Okay. Thank you.
    Chairman Miller. Thank you.
    Mr. Payne?
    Mr. Payne. Thank you very much.
    I just have a question regarding--of course we all talk 
about the high cost of college and loans that students have to 
take out.
    Two questions. One, basically we have a tremendous amount 
of interest today on the part of young people--there seems to 
be a new esprit de corps of volunteerism, sort of, a new spirit 
of wanting to help in areas that are underserved and in Third 
World countries.
    And one of the big areas that we have is the lack of 
medical personnel in developing countries, where we have the 
PEPFAR program that President Bush is very proud of, and we 
support it tremendously. It works on AIDS and TB and malaria 
and things of that nature.
    And we find that there are students graduating from our 
medical schools who would like to immediately go to Africa, 
parts of Asia, or where tuberculosis is very tremendous in 
Eastern Europe, the new strain of TB, but they have these 
tremendous loans that they have to be responsible for and, 
therefore, cannot participate--and even in some of the 
underserved areas in the United States.
    Have you thought in terms of any serious programs that 
could either defer or offset the immediate loan repayments that 
are due from these students, in order for them to be able to do 
programs that are in no-paying or low-paying areas, to help 
offset the loans?
    Secretary Spellings. Well, not internationally, 
Congressman. As you know, we are in the process of implementing 
the provisions of CCRAA that speak to loan forgiveness in 
public service areas here domestically. But I am not aware of 
discussions about forbearance for people doing international 
aid work.
    Mr. Payne. I just spoke to former President of the Senate 
Frist, who, as you know, does a tremendous amount of that type 
of work. Yesterday, as a matter of fact, he testified before a 
committee on child survival and global health. And he, too, 
probably would think something like that would be helpful.
    Sometime I would like to talk to people in your department 
about that, and also about even expanding what we have 
available domestically. Because I think that they could do a 
tremendous amount of good, and for a small amount.
    The other question, on a totally different area, we had a 
hearing of the Historically Black Colleges and Universities 
yesterday here, and there is a goal with the Department of 
Defense of a 5 percent set-aside goal for HBCUs. However, 
believe it or not, there is no mechanism to evaluate or 
quantify whether the goal is being reached. And I would like to 
also discuss with your staff about some method. It could be 1 
percent, it could be zero, it could be 7 percent--I would doubt 
the 7 percent--but if there was some mechanism that could be 
imposed, so that we have some idea.
    It is great to have a goal. And, of course, you know, we 
have to be careful, it is goals; they are not quotas. We never 
did quotas, even though people took goals and tried to switch 
it around to say they were quotas. We have goals, but it would 
be good to see whether there is some way to evaluate whether we 
have been coming close to the goals.
    So I would like to be in touch with your staff on that, 
too.
    Secretary Spellings. Certainly. Thank you.
    Mr. Payne. Thank you.
    Chairman Miller. Mr. Price?
    Mr. Price. Thank you, Mr. Chairman. I appreciate the 
opportunity to ask a few questions.
    I want to thank you so much for coming. I apologize for not 
being here earlier. I know you had an extensive discussion 
about the issue of Federal student loans. As I say to my son, 
``I resemble that remark'' now. We have one child who is a 
senior in high school, and so we are looking at--we have been 
accepted, thank the Lord, and now we are trying to figure out 
how to go from there.
    I have been able to listen to some of the testimony and 
some of the questions, and I think that the fundamentals are 
clear about different philosophies about where the 
responsibility ought to lie, how much role the Federal 
Government ought to play. Obviously, the majority party 
believes the Federal Government ought to play a much greater 
role. And I think it is important, as we review that 
philosophy, that there are some consequences, both intended and 
unintended. And I would like to explore one or two of those.
    The FFEL program comprises about 80 percent of loans now. 
Would you agree that it works relatively well----
    Secretary Spellings. Absolutely.
    Mr. Price [continuing]. And is an appropriate and helpful 
adjunct for probably millions of students to gain access to 
higher education?
    Secretary Spellings. Absolutely. It is the primary way they 
do within Federal support.
    Mr. Price. And I would agree and commend the wonderful work 
that they are doing to allow for greater opportunity for higher 
education for so many young people across our Nation. There are 
those who would say that the Direct Loan program ought to be 
the only program. And I would ask you, if we were to move 
rapidly in that direction, how quickly can the Education 
Department add servicing capacity of the DL program if the 
volume is increased by 30 or 40 or 50 percent?
    Secretary Spellings. We can respond quickly. That level--
essentially, we could double our current capacity. But, you 
know, obviously, as it scales up, we would have to come to you 
for additional resources, should that materialize. But, at this 
point, we can approximately double the capacity in the program, 
should we need to.
    But, as you know and as you said, we are strong supporters 
of both programs. Institutions make those decisions. You know, 
one of the things I think institutions like best about the FFEL 
program is, inasmuch as financing is not their core mission, 
they are able to have those services live in the private 
sector. Institutions will have to create those services 
internally, were they to join the Direct Loan program.
    Mr. Price. I think you would agree, Madam Secretary, that 
having the FFEL program in place allows for greater choices and 
opportunities for, again, millions of students.
    Secretary Spellings. It does.
    Mr. Price. If we were to move to a significantly greater 
degree to the Direct Loan program, that would, of necessity, I 
suspect, increase the debt. The House and Senate adopted a 
budget yesterday that has significant increase in deficit and 
increasing the debt.
    Do you have any sense about the implications on the 
national debt if the DL program were to increase to a large 
degree?
    Secretary Spellings. We are looking at cost implications, 
not only there but also if we need to invoke the Lender of Last 
Resort and these 100 percent guarantees. There are cost 
implications for the various tools that might be implicated. 
And certainly, as we develop those figures, we will share them 
with you.
    Mr. Price. So, as the Nation clamors for some fiscal 
responsibility and not increasing deficit and debt, it would be 
appropriate to continue to hold up the FFEL program as one that 
is a good option and opportunity for, again, millions of young 
people across this Nation to gain an education without 
significantly harming the fiscal----
    Secretary Spellings. I believe it is.
    Mr. Price [continuing]. Status of our Nation. I appreciate 
that.
    As a physician, I also want to tell my good friend that we 
are working diligently to try to make certain that students can 
have their loans forgiven if they serve domestically in 
underserved areas.
    Secretary Spellings. Right.
    Mr. Price. And we have large numbers of those, as you well 
know.
    With my remaining time, I am pleased to yield to my good 
friend, Mr. Ehlers.
    Mr. Ehlers. I thank the gentleman for yielding.
    I just wanted to follow up with my earlier question. My 
always-competent and ever-ready assistant assures me that the 
income-contingent repayment program that you are setting up is 
a substantial disadvantage for medical residents compared to 
the 20/220 pathway.
    And, as you know, we worry about having enough physicians 
in this country. Also there is another factor, and that is, 
there is very little chance that they are going to default on 
their loans once they begin producing income. But they are in 
danger of going into forbearance before they start earning more 
money under the new system.
    I would very much--if you have an answer for that now, 
fine. Otherwise, I would very much appreciate you looking at 
this, seeing what can be done to basically restore something 
close to the 20/220 pathway.
    Secretary Spellings. My understanding, as I said, 
Congressman, is that we have retained that as a transition to 
the new system that you all enacted as part of the CCRA. Now, 
whether there are specific, you know, anecdotal and individual 
cases, you know, we will have to just look into those.
    Mr. Ehlers. I think they are more than anecdotal and small 
numbers. I would appreciate you checking into that, and will be 
happy to work with you in that.
    Thank you. Yield back.
    Chairman Miller. Thank you, Madam Secretary.
    Mr. McKeon, did you have a question?
    Okay.
    Thank you very much for your appearance and for the 
information that you have imparted to us.
    I think you can tell from the questions and sometimes the 
sense of urgency in my colleagues' voices, this is a problem--
as one of them said, they are not looking forward to having 
hundreds of people calling their office if there is a breach in 
the system.
    Secretary Spellings. Nor am I.
    Chairman Miller. And I think it really is a question of 
whether or not, having been warned and having seen serious 
problems in other parts of the credit markets, the question is 
whether or not we will be able to put together that seamless 
system for those families and for those students.
    And, you know, when I was in the Merchant Marines a number 
of years ago, first they would brief you on what a lifeboat 
drill was, and then you would have the lifeboat drill, and then 
eventually you would have to get in the lifeboats to make sure 
that everything worked, that the pulleys worked, that the 
winches worked, and everything would work, and that you could 
launch the lifeboats. Never had to use them, but we ran through 
it several times.
    And when I was in the Department of Forestry, you 
constantly had fire drills. And you had to show that you could 
hook up all of the hoses, that you could put water onto a fire, 
whether it was residential or whether it was a forest fire. 
Never had to use the residential, but we knew how to do it.
    When I was in the refinery, we constantly had preparation 
for explosions, for accidents. Fortunately, when I was there, 
never had to use them, but we were constantly prepared, and we 
had constant walk-throughs to make sure that everybody knew 
exactly what they were going to do.
    You know, the great heavyweight champion of the world, 
Rocky Marciano, once said that everybody has a plan right up 
until the time they get hit. And we find out, more often than 
not, in Government, that is the case when the incident comes 
along.
    And I think this hearing really is about whether or not we 
have the confidence--if we can handle the worst, we can handle 
the best. What we are really talking about here, as I keep 
saying, is making operational a standby plan.
    Every member of this committee would prefer that the FFEL 
program will continue to operate. But we want to make sure 
that, in the event that we have a serious gap in the 
availability of loans under the FFEL program, that you will 
have the ability to make a choice, or the institutions will 
have the choice, of going to the Lender of Last Resort, as was 
envisioned under the law, and/or the Direct Loan program.
    I consider these standby authorities. And because they are 
standby authorities, we have the time to put in place the 
procedures and the operational protocols. I think that means 
that we have to move from monitoring to sit-down meetings with 
the impacted parties, the guaranty agencies, to hear their 
concerns and to work out an agreement, so, again, if necessary, 
we will be able to take the preparation and make it 
operational.
    I think, again, the schools need to know whether they 
want--how and how long it will take them to create a standby 
authority on the Direct Loan program, should they choose to do 
that.
    Apparently it was fairly seamless, or appears for the 
moment, for Penn State to make this switch. They were in the 
FFEL program. That program apparently not able to meet their 
needs, they were able to make the switch seamlessly for those 
parents and students.
    That is the goal of this committee. We need your 
cooperation. You need the Secretary of Treasury's cooperation. 
And I think we need some face-to-face discussions between the 
guaranty agencies who may have to stand in stead of these other 
organizations that might find themselves in a position that 
they can't meet their historical demand for student loans if 
the credit markets continue in the state of dysfunction that 
they currently are.
    We all hope that that will cease also. And, obviously, the 
Secretary of the Treasury and the Chairman of the Fed and this 
Congress are working hard to try to make that reality come to 
pass, where we go back to both liquid and stable credit 
markets. But this is only in anticipation.
    So thank you for your time.
    And I don't know if you want to make a comment, but clearly 
this is an opportunity to demonstrate that, with some notice, 
we can properly plan to mitigate the anxiety and maybe the harm 
to students and families in additional costs to them if plans 
are not in place.
    Thank you.
    Secretary Spellings. Yes, Mr. Chairman, thank you for those 
comments. And I can assure you we are doing those things and 
will continue to.
    Two things strike me today.
    One is that this is highly organic. We are learning, as you 
are, every day the various dimensions of this. And I think 
regularized communications between us, maybe not in this formal 
of a setting, are certainly in order as we go through what will 
be the busy season, the high season of this industry.
    And I would also say, particularly since I have heard many 
of you talk about specific institutional stories or anecdotes, 
please let us know those things, and we will run those to 
ground and do everything we can to make sure that there is 
capacity in the system.
    Chairman Miller. Yes.
    Mr. Platts? You are now on the Secretary's time, so you do 
whatever you want. [Laughter.]
    Thank you, Madam Secretary.
    Mr. Platts. Thank you, Mr. Chairman and Madam Secretary, 
for yielding time to me. So I will be very brief. And I don't 
want to be repetitive, but I do want to associate myself with 
Mr. Altmire's comments and questions earlier in Pennsylvania's 
situation.
    And I know you are very familiar--and Senator Specter, 
Senator Casey and most of us House members have written to you, 
as well as Secretary Paulson and the Federal Reserve. My 
understanding thus far, the Fed has responded saying they defer 
to you and Secretary Paulson on how to address the specific 
challenge across the country and then specific to us in 
Pennsylvania.
    And so I just want to, I guess, reaffirm Mr. Altmire's 
emphasis on how critical this is to students, as we know best 
in Pennsylvania, and that survival and strengthening of the 
FFEL program to allow PHEAA and other agencies like it to be 
re-engaged is critical to students getting access to the 
assistance they need.
    And as one who, you know, paid off my last student loans as 
a Member of Congress from undergrad and law school, I 
personally understand the importance of these programs and, you 
know, just look forward to working with you and the Department 
to make sure that that competition is there and the choice is 
there and, bottom line, the access is there for the students 
across the country, and, obviously, especially focused on 
Pennsylvania.
    So thank you, Mr. Chairman.
    And, Madam Secretary, thank you.
    Secretary Spellings. Thank you, Congressman.
    Chairman Miller. Thank you.
    Thank you, Madam Secretary. We will continue to be in touch 
with you. Thank you.
    The next panel to come before the committee will be made up 
of Mr. Paul Wozniak, who is the managing director of the 
Education Loan Group of UBS Securities. Mr. Wozniak is the 
managing director of UBS Educational Loan Group, and is now in 
his 26th year in the field of education lending. Mr. Wozniak is 
also involved in all aspects of investment banking, both 
Federal and private education loans, including assistance on 
structural economic credit program matters, and an active 
participant in the education loan community.
    Terry Muilenburg is the Senior Vice President of USA Funds, 
and whose function is to help administer the FFEL program. And 
in this position, she is responsible for representing USA 
Funds' interests in the Federal Government and works closely 
with other student loan organizations in the development of 
legislative and regulatory agenda.
    Roberta Johnson is the Director of the Office of Student 
Financial Aid at Iowa State University in Ames, Iowa. And prior 
to assuming that role as director of student aid at Iowa 
University, Johnson served 18 years as the assistant director 
and associate director positions at Iowa State, where she was 
responsible for student loan operations.
    Sarah Bauder is the Director of Student Financial Aid at 
the University of Maryland, College Park, Maryland. And she 
began her career in financial aid in 1990 as a financial aid 
counselor at St. Mary's College in Maryland. After 6 years, she 
accepted the position at the University of Maryland-College 
Park campus as assistant director for loan processing. She then 
moved to the position of associate director for operations and 
assistance, where she managed a $100 million student loan 
program, scholarships, athletic verification, and quality 
assurance.
    Charles C. Sanders--oh, excuse me, Mr. Wilson, did you want 
to introduce Mr. Sanders?
    Mr. Wilson. Yes, thank you.
    Chairman Miller. Yes, thank you.
    I yield to Mr. Wilson.
    Mr. Wilson. Thank you, Mr. Chairman.
    It is an honor for me to welcome Mr. Chuck Sanders here 
today. He is a neighbor. He is from my home State of South 
Carolina and on the panel today.
    Mr. Sanders currently serves as president and CEO of the 
South Carolina Student Loan Corporation. In that position, he 
is responsible for the day-to-day management and coordination 
of all corporate business activities. Prior to this position, 
Mr. Sanders served as director of investments and debt 
management for the South Carolina State Treasurer's Office for 
13 years.
    Mr. Sanders currently serves on the board of directors of 
Anderson University, the South Carolina Independent Colleges 
and Universities, the Greater Columbia Educational Advancement 
Foundation, the executive board of the South Carolina 
Association of Student Financial Aid Administrators, and is a 
board member and vice chairman of the Education Finance 
Council.
    He received his bachelor of science degree in banking from 
the University of South Carolina.
    I know from touring his office last month that he and his 
very capable and dedicated staff are student-friendly, giving 
opportunity for the young people of South Carolina. And I 
welcome Mr. Sanders here today.
    And I yield back the balance of my time. Thank you, Mr. 
Chairman.
    Chairman Miller. Thank you.
    Mr. Wozniak, we are going to begin with you.
    There will be a light. A green light will go on when you 
begin to testify--you are familiar with this--and then an 
orange light when you have a minute left, at which point we 
hope you will be able to wrap up your remarks. But, again, we 
want you to complete your thoughts. And then a red light.
    Let me say this to the panel. To the extent you feel a need 
to comment on something that you heard in the exchanges that 
took place in the previous panel with the Secretary, please 
feel free to do so. That would be helpful to us.
    Your entire statements will be placed in the record in 
their written form, and so you proceed in the manner in which 
you are most comfortable.
    Mr. Wozniak, welcome. Thank you.

