[Senate Hearing 110-151]
[From the U.S. Government Printing Office]




                                                        S. Hrg. 110-151

 HIGHER EDUCATION, HIGHER COST AND HIGHER DEBT: PAYING FOR COLLEGE IN 
                               THE FUTURE

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

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING COLLEGE AFFORDABILITY, FOCUSING ON HIGHER EDUCATION, HIGHER 
  COSTS AND HIGHER STUDENT DEBT, AND THE HIGHER EDUCATION ACT AND ITS 
                               AMENDMENTS

                               __________

                           FEBRUARY 16, 2007

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

               EDWARD M. KENNEDY, Massachusetts, Chairman

CHRISTOPHER J. DODD, Connecticut     MICHAEL B. ENZI, Wyoming
TOM HARKIN, Iowa                     JUDD GREGG, New Hampshire
BARBARA A. MIKULSKI, Maryland        LAMAR ALEXANDER, Tennessee
JEFF BINGAMAN, New Mexico            RICHARD BURR, North Carolina
PATTY MURRAY, Washington             JOHNNY ISAKSON, Georgia
JACK REED, Rhode Island              LISA MURKOWSKI, Alaska
HILLARY RODHAM CLINTON, New York     ORRIN G. HATCH, Utah
BARACK OBAMA, Illinois               PAT ROBERTS, Kansas
BERNARD SANDERS (I), Vermont         WAYNE ALLARD, Colorado
SHERROD BROWN, Ohio                  TOM COBURN, M.D., Oklahoma

           J. Michael Myers, Staff Director and Chief Counsel

           Katherine Brunett McGuire, Minority Staff Director

                                  (ii)






                            C O N T E N T S

                               __________

                               STATEMENTS

                       FRIDAY, FEBRUARY 16, 2007

                                                                   Page
Kennedy, Hon. Edward M., Chairman, Committee on Health, 
  Education, Labor, and Pensions, opening statement..............     1
    Prepared statement...........................................     3
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, 
  opening statement..............................................     5
    Prepared statement...........................................    14
Orman, Suze, Host, the Suze Orman Show, CNBC.....................    17
    Prepared statement...........................................    18
Draut, Tamara, Author and Director of the Economic Opportunity 
  Program, The Demos Institute, New York, NY.....................    20
    Prepared statement...........................................    22
Oberg, Ph.D., Jon, Former Researcher, U.S. Department of 
  Education, Washington, DC......................................    31
    Prepared statement...........................................    32
Baum, Ph.D., Sandy, Senior Policy Analyst, The College Board and 
  Professor of Economics, Skidmore College, Saratoga Springs, NY.    43
    Prepared statement...........................................    45
Isakson, Hon. Johnny, a U.S. Senator from the State of Georgia...    55

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Articles by Richard Vedder...................................     6
    Alexander, Hon. Lamar, a U.S. Senator from the State of 
      Tennessee..................................................    66
    Consumer Bankers Association.................................    67
    Letter to Senator Kennedy and Senator Enzi from Nelnet.......    69
    Questions of Senator Enzi to:
        Suze Orman...............................................    70
        Tamara Draut.............................................    71
        Jon Oberg................................................    71
        Sandy Baum...............................................    71

                                 (iii)



 
 HIGHER EDUCATION, HIGHER COST AND HIGHER DEBT: PAYING FOR COLLEGE IN 
                               THE FUTURE

                              ----------                              


                       FRIDAY, FEBRUARY 16, 2007

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:07 a.m. in 
Room SD-430, Dirksen Senate Office Building, Hon. Edward 
Kennedy, chairman of the committee, presiding.
    Present: Senators Kennedy, Enzi, and Isakson.

                  Opening Statement of Senator Kennedy

    The Chairman. We'll come to order. We thank all of our 
witnesses for coming this morning and it's a pleasure again to 
be with my friend and my colleague, Senator Enzi, the Ranking 
Member and Senator Isakson and we'll be joined by others as the 
morning goes along. We also have a number of students from 
George Washington University and the U.S. Students Association, 
the American Medical Student Association, even some young 
Democrats of America snuck in here this morning. So we want to 
welcome all of our students and a very interesting and 
worthwhile panel.
    Some 40 years ago, I was here when the Senate drafted the 
higher education legislation. It had been an issue that had 
been debated and discussed prior to the early 1960s and really, 
the issue was what is going to be the role of national policy 
towards the young people of our country. Are we going to 
recognize as a matter of national policy that we ought to 
provide some help and assistance to young, talented, creative, 
gifted students who are able to gain entrance into our fine 
schools and colleges across this country? Because they are 
limited in terms of their family's income, their own income, 
are they to be denied that opportunity or is the United States 
of America going to say to the young people of this Nation, 
we're going to find a path so any individual, any student in 
this country, young or old alike, that is able to gain entrance 
into any school that they choose, will be able to put together 
a financial package so that they would be able to go and also 
be able to come out of school without the heavy indebtedness, 
which is so often the case today? Assistance so that students 
during the time of their breaks between the various classes, 
are talking about their books rather than talking about the 
size of their student loans?
    With the Higher Education Act, after a long debate and 
discussion, an issue was whether we were going to provide help 
and assistance to the students or help and assistance to the 
universities--it was a very hotly contested debate. We made the 
judgment decision that we were going to provide help and 
assistance to the students. And at that time, 80 percent of the 
Federal help and assistance to the students was in the form of 
grants, 20 percent in terms of loans and that trend has 
completely reversed in the past several years.
    We hear political leaders talk about our youth. We hear 
them talk about the future. We hear how important it is to have 
an educated youth because we're going to have to deal with the 
global economy and in order to be a leader in global economy, 
we're going to have to have an economy of inventiveness--and 
where will the inventiveness come from if we don't have the 
young and talented and creative students? We say that we're 
going to need a national security force that's going to be 
second to none to deal with the new kinds of threats. Where are 
we going to be able to get that unless we have the best and the 
brightest also be interested in protecting the Nation?
    We say we want our democracy to function and work so that 
we're the model for the rest of the world in terms of our 
values and in terms of our respect for human dignity. 
Obviously, for democracy to be able to work, we need people 
that know the issues, understand the kinds of questions and are 
willing to work and pursue their views on these matters. All of 
this, I think, necessitates that we try and find out how we can 
move back to that day when we, as a nation, were making 
education affordable.
    What we've seen now in the recent times is that more than 
400,000 students who otherwise would not go to college because 
of financial reasons. It isn't so much even about these 
students, or about their own obligations but they don't want to 
bring indebtedness to their families. They respect their 
parents who have worked hard, played by the rules and now have 
a very small retirement income. They don't want their parents 
to go out and have to borrow and indebt themselves even though 
many do. We have an application for financial aid that is mind-
boggling in terms of its complexity and difficulty. Senator 
Enzi, who is by training and tradition, an accountant and an 
observer of the flow lines of resources, is helping the young 
people by making sure that we're going to try and simplify 
that.
    Finally and most of all, a focus for today, we want a 
student loan program that is going to work for the students. I 
believe that too often, the student loan program is working for 
the banks. How can we turn that more towards the student? I 
think the good, old-fashioned way--by using competition. We 
found out that the student loan programs needed incentives to 
begin the program and it seems to me, we ought to be finding 
out how we can try and use the concepts of incentives and 
competition to try and move the costs, and the interest rates 
down, and the Pell Grants up for those young people, and to 
assist those who want to go into public service, we should put 
a cap on what they're going to have to pay out of a limited 
salary as a school teacher, working in child care, working as a 
legal assistant in public service, a whole range of public 
service jobs. If they're making $25,000, $28,000 in a career, 
and are trying to give something back into the community, give 
something back to their country, we'll ensure they're not going 
to be overwhelmed by student debt and that they will have their 
debt forgiven after a period of 10 years.
    So we have a plan but we are fortunate this morning to have 
people that have looked at these issues and studied them in 
depth and we're very grateful for the opportunity to listen to 
them. I'll put my full statement in the record and I'd ask 
Senator Enzi for whatever comments he'd like to make.
    [The prepared statement of Senator Kennedy follows:]

                 Prepared Statement of Senator Kennedy

    I welcome our colleagues and witnesses for our hearing this 
morning on the increasingly serious problem of college access 
and affordability. It's affecting countless young people's 
basic life choices, from choosing a career to getting married, 
to buying a house and starting a family.
    I have a few charts that illustrate the challenges--it's 
not too much to call it a crisis.
    It's keeping 400,000 qualified students a year from 
attending a 4-year college.
    It's forcing many to rule out careers in public service--
such as teaching, social work or law enforcement. They may be 
lower paying jobs, but many find them deeply rewarding in other 
ways, and they bring large rewards to our society.
    It's contributing to the increasing economic inequality in 
today's America, in which low-income and first-generation 
students are far less likely than others to earn a college 
degree, even though higher education is more important than 
ever to keep the doors of opportunity open in our modern 
society.
    In a word, it's a crisis that's tarnishing the American 
dream for millions, and we in Congress can't ignore it any 
longer. Today, 60 percent of new jobs require some 
postsecondary education compared to only 15 percent of new jobs 
half a century ago.
    A major cause of the problem is cost. The cost of college 
has more than tripled in the past 20 years, and Federal aid 
hasn't kept up.
    Twenty years ago, the maximum Pell grant covered 55 percent 
of the cost of tuition, fees, room and board at a public 4-year 
college. Today it covers only 32 percent of those costs. As a 
result of rising costs and declining aid, more and more 
students are borrowing money to pay for college.
    In 1993, less than half of all graduates of 4-year colleges 
used student loans to finance their education. This year, it's 
two-thirds.
    The average college student graduates today with $17,500 in 
Federal student loans on graduation day. At public 
universities, student loan debt has more than doubled since 
1993.
    Last month, the House of Representatives passed the College 
Student Relief Act, which cuts interest rates on new subsidized 
student loans in half. Because the last Congress allowed 
interest rates to rise, typical student borrowers--already 
straining under $17,500 in debt--have to pay an additional 
$5,800 for their college loans.
    The House bill would prevent this. That's good news for 
millions of borrowers across the country, and I commend 
Chairman George Miller and Speaker Pelosi for their leadership 
in making this legislation such a high priority at the 
beginning of this new Congress, and I hope the Senate will do 
the same.
    We also need to do more to increase grant aid. Pell grants 
have been a lifeline to college for many low-income and middle-
income students for more than 30 years. But last year, the 
average Pell Grant fell for the first time in 6 years. In the 
recent funding resolution, Congress took a significant step 
forward with a modest increase in the maximum Pell Grant by 
$260, from $4,050 to $4,310. My hope is that we can raise it to 
$5,100 in this Congress.
    To prevent unreasonable debt burdens on students, we should 
cap student loan repayments at 15 percent of discretionary 
income, and offer loan forgiveness after 10 years to students 
who go into public service.
    It's also long past time to reform the Federal student loan 
programs, so they work for students and families--not the 
banks. It's a scandal that has allowed these student loan 
programs to become corporate welfare for big lenders. We pay 
enormous subsidies to lenders to take part in the Federal 
student loan programs, and we ignored the enormous growth of 
the student loan industry.
    Forty years ago, subsidies were needed to persuade lenders 
to take part. But today's, Federal subsidies make student loans 
the second most profitable business for banks--after credit 
cards. Something's obviously not right.
    Of the two basic programs, the Federal Direct Loan program 
costs taxpayers much less than the private loan guarantee 
program funded by the banks and heavily subsidized by the 
Treasury. We need real competition between the two programs, 
and we could use the obvious savings from such competition to 
increase need-based aid.
    The difference between the two Federal loan programs is 
obvious when you look at these charts prepared by the 
Government Accountability Office. Here is the program funded by 
the big lenders. It's an incomprehensible maze of rules and 
responsibilities, involving organizations the Direct Loan 
program doesn't need, and with money changing hands every which 
way.
    The Direct Loan program, by contrast, is much simpler. 
Instead of having lenders and guaranty agencies as middlemen, 
the government simply lends funds directly to the students--
which is one reason why this program is less expensive for 
taxpayers than the one funded by the banks. Clearly, the Direct 
Loan program is the better alternative.
    In addition, the private student loan market has grown 
thirteenfold--thirteenfold!--in the last decade. Students 
deserve protection from such gouging. We also need to be the 
insight over the sweetheart deals that lenders and schools are 
increasingly making to offer these loans to students. No 
students should have to mortgage their future in order to pay 
for higher education today.
    All these issues will be addressed in this year's 
reauthorization of the Higher Education Act.
    America can't be America without an educated citizenry. 
It's essential to the Nation's strength. Congress rose to a 
similar challenge after World War II. For every dollar we 
invested in the G.I. bill of rights, The Greatest Generation 
produced $7 in economic growth, and we must do the same today, 
because the need is so great and the stakes for the future are 
so profound.
    So I look forward to the testimony of our witnesses today, 
and to working with my colleagues in the months ahead to get 
the job done.