   STATEMENT OF PAUL WOZNIAK, MANAGING DIRECTOR AND MANAGER, 
           EDUCATION LOAN GROUP, UBS SECURITIES, LLC

    Mr. Wozniak. Chairman Miller, Ranking Member McKeon, 
members of the committee, thank you very much for inviting me 
today.
    I am Paul Wozniak, managing director and group manager of 
the UBS Securities, LLC. The group is one of the largest of its 
kind on Wall Street, and we are mandated to coordinate all 
education-related financing activity in the fixed-income 
department, which includes both asset-backed finance as well as 
municipal securities.
    I am currently in my 26th year of financing postsecondary 
loans, following my borrowing under the FFEL program as well.
    $54 billion of Stafford and PLUS FFELP loans were 
originated in 2007-2008 academic year, primarily by banks, 
private and public nonbank corporations, State agencies, and 
not-for-profit corporations. If patterns held as in past years, 
because the information is the latest available, banks probably 
accounted for about 60 percent of loan originations.
    However, when one observes the holders of loans, after the 
fact in the long-term markets, the market share of outstanding 
loans falls to less than 24 percent. And this is important in 
trying to understand how ultimately the student loan program is 
financed. Just like Fannie Mae and Freddie Mac provide 
secondary market support to the mortgage market, that is, in 
many regards, what many of the corporations and not-for-profit 
operations do for the student loan marketplace.
    Banks, as deposit-taking institutions, have a general cost 
advantage to entities that are required to access the capital 
markets through securitizations or other means. They must also 
allocate costs of capital and reserves, but, on the margin, 
they should maintain a funding advantage over those raising 
money in the capital markets.
    Further, for those banks who originate and sell their loans 
to other holders in the secondary market--and that appears to 
be the majority of the 2,000-some banks in the program--funding 
needs are both modest in size and short-term in nature.
    The remaining participants in the FFELP program, those who 
are holders of more than three-quarters of all FFELP loans 
outstanding, rely on the capital markets for their funding 
source. This generally takes several forms. Most of these 
entities use some type of warehousing program initially--
commercial paper, a line of credit--and then those are usually 
less-than-364-day facilities. They do that to accumulate enough 
assets to have an efficient financing program that will meet 
both rating agency and investor acceptance. These facilities 
generally must be cleaned out once a year.
    As Secretary Paulson said yesterday, the securitization of 
student loans actually has led to greater availability and 
lower costs. And, in fact, the most common form of refinancing 
or take-out is securitization.
    And this has taken the form of floating rate notes. 
Securitization is merely the creation of a trust which issues 
securities to investors. The trust uses the proceeds to acquire 
a pool of loans, usually from a warehouse facility, and that 
line of credit is paid down.
    The trust is structured to allow investors to solely look 
at the underlying loan collateral for repayment of the 
investment. And this is important, because it insulates the 
investor from any negative credit event that may befall the 
sponsor of the trust. As a result, the trust receives a higher 
rating than it could if corporate-issuer risk were also a 
continued possibility. And, therefore, it offers a lower rate 
of return to the investor, given those protections. 
Alternatively, the trust is required to perform on its own with 
no additional support from the lender.
    It should be known also that banks also make themselves 
available to the Floating Rate Note securitization market. 
Indeed, while banks are holders of less than one-quarter of all 
FFELP loans, banks who also securitize include about three-
quarters of those institutions, of those deposit-making 
institutions. So, said another way, you might assume that about 
only 10 percent of the loans outstanding are funded by 
deposits.
    Another option has been the auction rate market. The FRN 
market has been growing much faster than the auction rate 
market. The auction rate market is about one-third the size of 
the FRN market outstanding.
    Auctions certainly have been in the headlines recently. And 
as issuers have looked out over their funding options, given 
the low margins available on the loan product, they weighed the 
advantages of using an FRN versus the advantages of an auction 
structure. Auctions permit a high degree of financing 
efficiency, and they act in combination as a warehouse 
facility, term financing at a reasonable and variable rate cost 
of funds. Their ability to be redeemed and converted to other 
structures is also a very positive feature.
    For 15 years they performed exceptionally well. There were 
150,000 auctions, I would estimate, without a single failure. 
Recently, however, that has ended. That has created additional 
problems. And I will just say that the cost of financing has 
risen both on the FRN side and the auction rate by 
approximately 100 basis points. The burden on this marketplace 
is significant and real, and it is unlikely to be able to 
correct itself and avoid having an impact on access to loans.
    [The statement of Mr. Wozniak follows:]

     Prepared Statement of Paul W. Wozniak, Managing Director, UBS 
                             Securities LLC

    Good Morning. I am Paul Wozniak, a Managing Director and Group 
Manager of UBS Securities LLC. The group is one of the largest of its 
kind on Wall Street, and we are mandated to coordinate all education 
loan related finance activities in the Fixed Income department, which 
includes asset-backed finance and municipal securities. I am currently 
in my 26th year of financing postsecondary education loans.
    $54 billion of Stafford and PLUS FFELP loans were originated in the 
2007-2008 academic year, primarily by banks, private and public non-
bank corporations, state agencies and not-for- profit corporations. If 
patterns held as in years past, banks probably accounted for 
approximately 60% of loan originations--as they did in the prior year 
which is the last year for which data were available. However, when one 
observes holders of loans, banks' market share of outstanding loans 
falls to less than 24%. This is important when trying to understand how 
entities finance themselves.
    Banks, as deposit taking institutions have a general cost advantage 
to entities that are required to access the capital markets through 
securitizations or other means. They must also allocate costs of 
capital and reserves, but on the margin, they should maintain a funding 
advantage over those raising money in the capital markets. Further, for 
those banks that originate and sell their loans to other holders in the 
secondary market, which appears to be the majority of banks, their 
funding needs are both modest in size and short-term in nature.
    The remaining participants in the FFELP program, those who are 
holders of more than three-quarters of all FFELP loans outstanding, 
rely on the capital markets for their funding source. This generally 
takes several forms. Most of these entities will use some type of 
warehousing program or line of credit--a commercial paper conduit or 
bank loan--with terms that are generally renegotiated every 364-days 
and permit the FFELP lender to accumulate a sufficient amount of loans 
to accomplish an efficient financing program that will meet rating 
agency and investor acceptance. These credit lines must generally be 
cleaned out into some other financing program at least once per year.
    The most common form of refinancing or 'take-out' is a 
securitization. Primarily this has taken the form of the issuance of 
Floating Rate Notes or FRN's. A securitization is merely the creation 
of a trust which issues securities to investors. The trust uses the 
proceeds to acquire a pool of loans from the warehouse facility, and 
the warehouse line of credit is paid down. The securitization trust is 
structured to allow the investor to solely look to the underlying loan 
collateral for repayment of the investment. This is important because 
this insulates the investor from any negative credit event that may 
befall the sponsor of the trust. As a result, the trust receives a 
higher rating than it would if corporate issuer risk continued as a 
possibility, and therefore the FRN's bear a lower interest rate spread 
than it would if it were not so insulated. Alternatively, the trust is 
required to perform on its own with no additional support from the 
lender.
    It should also be noted that banks also avail themselves of the 
Floating Rate Note securitization market. Indeed, while banks are 
holders of less than one-quarter of all outstanding FFELP loans, banks 
accounting for about 75% of these holdings use or are prepared to use 
FRN securitizations to finance their portfolios to some extent. Banks 
do this because it diversifies the funding sources of their assets. 
While it may be a more expensive cost of funds than deposits, the 
diversification of funds and the potential for off-balance sheet 
funding requires its consideration.
    Another option that has been used extensively, and more so among 
state agencies and not-for-profit corporations, has been the auction 
rate securities market. The education loan backed auction market is now 
only about \1/3\ of the size of the education loan FRN securitization 
market. In recent years, issuance of FRNs has greatly exceeded the 
issuance of taxable auction rate securities, especially to finance pre-
10/1/2007 originated consolidation loans during the heavy origination 
era of those loans. Issuers had to weigh the advantages of a fixed 
spread FRN against the advantages of the auction structure. Auctions 
permitted a high degree of financing efficiency, in that they acted as 
a combination warehouse facility and term financing at a reasonable and 
variable rate cost of funds. Their ability to be redeemed or converted 
to other structures without significant cost was also a very positive 
feature. Given the relatively narrow spread on FFELP student loans, it 
is important to have a highly efficient, flexible financing vehicle.
    For 15 years the auction product performed exceptionally well. It 
was able to withstand numerous market shocks such as the 1994 bond 
market which at the time was described as the worst since the great 
depression, the 1998 Russian debt crises, Y2K and an accounting 
reclassification event in 2004. These tests of the product seemed to 
show its resilience. Interest rate spreads would widen, and then return 
to previous levels. For, what I would estimate as 150,000 auctions of 
education loan backed collateral; the market had never experienced a 
failed auction (where auction sales exceeded purchases and holds). That 
ended recently. As a consequence, the ensuing days resulted in 
significant auction sales resulting in a complete and total failure of 
the auction market. This was compounded by the problems facing the 
monoline insurance companies, encouraging sales and reducing 
restructuring options.
    As a result of the continuing liquidity crisis, the deleveraging of 
investor balance sheets and the failure of the education loan backed 
auction market, the cost of funds to holders of loans has risen 
significantly. Those with auction rate securities are incurring a 
penalty interest rate. Those with warehouse facilities, to the extent 
that renewals are available, are incurring a much higher rate as well 
as the requirement of posting significantly more equity than had 
previously been required. There are approximately $150 billion of 
education loans currently financed via these two methods. For those who 
would refinance these loans into a fixed spread FRN structure, they 
face (i) interest rate spreads that may be a full 1% (100 basis points) 
higher, (ii) the inability to currently finance certain loans with long 
average lives (consolidation loans) due to lack of investor demand, and 
(iii) the need to add significant and costly equity into a structure 
based on new rating agency assumptions borne of the current market 
environment. The burden on this marketplace is significant and real and 
is unlikely to correct itself to avoid having an impact on access to 
loans.
                                 ______
                                 
    Chairman Miller. Thank you.

STATEMENT OF TERRY MUILENBURG, SENIOR VICE PRESIDENT, USA FUNDS

    Ms. Muilenburg. Chairman Miller, Ranking Member McKeon, 
members of the Committee, all of us here today share a strong 
commitment to ensuring that every eligible student----
    Chairman Miller. I would ask you to pull the microphone a 
little bit closer to you.
    Ms. Muilenburg. All of us here today share a strong 
commitment to ensuring that every eligible student seeking 
Federal Family Education Loans will have an uninterrupted 
source of loan capital to pursue higher education. I am here on 
behalf of United Student Aid Funds, a 48-year-old nonprofit 
organization that works to enhance higher education 
preparedness, access and success. Last year we guaranteed $25.8 
billion in FFEL loans, or about one-fourth of all such loans 
issued.
    USA Funds and the other 34 guarantors, all of whom are 
either State agencies or nonprofit organizations, perform a 
critical role in the delivery of student aid. Together we 
administer every loan made under the FFEL program with an 
outstanding portfolio of over $400 billion. Through our efforts 
we protect the Federal investment in our students through 
delinquency prevention, default diversion and debt management 
programs.
    Consistent with guarantor's public purpose mission, we 
provide an extensive range of services and programs to increase 
awareness of the importance of higher education, the 
opportunities available and the financial support offered. We 
believe the more borrowers know about personal finance and 
borrowing wisely, the better prepared and more likely they are 
to successfully meet their financial obligations.
    We strongly emphasize the need for students to exhaust all 
eligibility for free money and grants and scholarships before 
turning to Federal loans, and advise against turning to more 
expensive private loans unless absolutely necessary, and then 
only to cover essential educational costs.
    Guarantors primary focus is default prevention. We begin 
this effort through financial literacy programs that begin 
early on and include intensive counseling on the options 
available to avoid default if the borrower falls behind on 
their loan payments. Thanks in part to these comprehensive 
efforts, the most recent national student loan default rate is 
4.6 percent, one of the lowest rates in the history of the 
program.
    Turning to the topic of this hearing, we first of all very 
much appreciate the remarks of members of the committee to the 
Secretary and Larry Warder with respect to the need for a 
school-based certification program, the need to ensure that we 
can use electronic processes on these loans, that we are able 
to sell these loans and that it would be very important for us 
to be able to sit down with the Department prior to their 
issuing guidance with respect to implementation of an LLR 
program.
    We first and foremost urge the administration, with support 
from Congress, to examine and pursue all available alternatives 
to address the liquidity issues in the credit markets as the 
preferred means of addressing the challenges many educational 
lenders are currently facing.
    At the same time, guarantors are required under the Higher 
Education Act to arrange for or serve as a Lender of Last 
Resort. The LLR program is just that, a safety net to assure 
uninterrupted access to needed loan funds. The act has provided 
this authority for decades, but LLR loans have been used in 
only limited circumstances. Using nonFederal monies, these 
narrowly focused programs were not intended to address broad-
scale disruption in the lending market. They have largely 
relied on the capacity of lenders to make loans which carry 100 
percent insurance in order to encourage lenders to participate.
    In the event of a more serious or widespread loan access 
problem, the Higher Education Act authorizes the Secretary of 
Education to advance funds to guarantors to make LLR loans. As 
we have discussed earlier, the Department last considered using 
this authority in 1998. The Department at that time asked three 
guarantors, including USA Funds, to be prepared to administer 
LLR programs using Federal advances, based on an agreement 
developed by the guarantors and the Department. It is my 
understanding that these same arrangements would have been 
offered to the other guarantors desiring to participate and 
willing to abide by the same terms and conditions.
    Of course these agreements were never implemented due to 
congressional action to modify the interest rate formula and 
ensure continued FFEL participation by lenders well before any 
problems would have developed. Those agreements provided for 
the Department to make advances, for guarantors to make LLR 
loans, a determination by the Secretary as to where each 
guaranty agency could issue such loans, and a school-based 
rather than a borrower-based process so that borrowers would 
not individually have to prove that they had been turned down 
by two lenders.
    Given the current situation with the credit markets it is 
essential that all parties be prepared to step in quickly and 
effectively so that every eligible student has access to 
Federal student loan funds. For this reason USA Funds urges the 
Department to sit down promptly with guarantors and develop 
specific plans that could be quickly implemented should it 
become necessary to activate an LLR program using Federal 
advances.
    I offer a few suggestions regarding how the Department 
might proceed. First, again as we have discussed, it should be 
a school-based rather than a borrower-based process. Clearly 
the Department in 1998 felt that it had the legal authority to 
implement a school-based rather than a borrower-based program. 
And I don't see why that should be any different today than it 
was then. The Department, upon the request of the school, 
should determine whether students attending that school are 
able to secure loans. The school should check with its existing 
lenders before making such a request. A school-based 
certification would both simplify and expedite it. From the 
borrower perspective it would be the same as it is today, 
consistent with the school's application process, with no 
additional hoops.
    Mr. Chairman, the bottom line is we hope the phone won't 
ring at 3:00 a.m. but if it does, we will answer the call. 
Thank you very much.
    [The statement of Ms. Muilenburg follows:]

   Prepared Statement of Terry L. Muilenburg, Senior Vice President, 
   Government and Industry Relations, United Student Aid Funds, Inc.

    Chairman Miller, Ranking Member McKeon, Members of the Committee, I 
am pleased to have the opportunity to testify this morning. All of us 
here today share a strong commitment to ensuring that every eligible 
student seeking federal student loans will have an uninterrupted source 
of loan capital to pursue postsecondary education.
    I am here today on behalf of United Student Aid Funds, a 48-year 
old nonprofit organization that works to enhance postsecondary-
education preparedness, access and success. Last year, USA Funds 
guaranteed $25.8 billion in Stafford, PLUS and Consolidation loans, or 
about one-fourth of all Federal Family Education Loans issued in fiscal 
year 2007.
    USA Funds and the other 34 guarantors, all of whom are either state 
agencies or nonprofit organizations, perform a critical role in the 
delivery of student financial aid. Together, we administer every 
student loan made under the Federal Family Education Loan Program, with 
an outstanding loan portfolio of over $400 billion. Through our 
efforts, we protect the Federal Government's investment in our students 
through delinquency prevention, default aversion and debt management 
programs. We also work with students, families, colleges, universities, 
career schools, secondary schools and higher education finance 
colleagues to provide information on educational opportunities and 
financial literacy programs that help students realize their higher 
education dreams.
    As you will note in this testimony, guarantors are involved with 
students over the long term: Our work with students begins as early as 
elementary school, through early awareness and outreach programs, and 
does not end until they have repaid their loans. Many guarantors, 
including USA Funds, provide early awareness, financial literacy and 
debt management materials in Spanish, as well as English, to ensure 
that Hispanic students and families, the fastest growing demographic 
segment of the population, are able to fully benefit from these 
services.
    Guarantors are also committed to accountability. In addition to 
serving students, families and schools, we are resolute in fulfilling 
our responsibilities to the Congress, the Department of Education and 
the American taxpayer.
Promoting College Access
    Consistent with our public service mission, guarantors provide an 
extensive range of services and programs to increase awareness of the 
importance of higher education, the opportunities available and the 
financial support offered. The College Access Initiative, established 
by the Deficit Reduction Act of 2005, formalized a fundamental role for 
student loan guarantors in promoting access to postsecondary education. 
We appreciate your recognition of this work by codifying our 
responsibility to do so.
    Through our college access efforts, guarantors are filling a local 
need that often cannot be met by the secondary school counselor. 
According to a survey by the National Association for College Admission 
Counseling, the national student-to-counselor ratio for public high 
schools is 315-to-1. Thus, despite diligent efforts on the part of 
school personnel, too many students still struggle to understand their 
options for postsecondary education and how to obtain financial aid. 
Throughout the country, guarantors step in to help prevent students 
from falling through the cracks. For example, last year guarantors:
     Distributed millions of college awareness, financial aid 
and financial literacy brochures, guides and toolkits to schools, 
students and families. USA Funds alone distributed over 4 million 
publications to help families plan and pay for college. These materials 
provide in-depth information on: saving and paying for college, 
planning for a career, money management, applying for financial aid, 
and available scholarships and grants.
     Organized and participated in more than 8,400 financial 
aid workshops and events that reached more than 900,000 students and 
families and more than 7,800 school guidance counselors. These 
workshops provide hands-on training for completing the Free Application 
for Federal Student Aid, and understanding the types of financial aid 
available, as well as the college application process.
Improving Financial Literacy and Preserving Low Default Rates
    Guarantors focus significant efforts on improving the financial 
literacy of students and families. For example, USA Funds' financial 
literacy program, Life Skills, is in use at over 500 postsecondary 
institutions nationwide. We believe that the more borrowers know about 
personal finance, money management, and borrowing wisely, the better 
prepared and more likely they are to meet their financial obligations. 
To accomplish that goal, guarantors provide detailed financial literacy 
materials, training sessions and interactive tools to assist all 
students and schools in understanding prudent borrowing and repayment 
and successful money management. Guarantors, including USA Funds, 
emphasize the need for students to exhaust all eligibility for ``free'' 
money in grants and scholarships before turning to federal loans, and 
advise against turning to more expensive private loans unless 
absolutely necessary, and then only to cover essential educational 
costs. Below are examples of financial literacy activities:
     Developing Web sites and distributing materials designed 
for students and families to understand how to handle their finances as 
they prepare for college and beyond
     Working with local education centers to implement early 
financial literacy programs with area high schools
     Developing financial-literacy materials for graduate and 
professional students and adult learners to teach students about time- 
and money-management practices that will permit them to graduate on 
time, with minimal education debt, and prepared to repay the student 
loans that financed their education.
    In addition to improving financial literacy, intensive efforts are 
involved in counseling borrowers on their repayment obligations and 
options to prevent defaults. These efforts include:
     Creating comprehensive, state-of-the-art default aversion 
programs, including tools schools can use to contact their former 
students;
     Counseling the delinquent borrower on the consequences of 
default and the options available to avoid default; and
     Assisting the borrower in obtaining the most reasonable 
repayment terms possible, a deferment, or a forbearance.
    In USA Funds' case, we successfully resolve more than nine out of 
ten past-due accounts, and as a result, last year we prevented $16.7 
billion in potential loan defaults.
    Thanks in part to these comprehensive efforts, the national student 
loan default rate is 4.6 percent, one of the lowest rates in the 
history of the program, with USA Funds below the national average at 
4.0 percent. I would like to thank the Committee for specifically 
recognizing these financial literacy, delinquency and default 
prevention activities as essential roles for guarantors in the College 
Opportunity and Affordability Act (H.R. 4137) and encourage you to 
include these provisions in the final conference agreement on the 
Higher Education Act reauthorization bill.
Lender of Last Resort Programs
    Turning to the topic of today's hearing, guarantors are statutorily 
required under the Higher Education Act to serve as, or arrange for, a 
backstop Lender of Last Resort (LLR) to address situations where 
eligible students and parents are unable to obtain Federal Family 
Education Loans. The statute requires guarantors to provide, or arrange 
with an eligible lender to provide, LLR loans in each state where it 
serves as the designated guarantor. Guarantors are required to have 
policies and operating procedures in place to address LLR situations. 
USA Funds has such procedures and, to my knowledge, so do all other 
guarantors.
    Lenders of last resort programs are just that: a safety net to 
assure uninterrupted access to needed loan funds. The Act has provided 
this authority for decades, but lender of last resort loans have been 
made in only limited situations. Using nonfederal monies, these 
narrowly-focused programs were not intended to address broad scale 
disruption in the lending market. They have largely relied on the 
capacity of lenders to step up and make loans, which carry 100 percent 
insurance to encourage lenders to participate.
    In the event of a more serious or widespread loan access problem, 
the Higher Education Act authorizes the Secretary of Education to 
advance funds to guarantors to make LLR loans. The availability of 
federal capital assures that loan funds will be available. The 
Department last considered using this authority in 1998 when, due to an 
impending change in the interest rate formula, there was concern that 
lenders might not make loans. The Department then asked three 
guarantors, USA Funds, Great Lakes Higher Education Corporation, and 
the Pennsylvania Higher Education Assistance Agency, to be prepared to 
administer lender of last resort programs using federal funds, based on 
an agreement developed by the guarantors and the Department. It is my 
understanding that the same arrangements would have been offered to 
other guarantors desiring to participate and willing to abide by the 
terms and conditions included in these agreements.
    These agreements, which were never implemented due to Congressional 
action to modify the interest rate formula and ensure continued FFELP 
participation by lenders--well before a crisis could have occurred--
provided for:
     Authority for the Department to make advances to 
guarantors for the purpose of making LLR loans;
     A determination by the Secretary as to where each 
guarantor could issue LLR loans;
     A school-based, rather than a borrower-based LLR process 
so that borrowers would not individually have to prove that they were 
turned down by two lenders;
     Insurance on LLR loans at 100 percent;
     Fees to guarantors making LLR loans with federal advances, 
intended to cover the costs of issuing and maintaining the loans, in 
lieu of the special allowance payments normally paid to lenders;
     Guarantor repayment of advances upon request of the 
Department, with the Department able to require assignment of LLR loans 
to the Secretary, and upon assignment, the portion of any advances 
represented by the loans would be considered repaid; and
     Eligibility for interest benefits and special allowance 
payments for a purchasing lender in the event an LLR loan was sold.
    The Lender of Last Resort provisions in the HEA are truly a last 
resort to ensure student access to loans for higher education. Given 
the current situation with the credit markets, it is essential that all 
parties be prepared to step in to address a situation where students 
are unable to obtain federal student loans. It is critical that all 
stakeholders are prepared to act quickly and effectively, so that every 
student at every Title IV eligible institution has access to Federal 
student loan funds. For this reason, USA Funds strongly encourages the 
Department to promptly work with guarantors to develop specific plans 
that could be quickly implemented should it become necessary to 
activate an LLR program.
    I offer a few suggestions regarding how the Department might 
proceed as it considers the need for lenders of last resort.
     First, USA Funds and our guarantor colleagues believe 
eligibility for lender of last resort loans should be school-based, 
rather than borrower-based. That is, the Department, upon request from 
a school, should determine whether students attending the school are 
able to secure loans. The school should check with its existing lenders 
before making such a request. Once the Department is satisfied as to 
the need for last resort lending, all students at the school should be 
eligible for the program. Students should not have to qualify 
individually. A school-based determination of eligibility would both 
simplify and expedite the process. From a borrower perspective, the 
application process would be the same as it normally would be, 
consistent with the school's loan application process flow. When the 
loan reaches USA Funds for guarantee, the loan would be ``flagged'' in 
our guarantee and servicing system as an LLR loan and tracked 
throughout its lifecycle as such.
     Second, I would also recommend that the Department work 
with guarantors to ensure that the operational processes involved in 
funding and making LLR loans reflect an electronic loan processing 
environment.
     Third, as in the 1998 agreements, guarantors should be 
permitted to sell LLR loans made with federal advances, with the 
proceeds used to repay such advances.
    At the same time, we urge the Administration, with support from 
Congress, to examine all available alternatives to address the 
liquidity issues in the credit markets as a preferred means of 
addressing the challenges many education lenders are currently facing.
    These are challenging times in the student loan marketplace, but 
with foresight and prudent planning, we can ensure uninterrupted access 
to student loans. We stand ready to work with the Department, Congress, 
lenders and our school colleagues to ensure that every eligible student 
and parent receives the federal student loans to which they are 
entitled.
    Thank you.
                                 ______
                                 