                   Opening Statement of Senator Enzi

    Senator Enzi. Thank you very much, Mr. Chairman. I thank 
you for holding this hearing and I am particularly pleased that 
we have college students here and I want to particularly 
welcome those from the George Washington University--that's my 
alma mater. I did happen to notice this last week that the 
Board of Trustees changed the tuition slightly and it is now 
the most expensive university in the United States. So help is 
obviously needed.
    Now, we've built an important record of hearings and 
roundtables on these issues in the 109th Congress and I hope 
that when all is said and done, that we have the tools that 
students need to complete higher education and help them 
acquire the knowledge and skills to be competitive in the 21st 
century.
    The American system of higher education is renowned. We 
have more than 6,000 colleges and universities and they enroll 
over 14-million students and provide access to all types of 
academic and skill-building programs. In Wyoming, we only have 
a handful. We have one 4-year university, public or private and 
seven community colleges. Our grand total of 10 accredited 
institutions of higher education in the State is the smallest 
of any State but Alaska. But that doesn't mean that we're any 
less concerned about a recent report by the Association of 
American Colleges and Universities that college graduates are 
less and less prepared to compete in the global economy. The 
American success story of higher education is at risk of losing 
those qualities that made it great; that's competition, 
innovation, access for all. Higher education will continue to 
be the on-ramp to success in the global economy and it's our 
responsibility to make sure that our young adults are able to 
access that opportunity and reach their goals.
    The Federal Government does have a role to play in 
increasing affordability, which is why I support increasing the 
maximum Pell grant award and why this committee is working on a 
broader higher education re-authorization bill that will 
promote innovation and new technologies to keep costs down, to 
expand the availability of information, and to help students 
and parents make more informed decisions and to improve the 
financial literacy across the board, so that students have a 
better understanding of how they can manage their loans and 
monthly loan payments. Schools and colleges also have a role to 
play. They can and must do more to increase accountability and 
seek efficiencies to bring down the cost of education.
    Also we need to explore innovative solutions to the 
complexity of the Federal student aid system. As Senator 
Kennedy said, we're trying to revise that free application for 
Federal student aid. I've looked into some of the reasons why 
it's so complicated and again, it has something to do with 
action that Congress has taken.
    Now concern for spiraling costs of college is not new. I 
plan to submit for the record several articles by Dr. Richard 
Vedder that provide us insight into the perfect storm that is 
confronting our institutions of higher education.
    Declining State support, stagnant productivity and students 
that are left without the tools they need to make informed 
choices about their college education. Over the last 20 years, 
tuition has grown at rates double the increase in family 
income. At the same time, productivity at our universities is 
declining, while more students find themselves having to take 
remedial classes in order to succeed in college-level 
coursework.
    Reauthorization of the Higher Education Act is needed to 
address these challenges and improve transparencies in ways 
that will combat these hidden costs of college. Institutions 
must better communicate the differences between sticker price 
and net price of a college education and there are many 
students that transfer from one school to another, only to 
discover that their hard-earned fully paid credits will not 
count toward their degrees. Other students enter college 
without the knowledge and skills they need, requiring them to 
take remedial courses just to catch up and we'll be doing some 
things in No Child Left Behind to try and end the wasted senior 
year of high school. This costs students money and time and 
adds to the taxpayers' cost. The result is that students 
graduate with greater debt. It also contributes to higher 
attrition rates, particularly for low-income students who find 
themselves no better off economically but likely to be facing 
monthly student loan payments.
    I also want to highlight an issue that I've been 
championing and see as a critical factor in discussing, which 
is student financial literacy. We must improve the financial 
literacy of students so they can weigh the costs and benefits 
of their college education options. And we can no longer assume 
that only 18- to 20-year-olds are at issue. We are seeing more 
working adults, people with college degrees and mid-career 
Americans pursuing additional education in order to acquire 
increasing knowledge and skills they need to be successful in 
the world economy. The choice of whether to pursue a 
postsecondary education is confronting millions of Americans 
and they need good tools by which to make those decisions.
    I've been a strong advocate for financial literacy because 
I believe that it gives individuals the tools to understand and 
shape their future. Senator Sarbanes and I were the authors of 
legislation enabling the Financial Literacy and Education 
Commission to develop a national strategy on financial 
literacy. I should note that next week, the Department of 
Treasury and Education will be holding the summit on K-
postsecondary education--overcoming challenges to help develop 
the national strategy. In addition, the summit will highlight 
the challenges to teaching young people about money and saving 
for college and the rest of their lives. We have members of the 
panel that have some expertise in that and I look forward to 
hearing from today's witnesses as we tackle these issues and 
get ready for that reauthorization of the Higher Education Act.
    Thank you, Mr. Chairman.
    [The articles by Mr. Richard Vedder follow:]
                  Attachment 1.--A Fortune in Tuition
    Tuition fees at the typical American State university rose ``only'' 
9 percent this year, USA Today tells us, down from 14 percent last 
year. For every single year for over 20 years, average tuition hikes 
have exceeded the inflation rate. When I entered Northwestern 
University in the late 1950s, it took a median-income family less than 
2 months' income to pay the annual tuition; today it takes over 6 
months' income to pay it, at a typical selective private school.
    Why is tuition soaring? According to conventional campus wisdom, 
it's because of declining external funding: lagging State subsidies to 
public universities, inadequate contributions and investment income at 
private ones. Schools also sometimes argue that higher tuition is 
funding qualitative improvements.
    My own research--published in a new book, Going Broke by Degree: 
Why College Costs Too Much (AEI Press, 2004)--suggests that the 
conventional wisdom is wrong. Tuition has been growing for decades--
during periods of rapidly rising as well as falling State and private 
funding. As to qualitative improvements, it is true facilities are 
nicer these days and some new academic offerings have been introduced, 
but at the same time the average score on the Graduate Record Exam is 
lower today than in 1965; it is highly questionable whether college 
kids are learning any more than they were decades ago.
    The real reason for soaring college costs is higher demand for 
colleges, largely resulting from well-intended but dubious governmental 
policies. When demand rises relative to supply, prices (in this case, 
tuition fees) go up. Demand is rising partly for non-governmental 
reasons, such as higher incomes and a growing earnings differential 
between high school and college graduates. But it is also rising 
rapidly because of the huge growth in government loan and grant 
programs as well as tuition tax credits. Pell grants, Stafford and 
Perkins loans, tax-sheltered college-saving schemes (``529 plans''), 
work-study programs, etc.: All serve to increase the number of students 
wanting a college education at any given price. Kids without money for 
college simply borrow it.
                               roman genn
    Rising tuition and enrollments have meant surging college revenues. 
Real per-
student spending rose about 70 percent over the past 20 years. How have 
the universities used this extra money? Financial data provided to the 
Federal Government suggest that remarkably little of the higher 
spending has gone toward instruction: perhaps 21 cents for each new 
dollar per student since 1976. Teaching and learning are becoming 
almost secondary activities at some universities. Research has grown, 
but so has spending on myriad other things. Administrative staffs, for 
example, have soared. In 1976, it took the typical university about 
three ``non-faculty professionals'' to service each 100 students; 
today, it takes nearly six. My fairly typical university spends over 
$10 million a year subsidizing intercollegiate athletics.
    Awash with funds, university personnel have taken good care of 
themselves too. Over the 1980s and 1990s, real average faculty 
compensation (including fringe benefits) probably rose about 45 
percent, and near-mid-six-digit salaries are commonplace for top 
administrators and superstar faculty. A large proportion of tuition 
increases has gone not for qualitative learning improvements, but to 
making life better for the permanent paid members of the academy--lower 
teaching loads, more travel, higher salaries, etc. University 
presidents beg legislatures and big donors for more funds ``to improve 
student access and academic quality,'' but use most of the money for 
fancy facilities, athletics subsidies, administrative-staff increases, 
and other things peripheral to the main mission of the institutions.
    How can universities get away with it? Unlike the private for-
profit sector, which faces strict financial discipline imposed by 
competition and markets, the not-for-profit modern American university 
is largely (although not completely) shielded from these forces. How is 
IBM doing? You can get real-time changing assessments of its fortunes 
by following its stock price, and at least quarterly estimates of its 
profits in press releases and stockholder reports. But how did Stanford 
do last year? Who knows? There is no bottom line in higher education. 
The closest thing to a bottom line for most high-quality schools is 
privately issued rankings of universities. The most influential, that 
of U.S. News & World Report, evaluates partly on the basis of the 
amount spent on inputs (e.g., faculty resources): The more the school 
spends, the higher the ranking.
    Not only is there little financial discipline, but political or 
institutional accountability is lacking as well. Unlike most 
governmental agencies, State universities typically are largely 
operationally independent of their funding source, with relatively 
little legislative or executive oversight to ensure accountability. 
Boards of trustees nominally run most not-for-profit institutions of 
higher education (both public and private), but they are usually 
dominated by part-time volunteers with little time for independent 
exploration of campus issues, and are usually co-opted by the 
administration they supposedly oversee.
    The sharp rise in the cost of student education suggests that 
productivity in American higher education is falling, certainly 
relative to the private sector, but probably in an absolute sense as 
well. While productivity is hard to measure (how do you evaluate 
research?), under any reasonable assumption universities are becoming 
relatively more costly and inefficient.
    As the cost of conventional higher education rises, people seek out 
other options. For-profit institutions such as the Apollo Group's 
University of Phoenix use about one-third the resources of the typical 
not-for-profit to educate a student, and are both rapidly growing and 
extremely profitable (with pre-tax profit margins approaching 30 
percent in some cases). Owing to their relative efficiency, their 
tuition costs are not much greater than those of some highly 
governmentally subsidized State universities.
    There are other options. Computer whizzes are sometimes foregoing 
degrees in computer science to become certified in major computer tasks 
by Oracle, Microsoft, or Novell. Some kids are heading overseas for 
college, or to the relatively lower-cost community colleges instead of 
the more expensive State universities. In time, universities may 
grudgingly get serious about cost-cutting, raising teaching loads, 
ending tenure, slashing administrative bureaucracies, and leaving 
peripheral businesses (such as food and lodging operations or sports 
teams). But it has not happened yet--because the incentives to do so 
are still largely missing.
    A compelling case can be made that government should get out of the 
higher-education business. Two arguments are used to defend public 
subsidies: Universities have positive externalities (spillover effects 
that benefit non-attendees as well as those getting degrees), and 
public funding expands access for lower-income students. As to the 
positive-externality argument, I have actually observed a negative 
correlation between State-government spending on universities and 
economic growth, controlling for other factors. Universities literally 
lower the incomes of non-participating citizens. And in the case of the 
second argument, there is only the very weakest of positive 
correlations between government spending on universities and the 
proportion of students either attending or graduating from college. 
(Another scandal: Over 30 percent of entering 4-year-university 
students do not graduate within 6 years.) The recent reduction, in some 
States, in government support for universities is thus sensible public 
policy.
    One worthwhile approach is Colorado's: Allocate more money directly 
to students, rather than to institutions. Give scholarships (vouchers) 
to students who are poor, to increase their access to education--but 
limit the funding to those with decent academic performance (in other 
words, stop subsidizing party-loving mediocre students). As for the 
rest, let them pay their own way: They are the ones who benefit, so 
they should pay the bill.
    Mr. Vedder teaches economics at Ohio University and is an adjunct 
scholar at the American Enterprise Institute.
               Attachment 2.--College Is a Bad Investment
    Pouring more taxpayer money into universities doesn't lead to 
prosperity.
    When university presidents plead for government money, they often 
make an argument for social investment. Pump funds into higher 
education and the economy will grow, they claim. After all, this is an 
information- and skill-based age in which college graduates are far 
more productive than their less-educated peers.
    True. But the evidence suggests that increased public funding for 
universities doesn't lead to greater prosperity and may even reduce the 
chances of it. Compare the growth in real per capita income in States 
that spend a lot on higher education with that of States that spend 
less and a few surprises show up. Over the past 50 years low-support 
New Hampshire out-distanced neighboring Vermont on nearly any economic 
measure, though Vermont spent more than twice as much of its 
population's personal income on higher education (2.37 percent versus 
1.15 percent in New Hampshire). Missouri, with modest State university 
appropriations (1.32 percent of personal income), grew faster than its 
neighbor to the north, Iowa (at 2.41 percent).
    Similar examples abound. Using data for all 50 States from 1977 and 
2002, I compared the 10 States with the highest State funding for 
universities against the 10 States with the lowest. The result: The 
low-spending States had far better growth in real income per capita, a 
median growth of 46 percent compared with 32 percent for the States 
with the highest university spending. In 2000 the median per capita 
income level for the low-spending States was $32,777, 27 percent higher 
than the median for the 10 States where higher education got the most 
State money.
    The results were the same when controlling for a State's oilfields 
or other energy sources, the age distribution of its population, the 
prevalence of labor unions, the tax climate and other factors that 
could affect growth--even the proportion of college graduates. This 
despite the fact that the States that were growing most quickly tended 
to have a high proportion of college graduates.
    How could this be? Colleges have devoted relatively little new 
funding over the past generation to the core mission of instruction 
(spending only 21 cents of each new inflation-adjusted dollar per 
student on it), preferring instead to assist research, hire more 
nonacademic staff, give generous pay increases, support athletics and 
build luxurious facilities. And while in the private sector, companies 
have learned to get more work out of fewer employees, the opposite 
appears to have happened in higher education. In 1976 American 
education employed three nonfaculty professional workers 
(administrators, counselors, librarians, computer experts) for every 
100 students; by 2001 that number had doubled.
    Another piece of the puzzle: Only the weakest of positive 
correlations links funding level and enrollment. Even if students 
enroll, they don't necessarily finish school. Nearly 40 percent fail to 
graduate within 5 or even 6 years, suggesting that many who attend 
universities don't much benefit from them.
    Yet another explanation is one Forbes readers know all too well. 
Taxes reduce private-sector activity. People who must pay high taxes 
tend to work and invest less and also tend to migrate to lower-tax 
areas. In other words, increasing funding to universities means 
transferring resources from the relatively productive private sector to 
higher education, which tends to be less productive and efficient.
    So what should we do? College is still a decent individual 
investment, certifying that the graduate meets minimum standards (often 
missing in high school) for competence, intelligence, maturity and 
literacy. But we should rethink the nature and magnitude of public 
support for universities. State governments, facing rising Medicaid 
bills and demands for primary and secondary education funding, are 
already slashing their support. I hope and expect this trend to 
continue. Big changes are coming to higher education. They are overdue.
               Attachment 3.--Let's Not Be 3.4 Percenters
    The new Democratic congressional majority is voting Wednesday to 
lower the interest rate of some subsidized student loans from 6.8 to 
3.4 percent. On the face of it, this appears as a welcome move to 
reduce the rising burden of student debt. Various student groups have 
been quick to endorse the idea.
    Though I've written much about how high tuition costs have imposed 
increased financial burdens on college students, I oppose the new 
Democratic proposal. There is, of course, the legitimate Republican 
procedural objection that decisions of this sort should be made only 
after experts are consulted, evidence is gathered and presented, and 
reasoned debate concluded.
    My concerns are different: the Federal student-loan program is 
already Byzantine in its complexity, and has even been harmful to some 
students. The Democrats' new move will do nothing to address these old 
problems.
    A historical perspective is useful. The great growth in college 
participation in the United States occurred before Federal financial 
aid was a reality. With the single, but important, exception of the GI 
Bill, there were no large Federal student-aid programs before 1970.
    In that year, total Federal student assistance amounted to $1.6 
billion. About $1,000 per student in 2007 dollars, this was less than 
one-fifth the commitment today, even adjusting for inflation and the 
higher cost of tuition. Yet the number of college students per 1,000 
Americans aged 18 to 24 grew from 23 in 1900 to 324 in 1970.
    The explosion in aid began in the 1990s. From 1990 to 2000, Federal 
student assistance more than tripled, going from $19 billion to $63 
billion, but the proportion of the population in the 18 to 24 age group 
going to college rose only modestly (from 506 to 545 in a thousand). 
Among some groups, including males, there was no growth at all over 
this period.
    The explosion in aid has actually accompanied a slowdown in the 
growth in college participation. There is little evidence that the aid 
epidemic has increased the proportion of adult Americans who are 
college graduates.
    Why? First, much of the increased student aid has gone to students 
who would have gone to college without the aid (e.g., recipients of 
Federal tuition tax credits, who could afford tuition in the first 
place).
    Second, and relevant to the current debate, more Federal money 
increased the demand for higher education, raising sticker prices. The 
greater demand was not offset by supply increases, partly because 
prestigious colleges have put limits on undergraduate admissions.
    Third, as the Education Trust showed convincingly recently, 
institutional financial assistance shifted sharply away from need to 
merit-based aid in recent times. The result? Higher tuition costs often 
more than offset higher aid for poorer students, so the burden of 
college attendance has risen, not fallen.
    The real problem is not high interest rates on student loans, but 
exploding college costs. There are easily a dozen causes for this, but 
a few especially stand out.
    Third parties (e.g., the Federal or State Governments, private 
philanthropists) pay a large chunk of the bills, rendering the 
customers relatively insensitive to prices (health care revisited).
    Universities are mostly nonprofit institutions with few incentives 
to cut costs. The lack of a well-defined ``bottom line'' makes 
universities strive to improve their US News & World Report rankings, 
which are perversely enhanced by spending more money and restricting 
access.
    A lack of well-defined property rights (who owns and controls 
universities) means the faculty is able to promote its own interests 
over those of relatively disenfranchised students and parents. For 
example, a drop in teaching loads has occurred not because of any 
nationally articulated research imperative, but because faculties have 
simply done it, with the approval of nominal bosses who politically 
need faculty support.
    Why have universities raised tuition fees dramatically, creating 
the current brouhaha over student aid? Because they can get away with 
it. The solution to the problem is not reducing interest rates on 
loans, but getting the rise in college costs to remain below the income 
curve.
    It would be far preferable simply to give students money in the 
form of an educational voucher and to let them use it in whatever 
fashion they wish than to try to artificially change the price of one 
of many cost items that determine the financial burden of college.
    The method that the Democrats seek to pay for these new lower 
interest rates is predictable and problematic. The fees paid to private 
loan programs are to be cut, and the guaranteed reimbursement provided 
in cases of default are also to be reduced.
    This is the strategy used in health care (cut fees to doctors and 
drug companies, lower costs to consumers), a move that has not stemmed 
the rise of health care costs, but rather threatens its quality in the 
long run. A similar outcome is likely if followed through in higher 
education.
    In an ideal world, the Government would get out of the financial-
aid business. Excepting the GI Bill, it has not improved access to 
college. Financial markets, capable of handling small loans for home 
repairs and car purchases as well as billion-dollar loans to giant 
corporations, can meet borrowing needs of individuals wanting to go to 
college.
    And still, there is growing evidence that governmental higher 
education support does not promote economic growth, the rhetoric those 
``educrats'' who benefit mightily from rising subsidies 
notwithstanding. Why, then, shouldn't the Federal Government limit its 
involvement at most to a Pell Grant program for truly low-income 
students, or perhaps get out of the aid business altogether?
    Our great hope in stopping this express train is President Bush. 
One hopes he is beginning to realize that his role in history would be 
enhanced, not retarded, by just saying no to something. Vetoing an 
interest-rate subsidy bill would be a good place to start.
 Dealing with Affordability Thoughts for the Affordability Task Force 
                 Future of Higher Education Commission
                             the questions
    Are American universities becoming less affordable, and, if so, 
what should we do about it? Before even attempting to answer those 
questions, we must ask the question: affordable for whom? The students 
(and their parents) who are attending college? For the Nation as a 
whole? For the colleges and universities themselves--are some forms of 
education more ``affordable'' to the institutions than others?
                       affordability to students
The Stylized Facts
    Starting with the question of affordability to students, it is 
indisputable that the costs of college have risen faster than overall 
inflation and, in recent years, even faster than the rise in family 
incomes. Thus the financial burden of college has grown. The evidence 
also is that this increased burden impacts more on relatively less 
affluent students who are more sensitive to price, thus raising the 
issue of the impact of reduced affordability on educational access.
    Even with higher costs, however, college ``investments'' are good 
ones for the student from a strictly financial perspective, as rising 
tuition charges have been roughly offset by an increase in the ratio of 
college to high school graduate earnings differential. Moreover, the 
``sticker prices'' of colleges are increasingly discounted through 
scholarships, and student loan programs help students borrow the money 
to get through school. Yet even these ``loans,'' although subsidized to 
some extent, represent a financial obligation to students. Also, the 
evidence shows that, even if one looks at the net tuition--gross 
tuition minus discounts in the form of scholarships--real costs have 
risen significantly faster than the rate of inflation. So even if 
college is a decent, even good, investment, for some there are 
significant cash flow problems involved in financing this investment, 
aggravated by the fact that close to half of the students entering 4-
year programs fail to graduate within even 5 years (and for whom, 
consequently, the investment on balance probably does not have a high 
rate of return).
    In addition, with respect to scholarships, it is a demonstrated 
fact that an increasing proportion of student financial aid has been 
awarded on criteria other than financial need. Income-specific data 
shows that, even if one controls for student academic ability, the 
burden of attending college is much greater for large segments of the 
population with below average incomes, lowering participation.
Reasons for Rising Prices
    When the price of something goes up, it is either because the 
demand for that something has risen, or the supply has fallen (or a 
combination of both). The simultaneous increase in both tuition fees 
and enrollments over time suggest that the increase in demand is the 
dominant factor. Yet the increase in demand could have been offset by 
an increase in supply. In less technical English, colleges and 
universities could have used incremental funds to greatly expand 
capacity. Yet large portions of American higher education have not done 
this, including virtually all the prestigious private research 
universities and liberal arts colleges, and most flagship State 
universities as well.
    When Amherst College, Northwestern University, or the University of 
Michigan receives an infusion of new funds from private donors or 
legislative appropriations, they do not use these funds to expand 
enrollments--the evidence is crystal clear on that. It is nearly as 
true of numerous less prestigious institutions as well. Indeed, 
institutional prestige is enhanced by increasing the proportion of 
students denied admission, and enrollment expansion potentially lowers 
perceived institutional reputation. Thus the incentives to expand 
enrollment are outweighed often by disincentives associated with that 
move. These factors, along with falling or stagnant university 
productivity and institutional emphasis on matters other than 
undergraduate instruction help explain the rise in college costs.
    On the demand side, well-intended government financial assistance 
programs have been largely self-defeating. Suppose the Federal 
Government increases student financial aid in a year by 10 percent 
(actually, below the average for the years since 1994); typically 
within a year, the colleges raise fees by 7 or 8 percent. Since 
students receiving large assistance payments or loans are relatively 
insensitive to price, and since the supply of ``slots'' available is 
also relatively inelastic because of selective admission policies at 
many schools, the increase in demand induced by increased student 
assistance has aggravated tuition increases. Moreover, limits on 
assistance popular with low-income families (e.g., Pell Grants) have 
risen relatively modestly compared with loans to more affluent 
students. The student loan program is increasingly an upper middle 
class entitlement (students from truly affluent families have also 
benefited significantly from the sharp increase in nonmerit-based 
scholarship aid, and tuition tax credits).
    Looking again at the supply side, the increase in the amount of 
expensive labor used to educate any given number of students (perhaps 
25 percent over the past 30 years) has aggravated the problem. For 
example, there are six ``non-faculty professional'' workers for every 
100 students today in American higher education, double the number 
three decades ago. Within the academy, there has been some shift of 
resources away from undergraduate instruction, some of it externally 
funded (e.g., Federal grant research), but some of it not. For example, 
average teaching loads for full professors at major research 
universities have fallen from perhaps 8-9 hours a week in the middle of 
the last century to about 5 hours today. Similar load reductions have 
occurred at schools with less research distinction. Institutions are 
using their own resources (some of them financed by tuition) to fund 
research via lower teaching loads. Again the incentive system is 
skewed. Professors are rewarded mainly for research (where the results 
are measurable to some extent, and thus subject to national 
recognition), rather than for teaching (where results are harder to 
measure and excellence less easy to identify and to parlay into a 
national reputation). For reasons of money and prestige, on average 
professors strive to minimize their teaching responsibilities, 
particularly at the research-oriented institutions. Thus universities 
have a lot of expensive faculty members doing modest amounts of 
teaching.
                     affordability to institutions
    The above discussion points out that many institutions find it 
costly to emphasize undergraduate instruction. The most student-
oriented of institutions--2-year community colleges--have lost ground 
financially relative to 4-year schools. For example, salaries of 
faculty in real terms have stagnated and even fallen, while those for 
senior professors at leading research institutions have risen 
substantially. Incentives systems generally have favored an increase on 
emphasis on non-undergraduate activities such as funded grant research. 
Research garners national reputation when it is high quality, via 
scholarly publications and even media dissemination. Stories about 
effective undergraduate instruction tend to be localized in nature, and 
do little to enhance national prestige as measured by the US News & 
World Report survey or other rankings. It is a sad but true fact that 
at most American universities, faculty prestige runs inversely with 
faculty teaching loads. Research universities use more and more 
relatively cheap adjunct professors and teaching assistants to instruct 
lower division undergraduates at relatively low cost, while showering 
resources on advanced graduate students and research, not to mention a 
burgeoning administrative bureaucracy.
                        affordability to society
    A greater proportion of our national resources are going to higher 
education, by far, than in, say 1960. That is to be expected given 
rising educational aspirations and increased college participation, and 
even today only about 3 cents of every dollar of output goes to higher 
education. So by most ways of looking at things, America can afford the 
costs. At the same time, however, higher education does not exist in a 
vacuum. State governments have significantly reduced institutional 
subsidies for a variety of reasons. The astronomical rise in Medicaid 
costs makes it unlikely that this trend will reverse anytime soon. Huge 
Federal budget deficits and what many regard as excessive spending 
growth over the past few years produces a climate where there will be 
strong resistance to radically expanding Federal aid.
    The enrollment share of private schools, counting the for-profits, 
is growing, and the public enrollment share is declining. Moreover, 
many schools that are ``public'' are increasingly moving in the 
direction of privatization, with some flagship American State 
universities receiving only 10 or 15 percent of their budget from State 
appropriations. The fiscal history of the United States for a third of 
a century suggests that a political equilibrium is reached in the 
typical State when State and local taxes are at 10 percent of personal 
income--less than that, the political forces demanding increased 
governmental services often prevail, but beyond that the forces 
demanding relief from high taxation often are politically successful. 
The aggregate State and local tax burden has remained remarkably stable 
(around 10 percent of income) since at least 1970. It is probably 
unrealistic to expect voters agreeing to higher taxes to fund higher 
education, regardless of the entreaties of the university community.
    This raises the question, ``who should pay for the universities?'' 
That answer may vary somewhat by type of institution--for example, it 
is probably unreasonable to ask current students to subsidize to any 
major degree long-run basic research efforts at the major research 
universities. But should the government or philanthropic institutions 
substantially subsidize the education of, say, students from relatively 
affluent homes that do a mediocre job in school, lingering around at 
partial public expense for 5 or 6 years? I question whether that is a 
luxury that we can afford.
    This gets to the critical underlying issue: are the services of 
universities and colleges public or private goods? Do the benefits 
accrue to the students in attendance, or to society at large? The 
question is complicated by the fact universities perform multiple 
tasks--disseminating knowledge to students, expanding the frontiers of 
knowledge through research, not to mention such non-academic functions 
as providing food, lodging and entertainment (e.g., college athletics, 
theater). It is at least plausible that it may be that positive 
spillover effects justifying public funding are more prevalent in some 
activities, e.g., scientific research, than in others, e.g., student 
instruction, research in the social sciences and humanities, 
intercollegiate athletics.
    Universities claim, with only minimal solid evidence, that they are 
important in promoting economic development. It is unquestionably true 
that advanced economies need lots of ``human capital'' and that a basic 
intellectual infrastructure is necessary for major technological 
innovation. That does NOT prove, however, that spending NEW or 
incremental dollars on higher education will have a high payoff. My own 
research with respect to State government appropriations suggests that 
it does not, and hints that the positive externalities or spillover 
effects present in public goods may not be present in higher education 
today at its current level of funding and with the current system of 
delivering educational services. I may be wrong, but the empirical 
basis for claims to the contrary is pretty slim.
    One factor in declining governmental support at the State level for 
higher education is a growing sense that the independence of 
universities, granted to insulate them from political pressures and 
allow academic freedom, may have bred a decline in institutional 
accountability. Who watches the universities? How do you even evaluate 
how they are doing? Often it seems universities embark on missions on 
their own and expect society to pay the bills. They do not require 
either legislative action or stockholder approval for most of the 
things they do. Thus teaching loads fell over time not because of a 
conscious national policy decision to lower them to support research, 
but because universities simply did so, almost by stealth, over a 
period of decades. Undergraduate instruction received less attention 
not because of public policy decisions, but because of institutional 
actions favoring more prestigious graduate programs, research, 
intercollegiate athletics, etc.
                   groping for solutions: some ideas
    It is mathematically impossible for the costs of education for 
students to rise faster than family income on a sustained basis (costs 
can rise faster than inflation almost indefinitely and have in some 
areas of the fine arts, as William Baumol has argued). Therefore, even 
without Commission action, some move towards lowering the tuition cost 
explosion is inevitable.
    I think a sharp slowdown in the growth in Federal aid programs 
would help reduce the growth in tuition costs. I think also that 
institutional efforts to increase merit-based assistance relative to 
need-based aid has added to the access problem, although it must be 
acknowledged that many underrepresented groups are largely 
underrepresented because of poorer academic performance at the K-12 
level rather than economic access barriers.
    A revamping of Federal student loan programs seems warranted. Loan 
eligibility should be restricted more. Students from higher income 
families should not receive federally subsidized assistance. Poorly 
performing students should be subject to loss of aid. Also, just as we 
now put time limits on welfare payments, we should do so on loan 
eligibility--perhaps 4 years for full-time baccalaureate students. At 
the same time we should increase assistance for lower income students 
to minimize access problems. One approach would simply be to increase 
the amounts available for Pell Grants. An alternative, perhaps more 
promising approach would be to convert Pell Grants into Equal 
Opportunity Scholarships working like vouchers, where awards are made 
to students usable at any accredited institution of higher education. 
Encouragement should be given to States to convert more of their higher 
education support into grants to students rather than to institutions. 
This should increase somewhat competition for students, perhaps reverse 
the relative neglect of undergraduate instruction, and simply make 
explicit what is already happening: the move towards privatization of 
State-supported institutions. Vouchers could be both performance-based 
and progressive--more to low-income kids, more for good students than 
bad.
    It may be possible to restructure Federal tax policy in a revenue-
neutral way that would better support national educational objectives. 
People take tax deductions for contributions to non-academic 
enterprises at universities, like athletic facilities. Rich schools 
with predominantly affluent students and annual endowment income 
exceeding $50,000 per student, such as Harvard and Princeton, receive 
gifts treated the same for tax purposes as schools with almost no 
endowments serving predominantly lower or middle income students. 
Perhaps deductions to ``rich'' schools should be restricted, and 
donations to poorer schools (public or private) be encouraged, possibly 
by the use of tax credits. Perhaps a National Scholarship Foundation 
should be created funded by tax credits financed partly by restrictions 
in tax write-offs for gifts to extremely affluent schools or for non-
academic purposes such as stadium renovations. Along the same lines, to 
improve access perhaps we should restructure governmental assistance to 
aid lower cost schools that clearly use incremental funds to increase 
capacity. Per-student costs can be reduced significantly simply by 
shifting the mix of students more to lower cost institutions.
    Barriers to entry into offering education services should be 
scrutinized. Recently, for-profit schools have begun buying up small 
not-for-profit schools mainly to obtain accreditation. Accreditation is 
costly and excessively input rather than outcomes based. Admittedly 
there are trade-offs here: loosing accreditation rules increases risks 
of non-legitimate diploma mills not only existing, but obtaining 
Federal funds for their students.
    More radically, perhaps we should encourage (require?) universities 
to separate their teaching and research functions. Professors would 
work for the University of Michigan for instruction, and for the 
University of Michigan Research Institute for their research. This 
might lead to improvements in the transparency of university finances, 
and could ultimately lead to a new research model. Perhaps we should 
also revamp Federal research grants, making them more purely 
competitive instead of grants given to monopolists (the sole proposes 
of a research project) based on some sense of merit. A standardized and 
simplified national overhead policy for research also makes great 
sense.
    The Academic Arms Race of spending more and more to obtain higher 
rankings on the US News & World Report and similar surveys should be 
discouraged. How? One approach is to offer new ways of evaluating 
university quality. For example, administer an entrance and exit 
general education test at all schools accepting federally assisted 
students, similar to the NAEP examination used at the K-12 level. One 
possibility is the new Collegiate Learning Assessment test developed by 
the Rand Corporation and already used at over 120 colleges. The Federal 
Government would then publish the ``value added'' at each school. 
Accreditation could be more tied to this outcomes-based measure. This 
examination, depending on the nature of test used, might also have the 
secondary benefit of dealing with an abysmal decline in knowledge of 
basic facts about our heritage, encouraging schools to beef up their 
general education curricula and take seriously a U.S. Senate resolution 
to require some study of history in college. To deal with another 
national higher education malady, Federal assistance could be barred to 
schools where the average student grade for the total student 
population is above, say, a ``B'' average. Grade inflation has 
contributed to declining standards and needs to be addressed.
    Some rewards should exist for schools that hold the line on costs, 
and take cost-cutting seriously, for example by using technology more 
intelligently to reduce costs. What would happen, for example, if the 
Federal Government awarded $1 billion annually to schools in the top 10 
percent of institutions in terms of meeting efficiency criteria (e.g., 
changes in expenditures per student, most incremental value-added per 
dollar spent, etc.), with the stipulation that 10 percent of the funds 
would go to efficiency bonuses to key employees? At the moment, the 
pressures are intense from tenured faculty and powerful deans for 
university presidents to recommend big budget increases. Those 
pressures should be counteracted by incentives to economize.
    These are just a few suggestions to ``wet the appetite'' for 
discussion of serious reform.

    [The prepared statement of Senator Enzi follows:]

                   Prepared Statement of Senator Enzi

    Thank you Senator Kennedy for holding this hearing and 
continuing our work on the reauthorization of the Higher 
Education Act. We built an important record of hearings and 
roundtables on these issues in the 109th Congress. I hope when 
all is said and done, students will have the tools they need to 
complete higher education and help them acquire the knowledge 
and skills to become competitive in a 21st century economy.
    The American system of higher education is renowned 
throughout the world. Our more than 6,000 colleges and 
universities enroll over 14 million students and provide access 
to all types of academic and skill building programs. In 
Wyoming we only have a handful of the total--one 4-year 
university, and seven community colleges. Our grand total of 10 
accredited institutions of higher education in the State is the 
smallest of any State but Alaska.
    However, we are no less concerned about a recent report 
from the Association of American Colleges and Universities that 
college graduates are less and less prepared to compete in the 
global economy. The American success story of higher education 
is at risk of losing the qualities that made it great--
competition, innovation, and access for all. Higher education 
will continue to be the on-ramp to success in the global 
economy, and it is our responsibility to make sure that our 
young adults are able to access that opportunity and reach 
their goals.
    The Federal Government has a role to play in increasing 
affordability, which is why I support increasing the maximum 
Pell Grant award, and why this committee is working on a broad 
higher education reauthorization bill that will promote 
innovation and new technologies to keep costs down, expand 
availability of information to help students and parents make 
more informed decisions, and improve financial literacy across 
the board so that students have a better understanding of how 
they can manage their loans and monthly payments. Schools and 
colleges also have a role to play. They can and must do more to 
increase accountability and seek efficiencies that bring down 
the cost of education.
    Also, we need to explore further innovative solutions to 
the complexity of the Federal student aid system. Right now 
filling out the Free Application for Federal Student Aid 
(FAFSA) prevents many students from even considering college. 
That was never our intent and it is time to make the FAFSA less 
complicated than filling out our tax forms--and for an 
accountant to say that, is really something. One interesting 
solution I've heard, and I hope to hear other suggestions 
today, is the possibility of rolling the financial aid process 
into the existing tax system. We need to explore this and other 
approaches to making sure that we improve the FAFSA to help 
students get timely and useful information about what resources 
they have available to pursue higher education.
    Concern for spiraling costs of college is not new. I plan 
to submit for the record several articles by Dr. Richard Vedder 
that provide us insight into the perfect storm that is 
confronting our institutions of higher education: declining 
State support, stagnant productivity, and students that are 
left without the tools they need to make informed choices about 
their college education.
    Over the last 20 years tuition has grown at rates double 
the increases in family income. At the same time productivity 
at our universities is declining, while more students find 
themselves having to take remedial classes in order to succeed 
in college-level coursework. Reauthorization of the Higher 
Education Act is needed to address these challenges and improve 
transparency in ways that will combat these hidden costs of 
college.
    Institutions must better communicate the difference between 
the ``sticker price'' and ``net price'' of a college education. 
And there are many students that transfer from one school to 
another only to discover their hard-earned, fully-paid credits 
will not count toward their degrees. Other students enter 
college without the knowledge and skills they need requiring 
them to take remedial coursework just to catch up. This costs 
students money and time, and adds to taxpayers' costs, too. The 
result is that students graduate with greater debt. It also 
contributes to higher attrition rates, particularly for low-
income students, who find themselves no better off 
economically, but likely to be facing monthly student loan 
payments.
    I also want to highlight an issue that I have been 
championing and see as a critical factor in this discussion--
student financial literacy. We must improve the financial 
literacy of students so they can weigh the costs and benefits 
of their college education options. And we can no longer assume 
that only 18-22 year olds are the students being served by 
these programs. We are seeing more working adults, people with 
college degrees and mid-career Americans pursuing additional 
education in order to acquire the increasing knowledge and 
skills they need to be successful. The choice of whether to 
pursue a postsecondary education is confronting millions of 
Americans, and they need good tools with which to make those 
decisions.
    I have been a strong advocate for financial literacy 
because I believe that we must give individuals the tools to 
understand and shape their future. Senator Sarbanes and I were 
the authors of the legislation establishing the Financial 
Literacy and Education Commission to develop a national 
strategy on financial literacy. I should note that next week 
the Departments of Treasury and Education will be holding the 
``Summit on K-Postsecondary Education--Overcoming Challenges'' 
to help develop the national strategy. In addition the Summit 
will highlight the challenges to teaching young people about 
money and saving for college and the rest of their lives.
    I look forward to hearing from today's witnesses as we 
tackle these issues in the reauthorization of the Higher 
Education Act.
    The Chairman. Thank you very much. We are very fortunate 
with our panel this morning. Suze Orman is a two-time Emmy 
Award winner, television host and a New York Times best-seller 
author, magazine and online columnist, writer/producer, 
motivational speaker, one of America's most recognized experts 
on personal finance. Ms. Orman has written five consecutive New 
York Times best sellers and lectured widely and is a certified 
financial planner and Director of the Suze Orman Financial 
Group and Vice-President of Investments at Prudential Based 
Securities and was an account executive at Merrill Lynch. Prior 
to that, she was a waitress at Buttercup Bakery in Berkeley, 
California, from 1973 to 1980.
    Tamara Draut oversees Demos' research policy advocacy work 
on issues related to economic security and mobility and is the 
author of Strapped: Why American's 20- and 30-Somethings Can't 
Get Ahead, published by Doubleday in 2006. Her research focus 
is on the growing debt burdens facing low- and middle-income 
households, and more broadly, the challenges confronting 
households trying to educate their way into the middle class. 
She is the author of a number of superb books. Her research has 
been covered extensively by the Times and Washington Post and 
television networks.
    Jon Oberg is a former staff member who worked for years at 
the Department of Education. He has four decades of experience 
in higher education finance at the institutional, State, 
Federal, and international levels. His experience includes that 
of Chief Financial Officer in his home State of Nebraska; staff 
on the U.S. Senate Budget Committee; President of an 
Association of Colleges and Universities; and legislative 
liaison to Congress in 1998 for the U.S. Department of 
Education, during the reauthorization of the Higher Ed Act. He 
holds a Master's degree from the University of Nebraska and 
earned a Doctorate from Free University of Berlin.
    Sandy Baum is a Professor of Economics at Skidmore College, 
and Senior Policy Analyst at the College Board. Dr. Baum earned 
a BA in Sociology at Bryn Mawr College, Ph.D. in Economics at 
Columbia, and has written extensively on issues relating to 
college access, college pricing, student aid policies, student 
debt, affordability and other aspects of higher education. Dr. 
Baum is the co-author of Trends in Student Aid, Trends in 
College Pricing, and Education Pays, the Benefits of Higher 
Education for Individuals and Society, for the College Board.
    So we have a very good panel here and we'll start off with 
Ms. Orman. Thank you very, very much for being here and I look 
forward to hearing from you.

         STATEMENT OF SUZE ORMAN, HOST, THE SUZE ORMAN 
                           SHOW, CNBC

    Ms. Orman. Thank you very much for inviting me to be here. 
I was listening to what all of you were saying in terms of how 
this is a problem that affects our students. I'm here to say it 
doesn't just affect our students. This is the perfect storm 
that is going to affect, in my opinion, the entire economic 
environment of the United States of America and let me tell you 
why.
    With the convergence of obviously, student education 
rising, we have also had the increase of real estate, the 
increase of gasoline prices, the increase of utilities, the 
increase of property taxes, the increase of simply being able 
to just live every single day. What that has done to the 
parents of these students, it has put them in a situation where 
there is no extra income whatsoever. They are barely making it. 
Most of them have extreme credit card debt. None of them have 
money put towards a savings or a retirement account of their 
own and what are they doing? They are trying to help their 
children obtain an education, become something. They are 
raiding their own coffers at a time when they do not have the 
ability to save any more because costs are too expensive. So we 
now are creating an economic family that is failing on every 
single level.
    The number one call now into my show is this: it is from a 
student who is worried about two things. How are they going to 
repay their student loan and what can they tell their parents 
because their parents are out of a job, their parents aren't 
making it and they are worried to death about their parents. So 
the burden on the shoulders of these students is greater than 
I've ever seen in my life.
    They aren't going to school. They don't want to go to 
school or if they do go to school, they come out with such 
horrific debt that they feel that they cannot take a job in the 
career that they would like to pursue, possibly a career that 
they were educated in because they have got to take any job 
that will allow them to live, pay their bills and just get by.
    So as I just briefly said, this is a perfect storm that is 
brewing out there, that is going to affect every single person 
in the United States of America. Shame on the colleges for what 
they charging, truthfully. Shame on the big business behind 
these students loans and what they are charging and how much 
money they are making off of our children's future. Shame on 
all of them. I see it every day. I am sure there is not one 
person in the entire world that speaks to as many people, one 
on one, as I do about their own personal financial situation. 
Henceforth, I wrote my last book called, The Money Book for the 
Young, Fabulous and Broke. I should have written it, the Young, 
Fabulous, Depressed and Broke. They are depressed because they 
are graduating school and college at a time when student loan 
debt is more than their grandparents paid and parents paid for 
all the real estate they ever purchased, when gasoline, as I 
said, is exorbitant. Many of these jobs are being shipped 
offshore. They don't know what to do and really, they are 
depressed and when they are depressed, they don't even try. So 
this is a grave, grave situation that we are facing here and 
again, in my opinion, it will become the reason that the United 
States of America loses all economic strength, power and 
everything in the future and what is so sad is we are doing it 
to ourselves.
    [The prepared statement of Ms. Orman follows:]
                    Prepared Statement of Suze Orman
    Chairman Kennedy, I am so grateful for the opportunity to address 
this committee today on the need to increase the affordability of 
student loans for our country.
    I say for our country, not just for prospective college students, 
because I fervently believe that this issue has an enormous impact on 
every American. Our ability to educate our citizens so they not only 
can compete in a global economy, but can be leaders in a global economy 
is, for my money, one of the most important priorities we can set for 
our country. Our future rests on the success of postsecondary 
education. The move last year to cut $12.7 billion in Federal student 
aid funding was a dangerous step in the wrong direction. If we do not 
take the steps today to make college more accessible and affordable, we 
are mortgaging our future as economic leaders.

     The increasing cost of college is a barrier to obtaining a 
4-year degree. As you have detailed, each year 400,000 low-income 
students do not seek a 4-year college education because of cost issues. 
Those are 400,000 potential leaders that are not getting the 
opportunity they deserve, and that we as a nation need them to have.
     The increasing cost of college saddles recent graduates 
with a high level of debt that is both a financial and career 
impediment. The average undergrad leaves school with about $20,000 in 
student loan debt--that is a 25 percent increase since 2000.* Dare to 
seek an advanced degree and that sum triples. It is easy to see how 
those large sums are a costly burden for our young adults.