    Chairman Miller. Ms. Johnson.

  STATEMENT OF ROBERTA JOHNSON, DIRECTOR OF STUDENT FINANCIAL 
                   AID, IOWA STATE UNIVERSITY

    Ms. Johnson. Thank you, Mr. Chairman and members of the 
committee. I am from Iowa State University located in Ames, 
Iowa, and proudly celebrating our 150th anniversary this year. 
Iowa State University is a land grant institution with an 
enrollment of 26,160 students. Prior to assuming the role of 
Director of Student Financial Aid, I served for 18 years in the 
Assistant Director and Associate Director positions at Iowa 
State where I was responsible for student loan operations. I 
have experience in the administration of loans through both the 
Federal Family Education Loan program and the Federal Direct 
Loan program.
    Iowa State University did enter the Federal Direct Loan 
program as a year-one school in 1994. Iowa State University's 
loan volume in the Federal Direct, Stafford, and PLUS loan for 
2006-2007 was $97.6 million. It encompassed over 20,000 
separate awards for 14,645 students. Yet we were able to 
accomplish this with only two full-time staff members. One of 
those staff members also administers the Federal Pell Grant 
program, Academic Competitiveness Grant, National SMART Grant, 
and will assume duties for the TEACH Grant program in July when 
that program becomes operational.
    There were a number of reasons why we moved to Direct 
lending in 1994 and why we remain there today. Most notably, we 
are able to provide better customer services to our students 
and their parents, minimize the amount of staff time spent 
dealing tracking down loan funds or changes, and maximize the 
predictability of receiving funds both for our students and our 
institution.
    Our students and their parents frequently comment on how 
easy it is to understand the process; that they appreciate 
always knowing who holds their loan; and that Iowa State 
University provides prompt, courteous service when they have 
questions about any financial aid program. Before direct 
lending at my institution, that was not the case.
    In my further testimony that I have provided, which I am 
not going to comment on directly, I have included some slides, 
including one which is a GAO slide which quite accurately 
depicts what Iowa State University experienced as a participant 
in the FFEL program dealing with multiple student loan players 
and the contrasting graphic that shows how the process works 
today in the Direct Loan program.
    The Direct Loan program has been described as Pell with a 
prom note. In fact any school, FFEL or DL, that is currently 
administering the Federal Pell Grant, ACG or National SMART 
Grant programs is already interfacing with the Department of 
Education's system for disbursing direct loans and other 
student aid. This system is called the common origination and 
disbursement system.
    To participate in the Direct Loan program, as has been 
mentioned earlier, requires only that a school sign up to 
participate with the Department of Education and that they then 
just add loan information to the files that they are already 
sending to the Department via this common origination and 
disbursement system.
    In the midst of the current credit crunch and with daily 
media reports about student loan instability, I think it is 
very important that we help students and their families 
differentiate between Federal and private loans and to reassure 
them that Stafford loans, PLUS loans, and Grad PLUS loans are 
available.
    While we have heard that there have been reports of certain 
FFEL lenders leaving the program, temporarily suspending 
operations, or redlining certain schools due to graduation or 
default rates, this is not the case in the Federal Direct Loan 
program. The Direct Loans are funded as a student entitlement 
from funds borrowed wholesale from the private sector through 
the sale of Treasury securities, and there is never a question 
of capital availability in the Direct Loan program. This is 
different than FFEL in that in that program the lenders are 
entitled to subsidy and default payments if they choose to make 
loans to students.
    The Direct Loan program also is administered by private 
sector contractors through competitively led contracts by the 
Department of Education. These contractors have years of 
experience administering Direct Loans, and indeed many of them 
are also services for the FFEL lenders. Like the FFEL program 
the Department's responsibilities are to oversee and govern the 
administration of both programs.
    In 1994 the Direct Loan program was entirely new. In 3 
years it had one-third of the market and the program worked 
smoothly. Today it has 20 percent of the market, thanks to 
marketing and taxpayer-provided discounts that were offered to 
schools to induce them into the FFEL program and the 
prohibition against marketing of Direct Loans by the 
Department.
    The Department of Education already does have the 
infrastructure to handle an influx of schools into the Direct 
Loan program, as we heard Secretary Spellings indicate earlier.
    Mr. Chairman, I thank you for the opportunity to appear 
before you today and for your support and the support of others 
on the committee for direct lending.
    I would be happy to respond to any questions that you might 
have later.
    Chairman Miller. Thank you very much.
    [The statement of Ms. Johnson follows:]

Prepared Statement of Roberta Johnson, Director of Financial Aid, Iowa 
                            State University

    Mr. Chairman and Members of the Committee: My name is Roberta 
Johnson and I am the Director of Student Financial Aid at Iowa State 
University in Ames, Iowa. Iowa State University is a land-grant 
institution with an enrollment of 26,160. Prior to assuming the role of 
Director of Student Financial Aid at Iowa State University, I served 
for eighteen years in the assistant director and associate director 
positions at Iowa State where I was responsible for student loan 
operations. I have experience in the administration of loans through 
both the Federal Family Education Loan Program and the Federal Direct 
Loan Program. Iowa State University entered the Federal Direct Loan 
Program as a Year One school in 1994.
    Iowa State University's loan Federal Direct Stafford and PLUS 
volume in 2006-07 was $97.6 million dollars and encompassed over 20,000 
separate awards for 14,645 students. Yet we were able to accomplish 
this with only 2 full-time staff members. One of those staff members 
also administers the Federal Pell Grant program, Academic 
Competitiveness Grant, National SMART Grant, and will assume duties for 
the TEACH Grant program in July.
    There were a number of reasons why we moved to Direct Lending in 
1994 and why we remain there today--most notably, we are able to 
provide better customer service to our students and their parents; 
minimize the amount of staff time spent dealing with tracking down loan 
funds or changes; and maximize the predictability of receiving funds 
both for our students and our institution. Our students and their 
parents frequently comment on how easy it is to understand the process, 
that they appreciate always knowing who holds their loan, and that Iowa 
State University provides prompt courteous service when they have 
questions about any financial aid program. Before Direct Lending, that 
was not the case.
    I have included in the attached slides a GAO slide that quite 
accurately depicts what Iowa State University experienced as a 
participant in the FFEL program, dealing with multiple student loan 
players and the contrasting graphic showing how the process works 
today. The Direct Loan Program has been described as Pell with a Prom 
Note. In fact, any school that is currently administering the Federal 
Pell Grant, ACG, or National SMART Grant programs is already 
interfacing the with Department of Education's system for disbursing 
Direct Loans and other student aid, the Common Origination and 
Disbursement (COD) system. To participate in the Direct Loan program 
would require only that they sign up to participate with the Department 
of Education and that they attach loan information to the files they 
are already sending to the Department via COD.
    In the midst of the current credit crunch and with daily media 
reports about student loan instability, it is important to help 
students and their families differentiate between federal and private 
loans and to reassure them that Stafford Loans, PLUS loans and Grad 
PLUS loans are available. While there have been reports of certain FFEL 
lenders leaving the program, temporarily suspending operations, or 
redlining certain schools due to graduation or default rates, this is 
not the case in the Federal Direct Loan Program. Direct Loans are 
funded as a student entitlement from funds borrowed wholesale from the 
private sector through the sale of Treasury Securities. There is never 
a question of capital availability in the Direct Loan Program. This 
differs from FFEL. In that program lenders are entitled to subsidy and 
default payments if they choose to make loans to students.
    The Direct Loan Program is administered by private sector 
contractors through competitively let contracts by the Department of 
Education. These contractors have years of experience administering 
Direct Loans, and indeed many of them also are servicers for FFLEP 
lenders. Like the FFEL program, the Department's responsibilities are 
to oversee and govern the administration of both programs.
    In 1994, the Direct Loan program was entirely new. In three years 
it had one third of the market and the program worked smoothly. Today 
it has 20% of the market thanks to the marketing and taxpayer provided 
discounts FFEL participants offered and the prohibition against 
marketing of Direct Loans by the Department. The Department of 
Education already has the infrastructure to handle an influx of schools 
into the Direct Loan program.
    Mr. Chairman, thank you for the opportunity to appear before you 
today and for your support, and the support of others on the committee, 
for Direct Lending. I would be happy to respond to any questions you or 
the Members of the Committee might have.
                                 ______
                                 
    Chairman Miller. Ms. Bauder.

 STATEMENT OF SARAH BAUDER, DIRECTOR OF STUDENT FINANCIAL AID, 
                     UNIVERSITY OF MARYLAND

    Ms. Bauder. Good morning and thank you for having me here. 
Is this on?
    Chairman Miller. You are on.
    Ms. Bauder. Good. I would like to take a quick moment first 
and say thank you on behalf of all the 6,000 financial aid 
administrators out there for increasing the Pell Grant. That 
$400 difference really does pay for books for a high need 
student in Pell Grants. We really have been fighting to get 
that increase, so thank you to have the opportunity to do that.
    I am the Director of Student Financial Aid at the 
University of Maryland, just a hop, skip, and jump up the road 
here. We have about 35,000 students on campus. And let me break 
that down for you. We have about 75 percent of those students 
file the FAFSA form. Of those students who file the FAFSA form, 
about 90 percent accept their student loan.
    We have about $120 million loan volume. And let me break 
that down further, because loans are a key component to how we 
package financial aid. So about $85 million is the Stafford 
loan, and those are broken out pretty equally between 
subsidized and unsubsidized loans. We have about $30 million in 
the Federal PLUS loans for dependent students, and then about 
$20 million for the Grad PLUS; and then the other $20 million 
is private loans, bridging that gap between the cost of 
education, what we have awarded and what the student can afford 
to pay.
    So, student loans, I give you those statistics to show that 
student loans truly are a large component of what we do in 
financial aid.
    The timing of this hearing actually couldn't be better. For 
the last 3 weeks, and nationally this is happening, we have 
been simulating our packaging, trying to figure out how we are 
going to spend our money for the upcoming freshman class. And 
so what we do is we create algorithms and we put all of our 
pots of money together and we say, okay, here is what we are 
going to do.
    My job as director is to retain and graduate our students. 
Admissions brings in the students. And we have a little bit of 
recruitment responsibility in terms of how we package our aid. 
But the bulk of the responsibility is to make sure we retain 
and graduate. And so that is a large responsibility on any 
director.
    And so what we are doing, and so as we are simulating here, 
here are some events. And I want to give you these events 
because each one is a brick in and of its own. And we are 
building a brick wall against inclusion or accessing to 
education. In and of themselves they are probably 
inconsequential and we can work around them. But as you build 
them together, it creates a wall.
    The first one we noticed is that consolidation loans are 
down. Very simplistically, from a director's perspective, is 
that is a result of having a fixed loan interest rate, not as 
attractive to students. And then also it is not as attractive 
to lenders to actually provide that loan because of the cuts in 
subsidies. That, in and of itself, again is not problematic 
except that since students aren't consolidating our Perkins 
loan revolving fund, the loans aren't coming back in to repay 
that. And so where historically for the last 5 or 6 years we 
have had approximately between $2.5 million and $3 million to 
reimburse in new Perkins loan funding, we have less than 
$200,000. So pretty much it is off the books for Perkins for 
our upcoming class. That is one brick.
    Another one we have is the Work Study and SEOG funds were 
cut nationally $20 million. That is kind of nickel and dime. 
And that results in about a $200,000 reduction in those funds 
for us. Again, very minimal, but when you add it, it becomes 
problematic.
    The third one then is--you know, I read the Wall Street 
Journal every day and headline news are the subprime mortgage 
crunch that we are experiencing. And so you couple that then 
with the cuts in subsidies to lenders and they are scrambling. 
They are trying to figure out how it is they are going to pay 
their portfolio.
    I am blessed. I am at an institution where lenders want to 
lend to my students. And I really, truly appreciate the FFEL 
process and how it has made our institution attractive in terms 
of its default rate. And I say that because not all 
institutions have that benefit. We work well with FFEL.
    The concerns that I have--and there are two indices in 
behavior that we are tracking right now that go along with 
these bricks. And the two of them are the number of appeals 
that we have from parents and students. And so if we put just 
for a second our hat on as a parent and say, okay, I am now 
caught in this subprime mortgage crisis, I am not sure how I am 
going to pay my mortgage, or I may be facing foreclosure. So 
here I have that, and yet Johnny and Susie want to go to 
college. I know my credit score is not quite what it should be.
    Now, the lenders don't want to lend high-risk loans or even 
medium-risk loans. And so if my credit is not pristine in high-
credit worthiness I am not going get that PLUS loan, or I am 
not going to get that private loan. So mom and dad now are 
appealing to our institution.
    So typically what would be what I call ``noise'' in any one 
behavior is now we are paying attention to it. So our appeal 
rate is up about 12 percent while our application rate is up 20 
percent. If none of this were happening I could justify it. I 
am paying attention to it. And I don't have enough longitudinal 
data to sit here and tell you this is a problem in and of that 
one data element.
    The second data element that we are watching is the 
percentage of denials in loans. And historically we just put 
loans together for the creditworthy loans and said here is the 
denial rate. What we are doing now is we are breaking it out, 
looking at PLUS loans, private loans and Grad PLUS loans, and 
what is the percentage. We are starting to see that tilt up. 
And so that is problematic and it is concerning, because I have 
to figure out, come August, when those bills are due, and the 
students are appealing to us, saying I have this delta or I 
have this gap that needs to be fed--oh, I am overtime, I am 
sorry, I will hurry up here--how is it that I am going to pay 
this? Do I get a female handicap because I can talk?
    Chairman Miller. Go ahead.
    Ms. Bauder. Okay. Thank you.
    Let me quickly sum up that we are in the FFEL program. I 
truly appreciate the FFEL program. I don't see it as just a 
program of getting the check to the student, but more a 
holistic program. From the moment the master promissory note is 
signed to the moment the last payment is made, our FFEL lenders 
and guarantors are watching our students. And so they exit our 
campus, those lenders are making sure that loan gets repaid. 
And I have a chart that shows our default rate and how we are 
coordinating that. Thank you. I am sorry for taking more time.
    [The statement of Ms. Bauder follows:]

Prepared Statement of Sarah Bauder, Director of Student Financial Aid, 
                         University of Maryland

    Mr. Chairman and members of the Committee, thank you for providing 
me the opportunity to meet with you today about such an important 
topic. First, I would like to applaud the leadership for increasing the 
Federal Pell grant program to an historic high. As you know, Federal 
Pell Grants provide access and affordability to our highest need 
students. These funds are critical to the retention and graduation 
goals of our students. Thank you so very much.
    As a quick background, I began my career in financial aid in 1990 
as a student employee, advancing to Associate Director of Loan 
Processing at St. Mary's College of Maryland. I then accepted a 
position at the University of Maryland, College Park campus as an 
Assistant Director for Loan Processing, was promoted to Associate 
Director for Operations in 1997 and to Director of Student Financial 
Aid in January 2005.
    Three years ago I had the opportunity to speak with you about the 
federal loan program and am excited to be here today to provide an 
historic perspective of what has happened over that time span. It is 
evident that we are in the calm before the financial storm and I am so 
encouraged that we are here to plan for what may be hard times ahead. 
Current economic conditions threaten the overall health of the federal 
student loan programs. Access, affordability and choice are in 
jeopardy. We need to assure students and parents that loans are still a 
viable source for payment of educational expenses. We need to maintain 
the public confidence in the financial aid programs so that access to 
education is attainable for all students.
    The University of Maryland--a mere eight miles away from the 
Capitol--is home to over 24,000 undergraduate students and 9000 
graduate students. Approximately 75% of all students file the Free 
Application for Federal Student Aid (FAFSA). Of those students, 90% 
receive a federal loan, for a total annual loan volume of about $90 
million. In addition, we have 3400 Federal Pell Grant recipients. We 
have a very diverse population with almost 45% being non-white. As the 
Director of Financial Aid, my job is to provide aid packages which 
assist in the retention and graduation of our student population, with 
an effort to reduce debt burden. Given the broad range of students who 
attend our campus, a 'one-size-fits-all' aid package does not advance 
those goals. Four years ago, we created the Maryland Pathways program 
as a means to provide a debt free education to our highest need, 
Maryland resident students. We currently have over 400 students who 
benefit from this unique program. In 2005, we added to this program by 
implementing a Pell Pathways program. This is the only program of its 
kind nationwide. In this program, we provide additional grant funding 
to students who come from socio-economic disadvantaged backgrounds who 
did not receive the Pell Grant because the student earned too much 
money. Last year, we implemented the Senior Debt Cap, which provides a 
University of Maryland grant instead of loan for those students who 
borrowed more than $15,900 in need-based federal loans. We were able to 
implement these programs without new monies by coordinating funding 
strategies with the State of Maryland and shifting our packaging 
algorithms for the awarding of federal and institutional funding. As 
you can see by the chart below, our loan indebtedness has decreased due 
to these programs.