    I hear from thousands of young adults each year--on my television 
show, at speaking engagements and through my Web site--about how 
defeated they feel before their career even starts, given the huge 
student loan debt they have to pay off. I am the first to say student 
loans are ``good debt''; we have all seen the studies that show a 
college degree can produce an extra $1 million in lifetime earnings. 
But when you are in your early twenties, with $20,000 or $60,000 or 
more in student loan debt and a starting job that doesn't pay too much, 
you aren't in a position to feel good about the potential lifetime 
payoff for your degree. Your reality is that you have a lot of debt 
that you feel pressured to pay off. And that debt load affects your 
entire financial life.
    Young adults with big student loans to pay off tell me they feel 
tremendous pressure to ``just get a job that pays'' when they graduate, 
rather than pursue a career that they are passionate about. A work 
force of 20-somethings that feels they can't afford to pursue careers 
that aren't highly compensated does not bode well for our Nation.
    And the student loan burden has a snowball affect on their broader 
financial life: The rapidly increasing price in home values across the 
Nation over the past 5 years or so has made buying a first home a 
struggle for so many young Americans. When you add in the fact that 
they are already loaded down with student loans, the prospect of adding 
on mortgage debt either becomes unthinkable, or pushes them into making 
dangerous decisions, such as buying a home with a negative amortization 
loan because they feel that's all they can afford . . . only to learn 
later on what a big mistake they have made.
    But the biggest mistake I see young adults make is to ignore them 
altogether. They are so overwhelmed by what they owe and can't fathom 
how they will ever be able to dig out from their debt hole that they 
make the horrible decision to ignore the loan. And then they come to me 
absolutely depressed when they find out that their loan has kept 
mushrooming as the interest payments are added onto the principal, and 
their personal credit scores are a mess because of their failure to 
make timely payments on their student loans. Irresponsible? Of course 
it is. But there is blame to go around. The fact is we are doing a 
lousy job of educating our children about finances. About how money 
works, about how loans work, and most importantly about being fiscally 
responsible. I applaud the proposals put forth by this committee to 
address ways to financially ease the burden of student loan debt, but I 
encourage you to also address the need for more and better education on 
how to handle student loans in the repayment period. It is a failure on 
our part when we hand money to young adults--be it credit cards or 
student loans--without truly making sure they understand the mechanics 
of how these agreements work, and give those young adults the 
information they need to act responsibly.
    Moreover, young adults are absolutely clueless that how they handle 
their student loans will have a tremendous impact on their future 
finances. They are shocked when I explain to them that their loan 
repayment history plays a major role in determining their credit score. 
When I explain to them that failure to keep up with timely student loan 
payments is going to lead to getting offered lousy rates on home 
mortgages and car loans, or could even impact their ability to land a 
job or rent an apartment, their financial depression just deepens.
    Another major education black hole is the issue of loan 
consolidation. Far too many young adults eligible for loan 
consolidation missed the boat on this valuable financial move when 
interest rates were so low in 2005. When I hear from young adults in a 
financial mess and I find out they have unconsolidated student loans, 
they invariably tell me they don't understand how consolidation works 
and are just too afraid or overwhelmed to figure it out.
    I have no easy answers when young adults weighed down with student 
debt come to me for help. There are no magic moves for someone who owes 
hundreds of dollars a month on their student loan, but they can't even 
afford the rent on their apartment, food, and other basics because 
starting salaries these days--high quality jobs with a promising career 
path--are harder and harder to come by. Two years ago I wrote The Money 
Book for the Young, Fabulous & Broke; it tackles all the financial 
challenges today's young adults face. But I made a mistake. It should 
have been titled, The Money Book for the Young, Fabulous, Broke and 
Depressed. So many young adults want to do the right thing, to be 
financially responsible. But they are justifiably depressed at how to 
pull it off. Just consider the scope of what they face: The cost of 
their student loans exceeds what their grandparents probably paid for 
all their homes. I challenge anyone on this committee to contemplate 
how they would have handled tens of thousands of dollars in student 
loan debt right out of school, when they are lucky to land a job with 
an annual salary that is but a fraction of their student debt.
    Yet I have not changed my mind: student loan debt is indeed the 
best kind of debt; it is an investment toward building a better future. 
But we need to do more to make that debt manageable for young 
Americans. And to demystify how it all works, so they can make the 
right moves right out of the starting gate when they graduate. We need 
to help financially and educationally.

     The student loan crunch is financially destabilizing for 
parents as well as students. One of the most overlooked aspects of our 
Nation's current student loan approach is how it affects the parents of 
these children. Once again, I come to you with real life experience: no 
matter the venue, every day I hear from parents who have literally 
mortgaged everything to be able to send their kids to college. They 
have used a home equity line of credit, or they have made saving up for 
their kids' college funds a priority at the expense of not setting 
money aside for their own retirement. Or they raid their 401(k) savings 
to pay for college. Noble you say? I beg to differ. As well-intentioned 
as every parent is, this is going to potentially lead to a huge 
national problem down the line: without the necessary retirement 
assets, how do we expect today's parents to take care of themselves 
when they stop working? And don't tell me they will have great home 
equity to fall back on . . . not when they took out a $50,000 or 
$100,000 home equity line of credit to pay for each child's college 
education.

    I wish you all could hear the frustration and sadness so many young 
adults share with me when they learn exactly what their parents did to 
help them go to college. Unfortunately they learn too late: after they 
are out of college and just starting out, Mom and Dad tell them they 
have little money to retire on, and the house is mortgaged to the hilt.
    I hope all members of this committee and all Members of Congress 
will keep in mind the inter-generational impact of our student loan 
policy. The more accessible and affordable the loans are for students, 
the less debt parents--and grandparents--will have to take on to help 
their loved ones get a college degree. That is not just good for those 
families; it is sound national economic policy. Do we really want an 
elderly population that is not prepared to support themselves in 
retirement because they chose to send their kids to college rather than 
fund their 401(k)s and IRAs?
    Revamping the current Federal student loan program to be both more 
affordable and more accessible will enhance our Nation's financial 
strength. It will produce a workforce that can lead a global economy. 
It will lead to a more stable economy where young adults are not buried 
with so much debt they can never see their way out, and it will allow 
their parents to focus on what we as a country need them to focus on: 
building the necessary savings to support themselves in retirement.
    I fully support recent proposals put forth by members of this 
committee:

     Reducing student loan interest rates. Yes, this is a 
subsidy. Why are we so afraid to use that term? We should be proud to 
state that we are subsidizing education. It is an investment in our 
collective future. The current fixed 6.8 percent rate on Stafford loans 
should at the very least be reduced for college students that qualify 
for subsidized loans; we owe it to them and our Nation to help them 
receive an affordable education. Ideally we can also find a way to 
extend lower interest rates to those students with unsubsidized 
Stafford loans.
     Increase the Pell grant limits. Raising the current $4,050 
limit to above $5,000 will go a long way to easing the financial stress 
of so many families.
     Consider increasing the income limits for deductibility of 
student loan interest.
     Make sure loan repayment rules are not too onerous. We 
need to help young adults juggle a daunting array of financial 
obligations. Yes, they need to pay off their student loans. But they 
also need to pay the rent and I think we all agree that it would be 
beneficial to them and for us as a nation if they also started funding 
a Roth IRA and contributing to a 401(k). That's a lot to handle all at 
once. I think one way this committee can help out is to review the 
required repayment rules for student loans. By capping the maximum 
annual repayment required at a reasonable percentage of income and by 
offering extended repayment schedules, you can make it easier for young 
adults to tackle multiple financial goals simultaneously. I know these 
issues are already on the table. But I also want to suggest one 
additional way to help young adults pay off their student loans: make 
it possible to refinance consolidated student loans. As you know, 
consolidation whereby a debtor locks in one fixed interest rate for the 
life of the loan is currently a one-time deal. I can not tell you how 
many adults in their late 20s and early 30s who consolidated when rates 
were much higher are now so frustrated to still be paying high interest 
rates on their old debt.

    The Chairman. Thank you.
    Dr. Draut.

        STATEMENT OF TAMARA DRAUT, AUTHOR AND DIRECTOR 
 OF THE ECONOMIC OPPORTUNITY PROGRAM, THE DEMOS INSTITUTE, NEW 
                            YORK, NY

    Ms. Draut. Thank you for the opportunity to testify here 
today. You know, going to college represents more than simply 
trying to make more money. For parents themselves who didn't go 
to college, it is their best option of ensuring that their 
children have a better life than they had and that their 
children's children have a better life than they had.
    As our Nation's primary lever to economic opportunity and 
social mobility, ensuring that students have the ability to go 
to college is an important tenant of the American Dream and of 
our social contract and is the Federal financial aid system 
that should be and serve as the primary gateway to this 
opportunity.
    Today, I believe the Federal financial aid system is 
failing on its basic premise, which is that if anyone wants to 
go to college and is capable of doing the work, they will be 
able to do so regardless of their family income. We all know 
that tuitions have skyrocketed, Federal financial aid, 
particularly grants, has grown anemic. These two forces 
combined have created what I call a debt-for-diploma system.
    I want to focus today on two aspects of the debt-for-
diploma system. One is the impact it has on whether low-income 
or first generation students will enroll or complete college 
and also the unrealistic assumption that today's average 
student loan debt is something reasonable for young people to 
assume.
    Today, two out of three undergrads leave school with about 
$19,000 in student loan debt. It's about $17,000 for those who 
go to public colleges and universities. Even community college 
students are no longer immune from relying on loans to help pay 
for college. They are leaving with about $8,700 in average 
student loan debt. Now, in many ways, these statistics about 
student loan debt represent the fortunate individuals. After 
all, they went to school and they graduated. Left out of these 
are the people who forego college altogether or drop out 
because the cost has become too high and the Federal financial 
aid package too low.
    Rising tuitions and anemic Federal aid have gotten us to a 
perverse reality today, where the highest achieving poor kids 
go to school at the same rates as the lowest achieving rich 
kids. According to the Advisory Committee on Student Financial 
Assistance, financial barriers prevent 48 percent of low-income 
families from going to a 4-year university. Financial barriers 
prevent 22 percent from enrolling in any college at all and 
unmet financial need is a major reason why college remains out 
of reach for these young people.
    Now I want to step back to those who do enroll in college. 
These students are taking on student loan debt by the 
thousands, the overwhelming majority who attend our public 
colleges have about $17,000 in debt. That's a figure that has 
more than doubled in the last decade. But not all students 
borrow at the same amounts and indeed, this is where low-income 
students are hit with another punch. In 2004, 88 percent of 
Pell grant recipients had student loans, compared to just over 
half of those who did not have Pell grants. Pell grant 
recipients also carried about 12 percent higher debt than those 
without Pell grants.
    So why should we care that the Federal financial aid system 
is now what I call a debt-for-diploma system.
    The Chairman. Just on that point about the indebtedness of 
those that are the lowest income. What's the significance? 
Could you expand on that, the significance of that again, for 
me?
    Ms. Draut. Absolutely. The impact is that these are 
students who come from households where when they graduate from 
college, they will not be able to fall back on parents if they 
are having trouble making the rent or they're having trouble 
making a car payment. These are, by and large, first generation 
college students, so their average student loan debt burden 
that is now higher than those without Pell grants means they 
are going to have an enormous time trying to make those 
payments and they don't have a safety net in the form of 
parental resources, which is one of the reasons why it is so 
difficult to draw a line in the sand about what is reasonable 
student loan debt today and I'm going to touch on that.
    Indeed, I don't think we should be trying to draw a line in 
the sand. We should be trying to figure out what is the best 
way to make it possible for people to afford college and I 
submit to you that it is not a debt-for-diploma system, that in 
order to sort of right this ship, we need to get back to a 
system that is much more based on grants than on debt.
    In the written testimony, I've put forth what Demos--the 
proposal that Demos has put forth, called the Contract for 
College. Basically, it's a contract because it says to students 
as early as seventh grade, if you want to go to college, you 
can and here's how much financial aid you will qualify for, 
based on the IRS returns of your parents last year. We need to 
let students know earlier the types and the amount of financial 
aid available for them and I believe we have the technology to 
do that.
    The second thing it would do is provide a sliding scale of 
grants so that if you have lower income, you can get a grant 
that will cover, for the lowest income students, three quarters 
of the cost of going to college.
    I hope that we will get into some particulars about how we 
can make the system, the higher education, more affordable and 
accessible without requiring the ordinary student to take on 
inordinate amounts of student loan debt.
    [The prepared statement of Ms. Draut follows:]
                   Prepared Statement of Tamara Draut
    Chairman Kennedy and Ranking Member Enzi, thank you for the 
opportunity to testify today on issues of access and affordability in 
higher education. In my role as the director of the economic 
opportunity program at Demos, a nonprofit, nonpartisan research and 
public policy organization, I have studied and written critically about 
the decaying access and affordability crisis that now characterizes our 
higher education system.
    As the primary lever for economic and social mobility, access to 
higher education is vital to this country's ability to make good on its 
promise of equal opportunity and upward mobility. The Federal financial 
aid system is fundamental to fulfilling the promise of providing a 
college education to anyone who desires self-improvement and is 
committed to the work necessary for advanced study. As the primary 
source of financial aid for most students, the effectiveness of the 
Federal panoply of grants and loans is paramount to ensuring college 
remains accessible and affordable to all students, regardless of their 
economic background.
    Today, rising tuition and anemic Federal financial aid has created 
what I call a ``debt-for-diploma system.'' The debt-for-diploma system 
affects young adults' choices about college, including where they 
enroll and whether or not they complete their degree. The debt-for-
diploma system also exerts powerful influence on young adults even 
after they leave college. With two out of three undergraduates leaving 
school with student loan debts averaging $19,300 ($17,500 for those 
attending 4-year public universities), the debt-for-diploma system 
continues to exert its influence in young adult's lives--impacting 
their financial stability long after they've accepted their diploma.
    During my testimony, I will focus on the intertwined issues of 
access and affordability by discussing the following:

    1. Trends in access, enrollment and completion in higher education 
by income and race/ethnicity;
    2. Trends in State funding of higher education and its impact on 
tuition costs at 2- and 4-year colleges and universities;
    3. Trends in student loan debt and Federal financial aid, including 
the purchasing power of the Pell Grant and shifts in the composition of 
aid;
    4. The larger economic context facing young adults; and
    5. A proposal Demos has developed to strengthen the Federal 
financial aid system so it again delivers on the promise of ensuring 
access regardless of family income.
               trends in access enrollment and completion
    Today, thousands of students are being denied access to 
postsecondary education simply because it is unaffordable. Thousands 
more enroll but drop out before obtaining a degree. In the 2001-2 
school year, over 400,000 college-qualified high school graduates from 
low- and moderate-income families (those with incomes below $50,000) 
did not enroll in a 4-year college, and 168,000 did not enroll in any 
college at all.\1\ Unless immediate steps are taken to reverse this 
trend, over the decade 4.4 million qualified students will not attend a 
4-year college and 2 million will not attend any college at all. The 
wide disparities in access to higher education run counter to our 
values of fairness, equal opportunity and upward mobility. In 1965, 
with the creation of the Higher Education Act, our Nation set out to 
ensure that any student who wanted to pursue a college education should 
have the opportunity, regardless of family income. While we've never 
fully delivered on that promise, we are now losing ground.
    According to an analysis of data from the Department of Education, 
low- and middle-income households face high levels of unmet need.\2\ 
Unmet need equals the cost of attending college, including tuition and 
living expenses, minus expected family contribution and financial aid. 
According to the report, the average public college student from a 
family with an annual household income of $62,240 or less will have an 
average of $3,600 in annual unmet need. Public college students from 
families with an annual household income of $34,288 or less will 
experience an average annual unmet need of $4,689. Students who face 
unmet need compensate by working longer hours and/or by taking out 
private student loans. These calculations of unmet need only apply to 
those students who are enrolled, not the 168,000 who do not enroll at 
all due to financial barriers.
    As a result of unmet need, the highest achieving students from poor 
backgrounds attend college at the same rate as the lowest achieving 
students from wealthy backgrounds.\3\ Or to put it more coarsely: the 
least bright wealthy kids attend college at the same rate as the 
smartest poor kids.

     Gaps in enrollment between low-income families (below 
$25,000) and high-income families (above $75,000) are as wide as they 
were three decades ago.\4\
     Although roughly three-quarters of high school seniors 
continue their studies, only half receive a degree 5 years after 
studying, and only a quarter receive a bachelor's degree or higher. 
Students from low-income families complete degrees at a much lower rate 
than their wealthy counterparts: only 21 percent of low-income students 
who enroll in college will complete a bachelor's degree--compared to 62 
percent of high-income students who enroll.\5\
     The degree completion rate is much more disparate as a 
percentage of all students, not just those who enroll. Forty percent of 
students in the top quartile graduate with a 4-year degree, compared to 
only 6 percent of students in the lowest quartile.\6\
     One third of college entrants drop out before their second 
year. First generation college students are about twice as likely as 
students with college-educated parents to leave a 4-year college before 
their second year.\7\
     The gap between college enrollment among whites, blacks 
and Hispanic students has widened over the last 30 years:

            In 2000, the enrollment gap between white and black 
        students was 11 percentage points, up from only 5 percentage 
        points in 1972.\8\
            The enrollment gap between white and Hispanic 
        students was 13 percentage points in 2000, up from a 5 
        percentage point gap in 1972.

     Financial barriers prevent 48 percent of college-qualified 
high school graduates from low-income families from attending a 4-year 
college; 22 percent will not attend any college at all. The percentages 
are similar for students in moderate-income families with household 
incomes less than $50,000.\9\

    Academic preparation is also critical to ensuring that lower income 
students enroll and complete college degrees. But the growing disparity 
between enrollments and degree completion is occurring during a time 
when academic preparation for college has steadily risen among low-
income students. More than half of high school seniors in households 
with incomes below $36,000 have completed college preparatory courses--
up from just over one-third in 1987. Nonetheless, racial and class 
disparities continue to result in fewer low-income and students of 
color who are prepared for higher education.
    The current access problem will be further strained as the largest 
generation since the Baby Boomers begins to age out of high school. The 
traditional college-age population is projected to grow by 16 percent 
between 2000 and 2015.\10\ This generation will be more ethnically 
diverse, better prepared for college, and more likely to have financial 
need for college. By 2015, 80 percent of the college-age population 
will be non-white, and almost 50 percent will be Hispanic. Left 
unchecked, the disparities in educational opportunity could severely 
threaten our social cohesion, dividing the country into a well-
educated, white minority and an under-
educated non-white majority.
Impact on Economic Growth
    Having fewer highly trained and educated workers dampens the 
economic productivity and growth of the Nation. It's estimated that 
narrowing the gap in the college participation rate would add $250 
billion in gross domestic product and $85 billion in tax revenue.\11\
    Ensuring that all qualified students can pursue education beyond 
high school is critical for maintaining the vitality of the American 
labor force. Nearly 60 percent of jobs today require some college.\12\ 
Over the next decade, 6 of the 10 fastest growing occupations require 
an associate or bachelor's degree.\13\ At the same time, job growth 
predictions also show that the largest growth in jobs over the next 
decade will be in the low-wage sector--those not requiring any post-
secondary training.
    Still other studies show that the looming retirement of the Baby 
Boomers will result in a major shortage of skilled workers.\14\ The 
reason is simple: unlike the Boomers, who achieved higher levels of 
education than their parents and grandparents, successive generations 
have gotten about the same amount of education as their parents.\15\ As 
the labor force is expected to grow far less in the next 20 years than 
it did in the last two decades, there may be a shortage of workers with 
at least some college education.\16\
    The current growth in outsourcing of service sector jobs may 
threaten the potential for young, educated workers to find jobs to 
match their skill set. At this time, however, the scope of the effects 
on economic growth and job creation caused by outsourcing is unclear 
and widely debated.
    Whether or not the economy will generate enough jobs for college 
graduates is up for debate--and is something of a red herring in the 
debate over access to higher education. What's important--and what 
needs to be fixed--is who gets to compete for the best jobs in America. 
Currently, young adults from modest backgrounds, as well as young 
adults of color, are much less likely to enroll and complete degrees at 
4-year universities. As a result, the playing field is far from level.
                        trends in college costs
    Over the last three decades, tuition at both 2- and 4-year public 
college and universities has been rising, with rapid increases in the 
last two decades. Since 1980, tuition at public 4-year universities has 
more than doubled, after adjusting for inflation (see Chart 1). In 
2006, the average tuition at a public 4-year college was $5,836, up 
from $3,856 in 1996 and $2,628 in 1986 (2006 dollars). In the last 5 
years alone, tuition has increased 35 percent, higher than any other 5-
year increase from 1976 to the present.\17\ Tuition at community 
colleges has risen, though not as steeply. In 2006, the cost of tuition 
at 2-year colleges was $2,272, up from $1,899 in 1996 and $1,227 in 
1986.