                                           LOAN GUARANTEES BY PROGRAM
----------------------------------------------------------------------------------------------------------------
                          Loan Program                             Total 2005-06   Total 2006-07    Difference
----------------------------------------------------------------------------------------------------------------
Stafford Subsidized.............................................     $45,287,075     $43,641,028    ($1,646,047)
Stafford Subsidized.............................................     $34,670,529     $33,230,596    ($1,439,933)
PLUS............................................................     $28,887,088     $26,322,797    ($2,564,291)
----------------------------------------------------------------------------------------------------------------

    So how does this impact student loans? Over the last year we've 
witnessed an array of events that has jeopardized the future of student 
loans and subsequently our ability to meet the needs of our students. 
Independently, the events probably would have only caused a ripple; 
however, when coupled together, the sting is felt in all aspects of 
financial aid. The financial markets are challenged by the sub-prime 
mortgage crisis, which has caused investors to back away from asset 
based securities, which are a source of capital for student lenders. 
Couple this with the cuts in subsidies to lenders by Congress and we 
have a formula that equates to lenders scrambling to find funding for 
their student loan portfolios. Consequently, the ability to lend money 
to students and parents is negatively impacted.
    As we enter our peak packaging season, I am concerned about our 
ability to meet the needs of our students for a variety of reasons. 
First, consolidation loans which have historically been a financially 
attractive solution for students have almost disappeared. This in turn 
has significantly reduced the amount of Perkin's loan repayment. Last 
year we disbursed $2.3 million in Perkins loan funding. This year 
(2008-2009), we have less than $200,000 to award to our students. 
Second, the Federal Work Study Program and the SEOG programs were cut 
by 20 million dollars nationally. That translates to a $120,000 
reduction in SEOG and a $50,000 reduction in Federal Work Study for the 
University of Maryland. Overall, we have almost 2.5 million dollars 
less in need based financial assistance to award to our neediest 
students in the Campus Based Programs. Third, due to the sub-prime 
mortgage crisis, home equity is less of a resource for families to 
utilize to pay for the cost of education, as are retirement funds. I 
have concerns as to the availability of funding options for our 
families. Couple these events with lenders having to tighten their 
lending standards, and there are fewer resources available to families 
to pay for college. Our parents borrow, on average, about $30 million 
in Federal PLUS loans, while graduate students borrow about $20 million 
in Graduate PLUS loans. With the overall economic condition, our 
families and students who typically borrow credit worthy loans will 
experience increased denial rates.
    Since we just completed the packaging of our incoming freshman 
class, I think it may be helpful to see the impact of these events on 
an average student. For example, if we superimpose the reduction in aid 
on a packaging scenario for a typical Maryland resident freshman 
student, with a zero dollar ($0) expected family contribution (EFC) 
attending the University of Maryland in academic year 2008-2009, we 
find that students/families may need to borrow an additional $2770 in 
loans (see chart below) as compared to the 2007-2008 academic year.

 
------------------------------------------------------------------------
                                             2007-2008       2008-2009
------------------------------------------------------------------------
Direct Cost of Attendance...............         $17,848         $18,139
  (tuition, fees, room, board, and
   books)
Types of Aid:
    Pell Grant..........................          $4,310          $4,731
    SEOG................................          $1,000            $500
    Federal Work-Study..................          $2,400          $1,800
    Perkins Loan Funds..................          $2,000              $0
    Stafford Loan.......................          $3,500          $3,500
    UM Grant Funding....................          $3,800          $3,800
                                         -------------------------------
        TOTAL funding...................         $17,010         $14,031
                                         ===============================
Potential PLUS/Private loan.............            $838          $3,608
------------------------------------------------------------------------

    With reduced financing options, families inevitably will need to 
borrow more funds to pay for college. Further there are fewer lenders 
providing student loans. One concern circulating among my colleagues is 
the disruption in the student loan industry as lenders withdraw from 
the FFEL program. This creates an administrative burden as lender lists 
need to be revised and students need to be informed to choose another 
lender. In addition, lender policies are changing. For schools serving 
high risk students, this may impact their ability to borrow a student 
loan. As of today, lenders representing 10% of Stafford and PLUS loan 
origination volume and 30% of consolidation loan volume have either 
suspended or discontinued their participation in the student loan 
programs. The University of Maryland never denies choice of lender to a 
student, which is why we work with over 80 different lenders. As 
lenders leave the FFEL program, we feel the administrative impact. I am 
somewhat nervous about the dilemma we are facing in the student loan 
industry and the availability of funds for our students and the 
potential disruption this could cause our families.
    We review our lender lists every year. As a historical perspective, 
we've chosen lenders who have quality customer service, advanced 
technology, excellent pricing, and who advance the mission of our 
University. Due to the cuts in subsidies, the zero fee loans our 
students benefited from are disappearing. However, FFEL lenders do 
advance our mission. One of the missions of our campus is to provide 
educational services in every aspect of campus, not just in the 
classroom. The University of Maryland has thoughtfully chosen to 
provide Stafford and PLUS Loans through the FFEL program because of the 
value added services provided to our students. Our guarantee agencies 
provide educational information to our students on default prevention, 
debt management, identity theft, and financial planning, to name a few. 
With continual and consistent communication, students understand the 
impact of borrowing, and the consequences for non payment. This 
knowledge gives our students life skills they will utilize long after 
they receive their diploma. Because of our partnerships with FFEL 
lenders and guarantors, our default rate has dropped consistently over 
the last seven years. In 2000, our default rate was 2.6%; in 2006 it 
was 1.2%. For University of Maryland students who borrow utilizing 
American Student Assistance, the default rate is .6%.


    The University of Maryland could not have provided those incredible 
repayment percentages without the assistance and knowledge of the 
lending experts. Since schools may face sanctions if their cohort 
default rates exceed certain levels, a lender and guarantor's 
effectiveness in working with borrowers to ensure that loans are repaid 
is a viable consideration when an institution chooses a loan program. 
Further, last year I decided we should conduct one-on-one counseling 
for students who reached a specific threshold of indebtedness per grade 
level. Our lenders very quickly were able to run reports for us to 
assess the indebtedness of our students. By profiling our students and 
providing them with individual counseling, we are able to further 
advance the mission of the University in educating our students.
    In summation, we need to take steps now to prevent the disruption 
to the FFEL student loan program. We need to assure our students and 
families that student loans have been, and will continue to be, a 
resource for them. I thank you for having me speak with you today.
                                 ______
                                 

STATEMENT OF CHARLIE C. SANDERS, JR., PRESIDENT AND CEO, SOUTH 
               CAROLINA STUDENT LOAN CORPORATION

    Mr. Sanders. Mr. Chairman and Ranking Member McKeon and 
committee Members, thank you for inviting me to come before you 
and for holding a hearing to discuss this very important issue. 
Prior to my role at South Carolina Student Loan, I was a 
municipal bond trader in the securities industry as well as 
director of investments and debt for our State Treasurer.
    South Carolina Student Loan was created by our general 
assembly in 1973 as a nonprofit private entity. And since our 
inception we have provided nearly $7 billion in higher 
education loans to over 423,000 families throughout our State. 
Our nonprofit mission is to provide programs of financial 
assistance to enable students to pursue and achieve their 
educational goals. Without this financial assistance, families 
in South Carolina would not have been able to pursue their 
education dreams.
    For the current academic year alone, we have provided over 
$600 million in loans, of which $63 million are private loans. 
I can tell you the current market situation has had an impact 
on our ability and that of my colleagues in other States in 
securing the necessary financing to provide student loans. The 
problems in this market are not due to credit risk but, rather, 
liquidity concerns. To repair the marketplace it is necessary 
to inject liquidity and restore confidence, and our Federal 
Government has this ability.
    In South Carolina we have almost $3 billion in outstanding 
student loan bonds. And of that, approximately 60 percent are 
in auction rate bonds. In February the auction rate market 
collapsed. And in South Carolina alone, we have had 28 failed 
auctions just over the past several weeks. And we are now 
having to pay rates of more than 7 percent as compared to 3 to 
4 percent just a short time ago. Some of my colleagues in this 
market are paying rates as high as 18 percent at a time when 
the statutory yields we earn on FFEL loans are roughly 4-\1/2\ 
to 5 percent. Therefore, most lenders are experiencing a 
negative return on their funds.
    Because of this situation, we in South Carolina have been 
attempting to refinance our auction rate bonds into some other 
form of financing vehicle since October, and it usually takes 
about 2 months to do a financing. But we have experienced 
difficulties in securing this financing due to the apprehensive 
position of rating agencies, liquidity providers and investors.
    The uncertainty of financing creates a situation where my 
organization and many of my peers are unable to commit to 
funding the same volume of loans we have in the past, if any 
loans at all. It has been reported that several lenders have 
suspended new loans, and I expect to see more announcements 
unless the financing situation improves substantially. This 
will certainly create access issues. The current market 
situation directly affects what we can do to serve students and 
families in our States. The FFEL public-private partnership has 
served students and families well for over 40 years and 
provided critical services.
    If my organization ceases to be a partner in the FFEL 
program, services provided by our 230 dedicated and service-
minded employees would be unavailable to our citizens. These 
programs include financial literacy, college and career 
planning, debt management, as well as teacher and military 
forgiveness programs.
    We are also partnering with our State Department of 
Education and several other State agencies in sponsoring an 
education and workforce development Web site serving over 
600,000 students and a drop-out prevention program at 16 of our 
secondary schools.
    Much has been discussed about a Lender of Last Resort 
program being the solution. It is not in my view the answer to 
this issue, as it is a capital markets problem and the Lender 
of Last Resort does not solve these issues. Instead I believe 
the most seamless solution for students, families and schools 
is limited and timely Federal financing to help restore 
confidence in this market.
    The Federal Reserve took action just this week for the 
purpose of injecting both liquidity and confidence into the 
mortgage market. It is also appropriate for the Federal 
Government to take necessary steps to restore stability in this 
market. Therefore, I respectfully ask the Secretary of 
Education to continue to monitor the situation and review 
access issues using authority currently available.
    At the same time it would be prudent for the Secretary of 
Treasury to take action as requested by many Members of 
Congress, including my Representative, Congressman Wilson, and 
others on this committee, to serve as the backstop for auction 
rate bonds and provide financings which would restore stability 
and confidence in this market. If action is taken immediately 
to address these issues, we may be able to avoid the possible 
shortage of funds for this next academic year.
    Thank you for this opportunity to address you and I will be 
happy to answer any questions.
    Chairman Miller. Thank you very much.
    [The statement of Mr. Sanders follows:]

Prepared Statement of Chuck Sanders, President and CEO, South Carolina 
                        Student Loan Corporation

    Introduction: Mr. Chairman, Ranking Member McKeon, my name is Chuck 
Sanders and I am the President and CEO of the South Carolina Student 
Loan Corporation. Thank you for inviting me to come before you and for 
holding a hearing to discuss this very important issue--ensuring the 
availability of Federal student loans for students and families both 
near and long term.
    Prior to my role at South Carolina Student Loan, I was a municipal 
bond trader in the securities industry as well as Director of 
Investments and Debt Management for the South Carolina State 
Treasurer's Office. Thus, I have long term experience in both student 
loans and municipal financing. I would like to tell you a bit about our 
student loan program in South Carolina.
    The South Carolina Student Loan Corporation was created by the 
South Carolina General Assembly in 1973 as a private, non-profit entity 
to administer the Federal Family Education Loan (FFEL) program in South 
Carolina. Since our inception, we have provided nearly $7 billion in 
higher education loans to over 423,000 families throughout the state of 
South Carolina. Our non-profit mission remains unchanged--to provide 
quality programs of financial assistance that enable eligible students 
and parents to pursue and achieve their educational goals. Without such 
financial assistance, families in South Carolina would not have been 
able to pursue their postsecondary education dreams. For the current 
academic year (2007-08), we have provided over $600 million in 
educational loans.
    As a not for profit student loan provider and issuer of student 
loan bonds, I can tell you first hand the impact the current market 
situation has had on our ability, and that of our peers in other 
states, in securing the necessary financing to provide access to 
student loans. While the immediate issue is that of a skittish credit 
market and the need for liquidity and confidence to return to the 
market, the implications go beyond direct financings. It is important 
to note that the situation we find ourselves in is a collateral affect 
of a much broader credit market disturbance instigated by activities in 
the sub-prime mortgage market. It is not because student loans were 
poorly underwritten or issued to ineligible or undeserving borrowers. 
Furthermore, the credit quality of this asset remains high. The 
problems in this market are not due to credit risk, but rather 
liquidity concerns. To repair the marketplace, then, it is necessary to 
inject liquidity and restore confidence. The Federal Government has the 
ability to help stabilize this irrational marketplace.
    As you know, we provide a myriad of programs and services for 
students in a holistic approach to assisting students and families. 
Much of this is also at risk if the current market situation does not 
turn around. I will discuss that more directly later in my testimony.
    Issues in the current market: In South Carolina, we have about $3 
billion in outstanding student loan bonds and of that approximately 60% 
percent are in auction rate bonds, with the remainder in longer term 
variable rate securities. Currently, across the broader student loan 
market, industry reports indicate that of the roughly $350 billion in 
outstanding FFEL program loans, about $80 billion are financed via 
outstanding auction rate securities. Most of this auction rate debt was 
issued by non-profit lenders, because this mode of financing was our 
best option to keep borrowing costs low. It worked well for 15 years in 
providing us with a consistent and predictable source of low-cost 
capital.
    Late last year, it became clear that the problems in the sub-prime 
mortgage market were having a negative ripple effect on the student 
loan capital markets. Initially, this meant a significant increase in 
financing costs, but the market remained intact. In the second week of 
February, however, the auction rate market collapsed when broker-
dealers--who have their own balance sheet issues--were no longer able 
to sustain the market by buying all the student loan securities that 
investors wanted to liquidate. Consequently, a raft of auction failures 
occurred, as sell orders vastly outpaced buy orders. This meant that 
some buyers had to hold the asset and were unable to sell for cash. 
This was a crushing blow, since the investor base for these securities 
existed because the asset has always been viewed as highly liquid. Once 
liquidity was no longer assured, many of these historic investors no 
longer saw a reason to be in the market. That investor base has yet to 
be replaced, and may never be replaced. Thus, the student loan auction 
rate securities failure rate has in a relatively short time gone from 
zero percent to nearly 100 percent.
    In South Carolina, we have had 28 failed auctions over the past 
several weeks and are now having to pay rates of more than 7 percent as 
compared to 3 to 4 percent just a short time ago. Some of my colleagues 
in this market are paying rates as high as 18 percent, at a time when 
the statutory yields we earn on FFEL program loans are roughly 4.5 to 5 
percent. Several news reports have described how individual nonprofit 
lenders are losing millions of dollars on their loan portfolios each 
month. The point here is that many lenders are seeing a negative return 
on funds and they do not have other sources of capital to draw upon. 
This means that they can only continue under current market conditions 
for a circumscribed period of time. While this time period will vary 
for each lender, the basic dynamic is the same.
    Because of this situation, we at South Carolina have been 
attempting to refinance our auction rate debt into another financing 
vehicle since October. We are experiencing difficulties in securing 
this financing, however, due to the apprehension of rating agencies, 
liquidity providers and investors.
    In the meantime, the uncertainty concerning whether these 
refinancings can be accomplished--and at what price--creates a 
situation where my organization, and many of my peers, are unable to 
commit to funding the volume of loans we have in the past--or in some 
cases, any loans at all. Recently, of course, it was reported that the 
Pennsylvania Higher Education Assistance Agency and others have 
suspended new FFEL program loan originations, and I expect to see more 
such announcements in the coming months, unless the financing situation 
improves substantially.
    Impact on Students and Families: Without some relief to this 
situation, I believe you will see additional loan providers 
reevaluating their participation in both the Federal and non-federal 
loan programs. This will undoubtedly create access issues for some in 
both the FFEL program and non-federal lending. The South Carolina 
Student Loan Corporation provides both FFEL and non-federal loans. For 
many students, borrowing to finance their education is something they 
must do and we want to provide low cost loans to assist those students 
and families that need this assistance. We always encourage Federal and 
State grants and scholarships first. For some students, however, the 
non-federal loan is necessary to bridge the gap between federal loan 
limits and their cost of attendance. Both FFEL and non-federal loans 
are at risk due to this current market situation. While private lending 
has received some criticism, it often makes the difference between the 
dream and the reality of a higher education.
    While disruption may not be widespread initially, the potential is 
there for many more students to soon be without their provider of 
choice. To this point, students and their families have benefited 
greatly from being able to shop around and find the best deal possible 
to them for financing their education. There are also genuine access 
concerns. Many students may soon be without access to non-federal loans 
that they need to fill the gap left by federal loan limits. And access 
to even FFEL program loans will become a greater concern with each 
passing month that the market remains in its current state.
    The current market situation directly affects what we can do to 
serve students and families in our states. The FFEL program has served 
students and families well for over 40 years. The public-private 
partnership has led to innovation and commitment by loan providers to 
supply low cost loans and critical services that help students pursue 
and complete a higher education. While we can do little or nothing 
about college costs, we can ensure students have efficient and low cost 
financing alternatives, and many other services to meet their needs. If 
my organization ceased to be a partner in the FFEL program, not only 
would a local mission-based organization vanish and 235 dedicated and 
service-minded employees be out of a job, but critical services would 
also be unavailable to our citizens. These include financial literacy 
programs, college planning, career planning, outreach, debt management 
programs, teacher and military loan forgiveness programs, and training 
opportunities for higher education professionals, to name a few. Our 
organization in South Carolina is both required and honored to serve 
students at every school in our state. Our absence would likely produce 
a disparate impact on different institutions within the state, with 
students at some schools facing a greater restriction of choice than 
their peers at other schools.
    Much has been discussed about the Lender of Last Resort Program 
being the solution. It is not, in my view, the answer to the issue 
before us. This is a capital markets problem and the Lender of Last 
Resort does not solve the market problem to ensure students continue to 
have choice in financing their education. The situation in which we 
find ourselves is not loan providers being unwilling to provide funds 
to students, it is loan providers being unable to provide loan funds 
due to the liquidity issues in the market place. While it is prudent 
for the Department of Education to review current law and its 
administrative processes, it is far more prudent for us all to work 
together to do all we can to make sure such a drastic measure is not 
needed. Students should be able to continue to choose the loan provider 
of their choice, as choice is a fundamental tenet of the FFEL program. 
We want to work with the Congress and with Treasury and other Federal 
agencies to avoid a widespread disruption in both the federal and non-
federal student loan programs.
    Ensure Choice: The title of this hearing is ensuring the 
availability of Federal Student Loans. Along with availability, it is 
important that schools and students continue to have choice in meeting 
their higher education financing needs. These programs have become more 
effective overall by allowing choice. Colleges and universities are in 
the process now of packaging financial aid for the upcoming academic 
year. We should not ask institutions that have selected the program 
that best fits the needs of their students to completely change 
midstream. It is both necessary and possible to do what is necessary to 
find a common solution to the market issues before us. FFEL program 
borrowers may have already chosen their loan provider and requiring a 
move to the Direct Lending Program will be thwarting that choice. 
Students, parents and institutions are better off with the ability to 
work with the local, community-based or national organization they 
desire. If the Direct Loan program is indeed their choice, it should be 
for reasons other than having no other option at all. While Direct 
Lending may be the choice of some, it is not for all and we should be 
putting students first and shoring up their ability to finance their 
education in a manner that best meets their needs. We want to continue 
to work with our partners in the higher education financing community 
to provide the means for students and their families to pursue their 
education without concerns regarding student loan availability.
    Conclusion and Recommendation: It is clear that this situation is 
not a byproduct of poor credit quality or flawed underwriting. Issuers 
are in this position due to no fault of their own, but rather as an 
unintended consequence of a larger market issue. I believe strongly 
that timely and limited federal intervention is warranted in this case 
to restore confidence in this quality asset and the student loan 
marketplace. The Federal Reserve took action just this week to inject 
both liquidity and confidence into the mortgage market. It is similarly 
appropriate and justified for the Federal Government to take the 
necessary steps to restore stability in this market. Such measures 
would have positive, immediate and far-reaching implications for 
students, families and our country.
    Therefore, I respectfully ask that the Secretary of Education 
continue to monitor this situation, utilize her existing authorities, 
and review access issues facing students across the country. At the 
same time, it would be prudent for the Secretary of Treasury to take 
action, as requested by many members of Congress, including 
Representative Wilson and others on this committee, to serve as a 
backstop for auction-rate bonds, making clear the Government's 
commitment to students across the United States. Finally, I ask that 
members of this committee work with their colleagues on other 
committees of jurisdiction.
    We need to restore not only confidence in the markets, but also the 
confidence of students, institutions of higher education and student 
lending partners. In the spirit of cooperation, we can work together 
during this unexpected and extraordinary time to do what is necessary 
and what is right. Action taken immediately to address these market 
issues could prevent a potential shortfall of loan funds to students 
for the upcoming academic year.
    I thank you again for the opportunity to address the Committee and 
appreciate the willingness of each of you to be here to take the time 
to hear from me and my colleagues about this most important issue. I am 
happy to address any questions you may have.
                                 ______
                                 
    Chairman Miller. Thank you to all of you. You have all 
raised I think very important issues and from an array of 
perspectives. I think it is helpful to the committee.
    Ms. Muilenburg, let me, if I might begin with you, thank 
you for your testimony and certainly for your written testimony 
as it is laid out. A number of us asked the Secretary about 
what she has been doing with respect to the guaranty agencies. 
Apparently there has not been a face-to-face meeting; is that 
correct?
    Ms. Muilenburg. That is correct.
    Chairman Miller. Your contact with the Department has been 
what? I don't mean you, I mean the agencies.
    Ms. Muilenburg. The agencies individually have contacted 
the Department to offer to come in and sit down. The President 
of our trade association, the National Council of Higher 
Education Loan Programs, has repeatedly offered to the 
Department to bring in a group of guarantors. We would bring in 
the chief financial officers, the operational folks, that would 
be able to sit down and talk about how to implement a program. 
The response thus far is they have appreciated the offer of 
assistance, they are monitoring the situation, and they will be 
in touch.
    Chairman Miller. As I understand it, in 1998, what was done 
is the agencies and the Department were brought together and 
they worked out essentially a legal agreement for how they 
would then proceed if necessary, and it turned out not to be 
necessary. But no such agreement has been suggested here to 
date?
    Ms. Muilenburg. Not thus far, sir.
    Chairman Miller. Is that agreement--or maybe your attorneys 
want to answer for the record--but I mean, is that agreement 
essential to proceeding?
    Ms. Muilenburg. It is essential if we are going to have to 
proceed using Federal advances. That was the--the key 
difference between the way the Lender of Last Resort program 
has worked to the extent it has been utilized in the past is it 
has been on an individual basis where there are students at a 
particular school in isolated circumstances who have not been 
able to get loans. In each of those cases guarantors have been 
able to find lenders to make those loans which would be 
considered----
    Chairman Miller. Those were very small. Mr. Wozniak and Mr. 
Sanders suggest that this problem is not one of isolated 
individual cases.
    Ms. Muilenburg. That is right. I mean, in USA Funds' case, 
we have guaranteed $1.8 million in Lender of Last Resort loans, 
the last being in 1998. And in all of those cases we were able 
to find lenders that would actually make those loans and we 
stood behind them as the guarantor.
    But if we are talking about a much more widespread access 
problem, clearly Federal advances will be necessary, because 
the lending partners to whom we turned in the past to make 
these loans are obviously the ones that are potentially having 
the problem accessing the capital markets.
    Chairman Miller. Well, it is very disappointing to hear 
that that outreach by the agencies is essentially--I don't know 
if it has been rebuffed or ignored, but it hasn't happened. And 
I think we heard here, from members on both sides of the aisle, 
we are trying to have confidence that this system will be 
operational, if necessary. So I appreciate your testimony. I 
will come back to you.
    Mr. Wozniak, Mr. Sanders outlined his living with--and I 
have two sons who are University of South Carolina Gamecocks by 
the way--he is living with what you described in the auction 
market. He has also suggested that if the Fed thought this was 
good for home mortgages, why wouldn't they consider it for 
student loans? He describes that as--and I think you did also--
that this is a liquidity problem. People who thought they were 
going to be able to go and sell these assets and become 
recapitalized, liquid, to make additional student loans have 
now found out that that market has been closed to them, as 
apparently it was closed to municipal markets and utilities and 
the Port of New York and New Jersey and others. So this is 
spread across good paper, so to speak.
    Do you want to comment on what Mr. Sanders said?
    Mr. Wozniak. I think that is correct. And that is one thing 
over the--one thing to recall as we look through this is that 
the underlying collateral, the students themselves and parents, 
have actually--there has not been a material difference in how 
the payment has been coming in. So it is not a widespread 
subprime issue. It is actually the case that the collateral has 
been there performing in a very reasonable fashion.
    So it is more of a liquidity and confidence issue in this 
process, which would hopefully be easier to work ourselves out 
of because we have collateral that is favorable collateral. It 
is just that in this type of market scenario it is more 
difficult.
    Chairman Miller. But in this market, I mean that 
collateral, 97 percent guaranteed, is treated----
    Mr. Wozniak. Well, you know, there is the guarantee side 
and there is the spread side. And the situation is that because 
interest rates have risen so high that is the difficulty.
    Chairman Miller. That is the 100 basis points that you 
talked about?
    Mr. Wozniak. That is correct. It would require far too much 
collateral. It is kind of like the old joke of how do you get 
$1 million from the stock market.
    Chairman Miller. Mr. Sanders has suggested what we have 
been talking about to date is that we are preparing a standby 
authority so that we have, as we understand it, we have access, 
or the Secretary would have access to the Treasury. He is 
suggesting that if you went out and purchased some of those 
loans, that these entities that have traditionally provided the 
loans for FFEL would be able to recapitalize some portion of 
that.
    Mr. Wozniak. If there is some means, right. If there is 
some type of means providing some type of liquidity process--
and that could happen in a variety of ways--that would help 
free up the market; that is correct.
    Chairman Miller. Does that have an impact on the timetable 
in which the credit markets might come back to something that 
we saw as normal, or is the auction market gone?
    Mr. Wozniak. The auction market has--at this point it can--
the auction market has always operated in a tremendous way on 
confidence. And from a confidence standpoint I would say that 
when you look at all the auctions that have gone before, and 
they had all gone fine, and the fact that--and it has even gone 
through some very difficult times and was able to be resilient. 
At this point it would be, I think, each of the issuers--
virtually every issuer that I know wants to get out of them, 
and they are not necessarily looking at using that as a 
financing tool.
    Chairman Miller. Okay. We will come back to that in the 
next round.
    Mr. McKeon. We have a vote on, but we are going to take Mr. 
McKeon's line of questioning and then I think we will see what 
time it is.
    Mr. McKeon. Thank you, Mr. Chairman.
    Mr. Wozniak, do you believe that we have a crisis on our 
hands when it comes to ensuring that all students will be able 
to obtain enough loans through the Federal and nonFederal bank-
based programs to pay for college next year, and why or why 
not?
    Mr. Wozniak. I would say yes, we have $80 billion of 
outstanding auction securities that issuers are trying to 
refinance. There is probably another $70 billion of loans that 
are sitting in the short-term facilities I was talking about. 
That is $150 billion backlog. And it is one of those situations 
that if your house is on fire you need to kind of fix that 
before talking about the addition.
    So as you look in the current process of how to provide, it 
would seem that there is likely to be, when you look at the, 
facts some type of access issue if everything stays where we 
are.
    Mr. McKeon. Thank you.
    Mr. Sanders, have you had to scale back any of your 
borrower benefit programs or value-added services that you 
provide to students or schools, and can you describe what has 
been scaled back and what led you to that point?
    Mr. Sanders. Yes, sir. We have actually already changed our 
borrower benefits related to our consolidation loans. We are 
making very few consolidation loans at this point. Also in the 
private loan part, we actually are having to increase our 
credit standards to have higher-quality loans which actually 
will reduce our volume roughly 20 percent. And we are also 
raising the interest rates on those private loans.
    The reason for doing that is if the markets do recover at 
some point in the future, we are going to have to have higher 
credit standards in our portfolio in order to finance it. So, 
yes, sir.
    Mr. McKeon. Thank you very much.
    Ms. Bauder, in your testimony you had mentioned the 
administrative costs associated with updating your preferred 
lender arrangements and staying on top of what lenders are 
still in the program. Given those additional costs, why will 
you choose to stay in the FFEL program rather than switch to 
the DL program?
    Ms. Bauder. Two main reasons. One is the mission of the 
university is about education. Our president continually says 
regardless of whether you are in the classroom or whether you 
sit in an office, you educate students. And so to that end, we 
partner with vendors and guaranty agencies that have that same 
mission in mind.
    You know, student loans are usually the first time a 
student has an introduction to debt. And so when you are 
thinking about debt, you have to think about it in terms of a 
life skill. What are we teaching them from the moment they 
borrow to the moment they are actually done repaying? And so if 
we think about student loans only as receiving a check, then we 
minimize the entire program. It is important we want to get our 
money.
    I think Roberta was talking about the ease of the direct 
lending program. I will mirror that with FFEL. It is an 
incredibly good culture to be in. We have 1\1/2\ employees that 
operate the FFEL program. To switch into direct lending is not 
an easy switch. We are talking about a culture here. We are 
talking about system changes. It would take us probably a year 
so that it would be transparent to the student to move over 
into direct lending. We would have to notify our software 
providers what we are doing. We do do PELLs and we do have COD, 
Common Origination and Disbursement, as Roberta was talking 
about, but it is not an easy switch. Communication on the Web. 
I mean I could go into my--put my operational hat on and give 
you the numerous amounts of if we didn't do it correctly, the 
disruptions that would fall onto the student. But the main 
thing is we really want to educate our students.
    Our default rate has gone down significantly because I am 
able to pick up the phone and call a guaranty agency or a 
lender and say, I want to profile my students; could you tell 
me for all of our sophomores if they are at a $15,000 
indebtedness, I would like to know their names. I don't have 
that capability on campus right now to do that. So they can do 
that.
    We can call them in on a one-on-one basis and start 
counseling them and say, Do you understand this is the 
repayment you are going to end up with? Do you understand the 
difference between a want and a need? Are you really borrowing 
what you need or are you borrowing for something else? That is 
important. That is a life skill that we are training our 
students on so that when they exit, you know, when they get a 
car, a mortgage, or a credit card or whatnot they are actually 
planning for their future.
    Mr. McKeon. That brings up a point that I have been very 
concerned about. The Secretary said that she could probably 
double their capacity. So if they are doing 20 percent of the 
loans now, they could probably double that. I don't know if 
they meant they could do that by next summer or fall, or if it 
will take a year or two. The problem is right now. It may fix 
itself next year.
    I mean, liquidity confidence could come back in maybe. 
Sometimes an election gives people new change, new start. It 
builds up confidence. But I am concerned about next summer and 
fall. And if it takes a year to switch to direct lending and if 
you have a lot of schools trying to do that all at one time, I 
am very concerned about the Department's capability of handling 
that.
    So thank you all for being here and for your testimony. I 
think this has been a very good hearing and I think it is very 
timely, very important, and I hope it causes some real focus on 
the potential problem at hand.
    Thank you Mr. Chairman.
    Chairman Miller. Thank you. I think--I mean, we will go 
back and look at the Secretary's testimony. I think it was she 
could double it relatively quickly, I mean like overnight. 
Beyond that was a longer time.
    Mr. McKeon. She didn't say a time.
    Chairman Miller. Well, we will ask the Secretary for 
clarification, because it is very important to this hearing 
whether or not she has the capacity to do that, to go from 30 
percent to 60 percent or whatever, and in what time frame. 
Again, that is what we are trying to sort out in this hearing.
    We are going to go vote and we are going to recess here for 
a few minutes, and then we will come back. Members expressed 
interest in asking questions and I have another round. And the 
challenge is, can I get to the floor in 36 seconds?
    [Recess.]
    Mr. Kildee [presiding]. The committee will reconvene, and 
the Chair recognizes the gentleman from New Jersey, Mr. 
Andrews.
    Mr. Andrews. Thank you, Mr. Chairman. Thanks to the panel 
for your outstanding presentations and for your patience in 
waiting for us to get back. Thank you very much.
    I have heard some points of consensus here this morning. 
One is that we want students to borrow less and get more 
scholarships. I think we all start from that. The second is 
that we want a healthy FFEL program and a healthy Direct Loan 
program. And the health of the FFEL program I do think depends 
upon a ready and willing and able Lender of Last Resort. We 
have got to get that in gear if it is needed on a large scale.
    And then I think it is also a consensus that students who 
have not yet exhausted their Federal resources to go to school, 
and have a gap, should exhaust their Federal resources. We 
should educate them about that and let them know before they go 
into the private loan markets.
    But we do have a situation where a significant number of 
students after they have exhausted those Federal resources, 
after they have gotten all the scholarship aid they can, have a 
significant gap.
    And, Ms. Bauder, I think you have given us a great example 
of that in your written testimony where you hypothesize a 
first-year student at the University of Maryland, State 
resident, no parental contribution, and he or she would be 
$3,608 short of the package that they need.
    I think you can tell that story about a student at a NAICU 
private college or university where the tuition is probably 
twice as high. You can tell that story about a student at a 
career school or technical program where you have high tuitions 
very often as well.
    What ideas do the members of the panel have as to how we 
should approach that problem? And, again, I am hypothesizing, 
the student who has exhausted their scholarship aid, exhausted 
their Federal resources, has a gap between the money they need 
and the money they have and has to turn somewhere. My sense is 
that they are the classic subprime borrower, that the prospect 
of attracting private capital for them is a very difficult 
prospect indeed.
    And also, I think I have this right, and I think the 
Secretary may have inadvertently stated this, we can get the 
Lender of Last Resort program 100 percent right, but it doesn't 
change the loan limits, right? You can go as high as you go, 
and that is it? So what ideas do the members of the panel have 
for us as to how we can address the needs of that student.
    Ms. Johnson. I think one of the issues was one that Sarah 
alluded to in her testimony. And that is the fact that with the 
Federal Perkins loan program we are seeing some drastic 
reductions on our campuses as a result of a couple of different 
things. One is that the influx of cash that we experienced into 
our revolving fund as a result of consolidations is dried up, 
because there is really no need for students to do a 
consolidation anymore when the interest rate on the Stafford 
loans is higher than what it is on their Perkins loan.
    Mr. Andrews. I completely embrace that. If I were writing 
the budget myself, I would have a much higher level of Perkins 
number than we do. I think the reality is, there is a 
likelihood we will operate on a CR around here until there is a 
new President. I am not saying that is going to happen, but I 
bet it does. And that means we are going to be at something 
like the present level in Perkins, so it is not going to be a 
whole lot of new money in Perkins. I wish that weren't true but 
I think it is. So what else do we do?
    Ms. Muilenburg. I think you probably have to think at this 
point about increasing loan limits. It has been under 
discussion in previous higher ed bills, and it hasn't been done 
I think largely due to cost considerations.
    Mr. Andrews. How do we pay for that?
    Ms. Muilenburg. Well, you could add unsubsidized loan 
eligibility, which my understanding is not a cost item in 
either FFEL or direct lending, and to provide some additional 
capacity.
    Mr. Andrews. I am not sure about that. I think that it is 
not subsidized in terms of the outlays, but if there is a 
guarantee attached to it. Are you proposing a guarantee be 
attached to it?
    Ms. Muilenburg. That it would be available in both 
programs.
    Mr. Andrews. Well, I think CBO would attach a number to 
that. So assuming it did, where do we look for resources to pay 
for an extension of loan limits? Welcome to the Congress.
    Ms. Muilenburg. I fully understand. We are well aware of 
the cost constraints that you all face.
    Mr. Andrews. And you do understand one sort of arcane 
technical point, but it is a very big deal. The way things work 
around here is if we look for offsets, we need to find them 
within our own little universe here of programs. And we really 
only have three things. We have the Pension Benefit Guaranty 
Corporation, we have the School Nutrition program and we have 
student loans and that is it. And we can't take the money out 
of the Iraqi budget surplus. They have a budget surplus in 
Iraq. We can't take it out of agriculture. We have to find it 
within the four walls of our own jurisdiction, which is not 
easy.
    Ms. Bauder. Could we talk about ACG, SMART and TEACH?
    Mr. Andrews. I'm sorry, could you put your microphone on? 
And my time is expired.
    Ms. Bauder. So I can't?
    Mr. Andrews. Well, I am sure the Chairman will let you 
quickly answer the question; not to speak for him, but may she 
answer my question?
    Chairman Miller [presiding]. Sure.
    Ms. Bauder. Okay. Thank you. ACG, SMART and TEACH are very 
cumbersome and costly to administer. I don't know if there is 
any--and I am totally brainstorming--I don't know the back end 
of how all the financing works, but taking those funds and 
putting them back into a program that is very easy to 
administer.
    Mr. Andrews. Which programs are you saying?
    Ms. Bauder. Academic Competitiveness grant, SMART and now 
the new TEACH program.
    Mr. Andrews. If I can just bore you one more time with 
details. But I think most of those fall into what we call the 
discretionary spending world. I don't think they are mandatory. 
Am I right about that? Okay, well, that gives us something. 
Although, you understand, one of the great glories of governing 
in tight fiscal times is that anytime you take a dollar away 
from one thing, you generate opposition to it.
    But listen, we would welcome your ideas. It is a tough 
problem, but we welcome your ideas. So I think we all agree, as 
the Secretary said, we want to educate students to get every 
last Federal dollar for which they are eligible so they don't 
have to go to the private market if they don't have to.
    Chairman Miller. I think Mr. Sanders wanted to comment.
    Mr. Sanders. Mr. Chairman, I was going to say that if the 
Federal Financing Bank was to come in and do some kind of 
financing--currently they invest in Treasurys which are below 2 
percent--but if they were to provide some type of financing 
based off, say, 3-month LIBOR plus a spread, they would be 
earning somewhere in the 3\1/2\ percent range. So it would not 
be a cost, it would be actually an earnings to the Federal 
Government.
    Mr. Andrews. What default rate are you factoring in on 
that?
    Mr. Sanders. Those are with Federal loans I am talking 
about.
    Mr. Andrews. Okay. I appreciate that thank you.
    Chairman Miller. Mr. Souder.
    Mr. Souder. Thank you Mr. Chairman. I apologize for being 
late to the hearing. I was able to hear the original opening 
statements of Secretary Spellings, and all this panel's 
testimony, as well as your and Mr. McKeon's questions due to 
the wonders of C-Span. But in between there, I had the mayor of 
Fort Wayne, the newly elected mayor who was here for his first 
visit to D.C. since being elected mayor, and we had a few 
things we needed to do that were local in addition to national.
    But one of the things that came up that I wanted to ask Ms. 
Muilenburg--and if anybody else has any comment with this--
there were some references made, but I missed some of the more 
intense discussion on this, in the first panel, of the 
difference in trying to account by university or college if 
they run into shortage of funds as opposed to systemwide.
    As the Chairman knows and as most of you who follow the 
issue, I am a strong advocate for nondirect lending. I believe 
the private sector has gotten the loan rates down. I believe 
that they service the students better.
    I thought Ms. Bauder did a terrific job in laying that out 
in hers, in trying to make sure that people and our students 
have access to education even with the uncertainties. And if we 
start to get in a pickle here, I don't want to have to throw 
out the baby with the bath water, so to speak, and have the 
Federal Government wind up at the end expanding their powers, 
to the disservice of students and the disservice of the 
taxpayers, because this system has worked better. At the same 
time, clearly the Federal Government may have to step in. And I 
was trying to sort through what did it mean precisely if they 
do it by college or university as opposed to systemwide?
    Ms. Muilenburg. What we were recommending, Congressman, is 
a system whereby a school would be able to be certified as a 
Lender of Last Resort school and that we would not have, as 
guarantors, to force students to go through the hoop of going 
to two lenders and being turned down by two lenders before 
being able to access an LLR loan.
    So the concept would be an institution-wide eligibility for 
Lender of Last Resort services. And, clearly, in the situation 
where there would be a widespread access, we would need Federal 
advances in order to make those loans available. Does that 
answer your question?
    Mr. Souder. I believe so. I want to do a follow-up with Ms. 
Bauder. When you were talking, you said about the difficulty, 
and then it came up, the question of if all of a sudden people 
switched. Would the doing it school by school resolve some of 
that question? In other words, at least it wouldn't force 
everybody into that type of system. How do you see that playing 
through in regards to your concern of the difficulty in making 
a fast switch?
    Ms. Bauder. I like the option of Lender of Last Resort 
being an umbrella over the school. Is that what you are--yeah, 
I think that is a good option in terms of--rather than having 
the students jump through so many hoops on an individual basis. 
Going into direct lending is somewhat cumbersome. It is a 
culture.
    It would be an easy switch if we didn't care about the 
impact on the student. We can transmit anything and create 
systems. But what it does is, there is a disruption to the 
student in terms of process, having to do another MPN, just the 
entire culture of student loans. And so in order to make that 
transparent and seamless for the student, it is somewhat 
cumbersome.
    Mr. Souder. Ms. Muilenburg, if it went by school, would 
that make it easier for the private lenders to step back in 
after the credit crunch occurred? What would the transition 
back out of that be?
    Ms. Muilenburg. The situation that we would envision 
working, and obviously we would have to sit down with the 
Department to figure out all of the operational details, but 
the notion would be that for as long a period as was necessary 
for the school to participate in a Lender of Last Resort 
program, that they would be able to do so, where the guarantors 
would essentially be the lenders as well as the guarantors of 
those loans.
    But certainly if the credit crisis begins to resolve 
itself, then there would no longer necessarily be a need for 
that school to participate in a Lender of Last Resort program. 
If the lenders with whom they have worked over the years 
reenter the marketplace and are able to make loans, we would 
certainly anticipate those schools returning to a normal FFEL 
loan processing environment.
    Mr. Souder. There seems to be a general concern in both 
parties that the administration wasn't doing a lot of advance 
planning regarding if the situation really turns bad. I know a 
number of members were asking questions, but I didn't get to 
hear Secretary Spellings' response. Have they talked to you 
much about this? Are they very far along in this plan? Do they 
seem locked into a different alternative?
    Ms. Muilenburg. The Secretary indicated this morning that 
they intend to issue guidance to the guarantors, I believe, 
next week. And that is both heartening and disappointing news. 
I am heartened that she is going to issue guidance about the 
program and how they would anticipate it working. It is 
disappointing that she didn't have her staff sit down and 
consult with us beforehand in order to make sure that 
operationally it can work.
    Hopefully it will be, as she indicated, an iterative 
process where we can work back and forth to figure out what the 
best way is to make sure that it works operationally smoothly 
for schools and students.
    Mr. Souder. ``Disappointing'' is a rather understatement.
    Chairman Miller. Mr. Kildee.
    Mr. Kildee. Thank you, Mr. Chairman.
    Ms. Johnson, you talked about the importance of helping 
students and families understand their options for Federal 
student aid and the differences between Federal and private 
loans. How do you do that and how are you helped by the 
Department of Education in doing that?
    Ms. Johnson. Well, one of the things that we do is we 
encourage all of our students, obviously, to complete the free 
application for Federal student aid, and we do that 
relentlessly and through a variety of mechanisms: sending e-
mails to currently enrolled students; sending correspondence to 
prospective students; sending postcards home that their parents 
might read, because we really want everyone to complete the 
free application for Federal student aid.
    Our profile is very similar to Ms. Bauder's in terms of the 
number of students who do complete the FAFSA form and how many 
are ultimately packaged with student loans and how many of them 
ultimately will go about securing those student loans.
    The other thing that in our environment has been very 
helpful is that because we are a Direct Loan school, my staff 
is freed up to spend time with those students. Our experience 
has been that students who are having questions about how to 
fund their education come first to the financial aid office. 
And when we would previously have to say well, you need to 
contact your lender about that, the response that we were 
getting from our students was, You are just giving me the 
runaround, you can't handle my question. You have to go 
someplace else.
    And my staff is trained now and they know with certainty 
when those dollars are going to come in and we spend time--we 
have the time to spend with those students to counsel them 
about the difference between a subsidized and an unsubsidized 
loan, about taking a Federal loan versus taking a private loan. 
And parents are always asking us, if they are looking at a 
private loan, they are looking for us to give them 
recommendations as to which private loan they should even take. 
And ultimately that cannot be our decision to make for them. 
They need to make that choice based on what is best for that 
particular family.
    But it has afforded us the opportunity to be able to sit 
down with those students and their parents and say, here are 
your options, here are things that you need to think about as a 
student and as a family, but you will need to make the 
selection, if you are particularly needing to use a private 
loan, because you need to choose a product that is going to 
meet your circumstances.
    Mr. Kildee. Do you think that the Department of Education 
could do much better itself in trying to assist these students 
in making these decisions?
    Ms. Johnson. My experience with working with the 
literature--and they do put out some very fine pieces with 
literature--is that students and their parents, and maybe it is 
a culture of students that are used to instantaneous and video 