    Tuition costs are just one aspect of the cost of attending college. 
Research has demonstrated that the most successful strategy for 
completing a college degree is full-time, on-campus study. Add in room 
and board charges for 4-year colleges, and the total cost of attending 
in 2006 was $12,796, up from $9,258 in 1996 and $7,528 in 1986.
    There is much debate over why tuition prices have risen so 
dramatically in the last decade, and certainly several factors have 
contributed to the rise in college costs. One contributor which is 
relatively undisputed is the decline in State funding of higher 
education. Public universities receive the majority of their 
operational support from State appropriations, so when States flat-line 
or cut appropriations, public universities make up the deficit in 
operational revenue by raising tuition. Over the last two decades, the 
level of State support has been declining. In fact, per-pupil-spending 
is at a 25-year low. As a result, the percent of public higher 
education revenues from tuition has steadily increased, from 21.5 
percent in 1981 to around 31 percent through the mid-1990s. After 
declining in the late 1990s, tuition revenues grew rapidly from 30 
percent in 2001 to 36.7 percent in 2005.\18\ While the absolute dollar 
amounts States spend on higher education have increased over the last 
decade, the increase has not kept pace with either inflation or 
enrollments, resulting in per-pupil spending at a historic low.
         student loan debt and trends in federal financial aid
    While increases in the published price of college have risen much 
faster than increases in the net price (what students actually pay 
after aid), student loan debt has more than doubled from $9,250 in 1993 
to $19,200 in 2004.\19\ The amount of student loan debt for those 
students graduating from public universities has also grown 
substantially, from $8,000 to $17,250.
    Not only has the amount of debt among graduating students 
increased, the percentage of students who rely on student loans to 
finance their education has also risen. In 1993, less than half of all 
4-year graduates had student loans; today, nearly two-thirds graduate 
with debt.
    Low-income students, particularly those who receive Pell grants, 
are much more likely to have student debt than other students. Among 
Pell grant recipients who earned their degree in 2004, 88.5 percent had 
student loans, compared to just over half (51.7 percent) of non-Pell 
recipients.\20\ Pell grant recipients also carried 12 percent higher 
debt, carrying on average $20,735 in student loan debt versus $18,420 
for non-Pell recipients.
    Our Nation's Federal financial aid system has become a debt-for-
diploma system. Over the last two to three decades, the composition of 
Federal financial aid has shifted from a grant-based system to a debt-
based system (see Chart 2). Of the $91 billion spent on Federal 
financial aid in school year 2003-4, only $19 billion was spent on 
grant aid, while loan-based aid comprised $65 billion.


    Not only does grant aid comprise a smaller share of the overall 
Federal financial aid pie, its purchasing power has declined 
precipitously, failing to keep pace with the cost of tuition and the 
surge in eligible students. As a result, what grant aid is available 
gets spread more thinly across a greater number of students.
    Today the maximum Pell Grant award--the Nation's premier program 
for helping low-income students pay for college--covers about one-third 
of the costs of a 4-year college today. It covered nearly three-
quarters in the 1970s.\21\ But only 22 percent of Pell grant recipients 
received the maximum award of $4,050 in 2003.\22\ The average award was 
$2,473, which covered about one-fifth of the costs of a 4-year public 
college.\23\
    As the Federal Government was shifting resources away from need-
based grant aid toward tax credits and debt-based aid, State 
governments and institutions were also shifting their aid dollars away 
from need-based aid (see Chart 3). Between 1994 and 2004, spending by 
the States on need-based scholarships for undergraduates increased by 
95 percent, while spending on merit-based aid increased by 350 percent. 
The proportion of State grants awarded based on merit, rather than 
need, has risen from 13 percent to 27 percent during this period.\24\ 
Similarly, universities have also begun using more of their financial 
aid resources to attract the best and brightest students--throwing 
increasingly percentages of aid dollars to students who could afford 
the cost of college without any aid. For example, in 1995, the average 
student from a family with an income below $20,000 received $836 in 
institutional grant aid, while students from families above $100,000 
received an average of $239 in grant aid. In 2003, the average award to 
low-income students had increased 50 percent to $1,251 while the 
average award to students from families earning above $100,000 had 
grown 227 percent to $781.\25\


                  putting student loan debt in context
    As the first generation to shoulder the responsibility of paying 
for college primarily by taking out loans, it's important to consider 
the larger economic context in which this new debt burden is unfolding. 
Some argue that the rise in student loan debt seems justified, or 
reasonable, given the economic benefit a college degree commands in the 
labor market. While it is true that someone with a bachelor's degree 
will earn approximately $1 million more in earnings over their lifetime 
than someone without a college degree, it is also true that the 
earnings for college graduates have remained flat for three decades 
(see table below). Earnings for young workers with ``some college'' 
have declined, with the typical young male worker with ``some 
college,'' earning 17 percent less than the previous generation. It's 
important to remember that among this ``some college'' population are 
young adults who dropped out of college before completing their 
studies. One out of five borrowers drop out of college before 
finishing, leaving them with debt, but no diploma. The percentage of 
indebted non-completers is even higher among community college 
students, with one out of four borrowers dropping out without a degree.
    The economic outcome of getting a bachelor degree has not risen for 
this generation; indeed the typical college grad is earning about the 
same as the previous generation. Rather, the college wage premium, as 
it is often called, is due to the precipitous decline in earnings power 
for workers with only high school degrees (see Table below).


----------------------------------------------------------------------------------------------------------------
                                                         Males                              Females
                                         -----------------------------------------------------------------------
                                             High                 Bachelor's     High                 Bachelor's
                                            School       Some      Degree or    School       Some      Degree or
                                            Diploma     College     Higher      Diploma     College     Higher
----------------------------------------------------------------------------------------------------------------
1974....................................     $42,697     $44,257     $51,223     $25,913     $29,556     $35,674
1984....................................     $36,773     $39,806     $46,775     $24,449     $28,263     $35,030
1994....................................     $29,996     $33,650     $45,629     $22,604     $26,938     $37,363
2004....................................     $30,400     $36,400     $50,700     $24,400     $28,800     $40,300
----------------------------------------------------------------------------------------------------------------
Source: National Center for Education Statistics, based on data from U.S. Department of Commerce, Bureau of the
  Census, Current Population Survey, March Supplement, 1972-2003.

    In addition to stagnant or falling incomes, today's young adults 
face substantially higher costs for housing and health care than the 
previous generation experienced during their 20s and early 30s--yet 
median earnings have failed to grow to accommodate either the rise in 
basic costs, or to accommodate the new student loan debt burden.\26\
          making college affordable: the contract for college
    The debt-for-diploma system is a failure.
    The fundamental problem is rooted in the reality that our 
government no longer really helps people pay for college--it helps them 
go into debt for college. The question we need to be asking is not 
``how much student loan debt is reasonable,'' but ``what is the best 
way to help students afford college?'' Given the enrollment gaps by 
income and race, in addition to the serious social consequences 
reported by borrowers, there is solid evidence that a debt-based aid 
system is not the best method for making college affordable. This is 
especially true when it comes to achieving the goal of making college 
affordable to low-income young people, for whom grant aid is the 
difference between enrolling or foregoing college altogether.
    The last two decades have greatly heightened the demand for a 
highly educated workforce--and the earnings differential between those 
with and without college degrees has widened substantially. A college 
degree has become what the high school diploma was 30 years ago--the 
surest pathway to the middle-class. Two years of post-secondary 
education is now considered the minimum level of education necessary 
for success in this economy. A worker with a bachelor's degree now 
earns about 70 percent more than a worker with only a high school 
diploma. Over a lifetime, that wage gap will add up to over $1,000,000. 
Those with ``some college'' earn more than those who only complete high 
school.
    And yet, our financial aid system has become less responsive to the 
needs of young people, particularly those from low- to middle-income 
families. At a time when getting a college degree has become a near 
necessity for entry into the middle-class, our Nation's primary ladder 
of opportunity is broken.
    In a Demos report, Millions to the Middle: Three Strategies to Grow 
the Middle Class, we proposed creating a new system called the Contract 
for College. The Contract for College is based on a simple premise: if 
you study hard and are academically ready for college, money will not 
be an obstacle course to fulfilling your potential. The Contract is 
similar to a set of proposals made by the bi-partisan National 
Commission on Responsibilities for Financing Post-Secondary Education, 
a body mandated by Congress in 1991 through legislation sponsored by 
Senator James Jeffords of Vermont, then Republican.\27\ The 
Commission's recommendations, which were never implemented by Congress, 
were released in a final report in February 1993.
    The Contract would unify the existing three strands of Federal 
financial aid--grants, loans and work-study--into a coherent, 
guaranteed financial aid package for students. The Contract would shift 
Federal financial aid funding toward more grant-aid for students. 
Students from households with incomes below $25,000 would be eligible 
for an annual grant to cover 75 percent of the costs of attending a 4-
year university or $9,000, while a student from a household with income 
between $75,000 and $100,000 would be eligible for an annual grant to 
cover 40 percent of the costs, or $4,800. Part of the Contract for 
every student would include some amount of student loan aid and/or 
work-study requirement. But by providing grant aid for low- to middle-
income students, it would end the five-figure student loan debt that 
stunts the progress of young adults. The table below provides an 
example of different Contract for College estimates based on family 
income.

                                            The Contract for College
          [Based on the average cost of annual enrollment at 4-year public colleges (approx. $12,000)]
----------------------------------------------------------------------------------------------------------------
                                   Household Income    Household Income    Household Income
 Household Income below $25,000    between $25,000-    between $50,000-    between $75,000-    Household Income
                                        $49,000             74,999              99,000          above $100,000
----------------------------------------------------------------------------------------------------------------
Grant to cover 75 percent of      Grant to cover 65   Grant to cover 55   Grant to cover 40   Unsubsidized loan:
 costs: $9,000.                    percent of costs:   percent of costs:   percent of costs:   $10,000
                                   $7,800.             $6,600.             $4,800.
Work-study: $1,500..............  Work-study: $1,500  Work-study: $1,500  Work-study: $1,500
Subsidized loan: $1,500.........  Subsidized loan:    Subsidized loan:    Subsidized loan:
                                   $2,700.             $3,900.             $2,350
                                                                          Unsubsidized loan:
                                                                           2,350.
----------------------------------------------------------------------------------------------------------------
The model above is for illustrative purposes. An actual plan would include more gradual phase-outs between each
  successive income level.

    An important component in designing the program would be to ensure 
that families have early knowledge of the financial resources available 
for their children to attend college. One of the weaknesses of the 
current financial aid system is that parents and students do not have 
adequate information about the amount of aid available to them until 
several months before enrollment. And aid amounts tend to change from 
year to year. The Contract could allow all households with students in 
the 8th grade and above to receive an estimate for aid based on the 
average cost of attendance at public 4-year institutions. For example, 
low-income families would be informed that they can receive a Pell 
grant that covers 75 percent of the cost of college, with subsidized 
loans and work-study to finance the rest.
    In addition, the Contract would provide Federal student loans 
through the Direct Loan Program, ending the Federal Family Educational 
Loan Program (FFELP)--the government guaranteed loan program in which 
the Federal Government acts as an intermediary between students and 
banks, providing massive subsidies to ensure a guaranteed rate of 
return to lenders. Back in 1992, Congress tried to create an 
alternative plan to the subsidy-rich deal for private lenders. Instead 
of using private lenders, the government would put up the capital for 
student loans and disburse the money directly to the college. The 
program, called the Direct Loan Program, started as a pilot program in 
1992 and was made an option for all colleges in 1993. Unlike federally 
guaranteed student loans, which cost taxpayers 7 cents on every dollar, 
the Direct Loan program costs less than 4 cents per dollar lent.\28\ By 
switching all Federal loans to the Direct Loan Program, the 
Congressional Budget Office estimates that the Federal Government would 
save billions of dollars over 10 years due to the reduction in 
subsidies and administrative costs associated with the FFELP 
system.\29\ Several pieces of legislation, with bipartisan sponsorship, 
have been introduced to encourage schools to participate in the Direct 
Loan Program.\30\ Based on enrollment projections, including increases 
due to the availability of enhanced financial aid, the rudimentary 
estimate of the cost of the Contract is approximately $48 billion per 
year.\31\ We estimate the cost of expanded Pell grants to be $39 
billion, $9 billion for work-study, and some administrative costs 
associated with the direct loan program.
    Existing revenue for the Contract includes current spending on Pell 
grants of $12.7 billion. We also propose eliminating the higher 
education tax credits which currently cost $5.9 billion and redirecting 
that money to the more need-based aid system of the Contract. 
Additional savings would be found by switching to the Direct Loan 
Program. In addition there are a variety of subsidies on existing loans 
in the FFELP system that if reduced could generate savings. For 
example, the special allowance payment to lenders on existing Stafford 
loans could be reduced by 50 basis points, as the President proposed in 
his budget, in addition to those on PLUS and consolidation loans. After 
reallocating money from existing spending on higher education programs, 
our cost estimates show an additional $30 billion will need to be 
raised.
    In exchange for the Federal Government picking up more of the tab 
for college, States need to do their part to keep tuition prices under 
control. That means increasing, rather than decreasing, State 
appropriations to higher education. Over the last 5 years, States have 
consistently slashed their support for higher education as a way to 
deal with budget deficits. Back in the late 1990s, when States were 
flush with extra money, instead of stockpiling those revenues for a 
rainy day, most States enacted tax cuts. When the tech bubble burst, 
States were left with no reserves and the political non-starter option 
of raising taxes. State governments need to be more fiscally 
responsible about providing stable support for higher education, which 
is the biggest source of operating funds for State colleges.
    Colleges too have an important role to play in keeping costs under 
check. The State university system in this Nation is the envy of the 
world. But far too often, State colleges are racing against each other 
to be the best in everything, instead of concentrating on developing 
core academic strengths. In any given State, public universities could 
save the system money by eliminating duplicative programs, coordinating 
research expertise and collaboratively reaching agreements for each 
university to home in on core academic fields.
                               conclusion
    Congress has recently enacted legislation that would lower the 
interest paid on certain Federal student loans. Last year, the House 
passed legislation that raised the maximum Pell grant. In addition, the 
President has proposed in his 2008 budget increasing the maximum amount 
of the Pell grant by $550, to a maximum of $4,600. However, neither of 
these reforms is adequate to address the scale of the problem that 
exists. In a country where higher education serves as the primary lever 
of economic and social mobility, the debt-for-diploma system represents 
a major failure. It's predicted that over the next decade more than 6 
million college-ready students will fall through the cracks of the 
current financial aid system. Their aspirations and our future hinge on 
whether or not bold action is taken now to restore the ladder of 
opportunity, and to end the failing debt-for-diploma system.
                                Endnotes
    \1\ ``College qualified'' refers to the index of college 
qualification designed by the U.S. Department of Education's National 
Center for Education Statistics (NCES). The index evaluates high school 
seniors on cumulative academic coursework GPA, senior class rank, NELS 
test scores, and SAT and ACT college entrance examination scores. 
``Low-income families'' refer to households with incomes below $25,000. 
``Moderate-income families'' refer to households with incomes between 
$25,000 and $49,999.
    \2\ Postsecondary Education OPPORTUNITY, Unmet Financial Need, 
Student Work/Loan Burden and Net Price to Family for Dependent and 
Independent Undergraduate Students by Institutional Type/Control and 
Parental/Family Income Quartiles, 2004, October 2005.
    \3\ Access Denied: Restoring the Nation's Commitment to Equal 
Educational Opportunity, (Washington, DC.: Advisory Committee on 
Student Financial Aid Assistance, February 2001).
    \4\ Ibid.
    \5\ Ibid.
    \6\ Richard D. Kahlenberg, ed., America's Untapped Resource: Low-
Income Students in Higher Education (New York: Century Foundation 
Press, 2004), p. 22.
    \7\ Nancy Hoffman. ``College Credit in High School: Increasing 
College Attainment Rates for Underrepresented Students.'' Change, July/
August 2003.
    \8\ Thomas R. Wolanin, ed. Reauthorizing the Higher Education Act: 
Issues and Options. (Washington, DC.: Institute for Higher Education 
Policy), 2003.
    \9\ Empty Promises: The Myth of College Access in America 
(Washington, DC.: Advisory Committee on Student Financial Assistance, 
June 2002).
    \10\ Ibid.
    \11\ Access Denied: Restoring the Nation's Commitment to Equal 
Educational Opportunity.
    \12\ Ibid.
    \13\ Bureau of Labor Statistics Employment Projections. February 
2004.
    \14\ Anthony P. Carnevale and Donna M. Desrochers, Standards for 
What? The Economic Roots of K-16 Reform. Educational Testing Service, 
2003.
    \15\ ``Grow Fast Together. Or Grow Slowly Apart,'' The Aspen 
Institute, September 2002.
    \16\ Carnevale and Desrochers, Standards for What? The Economic 
Roots of K-16 Reform.
    \17\ The College Board, Trends in College Pricing, 2006.
    \18\ State Higher Education Executive Officers, State Higher 
Education Finance FY 2005.
    \19\ Project on Student Debt, ``Quick Facts About Student Debt.''
    \20\ Ibid.
    \21\ Gladieux, p. 29.
    \22\ ``2003-2004 Federal Pell Grant Program End-of-Year Report.'' 
U.S. Department of Education, Office of Post-Secondary Education. Table 
3A. Available online at http://www.ed.gov/finaid/prof/resources/data/
pell0304.pdf.
    \23\ Ibid.
    \24\ Kati Haycock, ``Promises Abandoned: How Policy Choices and 
Institutional Practices Restrict College Opportunities,'' The Education 
Trust. Available online at http://www2.edtrust.org/NR/rdonlyres/
B6772F1A-116D-4827-A326-F8CFAD33975A/0/PromiseAbandonedHigherEd.pdf.
    \25\ Ibid.
    \26\ Tamara Draut, Strapped: Why America's 20- and 30-Somethings 
Can't Get Ahead (Doubleday: 2006).
    \27\ The Commission's final report Making College Affordable Again 
was released in February 1993. The report identified specific policy 
concerns, which led to the formulation of policy recommendations, 
including the Student's Total Education Package (STEP). The 
Commission's full report is available online at http://www.ihep.org/
Pubs/PDF/makingcollegeaffordable.pdf.
    \28\ Office of Management and Budget, Budget of the U.S. 
Government, Fiscal Year 2008 Appendix. Available online at http://
origin.www.gpoaccess.gov/usbudget/fy08/browse.html.
    \29\ Committee on Education and the Workforce, ``Bipartisan Student 
Loan Bill Would Boost Funding For College Scholarships by $12 Billion 
Without Costing Taxpayers a Dime, Says CBO,'' January 12, 2005. 
Available at http://edworkforce.house.gov/democrats/releases/
rel11205b.html.
    \30\ See Sharkey, 2005. According to Sharkey, Rep. Thomas Petri (R-
WI) and Rep. George Miller (D-CA) have introduced the Direct Loan 
Reward Act, which would establish incentives for colleges to switch to 
the Direct Loan program by offering to let them keep half of the 
savings for their use in financial aid programs. The bipartisan Student 
Aid Reward Act, introduced by Rep. Petri, Rep. Miller, Sen. Edward 
Kennedy (D-MA) and Sen. Gordon Smith (R-OR), asks the Secretary of 
Education to determine which student loan program is less expensive, 
and then provides additional scholarship money to schools that adopt 
the cheaper loan program.
    \31\ David Callahan, Tamara Draut and Javier Silva. Millions to the 
Middle: Three Strategies to Grow the Middle Class. (New York: Demos), 
2004. Available at http://www.demos-usa.org/pubs/millions_web.pdf.

    The Chairman. Thank you.
    Dr. Oberg.