and multimedia ways of getting their information--but that many 
of our students are not utilizing the written documentation 
that the Department of Education is providing.
    So that the opportunity to sit down one on one or provide 
information to them in other formats is very helpful.
    Mr. Kildee. Thank you very much, Ms. Johnson.
    Chairman Miller. Mr. Payne.
    Mr. Payne. Thank you very much.
    A question. Two questions. But the first one is even if the 
Federal Family Education Loan, the FFEL, or the Direct Loans 
are available, how will students be able to finance a gap 
between what the Federal student aid covers and the total cost 
of education today?
    In other words, saying that the Federal Family Education 
Loans or Direct Loans are available does not mean that access 
to higher education is ensured particularly for lower-income 
students who want to attend private institutions. And I just 
wonder if any of you have any thoughts on that.
    Ms. Bauder. Well, I can look historically and say that the 
gap has been met through multiple resources. One is, most 
institutions have a payment plan. We have a Terp payment plan 
where you can pay out of your operational home budget once a 
month to make up for that delta. Credit cards, home equity, 
retirement plans. There are multifaceted resources.
    The home equity now. I mean, a lot of the homes where last 
year parents had equity to borrow from, obviously that is no 
longer there for a lot of families, and so that resource is 
dried up. And in turn sometimes retirement as well.
    So now we are stuck with, probably, credit cards. We 
actually are looking in terms of how are we going to advance 
our Terp payment plan, can we move it around a little bit to 
make it more advantageous for our families?
    Mr. Payne. I hope they don't have to use credit cards, not 
the credit cards that I see interest rates floating around of 
32 percent. Unbelievable.
    Just a question in general. For example, there are some 
kind of unique programs that have been created by States for 
different purposes, perhaps. I know that Georgia started the 
HOPE loan, the HOPE scholarship. And I understand that the 
purpose was supposedly to keep top Georgia students in Georgia. 
In other words, they didn't want them to go out of state, they 
wanted them to stay in State. They needed an incentive to keep 
them in State, so that they would stay in State.
    And the program is funded through the lottery, where mostly 
low-income people, unfortunately, are hoping--maybe that is why 
they call it the HOPE scholarship--they are hoping to hit the 
lottery, and many times don't. The ones who can least afford it 
are doing the lottery.
    What happens is that minority students you get in, if you 
have a certain grade level at your high school. However, when 
you are thrown into the mix, in many instances because of the 
inequity in the educational level at the various high schools, 
those minority students in many instances--because you have to 
maintain a certain grade average--can no longer be allowed to 
have the HOPE scholarship and therefore have to drop out of 
school or go somewhere else.
    Of course, the brighter students that they want to keep in 
are doing well because they would have done well anyway. Also 
students of wealthy people and people who could afford to pay 
are now getting a free pass. And those who need it the most are 
really losing out.
    Now, I know none of you are from Georgia, but how do we 
kind of structure things so that they sound good--but, once 
again, it seems like the people that need help the most, even 
with these newly created programs, really tend to end up still 
at the bottom?
    Do you think a program conceived like the HOPE program, you 
are in South Carolina, maybe do you have something similar to 
that, you are right next door, and how do you in your opinion--
I am not knocking any of you because you are not from Georgia, 
and I wouldn't even knock a person if you were from Georgia, 
``Georgia on my Mind,'' you know, I like that song. But could 
you----
    Mr. Sanders. We do have a program in South Carolina that is 
funded by the lottery. And I will tell you, though, with North 
Carolina having created their lottery, just in the last year 
our revenues are down 100 million in our lottery program. So 
they are scrambling as well. We are facing similar situations 
to what you are.
    Mr. Payne. One thing I do find disheartening is that too 
many States have decided to use the lottery for funding. In New 
Jersey the senior citizens PAAD $2 prescription drug benefits 
was paid for by casino gambling, because we have that in the 
State. Now Pennsylvania has casino gambling, Delaware has 
casino gambling, New York has casino gambling. And, of course, 
the revenues in casino gambling in Atlantic City are down, 
therefore challenging those programs.
    So I just wanted to throw that out, because we really need 
to figure out a way to try to see that those students who have 
the ability to make it can. I won't get into endowments because 
we may be--I hope the Chairman has a hearing on that in the 
future to talk about universities that are sitting on hundreds 
of millions of dollars and students are unable to afford it.
    Thank you. I will yield back.
    Chairman Miller. Thank you.
    Terry, we talked quickly with the Secretary about the 
question of whether the Lender of Last Resort would be up and 
running so it could be done on an electronic loan processing 
arrangement. Mr. Warder suggested that that could be done. What 
do you know?
    Mr. Muilenburg. Well, we would certainly want to do it in 
an electronic loan environment, just the way we do all of our 
FFEL loans today. Back when the last Lender of Last Resort loan 
was guaranteed by USA Funds we could handle those on a manual 
basis, loan by loan. But certainly in a big situation, we would 
want to be able to use an electronic loan process. We are now 
going into our systems to identify the systems changes that 
need to be made to administer an LLR program and beginning to 
make those system changes today. The challenge, of course, is 
we don't know what the parameters of that program are going to 
be, whether there are going to be Federal advances made and how 
we need to set up operationally if we are going to be able to 
draw down funds to actually originate the loans. But we are 
doing everything we can to do the systems modifications today, 
to enable us to meet that need if it arises.
    Chairman Miller. Ms. Johnson and Ms. Bauder, Ms. Johnson, 
you are in the Direct Loan program----
    Ms. Johnson. Correct.
    Chairman Miller [continuing]. So this is all interesting, I 
guess to you, but it is not urgent in the sense of your 
institution. Ms. Bauder, what is your sense here when you look 
down the road and you listen to this conversation? Will you 
wait for the Lender of Last Resort and just work through your 
guaranty agency, or would you apply for Direct Loans or not? 
What would you use as your standby if you think that we could 
go into July and August with a market in turmoil and lenders 
having trouble becoming liquid enough to meet that demand?
    Ms. Bauder. Well, I guess I would start by saying I would 
hope we would put more options on the table. I didn't come with 
any, but I would certainly try to think of other options 
besides direct lending and Lender of Last Resort. I 
unfortunately have only heard about Lender of Last Resort--I 
think yesterday is the first time I heard about it. And being 
in financial aid almost 20 years, it is a little nerve-wracking 
in terms of saying, hey, we are going to rest our laurels on 
something that sounds as if it is not tried and true. And if I 
don't know about it, I am sure that other administrators are in 
the same boat that I am in. So I am not----
    Chairman Miller. That is why we are trying to encourage 
some communication here.
    Ms. Bauder. Exactly. So I don't have enough information to 
talk intelligently about it. Direct lending, again, I think we 
signed--I wasn't at University of Maryland when they originally 
thought about getting into direct lending. They did sign up for 
it, but I believe processed a few loans, but really just 
dabbled in it. And I certainly wouldn't want to go in that 
direction.
    I do see, if you look historically that, you know, the FFEL 
program, our students really benefited from the subsidies in 
terms of having zero fees, having a lot of back-end benefits, 
having a lot of brochures and one-on-one hand-holding in terms 
of going through the process up through repayment. And so now I 
think those fees are going to have to--the student is going to 
take the brunt, eventually, of the pricing advantages that they 
had before, they are going to be charged those fees.
    And so that is a concern of mine as I look down the road of 
saying--in fact, I think I have in my testimony the three 
things we look at when we look at our lender list is pricing, 
technology and customer service, and then mission with the 
university. This year I am not looking at pricing. I think we 
live in an unstable environment right now in terms of 
financing, and so we are looking at technology, customer 
service, and then mission with the university as we are looking 
forward.
    Chairman Miller. I understand that. And that is everybody's 
preference. We are talking about here, if in fact these lenders 
cannot get liquid enough--I mean, cannot recapitalize to get 
liquid, again that is all interesting, but they will not be 
available to make the loans. So I think what we are suggesting 
is people ought to start thinking about some standby, hoping 
they won't have to use it.
    Clearly, the preference of this administration, and 
properly so, is the marketplace here. But so far that 
marketplace, as Mr. Wozniak has suggested, has not been able to 
untangle itself with respect to a whole range of credit 
instruments, whether it is municipal bonds or utilities or 
special local agencies, all of which have substantial streams 
of revenue, and highly rated and all the rest; when they come 
to the auction market they are treated as Mr. Sanders is, who 
never thought he would be treated in this fashion and has never 
been treated in this fashion by the auction market.
    So this is about what happens in the event that--and then 
how you complete that sentence. I can't argue with your 
statement that probably most loan officers have not heard about 
it. There would be no reason to think about it in the 
historical performance over the last several years. Why would 
you think of Lender of Last Resort? But the mortgage lenders 
didn't think about the Lender of Last Resort, and the municipal 
bond people haven't thought about Lender of Last Resort. Nobody 
has thought about this until they get hit.
    Mr. Bauder. Right.
    Chairman Miller. And they have all been hit now. And it has 
turned out to be a rather dysfunctional market. And I don't 
want to put words in your mouth--I want you to comment--but you 
don't seem, Mr. Wozniak, to be confident that this is going to 
sort itself out anytime soon. Again, we are all open to we get 
a surprise every day here. Sometimes they are positive and 
sometimes they are negative.
    Mr. Wozniak. No, from a standpoint the municipal market is 
certainly working its way through, and they have various 
streams. In the student loan market, we of course deal with a 
specialized asset that has a particular return. We don't get to 
establish what the interest rate is. And there is a tremendous 
amount of assets that have to be refinanced. So it is going to 
take some time. And even if rates come back tomorrow, they are 
not going to move back to where they were last summer in a 
straight downward pattern. So it is going to take some time as 
the market has to regain confidence.
    Chairman Miller. Do we have any way of inferring that if 
the infusion that we saw--was it $200 billion that the--was it 
$200 billion?
    Mr. Wozniak. $200 billion, yes.
    Chairman Miller [continuing]. $200 billion that the 
chairman of the Fed put into the system, that that would have 
any spillover in a positive sense on those same institutions 
that are also lenders to the student loan market?
    Mr. Wozniak. It may be too early to tell. The facility is a 
28-day facility with extensions. Part of it, and what we are 
looking at in the current case with the auctions and others are 
much longer assets than that. Obviously, the mortgage assets 
are long-term assets, too. It is an attempt to put some 
liquidity in the system. It isn't going to be helpful directly 
to the auction market. I think that has a different component 
to it, different type of issue that is surrounding it, outside 
the overall securities markets in general.
    Chairman Miller. Mr. Sanders, if you can't go--you 
mentioned you had seen 28 failed auctions. If you can't go to 
the auction market, what is your anticipation of your 
situation?
    Mr. Sanders. Well, the situation we have with our failed 
auctions is existing debt.
    Chairman Miller. Right.
    Mr. Sanders. We are certainly not trying to issue more 
auction rate bonds at this point. But I think Paul is right; 
the situation with the Fed injecting money into the mortgage-
backed system, certainly it is going to help in that market a 
little bit. But I guess the best thing that can be said about 
that is it wasn't bad news.
    In our industry, pretty much every day has been bad news, 
so at least it wasn't that.
    Chairman Miller. What do you look to in terms of your 
ability to make these loans?
    Mr. Sanders. Currently, we are looking at trying to 
refinance into what are called variable rate demand bonds, 
which requires a credit facility, banks that would be standby 
in order to buy the bonds. You also have to have the rating 
agencies to rate the bonds. The process we have been going 
through for the last 4 to 5 months has just been a give-and-
take. The rating agencies as well as the credit facility banks 
are just nervous at this point. They continue to want more and 
more, and it is making it very difficult for us to get that 
issue accomplished.
    Chairman Miller. Okay. Ms. Johnson, Ms. Bauder talked about 
the consolidators who aren't available at the moment. Is your 
situation the same as hers or----
    Ms. Johnson. Well, our students primarily will consolidate 
to the Federal direct consolidation program----
    Chairman Miller. Back through the program.
    Ms. Johnson [continuing]. Directly into that program. So we 
have always suggested to our students that they do have choice 
on the back end with their student loans. And if they find a 
FFEL lender who would consolidate and offer them benefits that 
they find agreeable to them, particularly at the point of 
graduation when they know where they are going to be living and 
what their salary is going to be and what makes sense for them, 
that they should be looking at consolidation. But primarily our 
students have been consolidating into the Federal Direct Loan 
program.
    Chairman Miller. Has that changed? You were talking to a 
couple of other members, both of you, about the impact that has 
had on the Perkins, on the repayment. Is your outlook different 
than Ms. Bauder's?
    Ms. Johnson. Our outlook is exactly the same as Ms. 
Bauder's, and primarily that is because of the interest rate 
change in the Stafford loan program. When it was variable with 
the cap and it was very low interest rates for a number of 
years, students who had large volumes in the Direct Loan 
program at very low interest rates were very eager to 
consolidate their loans and their Perkins loans with those, 
because it would draw down their overall interest rate on those 
loans.
    Since that has moved to a fixed rate loan, those students 
are less likely to consolidate those loans. They would rather 
leave their Perkins where they are, at a 5 percent rate, so we 
are not seeing that infusion of capital.
    I would like to also just address something that Sarah had 
talked about, and that was a little bit about the conversion 
into the Direct Loan program. And I hope I am not reading 
between the lines, but I thought I heard the Secretary this 
morning say something that they were looking at all options, 
one of which was looking at something with the transmission of 
information in the FFEL. And I believe that FFEL lenders are 
using a format that is called Common Line.
    Several years ago, I think every school that was in the 
Pell Grant program was trying to convert over to a new schema 
called XML formatting. And many of us were not there yet in 
terms of doing that. And so for at least 3 or 4 years, the 
Department of Education had a conversion program that was 
available for us so we could transmit our Pells in our current 
school format. They would do the conversion into what the 
common origination and disbursement needed and then pass it 
back through the conversion box so that we could receive it 
back in a format that we could utilize on our campuses.
    As I brainstorm about ways that perhaps some schools may 
find it easier to transition into the Direct Loan program, if 
such a conversion box were available so that schools that are 
currently using Common Line could pass their current 
information through the conversion box that could be translated 
by the Department of Education to process those loans and then 
convert them back, I think that the up-front conversion time 
for the schools would be mitigated to some extent. Yes, 
students would have to sign a new promissory note, but for some 
students who are already possibly looking for a new lender they 
would be having to sign a new promissory note anyway. So it is 
something I think that they should consider.
    Chairman Miller. Thank you. That is why we are trying to 
encourage these conversations. Mr. Keller.
    Mr. Keller. Thank you, Mr. Chairman.
    Twice during this hearing, a reference has been made to 
calling the red phone at 3 in the morning. If you are a student 
lender and you are calling the White House red phone at 3 in 
the morning, no matter who the occupant is, you are going to be 
in trouble. McCain is going to snap at you for making him talk 
about something other than national security. Hillary is going 
to hang up on you because she wants to put you out of business. 
Obama is going to politely call for change and hope, changing 
his phone number and hoping you don't get the new one.
    The 80 percent of students who rely on the FFEL program for 
the Federal student loan program, I hope we have something 
better than a red phone strategy at the end of these hearings. 
My biggest concern, frankly, is outside the FFEL program for 
the students who utilize their FFEL loans as best they can, but 
the tuition gap is so huge they have no choice but to get the 
private loan.
    And let me start with you, Mr. Wozniak. What impact on the 
students who are relying on these nonFederal private loans is 
the current credit situation likely to have?
    Mr. Wozniak. Okay. Multiple issues are occurring I would 
say. One is that the cost of funds is higher, dramatically 
higher, no question about that. That means that that cost has 
to be passed on.
    Number two, again, I think generally speaking again, the 
student loans process with regard to private loans performance 
has not had significant deterioration relative to over time. So 
it is a situation where it was not a big subprime type of 
activity. But nevertheless, the rating agencies in the current 
environment are restressing and adding more assumptions within 
their assumptions. So what is going to happen there is, there 
will be more protection that needs to be built into structures. 
Both of those items will tend to protect the bondholders more 
going forward, and will also result in a higher cost of funds 
to a smaller segment of students.
    Mr. Keller. Let me follow up your line of answer there. 
When you say higher cost to students, do you mean potentially 
higher interest rates and higher origination fees?
    Mr. Wozniak. Yes to both.
    Mr. Keller. When you say the credit situation, you are 
going to have lenders requiring a better credit score from the 
students and/or their parents in order to qualify for a loan?
    Mr. Wozniak. The cut-off rate, so to speak, will be at a 
higher credit score than previously.
    Mr. Keller. Is it possible that they may even start 
requiring some sort of collateral for these loans?
    Mr. Wozniak. I don't--I would say no. That type of 
borrowing can be done--and again, I suppose through a home 
equity or other line to the extent that that was an option. But 
no, I would say no.
    Mr. Keller. Okay. And for the students who are from low-
income families, 18-year old kid trying to go to college. And 
his mom, single mom, is a waitress, probably is not going to 
have a great credit score. What is their option going to be?
    Mr. Wozniak. That again, from the private loan marketplace 
itself, is not for everybody. In part it is--in many regards 
that part of the market is hoped for, and I know there is only 
a limited amount of scholarship grant money and other types of 
funds. But the process is not to give somebody a loan if it is 
believed that they would have difficulty paying it back.
    Mr. Keller. Okay. Ms. Bauder, let me ask you a similar 
question to the last question I asked. What options do students 
have to pay for college if they have maxed out their Federal 
aid and are not eligible for a private nonFederal loan?
    Ms. Bauder. Well, we actually have students on campus like 
that today. Typically, we work with them on a case-by-case 
basis. Usually, we do some type of payment plan for them over 
time. Right now our payment plan is 8 months or 10 months. We 
will extend it through the summer and see what they can come up 
with. We also work with our development office to see what 
funds they have that are for need-based funding. But it is 
really on a case-by-case basis.
    Mr. Keller. All right. Mr. Sanders, you are a FFEL lender 
and you also provide private loans, is that right?
    Mr. Sanders. That is correct.
    Mr. Keller. Tell us what the current credit situation has 
done in terms of student options both under the FFEL--under the 
FFEL and the private lending. How has that affected students in 
a real world basis?
    Mr. Sanders. Well, I think as was mentioned earlier, we are 
really not into the loan season yet. We are probably about a 
month away. I think schools are probably in the process of 
packaging loans now. But as I mentioned earlier, we are 
actually tightening our credit standards. We are having to. We 
are also increasing the interest rate. And again, we are doing 
that because when we do exhaust the funds that we currently 
have, which will be sometime in the late fall, we will have to 
have better credit standards if we want to access the financial 
markets in the future.
    Mr. Keller. When you say you are increasing the interest 
rates, are you talking about on the private loans?
    Mr. Sanders. That is correct. Private loans only. On the 
Federal loans there has been no effect, and I am still hopeful 
there won't be any effect.
    Mr. Keller. All right. Thank you.
    Mr. Chairman, my time has expired, so I yield back.
    Chairman Miller. Thank you. Mr. Souder?
    Mr. Souder. I am kind of baffled about something here. This 
sounds like a one-way market. Normally, if you would have a 
tightening of the credit and inability to buy, somebody would 
start to adjust the price. Are you suggesting universities 
aren't going to respond at all in trying to adjust tuitions? Is 
it just an inertia that in this country they can raise tuition 
indefinitely, regardless of whether students can afford to go 
there? If students start to drop off and not be able to go to 
school, Mr. Sanders, is one possibility that people will price-
shop more for where they go to school?
    Mr. Sanders. You know, that is a good question. I don't 
think we have reached that point yet. Certainly I think that is 
a possibility. We obviously have a very good technical college 
system in South Carolina that a number of students are now 
starting to enter there for their first year to get their 
general courses out of the way, and then transferring later to 
our 4-year schools. So that is already occurring in my opinion.
    Mr. Souder. My family didn't have enough money not to 
price-shop. We didn't have some kind of protection behind it. 
My dad had X amount. He said if I went to the regional campus 
and lived at home, he would work with grad school.
    Are we trying to build a system that anybody can go 
anywhere they want at any time, the universities never have to 
adjust any tuition? I mean, I don't view it as a bad thing that 
there is some element of risk assessment here and repayment 
assessment.
    Another concern I kind of had when I was listening to the 
discussion is that it doesn't seem--let me ask this question to 
Mr. Wozniak. Has the market so bundled--because there is a big 
frustration in the housing market of people who feel that their 
credit is being stressed when they weren't the people who took 
the balloon payments. Is there any kind of market mechanism 
that adjusts for those lenders who actually have the ability to 
get their loans repaid, did a wise job of estimating and 
balancing that, or are they just being bundled with high-risk 
loans and the market is going to dry up and change everybody's 
rates because there has been no risk assessment?
    Mr. Wozniak. No. Again, the marketplace on the education 
loan side, again, has not seen any particular big jump up in 
any type of performance status. So the students are continuing 
to make their payments, lenders continue to work with students 
to make sure that they give them every opportunity that they 
can with forbearances and other issues. We have not seen a big 
jump up. Bundling doesn't occur. People generally have been 
putting pools of loans together and taking the whole pool and 
putting them into the marketplace.
    Mr. Souder. Taking the other side of it, because part of my 
concern by schools and universities in the Higher Ed bill, one 
of my concerns was that by doing too rigid a standard on 
schools that were falling out, of having too many students 
default, if we didn't average that we were in fact going to 
dramatically impact low-income students, universities that 
reached out to a higher percentage of minorities, those in 
urban areas.
    And I appreciate that the Chairman has worked with that. 
There, clearly the government may need to step in. But if we 
are going to just kind of average this, there is no incentive 
of the private sector or of the market to try to do any kind of 
responsible loan assessment. If all this stuff just gets 
bundled and averaged, the credit tightens up on everybody.
    To me, where the government should be looking at stepping 
in is where we have high-risk cases. The people who have the 
least ability to pay can't maybe even make an adjustment for a 
technical school or others, and then the market can't meet it. 
And that is where the government comes in.
    My concern in some of this discussion is that we are broad-
brushing everybody, taking any accountability out of the 
universities, any accountability out of the individuals to 
adjust where they go, the number of years they go, the number 
of what decisions they make on career. And I was just a little 
concerned about the tone. I yield back.
    Chairman Miller. I thank the gentleman. And he raises a 
number of serious questions. And on top of that, of course, 
many of the States are sending the signal to their State 
institutions that they may have to raise fees or make cuts 
because State budgets are in trouble because of the same 
economic problems created by all the other actions in the 
credit market and in the economy.
    Thank you very much for your time and your expertise this 
morning. I think you will probably be hearing from us. But more 
importantly, I hope you hear from the Secretary. I am I little 
dismayed at the end of this hearing, after this panel. You are 
out there a consumers of these services and as agents for the 
retail consumers of these services, and the fact that you have 
not had access to more concrete and better information is 
distressing. And it really does start to raise concerns.
    I sent the Secretary a letter 2 weeks ago, but after 
listening to this, I just wonder whether or not they have a 
sense of urgency. Urgency and panic are two different things. 
Urgency about creating the standby system so that families and 
students will be able to continue to have access to this 
education on a timely basis I think should be a prime concern 
right now within the Department of Education.
    As I said at the outset of the hearing, a course delayed, a 
semester delayed, or a quarter delayed can mean even greater 
financial hardships for these students and for these families. 
And that is what we seek to avoid.
    I hope the markets correct. I hope there is a market 
answer. But we do have these two provisions on the books that 
at least we ought to run all of the traps, make them 
operational, make sure everybody understands them and has the 
options and they can make their choices. And hopefully that 
will work.
    You will be hearing some more from us. Thank you very much 
for all of your time. Thank you to all the members of the 
committee for their attendance and their questions.
    And I want to insert a statement into the record. Mr. Petri 
has asked to have a statement put in the record. And without 
objection, so ordered.
    [The statement of Mr. Petri follows:]

    Prepared Statement of Hon. Thomas E. Petri, a Representative in 
                  Congress From the State of Wisconsin

    I want to thank Chairman Miller and Ranking Member McKeon for 
holding this important hearing today. I hope that after today's hearing 
students and parents will be confident that anyone who qualifies for 
federal students loans will be able to get them.
    Numerous stories have been popping up in newspapers and other media 
warning that the current turmoil in the financial markets, fueled by 
subprime mortgages and the resulting credit crunch, will affect the 
availability of student loans. Most of these stories have failed to 
make the distinction between private and federal student loans.
    The majority of students finance their education through federal 
loans. By law, students get those loans without credit checks and at 
virtually zero risk to the lenders because the government reimburses 
the lenders for any loan defaults. Currently, there are over two 
thousand lenders participating in the Federal Family Education Loan 
(FFEL) program. Should serious disruptions develop in the FFEL, by law 
the Department of Education is required to take up the slack.
    Furthermore, students can get federal loans directly from the 
government through the Direct Loan Program. I look forward to hearing 
from the Education Department on the measures it has taken to ensure 
that the Direct Loan Program is prepared to take on any increase in 
loan volume.
    In the mid-1990s, one third of the federal student loan market 
transitioned to the Direct Loan Program through a smooth operation 
created by the Department.
    One would expect that after nearly fifteen years and improved 
technology the Direct Loan program could rapidly and smoothly expand 
from its present market share of 20%.
    In fact, the Direct Loan Program is now delivered through the 
Common Origination and Disbursement System (COD) which is the same 
system that successfully delivers Pell Grants. Thus, any school which 
participates in the Pell Grant program should be able to easily switch 
to the Direct Loan Program.
    Congress has a responsibility to ensure students' access to federal 
aid--and there are measures in place to do so. It is important today 
that we make sure that those measures are working properly.
    Thank you, and I look forward to an informative hearing today.
                                 ______
                                 
    [Questions to witnesses from Mr. Scott follow:]

Questions for the Record Sent to Witnesses Bauder, Johnson, Muilenburg, 
                          Sanders, and Wozniak

    Thank you for testifying at the March 14, 2008 hearing of the 
Committee on Education and Labor on ``Ensuring the Availability of 
Federal Student Loans.''
    Representative Robert C. Scott (D-VA), a member of the Early 
Childhood, Elementary and Secondary Education Subcommittee and the 
Higher Education, Lifelong Learning and Competitiveness Subcommittee, 
has asked that you respond in writing to the following questions:
    1. On the issue of income-contingent repayment, how many students 
participate? What is the cost, and who pays the cost, of writing off 
the remaining balance of those loans?
    2. Is there any evidence that students purposefully select courses 
of study that lead to professions for which student loan write-offs may 
be available?
    3. If we increased the amount of money available for student loans, 
how would the cost of these additional loans be scored for the purpose 
of ``PAY-GO''?
    4. How much of the cohort default rate is a function of credit 
worthiness of students (and their parents) before they attend school, 
as opposed to the effort the school makes to obtain repayment? Is there 
a better measure of the school's effort to obtain repayment than the 
cohort default rate? Does the cohort default rate unfairly punish those 
schools that admit low income and first generation students?
    5. Testimony before the committee suggests that the major advantage 
to schools of the FFELP over the Direct Loan program is the fact that 
under FFELP, the private lender, not the school, shoulders the 
administrative expenses. The private lenders get a subsidy; would the 
schools be willing to take on the administrative expenses, if they 
received a smaller subsidy than the one we are now paying to the 
private lenders?
    6. What would be the problems with treating student loans like 
mortgages in terms of going back and forth between fixed rates and 
variable rates at the discretion of the borrower depending on the 
interest rate conditions at the time?
    7. What has the historical mix been between Pell grants, student 
loans and work-study? Are we providing enough assistance in the form of 
grants and work opportunities?
    Please send an electronic version of your written response to the 
questions to the Committee staff by close of business on Friday, March 
28, 2008--the date on which the hearing record will close. If you have 
any questions, please do not hesitate to contact the Committee.
            Sincerely,
                                             George Miller,
                                                          Chairman.
                                 ______
                                 