       STATEMENT OF JON OBERG, PH.D., FORMER RESEARCHER, 
          U.S. DEPARTMENT OF EDUCATION, WASHINGTON, DC

    Mr. Oberg. Thank you, Mr. Chairman, Senator Enzi, Senator 
Isakson. I'd like to request first that my written testimony be 
made a part of the record.
    The Chairman. All of the written testimony will be part of 
the record.
    Mr. Oberg. Thank you, Mr. Chairman. I'd also like to invite 
attention to my written testimony. It's far more than I say in 
5 minutes here. I have 17 specific recommendations in the 
written testimony on the subject and I'd particularly like to 
invite attention to the footnotes in the testimony. Sometimes 
the footnotes are more interesting than the text and among 
these 17 recommendations, they don't all come from me and I 
have appropriately cited the authorities and the literature and 
so on, on which the recommendations are based. I'm negligent in 
a couple of cases, of not having that in there and let me say 
that here, on my recommendations, on the Fair Payment Awareness 
Program, which is a part of your bill, Mr. Chairman, S. 359 and 
also part of my recommendations. I'm indebted to the work of 
the Project on Student Debt for that.
    Also, one of my recommendations deals with auctions, the 
potential auctions of student loans in order to bring more 
competitiveness into the system and for that, I'm indebted to 
the New America Foundation, which has been doing work on this.
    My testimony was written about the first of January, about 
6 weeks ago, when I first heard about this hearing coming up 
and I thought some of my ideas and some of those 
recommendations would be leading-edge at that time. I since 
discovered that they are much more mainstream than I had 
thought they would be. The idea of taking subsidies out of the 
loan programs and moving them to the grant programs of the 
Federal Government, which are under-funded and doing that 
through a process of entitlement spending, is an idea that is 
already embodied in your bill, Mr. Chairman and I was also very 
pleased to see that this is an idea that is in the President's 
budget as well.
    Another idea I thought might be on the leading edge was to 
open up for public view, many of the processes that are evident 
in the selection of lenders, how student's financial aid 
packages are put together and so on and I find that, indeed, 
there is already a Student Loan Sunshine Act that has been 
introduced, bipartisan, bicameral. There is one in the House as 
well.
    Let me, instead of going over those ideas, go over a couple 
of ideas where my recommendations are not already mainstream. I 
hope someday they will be but first let me say that when I was 
invited to testify, I asked your staff if I was expected to 
testify on the 9.5 guaranteed loan scandal. I was told that 
that was not the reason I was here particularly, because I had 
been the legislative liaison from the Department of Education 
for the reauthorization of the Higher Education Act in 1998 and 
then I might have views on some of the legislation that came 
out of that, such as the Europe Program, the VFAs, the 
Voluntary Flexible Agreements and other items but let me say a 
couple of quick words about the 9.5 problems.
    As one of my attachments to my written testimony, I 
suggested back in 2003, that one solution to this would be 
simply for the Secretary to call the loans. I still think that 
is a good recommendation. That was put in as a bill last year 
by Senator Murray and Senator Kennedy and I commend that to you 
again and that is one of my recommendations.
    There is also--I thought this might also be leading edge 
but I see that--and that is the recovery of the forgiveness of 
these illegal payments that has been done in the past month. I 
see the two House Republicans have already introduced or have a 
circulating letter asking the Secretary of Education to recall 
these funds, specifically about $322 million at Nelnet. My 
recommendation to the committee would be that I think it would 
be appropriate for your committee to advise the Department of 
Justice that before it acts on approving these illegal payment 
forgiveness's, that the Congress have an opportunity to 
exercise oversight on it.
    Let me quickly turn to two items that are extremely 
important, I think. One is reform the student aid process. If 
anything is important in my testimony, it is reform of the 
process. Our process is a disgrace that is the Nelnet scandal 
times 100. One particular disgrace is what is called enrollment 
management. Enrollment management has been called by prominent 
researchers the ruin of American higher education. Let me 
simply say this. If you want the Pell increases to reduce 
student debt, you will have to end enrollment management as it 
is currently practiced.
    Finally--my time has expired but let me say a couple points 
about private loans. The loan industry is restructuring around 
private loans. Congress needs to respond and shape how the 
industry will be restructured for the benefit of students.
    Especially for Senator Enzi, I am a State and local person 
as he is. I believe that as this is restructured, we should 
have a role for the State agencies and that is embodied in one 
of my recommendations. So thank you, Mr. Chairman and Senator 
Enzi, for your time and I'd be happy to answer any questions.
    [The prepared statement of Mr. Oberg follows:]
               Prepared Statement of Jon H. Oberg, Ph.D.
    Mr. Chairman, members, thank you. This is a homecoming for me. 
Although I am here today as a political scientist and public finance 
researcher, I have worked many long hours in this building over three 
decades, first as staff to the Senate Budget Committee when it was led 
in a bipartisan manner by Senators Muskie and Bellmon, later as 
president of a college association working with Congress for the 
interests of institutions, and finally as legislative liaison for the 
Department of Education during the reauthorization of the Higher 
Education Act in 1998.
    I am pleased to be back to recommend 17 changes in our student 
financial aid system. I will testify first on loans, then grants, then 
process, and lastly research.
                                 loans
    The HEA needs a major overhaul of its loan programs. Before I list 
reforms that would make the FFEL guaranteed loan program more efficient 
and effective, let me advance an idea whose time may have come: simply 
eliminating or phasing down the FFEL guarantee on new loans and moving 
the net savings to under-funded Federal grant programs.

Here's why:

     The Federal guaranteed student loan program, FFEL, costs 
Federal taxpayers billions of dollars annually, somewhat over $6 
billion in 2007 according to OMB's estimates.\1\ Moving net savings 
from ending FFEL guarantees to the Pell grant program, for example, 
could put Pell funding back relatively soon near the levels it started 
with when first fully implemented in the 1970s.
---------------------------------------------------------------------------
    \1\ Estimates may be on the low side; OMB assumes future legislated 
efficiencies. See http://www.whitehouse.gov/omb/budget/fy2007/pdf/
appendix/edu.pdf.
---------------------------------------------------------------------------
     The guaranteed loan program was not originally intended to 
draw heavily from the Federal treasury, but to fill a cash-flow gap for 
middle-income families not eligible for assistance under the Federal 
Government's loan and grant programs.\2\ This is now 2007, but 
discussions surrounding the program sound like debates from more than 
three decades ago, when there was a lack of student access to capital. 
That time has long since passed.
---------------------------------------------------------------------------
    \2\ Lawrence E. Gladieux, ``Federal Student Aid Policy: A History 
and Assessment,'' http://www.ed.gov/offices/OPE/PPI/FinPostSecEd/
gladieux.html; Steven Brooks, ``NASFAA History: 1966-1985,'' http://
www.nasfaa.org/Publications/2001/Nhistory66-85.html.
---------------------------------------------------------------------------
     There are established alternatives. The Direct Loan 
program, by most credible accounts, is less costly as a vehicle to 
deliver Stafford and PLUS loans \3\; private loans for higher 
education, despite their troublesome rates, fees, and marketing 
practices, are now widely available and here to stay \4\; higher 
education tax benefits subsidize the higher education of the middle 
class.\5\
---------------------------------------------------------------------------
    \3\ Increases in Direct Loan costs would marginally reduce the 
savings from eliminating FFEL, in the 5 percent to 10 percent range, 
based on OMB cost figures. (The Direct Loan program is less costly 
according to several government and independent studies, using various 
methods and assumptions. I am not aware of any studies to the contrary, 
save those paid for by the loan industry. Typically the latter use cash 
accounting or other methods the industry does not use on itself.)
    \4\ Private loans have been the fastest growing source of student 
aid in recent years and are now firmly established as components in 
many institutions' student financial aid packages. It is impractical 
for reasons of cost for the Federal Government to try to reduce the 
reliance on private loans by greatly increasing FFEL loan limits. A 
practical way for Congress to deal with private loan issues is to 
require disclosure and sunshine whenever such loans are mixed with 
Federal programs in students' financial aid packages. For the most 
part, private loan providers are the same as those that participate in 
the FFEL program. If no new FFEL loans were guaranteed, there would 
still be Federal outlays for many subsequent years to such loan holders 
for existing guaranteed loans. In this environment, these subsidies 
would be used to make private loan products (already highly profitable) 
more competitive, benefiting students rather than simply adding to 
bottom lines that make the student loan industry such a Wall Street 
favorite for high profits and low risks. The industry should not be 
underestimated in its ability to compete, if it must.
    \5\ At a December 2006, Senate Finance Committee hearing, Susan 
Dynarski proposed elimination of the Pell grant program and putting the 
savings into refundable tax benefits. This is the scale of thinking 
appropriate to the need for major changes in the way we try to provide 
college access, but it would make more sense to wind down the FFEL 
program, for which there are alternatives, and put the savings into 
Pell grants. Ironically, Congress established the guaranteed loan 
program in part as an alternative to tax benefit programs; having 
failed in that role, FFEL should be terminated, not Pell.
---------------------------------------------------------------------------
     Excess student loan debt burden is a real problem; 
students often must take out loans because of a paucity of grants for 
those with financial need. A logical response would be to move loan 
subsidy expenditures to support of grant programs. As important as it 
is to keep loan interest rates low for students, it is also important 
to consider loan principal; that is, how to keep principal down or 
eliminate it entirely for many students through better grant funding.
     The student loan industry that has grown up around the 
FFEL program has become the tail that wags the dog. Recent HEA 
reauthorizations have focused on loan industry subsidies to the neglect 
of the needs of students and families; Big Education now rivals Big Oil 
and Big Pharm in political contributions, with commensurate effects on 
the legislative process.\6\
---------------------------------------------------------------------------
    \6\ Bethany McLean, ``Dems: Make Student Loans Student Friendly,'' 
Fortune, November 13 2006.
---------------------------------------------------------------------------
     The loan industry's consulting services have abetted the 
shift of college and university resources away from the financially 
needy, with the unsurprising result of higher loan burdens among low- 
and middle-income students and families. These industry-provided 
``enrollment management'' services customarily countervail the mission 
of Federal programs to assist the financially needy populations.\7\
---------------------------------------------------------------------------
    \7\ See Kati Haycock, ``Promise Abandoned: How Policy Choices and 
Institutional Practices Restrict College Opportunities,'' The Education 
Trust, August 2006. Economist Gordon Winston has said, ``Enrollment 
managers are ruining American higher education.'' See Matthew Quirk, 
``The Best Class Money Can Buy,'' The Atlantic, November 2005. The 
ruinous practice singled out by both Haycock and Winston, ``enrollment 
management,'' is marketed to institutions by a Sallie Mae subsidiary, 
Noel Levitz, to name one example. Professor Elizabeth Warren famously 
said on the CBS News Program 60 Minutes, ``It shouldn't be the case 
that Sallie Mae gets to play every hand at the poker table while the 
government is the one that keeps anteing up the money.'' But that's not 
the half of it, as the Sallie Mae business model plays every hand with 
families' tuition money as well: Sallie Mae subsidiary UPromise helps 
families save for higher education, while Sallie Mae subsidiary Noel 
Levitz consults with institutions about how to take the savings away.
---------------------------------------------------------------------------
      There is a great deal of waste, abuse, and mismanagement 
\8\ in the FFEL program, and perhaps outright corruption. The 9.5 
percent guaranteed return scandal alone (in which several secondary 
markets in 2002-4 increased the volume of student loans paying a 9.5 
percent guaranteed return, despite Congress's action in 1993 to phase 
out such loans) has cost Federal taxpayers untold sums, perhaps 
billions of dollars. In 2003, I wrote an internal memorandum to the 
Department of Education's chain of command identifying how the abuse of 
the 9.5 guarantee was being perpetrated. Had the Department acted on my 
analysis and recommendations at that time (or on those of GAO, a year 
later), billions of dollars of growth in these loans and subsequent 
payments of hundreds of millions to loan holders could have been 
avoided.\9\ As matters now stand, the Secretary of Education has 
determined that this was an illegal scheme, but one secondary market, 
Nelnet, has been forgiven $322 million and an unknown number of others 
are also being forgiven, before they have even been audited. Inasmuch 
as this is now undergoing Department of Justice review, I recommend 
that the committee ask DOJ to delay any decisions until Congress has an 
oversight opportunity to review forgiveness of these illegal payments.
---------------------------------------------------------------------------
    \8\ Office of Inspector General, U.S. Department of Education, 
``Review of Financial Partners' Monitoring and Oversight of Guaranty 
Agencies, Lenders, and Servicers,'' Final Audit Report, ED-OIG/A04E0009 
September 2006.
    \9\ See Attachment A. In February 2004, I also shared this 
memorandum with the Government Accountability Office, which confirmed 
in its September 2004, report (GAO-04-1070) that the Department could 
have acted at any time to shut off 9.5 growth for a savings of billions 
of dollars. I likewise shared this and other analyses with the Office 
of Inspector General, which has subsequently found that the illegal 
payment scheme at Nelnet alone amounted to $1.2 billion.
---------------------------------------------------------------------------
    Here are nine reforms that, taken either independently or together, 
could phase down the FFEL program (my recommendation) or at least make 
the program more efficient:

    Loan Reform 1: Gradually reduce the Federal guarantee on student 
loans until it is phased out. Congress should not beggar the Pell grant 
program for the sake of keeping an anachronistic guaranteed loan 
program afloat, the need for which existed 30 years ago but now is 
hardly compelling at a time when the student loan industry is several 
thousand lenders strong and is quickly restructuring around private 
loan programs that already receive significant State and Federal 
subsidies.\10\
---------------------------------------------------------------------------
    \10\ The student loan industry has at least the following subsidies 
available to its private (alternative) loans: (1) capital from State 
agencies; (2) non-dischargability of private student loans in 
bankruptcy; (3) bundling of private loans with federally guaranteed 
loans in securitization trusts; (4) powerful loan collection tools and 
collection of private loans prior to federally guaranteed loans; (5) 
student loan interest tax deductibility; (6) Federal administration of 
institutional eligibility; (7) potential revenue from sales of 
federally guaranteed loan assets. While these subsidies do not spread 
default risk in the manner of the current Federal guaranteed program, 
spreading private loan risk is not an insurmountable problem. Private 
student loans are typically guaranteed by a 3 percent to 8 percent fee 
capitalized to borrowers' loan balances, and some have third party 
insurers. Note that a 3 percent guarantee fee is the same as the 3 
percent sum of fees in the Stafford loan program. Note also that 
industry leader Sallie Mae's spread for private loans in the last 
quarter of 2006 was 5.28 percent (and increasing over 2005), while the 
spread for FFEL loans was 1.20 percent, suggesting that private loans 
are very profitable and that lenders could assume more risk and could 
lower private loan fees if necessary to compete.
---------------------------------------------------------------------------
    Loan Reform 2: Use competitive bidding or auctions to set lender 
subsidies, rather than paying lenders a special allowance set by a 
lobbying process in Congress. One of the reasons the Direct Loan 
program is less costly than the FFEL program is not that it is run by 
the government, but that it is run by private industry through 
competitive bidding. Ironically, it is the government's hand in setting 
subsidies that makes the FFEL program an inefficient program compared 
to the one that is contracted out competitively to private industry. 
(Milton Friedman advocated the Direct Loan program with income-
contingent repayment; perhaps such loans should be called ``Friedman 
Loans.'') GAO has already done an extensive study of competitive 
bidding and auction mechanisms appropriate to the FFEL program.\11\ For 
example, one of the market mechanisms identified in the GAO report was 
a competitive bid sale of contractor-originated student loans, with or 
without a guarantee. Since that report, loan holders such as the 
Illinois Student Assistance Commission have undertaken loan sales 
through competitive bidding, to the benefit of students. On the other 
hand, establishment of some market mechanisms could be complicated to 
enact, and are less desirable than simply phasing out FFEL.
---------------------------------------------------------------------------
    \11\ ``Alternative Market Mechanisms for the Student Loan 
Program,'' GAO 02-84SP, December 18, 2001; http://www.gao.gov/
new.items/d0284sp.pdf. Economist Robert Archibald has advocated 
institution-level competitive bids in an all-private loan system.
---------------------------------------------------------------------------
    Loan Reform 3: Reform the student loan guaranty agencies by 
building on the lessons of the Voluntary Flexible Agreement provisions 
of HEA 98. Previously, guaranty agencies actually had financial 
incentives to let borrowers go into default and then collect, rather 
than keeping the borrowers in repayment. The VFA provisions enabled the 
Department of Education to work with guaranty agencies to implement 
alternative payment systems so as to reverse these perverse incentives. 
Essential to this reform effort must be cost neutrality, if not cost 
savings, with the GAO report of 2002 on VFAs as a starting point.\12\
---------------------------------------------------------------------------
    \12\ ``Federal Student Loans: Flexible Agreements with Guaranty 
Agencies Warrant Careful Evaluation,'' January 2002, GAO-02-254.
---------------------------------------------------------------------------
    Loan Reform 4: Reinstate the former provisions of the HEA that 
guaranty agencies and secondary markets must operate under the explicit 
approval of their respective State governments and within the mission 
of the HEA. Some student loan entities exist in a nether land that, 
they have argued, allows them to avoid open meetings, ignore freedom of 
information requests, award their executives golden parachutes with 
``hush-money'' clauses, and sell off assets for non-HEA purposes. 
Without reform, these agencies should not be permitted to issue tax-
exempt bonds.
    Loan Reform 5: Prohibit the conversion of more not-for-profit 
student loan entities to for-profit corporations. There is ample 
evidence that when conversion occurs, shareholder bottom lines override 
fidelity to the mission of the HEA. As the restructuring of the student 
loan industry develops around private loans, consider putting State 
not-for-profit agencies operating under close supervision of their 
governors and legislatures in an advantaged position so that they 
become the primary conduit through which private loans are subsidized 
and default risk is spread, rather than large for-profit corporations 
like Sallie Mae, which are more attuned to their stockholders than to 
students and families. Consider putting State agencies in a position of 
assisting colleges and universities in their respective States with 
choosing private lenders, perhaps by arranging competitive bids.
    Loan Reform 6: Reallocate default risk among taxpayers and loan 
holders from its current 97 percent insurance to a figure more in line 
with financial services industry norms; end the unnecessary Exceptional 
Performer provisions, which now provide certain loan holders 99 percent 
insurance; and reduce the lender subsidy substantially. President 
Bush's 2008 budget proposes a 50-basis point reduction in the lender 
subsidy, an appropriate order of magnitude. President Bush's budget 
directs FFEL savings to increase need-based grants, consistent with the 
recommendations of this testimony.
    Loan Reform 7: Establish loan collection conflict-of-interest rules 
to eliminate incentives for permitting loans to go into default and to 
eliminate collection of private loans before Federal guaranteed loans 
when the same borrower holds both. Adopt the proposals of The Project 
on Student Debt to limit excess borrower debt through payment 
limitations and better use of income contingent loans; these appear in 
S. 359 as the Fair Payment Assurance program.
    Loan Reform 8: Require the Secretary of Education to contact 
borrowers and offer consolidation loans, including incentives as 
necessary, when in the interest of both borrowers and taxpayers.\13\
---------------------------------------------------------------------------
    \13\ The Secretary may already have this authority under Section 
432 of the HEA, Legal Powers and Responsibilities, but it is not a 
requirement. The most obvious use of such authority would be to 
``call'' billions of dollars of loans requiring taxpayers to guarantee 
loan holders a 9.5 percent return, for savings to taxpayers in the 
hundreds of millions.
---------------------------------------------------------------------------
    Loan Reform 9: There is a middle ground between winding down FFEL 
and FFEL reform: allow colleges and universities that choose the Direct 
Loan program to share in the resulting cost savings. The STAR proposal 
to establish such an effort is a good idea conceptually; critics have 
said it would result in excessive complexity as to how to calculate the 
savings and how to make the distributions. It is preferable, however, 
to the superficial FFEL reforms that have characterized recent HEA 
changes.
                                 grants
    The objective of making savings in the guaranteed loan program 
should be to enhance Federal need-based grant funding. This should take 
precedence over efforts to make borrowing more attractive.
    Part of the problem with Federal grants (and I emphasize that it is 
only part of the problem) is that Federal grant funding has not kept up 
with the cost of college. The Federal Pell grant maximum in 1976 was 
$5,064, expressed in constant dollars, compared to the current maximum 
of $4,050. To have the same purchasing power today as 30 years ago at a 
typical 4-year public institution, the maximum now would have to be 
raised to approximately $6,400.\14\
---------------------------------------------------------------------------
    \14\ The College Board, ``Trends in Student Aid, 2006,'' p. 17. 
Note that in 1976 there was a cap of 50 percent of cost of attendance.
---------------------------------------------------------------------------
    The good news is that there seems to be a bipartisan consensus in 
Congress and much support throughout the country for a substantial 
increase in Pell grants.\15\
---------------------------------------------------------------------------
    \15\ Presumably the support is for aid to the lower-income. 
Congress should refocus Pell on the lower-income as it provides 
increases, inasmuch as under current formulas a substantial portion of 
the increases would expand the reach of Pell into the less needy 
population.
---------------------------------------------------------------------------
    Pell grants alone cannot fulfill the purpose of the HEA. They must 
be accompanied by effective programs that provide students with good 
pre-college preparation and support while in college. The current 
Administration has been dead wrong in trying to kill TRIO and GEAR-UP 
programs in the past, and SEOG and LEAP in this year's budget. These 
programs need support, as do other similar State, local, and private 
efforts.
    Federal grant programs such as SEOG, LEAP, and others serve good 
purposes and, while not beyond review, should not be distractions from 
more important issues, such as loan reform. Do not step on the 
beneficial, hard working ants of the HEA and claim to have slain a 
dragon. There is a big dragon out there, the student loan industry's 
exploitation of the FFEL program: as a citizen and taxpayer, I ask you 
to slay it, or at least tie it back in its cave.
                                process
    The best intentions of loan reforms and increases in grant funding 
will be for naught unless there is reform of the student aid process. 
The current process is a national disgrace.