    [Responses to questions from witnesses follow:]

                                     Iowa State University,
                                                    March 28, 2008.
Hon. George Miller, Chairman,
Committee on Education and Labor, U.S. House of Representatives, 
        Washington, DC.
    Dear Chairman Miller: In response to your inquiry of March 25, 
2008, I offer the following:
    1. On the issue of income-contingent repayment, how many students 
participate? What is the cost, and who pays the cost, of writing off 
the remaining balance of those loans?
    The answer to this question is best directed to the U.S. Department 
of Education. It is my understanding that the taxpayer cost of 
cancellations is incorporated into the cost of each annual cohort of 
loans by both OMB and CBO. Those entities would best be able to answer 
the question about taxpayer costs.
    From the standpoint of a student aid director and the students I 
represent, the income-contingent repayment (ICR) plan is an invaluable 
tool to support graduates who choose rewarding, but low-paying, 
employment. Also, in difficult economic times similar to those we are 
now seeing, the ICR plan provides families with a lifeline to avoid 
default. Because students can change repayment plans as frequently as 
necessary in the Federal Direct Loan Program, students can move into 
ICR to avert a default and return to a standard, graduated, or extended 
repayment plan when financial stability is regained.
    2. Is there any evidence that students purposefully select courses 
of study that lead to professions for which student loan write-offs may 
be available?
    I am not aware of any evidence to this effect. However, many aid 
directors work closely with faculty advisors and colleges/departments 
that are more likely to have students heading toward these careers. As 
an example, my staff work closely with our education department to make 
students aware of loan forgiveness options should they ultimately teach 
in an area that qualifies. Because there are narrow service 
requirements in the loan forgiveness programs, particularly in the out 
years, it can be difficult for students to take advantage of loan 
forgiveness options. For instance, an individual who qualifies for 
teacher loan forgiveness in the early years may find within several 
years that the employing school no longer qualifies as a high need area 
and loan forgiveness is no longer available.
    3. If we increased the amount of money available for student loans, 
how would the cost of these additional loans be scored for the purpose 
of ``PAY-GO''?
    The additional cost related to increased loan limits would be 
affected by such things as whether the loans were subsidized or 
unsubsidized. As I understand the process, the Congress would determine 
any required ``PAY-GO'' offsets.
    That being said, the amount of borrowing that is occurring within 
the private loan arena is a direct result of limits on federal student 
loans. Unfortunately for many undergraduates, their parents cannot (due 
to credit reasons) or will not seek funding through the PLUS loan 
program. These students have no other option except to borrow through a 
private loan. While the first recommendation would be for these 
undergraduate students to have higher loan limits available to them 
through the Stafford Loan program, if appropriate offsets are not 
available to make this feasible, expansion of the unsubsidized loan 
program to allow undergraduate students to borrow the cost of 
attendance less other financial aid (and available only via completion 
of the Free Application for Federal Student Aid) is an idea worth 
exploring. As a point of reference, with the introduction of the 
Graduate PLUS program in 2006, private loan borrowing by graduate 
students at my institution is now zero.
    4. How much of the cohort default rate is a function of credit 
worthiness of students (and their parents) before they attend school, 
as opposed to the effort the school makes to obtain repayment? Is there 
a better measure of the school's effort to obtain repayment than the 
cohort default rate? Does the cohort default rate unfairly punish those 
schools that admit low income and first generation students?
    Unlike the Federal Perkins Loan program, Federal Direct Loans are 
serviced by Department of Education contractors. At my institution, we 
take advantage of an option within the Direct Loan program called Late-
Stage Delinquency reports. This allows my staff to make contact with 
students at various stages of delinquency to remind them of their loan 
obligation and to assist them in seeking deferment/forbearance/
repayment options that might help avert a default. We find that 
students are very receptive to working with us because we built a 
relationship with them during their tenure at our institution.
    In my opinion, the creditworthiness of the student upon entering 
school is less a factor in default as is program completion and job 
opportunities after leaving school. I am concerned that because of the 
use of the cohort rate, some schools may choose not to participate in 
the federal loan programs, leaving their students no options but to 
borrow through more expensive private loans.
    5. Testimony before the committee suggests that the major advantage 
to schools of the FFELP over the Direct Loan program is the fact that 
under FFELP, the private lender, not the school, shoulders the 
administrative expenses. The private lenders get a subsidy; would the 
schools be willing to take on the administrative expenses, if they 
received a smaller subsidy than the one we are now paying to the 
private lender?
    That testimony, in my opinion, is not correct. Schools in both 
programs have some administrative expense such as certifying loan 
amounts, evaluating the place of loans in the entire aid package, and 
assisting students with speedy access to loan funds. These functions 
are the same in both programs. The additional expense for operating the 
direct loan program is minimal. Except for the addition of a promissory 
note, schools that administer Federal Pell Grants, the Academic 
Competitiveness Grant, National SMART Grant, and the impending TEACH 
Grant are already doing most of the things necessary to administer 
direct loans. The notion that Direct Lending is more difficult to 
administer than FFELP is a myth. In fact, I would argue that Direct 
Lending is significantly simpler because the aid officer, student, and 
parents always know exactly where to go to resolve loan issues--there 
is only one lender rather than the multiple players of lender, 
guarantor, and service agency that exist in FFELP. The simplicity of 
the Direct Loan program frees me and my staff to spend additional time 
with students counseling them on aid, assisting them in locating 
scholarship sources, help with debt management skills, and identifying 
other resources in the event of a detrimental financial event in the 
student's family.
    6. What would be the problems with treating student loans like 
mortgages in terms of going back and forth between fixed rates and 
variable rates at the discretion of the borrower depending on the 
interest rate conditions at the time?
    I believe that student borrowers should have as much flexibility as 
possible to refinance their loans at the best rates and terms available 
to them. The current structure does not support the best interests of 
students.
    7. What has the historical mix been between Pell grants, student 
loans, and work-study? Are we providing enough assistance in the form 
of grants and work opportunities?
    In the early 1980's when I began my career in financial aid, 75% of 
the typical student aid package was in the form of grant aid and family 
contribution. Today, the maximum Federal Pell Grant covers only 25% of 
the total cost of attendance at Iowa State University. Today, students 
at my institution are encumbered with debt--72.6% of the undergraduates 
borrowed to help meet their costs and the average debt upon graduation 
is $30,475 (which includes private loan borrowing).
    As a result of stagnant or falling federal support, Iowa State 
University and many other institutions, have committed increasing gift 
aid to students. Some of these dollars are available as a result of 
fund-raising efforts while others are apportioned from tuition dollars 
collected from all students.
    Work-study is a key funding source for students that often assist 
them in the out-of-pocket costs of college such as books, supplies, 
travel, etc. Work-study allocations have been flat for nearly a decade. 
This next year will be a particularly hard year to stretch these 
critical work-study dollars--while we support the increase in minimum 
wage for all workers, funds are exhausted more quickly as student are 
earning more. Also, due to the weakened economy, students who 
previously worked off-campus are returning to look for employment 
opportunities on-campus either because the cost of commuting to an off-
campus job is prohibitive or because the community job market has 
tightened.
    Thank you for the opportunity to provide follow-up to the hearing. 
If you or any other members of the committee have further questions, 
please contact me.
            Sincerely,
                                           Roberta Johnson,
                                                          Director.
                                 ______
                                 

           Answers for the Record Submitted by Ms. Muilenburg

    1. On the issue of income-contingent repayment, how many students 
participate? What is the cost, and who pays the cost, of writing off 
the remaining balance of those loans?
    As a guarantor in the Federal Family Education Loan Program, USA 
Funds does not have recent, first-hand information about participation 
in the Income Contingent Repayment Program, which is only available 
under the Federal Direct Loan Program. Looking back at FY 2004 (the 
latest year for which the Education Department's budget appendix 
included this information), it appears that few borrowers with 
unconsolidated loans appear to be using the program. For example, for 
FY 2004, ED projected that only 3.2 percent of FDLP Stafford loan 
borrowers would opt for ICRP. In contrast, 45 percent of Direct Loan 
consolidation borrowers were expected to repay via income contingent 
repayment. For more recent data on the ICR program, I suggest you 
contact the Department of Education.
    If a loan made under the ICR program is ultimately forgiven, there 
would be a cost to the federal government, and the amount forgiven is a 
tax liability for the student loan borrower. Since ICRP loans can only 
be written off after 25 years and the program has not yet been in 
effect for 25 years, we do not know the actual federal cost of the 
write-off provision.
    2. Is there any evidence that students purposefully select courses 
of study that lead to professions for which student loan write-offs 
maybe available?
    We do not have data on the fields of study of student loan 
borrowers, and are not aware of any research that confirms the notion 
that borrowers pursue particular fields of study in order to take 
advantage of loan forgiveness options. It is too early to assess 
whether the new loan public service loan forgiveness provisions of the 
College Cost Reduction and Access Act, which will not take effect until 
2009, will have such an impact.
    3. If we increased the amount of money available for student loans, 
how would the cost of these additional loans be scored for the purpose 
of ``PAY-GO''?
    There are federal costs associated with increasing loan limits, and 
because the FFEL and FDL programs are entitlements, costs associated 
with increasing loan limits would be subject to ``PAY-GO''. However, 
increasing Unsubsidized Stafford loan limits would not appear to result 
in federal costs, according to the OMB Budget for fiscal year 2009. 
While USA Funds strongly believes increasing federal loan limits is 
appropriate in order to reduce reliance on more expensive private 
loans, the current challenges FFELP lenders are facing in the capital 
markets will not be resolved by increasing loan limits.
    4. How much of the cohort default rate is a function of credit 
worthiness of students (and their parents) before they attend school, 
as opposed to the effort the school makes to obtain repayment? Is there 
a better measure of the school's effort to obtain repayment than the 
cohort default rate? Does the cohort default rate unfairly punish those 
schools that admit low income and first generation students?
    Federal Stafford loans are available to students without regard to 
credit worthiness, and parent PLUS loans are not counted in an 
institution's cohort default rate. Schools participating in the federal 
student loan programs are not formally charged with ensuring that their 
former students repay their loan obligations, but rather to perform 
entrance and exit counseling to ensure students understand their rights 
and responsibilities. Guarantors such as USA Funds, also work closely 
with student loan borrowers to avert defaults, and assist schools with 
debt management services they can use to contact their former students 
to help in the default prevention effort.
    With respect to schools' cohort default rates, the cohort default 
rate is an imperfect measure of a school's educational quality. Schools 
that do admit significant percentages of low-income, first-generation 
students can be unfairly stigmatized by the use of the default rate as 
a proxy for the quality of instruction as well as continued 
participation in the Title IV program. The reasons for the higher 
default rates at these schools are several including: (1) low income 
students tend to be at higher risk; (2) higher risk students tend not 
to graduate on the same time schedule as students not in that category; 
(3) higher drop out rates are strongly correlated to higher default 
rates; and (4) adverse economic conditions/increased unemployment rates 
lead to increased inability to repay student loans, which 
disproportionately affect low income students and the institutions they 
attend.
    The factor most closely linked to student loan defaults is the 
borrower's failure to complete his or her academic program. Dropouts 
are at much higher risk for loan default because, even though they may 
have less college debt than graduates, they lack the diploma necessary 
to obtain the better paying positions that graduates receive. Therefore 
initatives the promote student retention and completion also contribute 
to lower loan default rates.
    5. Testimony before the committee suggests that the major advantage 
to schools of the FFELP over the Direct Loan program is the fact that 
under FFELP, the private lender, not the school, shoulders the 
administrative expenses. The private lenders get a subsidy; would the 
schools be willing to take on the administrative expenses, if they 
received a smaller subsidy than the one we are now paying to the 
private lenders?
    As a student loan guarantor in the FFELP, and not an educational 
institution, USA Funds cannot speak to the issue of whether schools 
would prefer to participate in the Direct Loan program if they were 
provided administrative fees. I would note, however, that many of the 
services we provide, such as financial literacy materials and training, 
as well as customized debt-management services that institutions can 
use to work with their former students to help prevent defaults--all of 
which are provided free of charge--are simply not available to schools 
under the Direct Loan program.
    6. What would be the problems with treating student loans like 
mortgages in terms of going back and forth between fixed rates and 
variable rates at the discretion of the borrower depending on the 
interest rate conditions at the time?
    Federal student loans are subsidized and backed by the federal 
government, with no fees paid by borrowers who choose, for example, to 
consolidate their loans. This is in contrast to home mortgages, where 
homeowners who choose to refinance their mortgages to get a better 
interest rate or loan terms, generally pay significant fees in order to 
do so. In addition, the terms of a promissory note signed by a borrower 
contain the specific terms of the loan, including the interest rate, so 
it would not be possible to simply switch from a fixed to a variable 
rate loan and vice versa without a new promissory note. Finally, the 
cost of the federal student loan subsidies under such a scenario could 
increase dramatically.
    7. What has the historical mix been between Pell grants, student 
loans and work-study? Are we providing enough assistance in the form of 
grants and work opportunities?
    According to the College Board's ``Trends in Student Aid 2007'', 
federal grant aid to undergraduate and graduate students increased 83 
percent in inflation-adjusted dollars over the past decade, and federal 
student loans increased by 61 percent over the same time period. Today, 
nearly $86 billion in federal grant aid is provided to undergraduate 
and graduate students, compared with $38 billion a decade earlier.
    However, because of increases in the cost of postsecondary 
education, growth of enrollments in higher education over time, and 
changes in the structure of aid programs, these increases do not 
necessarily make college more affordable for individual students. For 
instance, the economic impact of Pell Grants has diminished 
considerably over the past 20 years. In 1987-88, the $2,100 maximum 
Pell Grant, covered 50 percent of tuition and fees and room and board 
charges at the average four-year public college or university and 20 
percent of average total charges at private four-year institutions. 
However, in 2007-08, the $4,310 maximum Pell Grant equals only 32 
percent of the average total charges at public colleges and 
universities and 13 percent for private, four-year institutions.
    Moreover, federal work-study funds and other campus based aid 
continue to account for only a small percentage of all student aid, 
about 1 percent. A total of $776 million was provided for work-study a 
decade ago, compared with nearly $1.2 billion today, an increase of 
only 18 percent.
    As a result, students are increasingly turning to loans to help 
finance their higher education. In the 1996-97 academic year, the 
average amount borrowed under the Stafford and PLUS programs for 
undergraduate students was $8,069, compared with $11,179 today (a 39 
percent increase).
    Clearly, federal student loans are and will remain a vital 
component of federal financial aid. However, USA Funds strongly 
supports increasing need-based grant aid to ensure that a postsecondary 
education continues to be an attainable goal for all American families.
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                ------                                

                        Municipal Securities Group,
                                        UBS Securities LLC,
                       Purple Sage Park City, Utah, March 28, 2008.
Hon. George Miller, Chairman,
Committee on Education and Labor, U.S. House of Representatives, 
        Washington, DC.
    Dear Chairman Miller: Thank you for your follow up questions to my 
testimony of March 14, 2008. I would first like to remind the Committee 
that my expertise is primarily in the capital markets, asset-backed and 
municipal securities areas with a specialty in education loans. My 
background gives me access to reports and studies dealing with loan 
performance data, government cost scoring and other data solely 
regarding loan repayment. I have limited knowledge of the social 
implications of the loan programs on borrower decision making 
processes, the financial aid process with regard to grants or work 
study, or the manner in which individual schools approach these issues 
with their matriculating students. With that stated here are my 
responses.
    1. The income-contingent loan program is administered by the US 
Department of Education. They would be the party with access to data on 
the number of students enrolled and the cost of the program. As the 
income-contingent loan program is a program under the federal direct 
loan program, and the loan is an asset of the United States, the 
writing off of the remaining balance of these loans is a cost to the 
federal government.
    2. This question is outside my area of expertise.
    3. This question is also outside my area of expertise.
    4. Federal Stafford loans do not permit credit assessments to be 
performed for the purpose of securing a loan. Hence, a comprehensive 
database may not be available to determine this. It is possible that 
studies of this nature may have been done that I am not aware. Sandy 
Baum of Skidmore College and a Senior Policy Analyst of the College 
Board may be someone who may be able to provide insight into these 
issues.
    5. It is my understanding that schools have selected the FFELP 
program by a factor of 4 to 1 by dollar volume for a variety of 
reasons, not limited to administrative expenses. As my practice does 
not involve direct communications with school financial aid offices and 
their business officers, I cannot make an assessment as to the 
importance or willingness of schools to accept the additional 
administrative costs in return for remuneration.
    6. The federal student loan program, both FFELP and Direct Loans, 
offer loans to students and parents at identical interest rates. Over 
the years, Congress has amended the Higher Education Act of 1965 on 
numerous occasions to change the interest rate or manner in calculation 
of the interest rate on student and parent loans. These changes in rate 
have a dramatic impact on the cost of the program to the federal 
government. When Congress increases rates to borrowers, the cost of the 
program to the federal government falls as it is the beneficiary of the 
higher rates in the Direct Loan Program and reduces the cost of 
subsidies to holders of loans in the FFELP program. Reducing rates to 
borrowers therefore, increases federal costs due to lower rates and 
higher subsidies.
    Were the federal government to allow borrowers a choice of fixed or 
variable interest rates, the cost of such a program to the federal 
government would depend on the actual level of interest rates that 
occurred over the borrowing period. From a budget scoring perspective, 
this would depend on the assumptions used by CBO. CBO would also have 
to assume how many borrowers would select various options.
    Because these loans are virtually always originated at below market 
interest rates, especially for unsecured, non-credit tested borrowers, 
it may be better for Congress to settle upon a single reasonable fixed 
interest rate that could remain in effect over long periods of time. 
This reduces the angst that might be created among borrowers over who 
got a better rate, or should I pick variable or fixed, and who is going 
to provide advice on such a decision which frankly is a subjective 
decision that the best minds in finance could not provide an absolute 
answer.
    7. The College Board publishes a comprehensive study on this in its 
publication ``Trends in Student Aid 2007''. You may access it here:

  http://www.collegeboard.com/prod--downloads/about/news--info/trends/
                          trends--aid--07.pdf

    The remainder of the question is beyond my area of expertise.
    If you have any further questions, please do not hesitate to 
contact me.
            Sincerely,
                                           Paul W. Wozniak.
                                 ______
                                 
    Chairman Miller. And the committee will stand adjourned.
    [Whereupon, at 12:45 p.m., the committee was adjourned.]

                                 
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