Here's why:

     Average students and families have a hard time filling out 
the FAFSA (Free Application for Federal Student Aid). Even CPAs have to 
turn to specialists to fill out these forms. Many families are turning 
to consultants and paying high fees just to complete the 
applications.\16\
---------------------------------------------------------------------------
    \16\ http://www.princetoninfo.com/200107/10704s04.html.
---------------------------------------------------------------------------
     The information families struggle to put into the forms is 
often irrelevant to the type and amounts of aid students eventually 
receive, after they go through what is known as the aid packaging 
process. Many institutions will give students the package they want 
them to have, regardless of Federal need analysis or funding, because 
existing Federal rules do not have the teeth to ensure that the Federal 
funds are used for their intended purposes.\17\
---------------------------------------------------------------------------
    \17\ For example, the Federal funds may be used to decrease other 
grant aid in a student's aid package, as opposed to reducing the 
student's loan or work burden. One reason Pell grants have not been 
increased by Congress in recent years is criticism, especially from 
conservatives (but not limited to them) that Federal Pell increases do 
little good, for institutions use them as a reason to increase tuition. 
While there is not much evidence of this in terms of list price 
tuition, the same cannot be said for net price tuition. Many 
institutions raise net tuition by lowering their own grants and 
discounts for Pell and other outside scholarship recipients. (The 
procedure can be found on many institutions' web pages under ``outside 
scholarship policy.'' The practice is sometimes rationalized as 
horizontal equity, but in the process it sacrifices vertical equity and 
Federal intent.) It is time to remove this impediment to Pell increases 
through process reforms, as discussed below.
---------------------------------------------------------------------------
     If students and families knew how their aid packages were 
put together, they would march on Washington. The reason they don't 
march is that the information is not available to them. How 
institutions package aid is often secretive, proprietary information.
     The prevailing packaging practice of the past few years 
among both public and private institutions has been to award more grant 
aid to better-prepared students at the expense of financially needy 
students, resulting in higher debt burdens for lower income families. 
These practices include those known as ``enrollment management'' and 
``financial aid leveraging.'' \18\
---------------------------------------------------------------------------
    \18\ Sam Kean, ``Report Blames College Practices on Limiting Access 
of Minority and Low-
Income Students,'' The Chronicle of Higher Education, September 1, 
2006; Donald R. Hossler, ``How Enrollment Management has Transformed--
or Ruined--Higher Education,'' The Chronicle of Higher Education, April 
30, 2004.
---------------------------------------------------------------------------
     The student loan industry is the largest provider of 
enrollment management and financial aid leveraging services to 
institutions. Some providers sell software to institutions to 
circumvent the intent of Federal programs.\19\
---------------------------------------------------------------------------
    \19\ For example, The College Board, a student loan provider in 
partnership with Sallie Mae and Citibank, has offered institutions aid-
packaging software (FAST) to add back, to families' expected family 
contribution, the amounts they receive in Federal higher education tax 
benefits. The relationship between The College Board and Citibank is 
expressed in this December 19, 2006, Citibank press release: ``The 
Citibank program allows the College Board to leverage the industry's 
leading education loan products . . . to enhance its market position as 
an education loan provider.''
---------------------------------------------------------------------------
     Institutions often steer students to ``preferred'' lenders 
rather than help them get the best loan terms, based not on what is 
good for the student, but in large part because of arrangements the 
institution has with the lender, which are often not divulged. 
Sometimes these arrangements have involved personal benefits for 
institutional employees.
     Private loans, sometimes decidedly disadvantageous for 
students, are increasingly put into aid packages without students' 
understanding of the distinction between guaranteed and private loans, 
especially when the lender is the same entity. My own research in 2003 
at the Department of Education showed that substantial numbers of 
students with remaining Federal eligibility were nevertheless borrowing 
privately, on less favorable terms. Others have reported the same 
confusion, to the detriment of students.
    Here are six process reforms that are necessary, individually or in 
combination, to make the HEA work for students and families:
    Process Reform 1: Require that if any Federal aid is included in an 
aid package, the packaging process may not be considered confidential 
or proprietary, including preferred lender and private loan 
arrangements, enrollment management and financial aid leveraging 
techniques, and distributions of borrower benefits. Aid packaging and 
institutional arrangements with lenders should be, except as necessary 
to protect individual students' privacy, subject to the Freedom of 
Information Act and the Student Right to Know Act. Exposure to sunshine 
will change many practices for the better without further regulation, 
and illuminate practices that need regulation.\20\ The bipartisan, 
bicameral Student Loan Sunshine Act is a good place to start. It may 
also be time to require that students who have remaining Federal loan 
eligibility be provided an informed consent process before a private 
loan is included in their aid package.
---------------------------------------------------------------------------
    \20\ ``Cherry-picking'' students for borrower benefits, for 
example.
---------------------------------------------------------------------------
    Process Reform 2: Vastly simplify the FAFSA application process, 
because much of the currently required application information is 
ultimately irrelevant to a student's total aid package. The best idea 
may be to gather most information from Federal tax returns for those 
who check this option on their tax forms. This would simultaneously 
deal with problems in the current application process, wherein families 
may be penalized for saving and especially saving in a child's name. We 
rely on the Internal Revenue code to determine how much we can afford 
to pay in Federal taxes; the tax system could likewise be used to 
determine how much we can afford to pay for higher education.
    Process Reform 3: Adopt lessons learned from the Gates Millennium 
Scholarship program. The Gates Foundation has had more success than the 
Federal Government in using grants to lower loan burdens and to help 
students persist in college because of the conditions they set for 
institutions. (GMS requires a supplement-not-supplant condition on 
their grants to students.) \21\
---------------------------------------------------------------------------
    \21\ ``Fattening up financial aid,'' The Boston Globe, December 30, 
2006; Institute for Higher Education Policy, ``Expanding Access and 
Opportunity: Impact of the Gates Millennium Scholars Program,'' June 
2006.
---------------------------------------------------------------------------
    Process Reform 4: Place on probation (for participation in Federal 
HEA Title IV programs) institutions that use enrollment management 
techniques to decrease low-income/first generation shares of 
enrollment.\22\ Alternatively, if other reforms are not adopted, bypass 
some or all institutions in the awarding of Federal aid.\23\
---------------------------------------------------------------------------
    \22\ Suggestion comes from Tom Mortenson, ``Five Questions for 
Enrollment Management,'' Postsecondary Education Opportunity, December 
4, 2005. http://postsecondaryopportunity.blog spot.com/
2005_12_01_postsecondaryopportunity_archive.html.
    \23\ Suggestion comes from Richard Vedder, ``The Administration's 
Pell Grant Initiative,'' February 1, 2007. http://
collegeaffordability.blogspot.com/2007/02/administrations-pell-grant-
initiative.html.
---------------------------------------------------------------------------
    Process Reform 5: In the Federal budget, move a desired Pell grant 
maximum by legislation from discretionary to entitlement, so as to cut 
loan entitlement expenditures in favor of grant support. This would be 
consistent with fiscal responsibility and a pay-as-you-go approach.
    Process Reform 6: One process change that would slay several 
dragons with one blow would be to make Pell grants a matched 
entitlement; that is, when institutions put up a certain level of match 
from their own funds, the Federal Government would consider the Pell 
grant an entitlement (up to a set maximum).\24\ That change would 
facilitate moving loan entitlement savings to grants but also give 
incentives to institutions such that they would, on their own, work 
with the Federal Government in assisting the financially needy. This 
would help to reverse the current trend, which has been for 
institutions to shift money away from the low income faster than 
Federal and State Governments have been able to add it.
---------------------------------------------------------------------------
    \24\ Variations on matching have been advance by others, most 
prominently by Michael McPherson and Owen Schapiro in several books and 
articles.
---------------------------------------------------------------------------
    The importance of process reforms is essential. I would go so far 
as to say that not one single dollar of additional Pell grants should 
be spent until there is process reform to ensure that it will aid 
students and families as it is intended to do. The Federal Government 
must take the lead in getting Federal, State, and institutional 
governments to work together, rather than countervailing each other, in 
the national cause of improving college access and affordability. 
Process reform is crucial to restoring the moral authority of 
institutions to request increases in Pell grants, which authority has 
eroded to virtually nothing as institutions have moved their own funds 
away from the low income while hypocritically asking Federal taxpayers 
to pick up the bill.\25\ Many institutions would welcome Federal 
leadership to get away from the ``alms race'' without disarming 
unilaterally.
---------------------------------------------------------------------------
    \25\ See Donald E. Heller, ``Elephant in the Student Aid Office,'' 
InsideHigherEd, September 25, 2006, reproduced here as Attachment B.
---------------------------------------------------------------------------
                            federal research
    As a recent Federal researcher, I would be remiss if I did not make 
recommendations about needed research reforms in Federal HEA related 
research.

Here's why reforms are needed:

     In terms of the Higher Education Act, the U.S. Department 
of Education has no research or evaluation effort worthy of the name. 
It does minimal HEA research and evaluation, despite the importance of 
the HEA to the future of the country and the fact that approximately 
half of the Department's funding and personnel are involved in HEA 
programs. At the Department's Institute of Education Sciences, the 
National Center for Education Evaluation (NCEE) does no evaluation of 
the major grant and loan programs of the HEA; the National Center for 
Education Research (NCER) has no researchers who do research \26\; and 
the National Center for Education Statistics (NCES) compiles statistics 
but its reports fall well short of the scientific research standards 
set for the Department under the Education Sciences Reform Act of 
2002.\27\
---------------------------------------------------------------------------
    \26\ See Attachment C, the e-mail response to Attachment A, which 
identified waste and abuse in the FFEL student loan program. It is 
highly unlikely IES will be able to attract qualified researchers to 
fill research positions if the duties involve only research 
administration paperwork, as opposed to research itself. Just because 
researchers may turn up inconvenient findings that conflict with the 
policies of the administration, or potentially embarrass it, is not 
sufficient reason to prohibit research. In fact, IES was intended by 
Congress to be the office at the Department where research is insulated 
from such considerations. (As is often the case, the attempt to cover 
up the evidence or silence the messenger may turn out to be more 
damaging than dealing forthrightly with the problem. Likewise, the 
screening of academic researchers through background investigations 
raises the specter of allowing information access only to those who can 
be trusted in their research conclusions. On background investigations 
at the Department, see Jonathan D. Glater, ``Critics Question Education 
Department's Screening,'' The New York Times, February 11, 2007.)
    \27\ GAO found no student aid research works produced or contracted 
out by the Department that met standards for scientific rigor. See 
``Student Aid and Tax Benefits: Better Research and Guidance Will 
Facilitate Comparison of Effectiveness and Student Use,'' GAO-02-751, 
September 2002, pp. 41, 46, 47. Several NCES studies have been 
criticized by academic researchers for reaching causal conclusions 
without using causal methodologies.
---------------------------------------------------------------------------
     The postsecondary databases compiled by NCES at the 
Department of Education are outdated inasmuch as they do not adequately 
permit integration of student enrollment, academic preparation, and 
financial aid information.
     Many NCES descriptive reports do not present information 
in a manner useful to policy analysis and legislative oversight. Take 
the debate over college affordability, for example: despite the obvious 
relevance of net institutional tuition charges (that is, tuition list 
price minus institutional grants or discounts), NCES does not present 
such information in its reports. Nor does NCES typically break down 
family income statistics by race and ethnicity, despite their obvious 
relevance to the debate over affirmative action.
     The Department of Education has asked for an expensive and 
perhaps invasive ``unit record'' data system, despite having a great 
deal of information that it has not fully explored and researched. 
Although it has wisely backed away from its most extreme ``unit 
record'' version, there is still room to improve the proposal.
    The following two research reforms would go a long way toward 
addressing the need for adequate research to support the HEA and its 
programs:
    Research Reform 1: Require the Department of Education to publish 
pricing information on its College Opportunities On Line (COOL) Web 
site in a manner that facilitates student and family comparison of 
institutional net prices, including information in terms of family 
income, race and ethnicity. Require similar breakdowns in all 
descriptive reports dealing with college affordability and 
distributions of student financial aid.\28\
---------------------------------------------------------------------------
    \28\ See Attachment D for an example of the student financial aid 
information available to prospective students on the COOL web site. 
Note that it is not possible to tell where institutional grants (the 
largest source of aid) are going in terms of family income, race, or 
ethnicity. Families therefore are at a disadvantage to know what to 
expect in their students' financial aid packages, and the public-at-
large is kept in the dark as to how the financial aid process works and 
who benefits.
---------------------------------------------------------------------------
    Research Reform 2: Require an updating of current higher education 
databases; require presentations of information in terms relevant to 
policy debates and legislative oversight; require evaluations of major 
HEA programs, and restore the conduct of research to the job 
descriptions of research personnel.
    Thank you for the opportunity to testify. I think it is commendable 
that your committee has found time to hear from an individual who is a 
citizen, taxpayer, and parent, not representing any group with a 
special interest in the HEA. I would be pleased to answer questions and 
to work further with both sides of the aisle on putting these 
recommendations and others into legislative language and ultimately 
into effect.
                              Attachment A
                                                 November 21, 2003.
To: Department of Education
Through: IES Chain of Command
     Subject: Eliminating Waste in Department of Education Student 
                             Loan Programs
    In the course of doing research into postsecondary education 
finance, I have come across what appears to be significant Federal 
waste. I estimate it amounts to about $30,000 per day, perhaps more. In 
essence, the Department of Education is expanding the base amount of 
Stafford loans on which a return of 9.5 percent--well above market--is 
guaranteed to certain loan holders, when there is no reason to do so.
    Knowing that ED makes ``special allowance payments'' to student 
loan holders, in early 2003 I began to look into how a certain category 
of these payments, the so-called ``9.5 percent floor SAPs,'' are being 
distributed. By law, if the payments are excessive, they must either be 
returned to Treasury under arbitrage rules or distributed for eligible 
purposes, such as student benefits. I endeavored to determine how the 
payments might be benefiting students by demographic categories such as 
family income, race/ethnicity, and type of institution.
    I expected to find increases in the amounts of the payments, given 
that students are paying historically low interest rates for Stafford 
loans and therefore ED must pay high spreads (as much as 6.68 percent) 
in order to provide the loan holders a 9.5 percent return. However, I 
expected to find declines in the base amount of the outstanding loans, 
inasmuch as Congress repealed the authority for the program in 1993. 
What I found instead was an increase in the amounts outstanding, some 
of it rapid in the past 2 years, with little legal authority for the 
increase beyond a trade association's interpretation of a 1996 ED 
letter. I found no effort at ED or Treasury to evaluate the program 
under the requirements of the Government Performance and Reporting Act 
(GPRA), and I have little reason to think the payments are 
systematically distributed in any way that would result in expanding 
postsecondary opportunity. The payments go to both for-profit and not-
for-profit entities.
    The Secretary of Education could stop the increases in the base 
amount immediately. The increases are resulting from transfers of the 
9.5 percent floor loans to taxable bond issues and refinancing of the 
original tax-exempt issues. Here is how one loan holder described the 
process:

          According to EFC, ED provided guidance in a March 1996 Dear 
        Colleague letter that 9.5 percent floor loans retain the floor 
        . . . even after they are transferred from a relevant [tax 
        exempt] bond issue. As far as the balance of loans earning the 
        9.5 percent floor, as long as the [original tax exempt] bond 
        issues remain open, the recycling provisions of the indentures 
        results in increases in the loans receiving the 9.5 percent 
        floor.

    Some loan holders, however, suspect that this process is 
questionable. A July 2003, Nelnet IPO acknowledged that as a recipient, 
it questioned whether it is entitled to the funds. (IPOs must provide 
full disclosure to potential stockholders.)

          A portion of our FFELP loan portfolio, with an outstanding 
        balance of $925.2 million as of June 30, 2003, is comprised of 
        loans, which were previously financed with tax-exempt 
        obligations issued prior to October 1, 1993. Based upon 
        provisions of the Higher Education Act and related 
        interpretations by the DOE, we believe that we may be entitled 
        to receive special allowance payments on these loans providing 
        us with a 9.5 percent minimum rate of return. To date, we have 
        not recognized interest income generated by these loans based 
        on the 9.5 percent minimum rate of return. We have asked the 
        DOE to confirm that we are allowed to recognize the income 
        based on the 9.5 percent minimum rate of return. We have 
        deferred recognition of this excess interest income pending 
        satisfactory resolution of this issue. As of June 30, 2003, the 
        amount of excess interest income deferred totaled approximately 
        $5.9 million. Since we did not refinance loans with the 
        aforementioned tax-exempt obligations until 2003, all of this 
        deferred income was recorded this year.

    Recently, I had a personal conversation with a different recipient, 
who advised,

        The 9.5 percent guarantee can't be justified. But if we are 
        allowed to enlarge the base, we'd be fools not to exploit it 
        for all it's worth.

    As to the amounts involved, last year the 9.5 percent floor SAPs 
cost $432 million. I estimate that approximately $70 million of that 
was due to net growth in the amounts outstanding since repeal of the 
underlying authority. For the current year, I believe a reasonable 
estimate of the cost of more growth could be an additional $20 million 
to $30 million, depending on how much the procedure is exploited. (One 
loan holder expanded amounts outstanding from $900 million in 2002 to 
$1.3 billion in 2003.) Even if the cost of the growth is only $12 
million higher for 2004 (a conservative estimate) that is $1 million 
per month that could be saved were the Secretary of Education to act 
now to cut off the base growth of these payments. That is in excess of 
$30,000 per day.
    The Secretary could issue a Dear Partner/Colleague letter that 
would clarify the 1996 letter, to disallow future increases in the 
amounts of 9.5 percent floor loans outstanding. This would be 
consistent with the 1993 law (OBRA 1993) that repealed the authority 
for new issues.
    The above discussion deals only with the growth of the amounts of 
the 9.5 percent floor loans outstanding, not with the existing base of 
approximately $13 billion. The existing loans could be dealt with as 
well, however, were the Secretary to ask Congress for authority to 
contact student borrowers and offer to replace such loans with loans on 
which the borrowers would pay less interest. This would essentially be 
the same as calling the loans, a routine business practice. Replacement 
loans would be issued through direct loan consolidation, on which ED 
pays no SAPs. Such a procedure would result in both a savings to 
student borrowers and to taxpayers, perhaps up to $3 billion over the 
next decade.
    Any or all of these savings could be used to increase funding for 
postsecondary programs that have more potential for increasing 
postsecondary opportunity to fulfill ED's mission.
                                              Jon H. Oberg,
                                                          IES/NCER.
                              Attachment B
                 the elephant in the student aid office

                         (By Donald E. Heller)*

    Secretary of Education Margaret Spellings' Commission on the Future 
of Higher Education recently released its report titled ``A Test of 
Leadership: Charting the Future of U.S. Higher Education.'' The report 
contains a series of recommendations built on a year of deliberation by 
its 19 members. First and foremost is the recommendation that ``the 
U.S. commit to an unprecedented effort to expand higher education 
access and success by improving student preparation and persistence, 
addressing non-academic barriers and providing significant increases in 
aid to low-
income students.
---------------------------------------------------------------------------
    * Donald E. Heller is associate professor of education and senior 
research associate in the Center for the Study of Higher Education at 
Pennsylvania State University in University Park.
    The original story and user comments can be viewed online at http:/
/insidehighered.com/views/2006/09/25/heller.
---------------------------------------------------------------------------
    Last week, in an effort to get out ahead of the momentum that is 
already building for the report and its recommendations, the American 
Council on Education and the other organizations that make up the ``big 
six'' higher education lobbying groups in Washington issued an eight-
page letter to their members.
    This document, ``Addressing the Challenges Facing American 
Undergraduate Education,'' describes seven ``issues and actions'' that 
the organizations expect will result from the issuance of the Spellings 
commission's report. The first of these actions, echoing the 
commission's first recommendation, is ``Expanding college access to 
low-income and minority students.''
    According to the six organizations, ``The single most effective 
step to boost college participation of low-income and minority students 
is to increase substantially the value of Pell grants.'' Pell grants, 
the centerpiece of the Federal Government's efforts to reduce college 
cost barriers for low- and moderate-income students, is indeed a 
critical part of the Nation's financial aid system.
    The letter supports the commission's recommendation to increase the 
value of the average Pell award form 43 percent of the average in-state 
tuition at a public 4-year institution to 70 percent within 5 years. 
This is a noble goal, and having the support of the six lobbying groups 
is critical in helping to persuade Congress and the Bush administration 
to support it also. ACE's own calculations demonstrate that such an 
effort could require almost doubling the current $13 billion budget of 
the Pell grant program.
    The letter also encourages colleges and universities to find ways 
to control the growth of costs, again echoing a major theme of the 
Spellings commission. And it encourages the institutions to do a better 
job providing to students and parents clearer and more accurate 
information about the true ``net price'' of college, after taking into 
account financial aid.
    But in all the discussion in the letter about making college more 
affordable, these organizations ignore the elephant in the room: how 
colleges and universities spend their own institutional financial aid 
funds. While an increase in the value of Pell grants will certainly 
help achieve the objective of expanding postsecondary opportunity for 
low-income students, the goal could be promoted much more quickly and 
effectively through the reform of institutional financial aid policies.
    In a study I conducted earlier this year for the Wisconsin Center 
for the Advancement of Postsecondary Education, I examined the 
distribution of grant awards to undergraduate students. Using data from 
the National Postsecondary Student Aid Study, a nationally 
representative sample of students from the 2003-4 academic year, I 
looked at what many label ``traditional college students''--those who 
are still dependents of their parents and attended a single college 
full-time that year.
    What I found was while colleges and universities provided just over 
$4 billion in Federal grants and $3 billion in State grants to these 
students, they provided more than $10 billion in grants from their own 
resources. The Nation's colleges and universities should be applauded 
for the effort they make in helping to lower the cost of college by 
partnering with the Federal and State Governments to award grants from 
institutional resources.
    But not all grants are alike. My study found that while 97 percent 
of all Federal grant dollars and 75 percent of all State grant dollars 
awarded to these students went to those whose parents' income was below 
the national median, only 47 percent of all institutional grants were 
targeted to this same population of students. Over half of the grants 
awarded by institutions, or $5.5 billion, was awarded to students 
without any consideration of their or their parents' financial need.
    This is in contrast to Pell Grants, which are very highly targeted 
at needy students, and three-quarters of State grants, which also use 
financial need as the primary criterion for determining eligibility. 
The lack of means-testing in the awarding of over half the 
institutional grants, along with broader definitions of ``need,'' 
results in a very different distribution of awards as compared to 
means-tested Federal and State grant programs.
    There has been much written in the Nation about the necessity of 
helping middle-income students find ways to help pay for college, 
especially since many of them come from families that are above the 
eligibility cutoff for Federal or State need-based grants. Many 
institutions have indicated that they are filling that objective 
through their own institutional grant programs. And while many of these 
grants do go to students of modest means, the truth is that many go to 
students who come from families with incomes well above a level that 
most of us would describe as ``modest.''
    For example, in 2003-4, institutions awarded more than $2 billion 
in grant aid to dependent students from families with incomes in excess 
of $108,000, or approximately twice the median family income of all 
dependent students in the Nation that year. While some may believe that 
these families deserve help in paying for college, it is difficult to 
make the argument that this should be a priority in light of the 
Spellings commission's declaration that its members ``are especially 
troubled by gaps in college access for low-income Americans.'' One is 
hard-pressed to argue that giving $2 billion in grants to students from 
these upper-income families helps to address the commission's concerns.
    What is particularly troubling is that the letter from ACE and its 
partner organizations never once lays even a portion of the 
responsibility for helping lower-income students afford college at the 
doorstep of the financial aid policies of their member institutions. 
There is language in the letter, of course, about expanding Pell 
Grants, and about other ``efforts'' and ``goals'' of institutions to 
improve access for poor students. There is also the announcement of 
another public service campaign called ``Know How To Go'' targeted at 
low-income students (raise your hand if you remember ACE's ``College is 
Possible'' campaign, which was launched in 1997 and sounds awfully 
similar to ``Know How To Go'').
    But never does the letter recommend that these institutions conduct 
an evaluation of their own financial aid programs to determine whether 
they are working in consort with the goal of expanding access for 
underserved populations, or whether they are simply rewarding wealthier 
students who have had many social, financial, and academic advantages 
in the years before they went to college.
    Rather than focusing solely on public service campaigns, cost-
cutting efforts, and new ways of explaining the difference between 
``sticker price'' and ``net price,'' colleges and universities would be 
much better off by simply taking this $2 billion and putting it in the 
hands of low- and moderate-income students. This decision could be made 
tomorrow, requires no action on the part of the Federal Government, and 
would have an immediate impact on the college participation of these 
students.
    The American Council on Education and the other higher education 
organizations in Washington should be lauded for their attempts to be 
proactive in supporting the recommendation of the Spellings commission 
to improve college access for low-
income students. But before the organizations and their member 
institutions ramp up their external public relations and lobbying 
efforts, they should look inward at their own practices.
    Reforming institutional policies so that all financial aid 
resources are focused on students who truly need them to be able to 
afford college--rather than being awarded to students who would attend 
college anyway--is an important first step.
                              Attachment C
From: Whitehurst, Grover
Sent: Wednesday, November 26, 2003 2:24 PM
To: Oberg, Jon

Subject: Re: Two Items of Concern

    Jon: I will forward your letters to appropriate people. As soon as 
acting associate commissioner Wiatroski is in place and has his feet 
under him, I want you and he to address your EDPAS agreement, with 
specific attention to your job responsibilities. NCER does not have an 
intramural program of research on postsecondary education finance, so 
whatever you have been doing in that arena will need to be justified 
and approved under a concept clearance if it is to continue. In the 18 
months you have remaining, I will expect your time and talents to be 
directed primarily to our business of conceptualizing, competing, and 
monitoring research grants.



    The Chairman. Thank you.
    Dr. Baum.

  STATEMENT OF SANDY BAUM, PH.D., SENIOR POLICY ANALYST, THE 
  COLLEGE BOARD AND PROFESSOR OF ECONOMICS, SKIDMORE COLLEGE, 
                      SARATOGA SPRINGS, NY

    Ms. Baum. Thank you Chairman Kennedy and Ranking Member 
Enzi, for giving me the opportunity to be here and talk with 
you about issues of college access and affordability.
    The Federal student aid programs make a vital difference in 
the lives of many students and Congress is to be commended for 
the recent increase in the Pell grant maximum, which was long 
overdue. However, significant gaps remain in college access and 
affordability in this country and some of our policies could 
definitely be made more equitable and more efficient in order 
to improve the opportunities faced by students at the bottom 
end of the income distribution.
    The issue is obviously two-sided. Rising prices are a 
problem as is the shortage of funds to pay those prices. I'm 
only going to say a couple of words about the tuition side of 
the equation. Some of these have been mentioned already. First, 
rising prices are not a new phenomenon. Public college tuition 
has been rising more rapidly, particularly at 4-year colleges 
in recent years than it has historically but this is just not a 
new story.
    Second, we should definitely be focusing on the net price 
that students and parents actually pay, after taking grant aid 
and tax benefits into consideration. It's the net price of 
college that determines affordability. The story about GW that 
we heard before is the story about sticker prices and 
unfortunately, it's all very complicated and difficult to get 
students and families to understand.
    To understand why prices are rising, I address that issue 
in my written testimony. Federal student aid is not the 
explanation for why prices are rising. So what we can do in 
order to help students is primarily help them with student aid. 
We should not be trying to regulate prices. We should be urging 
colleges and universities to do better at containing the costs 
of providing quality higher education for students and 
encouraging States to maintain reliable funding for public 
institutions.
    The market does work, to a reasonable extent, in higher 
education. Students and families are already voting with their 
feet and moving to attend institutions with lower prices and 
lower net prices. But student aid is the best vehicle for the 
Federal Government to address college affordability.
    Again, there is a lot of detail in my written testimony but 
what I think is particularly important is that the principles 
be kept in mind when designing student aid policies. We have a 
hodge-podge of programs now and they are not all rooted in 
principles that are valid for designing the best student aid 
programs. We should have adequate funding but we also need 
simple programs. We need predictable programs. We need well-
coordinated programs and we need programs that are well-
targeted. Many of our dollars now are targeted at students who 
could easily afford to go to college without subsidy. These 
programs are nice for them but they're not necessarily changing 
their behavior. We need to help students in the bottom half of 
the income distribution.
    We do need to simplify. We need to simplify the Federal 
application form. We need to make aid predictable. When 
families with children fill out their tax forms and they could 
get a notice of what kind of Pell grant aid they would be 
eligible for if they were to apply, under current 
circumstances. We should be able to have a table that tells 
you, given your family size and your income, what your Pell 
eligibility will be.
    We should also be helping families early on to expect that 
they will be able to pay for college. Aid should be 
predictable. We should have subsidized savings programs for 
students from low-income families when they're young so that 
their expectations will be higher about whether the money will 
be there when they are ready for college.
    The Federal Government should also be using some of its 
limited dollars, more of its limited dollars, to provide 
incentives for other partners in the higher education financing 
process to direct their funds towards students with high need. 
Some of the proposals by Senator Reed and Senator Enzi, to 
expand the current LEAP program, provide incentives for States 
and institutions to provide need-based aid and mentoring 
programs are moves in a good direction on this front.
    The Federal methodology for determining who gets aid is 
flawed. Probably the biggest flaw in the current system is the 
work penalty, aside from the complication of the system. Right 
now, if students work excessively, in order to fund their own 
educations, we penalize them by taking away their eligibility 
for Federal aid. That's a problem.
    Then the student debt question, which has already been 
addressed here but I want to make some more comments about it. 
First, I agree with many of the comments that have been made 
but I disagree with others. The typical student is not the 
problem. The typical amount of debt with which a student 
graduates with a Bachelor's degree of about $20,000 is fine for 
the typical graduate. The payoff to a college education is very 
high. The problem is, that a growing minority of students do 
face very real difficulty and the fact that the median student 
doesn't have a problem does not diminish the problems with 
those students. We need to target our improvements in the 
student loan system. We need to subsidize the students who have 
trouble repaying their debts. So the income contingent 
repayment plans by Senators Clinton and Kennedy are really good 
moves in this direction, as are the improvements in the 
hardship provisions that have been proposed by the Project on 
Student Debt and by Senator Kennedy.
    And the private loan issue is huge. No matter what we do to 
help students pay off their Federal loans, 20 percent of 
education debt now comes through private markets. We have to do 
something about that. We have to subsidize students more 
through a simpler process, both based on their financial 
circumstances before college and based on their financial 
circumstances while they are paying off their student debt. 
Thank you.
    [The prepared statement of Ms. Baum follows:]
                Prepared Statement of Sandy Baum, Ph.D.
    I would like to thank Senator Kennedy, Senator Enzi, and the 
members of the Health, Education, Labor, and Pensions Committee for 
giving me the opportunity to discuss the issues of college access and 
affordability and the Reauthorization of the Higher Education Act. The 
Federal Government's efforts to increase college access and 
affordability are critical to the Nation's future. Existing student aid 
policies have contributed to rising college participation levels and 
have eased the financial burden higher education imposes on students 
and families across the Nation. Recent moves to increase the maximum 
Pell Grant are particularly encouraging, indicating a renewed 
willingness on the part of lawmakers to address the persistent problems 
of access to higher education in our society. Improving the financing 
mechanisms for students can also make a very real difference in 
promoting educational opportunity.
                 the importance of federal student aid
    In 1974, fewer than half of U.S. high school graduates enrolled 
immediately in college. The increase in that proportion to two-thirds 
over the past 30 years \1\ could not have occurred without the 
significant contribution of Federal student aid programs. Along with 
the efforts of both States and institutions in providing financial 
assistance to students, Pell Grants, Stafford Loans, and other Federal 
aid programs have opened the door to financial and personal success for 
millions of Americans.
---------------------------------------------------------------------------
    \1\ National Center for Education Statistics, Digest of Education 
Statistics 2005, Table 181.
---------------------------------------------------------------------------
    Yet unacceptable gaps in college enrollment rates, and even larger 
gaps in college completion rates, persist between students from 
privileged backgrounds and those from low- and moderate-income families 
with similar academic qualifications. These gaps are not only 
inequitable, leading to the perpetuation of inequality from generation 
to generation; they also represent significant inefficiency for the 
U.S. economy. As great as the private benefits to higher education are, 
the social benefits are even higher. Society benefits in both financial 
and non-financial ways from increased educational attainment among the 
population. College-educated adults are our most active civic 
participants. Higher levels of educational attainment also reduce 
dependence on public income support programs, generate higher tax 
revenues, and lead to increased productivity and higher wages for all, 
including those who do not themselves have college degrees.\2\
---------------------------------------------------------------------------
    \2\ Sandy Baum and Kathleen Payea, Education Pays 2004. The College 
Board.
---------------------------------------------------------------------------
    Financial barriers provide only a partial explanation for the gaps 
in educational attainment across socioeconomic groups. The problems we 
face are also rooted in academic preparation, aspirations, and 
expectations. Efforts to increase affordability, both through 
moderating price increases and through providing student aid, cannot 
solve all of the problems in this area. However, it is clear that 
finances play an important role and that many students from low- and 
moderate-income backgrounds lack the financial wherewithal to enroll 
and succeed in college. More equitable and efficient policies with more 
generous funding have the potential to significantly reduce the 
barriers to educational attainment facing too many Americans today.
    Congress now has the opportunity to make significant improvements 
to the current system of higher education finance. A number of bills 
sponsored by members of this committee embody ideas that, if 
implemented, would represent major improvements in college access and 
affordability. Prominent among these are Senator Kennedy's Student Debt 
Relief Act, Senator Clinton's Student Borrower Bill of Rights, and 
Senator Reed's and Senator Enzi's proposals for revitalizing and 
expanding LEAP to increase the effectiveness of Federal matching funds 
for need-based grant aid from States, institutions, and other entities. 
The HEA Reauthorization is a particularly important opportunity for 
improving the lives of our students and the future promise of the U.S. 
economy.
    Financial barriers to college access and success result both from 
the high and rising price of college and from the inadequacy of the 
student aid funds available to low- and moderate-income students. I 
will address these two issues in turn.
                          the price of college
Rising College Tuition has a Long History
    Tuition increases make headlines. The focus is almost always on 
published tuition and fee levels and usually on the highest prices and 
the largest increases. While tuition and fees do consistently rise more 
rapidly than the Consumer Price Index, this information is hardly 
sufficient to evaluate the prices students face. The 51 percent 
increase in the inflation-adjusted average tuition and fees at public 
4-year colleges and universities over the past decade was very high by 
historical standards, and this growth is clearly not sustainable in the 
long run. However, the much smaller rates of increase in tuition and 
fees at private 4-year colleges (where dollar increases are, of course, 
larger than in the public sector), and particularly at 2-year public 
colleges, were actually smaller than the increases of recent decades. 
In other words, rapidly rising college prices are not a new 
phenomenon.\3\
---------------------------------------------------------------------------
    \3\ The College Board, Trends in College Pricing 2006.
---------------------------------------------------------------------------
Variations in Tuition
    The average prices that are reported by the College Board each 
year, as well as by the Department of Education, hide considerable 
variation not only across sectors, but also across States and 
geographical regions, and even within these categories. Students have 
many options. Forty-two percent of full-time 4-year college students--
and 58 percent of those in the public sector--are enrolled in 
institutions that charge less than $6,000 a year. Twenty-five percent 
of full-time college students, and a significantly larger proportion of 
part-time students, are enrolled in 2-year public colleges, where 
average tuition and fees are about $2,300.\4\
---------------------------------------------------------------------------
    \4\ The College Board, Trends in College Pricing 2006.
---------------------------------------------------------------------------
Non-Tuition Expenses
    Although the sticker price exaggerates the amount the majority of 
students pay for college, the reality is that the cost to students 
participating in higher education is significantly higher than just 
tuition and fees. Room, board, and other costs of attendance contribute 
to the affordability problem. Even if a student has a Pell Grant that 
covers the full tuition and fee charges at a 2-year public college, 
she/he must cover living expenses as well. Tuition expenses constitute 
less than 20 percent of the total out-of-pocket cost for students at 
community colleges who cannot live with their parents. Moreover, it is 
foregone wages that constitute the largest cost for many college 
students. Successful participation in higher education usually involves 
diminished labor force participation. Particularly for students with 
family responsibilities, the loss of income may be the real culprit in 
making higher education unaffordable. While student aid policies 
clearly cannot solve all of the economic problems students face, the 
adequacy of funding must be evaluated with these realities in mind.
Net Price: What Students Actually Pay
    Over half of all college students, and two-thirds of full-time 
students, receive grant aid that reduces the net price of college.\5\ 
Many others receive tax credits and deductions that reduce the net 
price they pay. Net tuition after grant aid is what determines 
affordability, so our focus should not just be on published tuition and 
fees. Over the past decade, net price actually fell in real terms at 2-
year public colleges. It grew more slowly than published tuition and 
fees at both public and private 
4-year colleges.
---------------------------------------------------------------------------
    \5\ Lutz Berkner et al., Undergraduate Financial Aid Estimates for 
2003-2004 by Type of Institution. National Center for Education 
Statistics. NCES 2005-163. 2005.
---------------------------------------------------------------------------
    It is important to remember that the difference between net price 
and sticker price is the result of a combination of Federal and State 
subsidies to students and the discounts, or institutional grant aid, 
which colleges and universities provide to their students. 
Institutional grant aid grew about 80 percent in inflation-adjusted 
dollars over the decade from 1995-96 to 2005-6.\6\
---------------------------------------------------------------------------
    \6\ The College Board, Trends in Student Aid 2006.
---------------------------------------------------------------------------
    The net price of college requires neither an unmanageable nor a 
rapidly growing portion of income for students from affluent families, 
even if they have not saved in advance. In 2003-4, full-time dependent 
students from families in the top quarter of the income distribution 
paid about 4 percent of their incomes for tuition and fees and 11 
percent for the total cost of attendance at the average 4-year public 
college. A decade earlier, these percentages were 3 percent and 10 
percent. The net tuition at 4-year private non-profit colleges and 
universities constituted 12 percent of income and the net total cost of 
attendance 19 percent for these high-income students in 2003-4.
    The situation for families in the lower half of the income 
distribution is quite different. For those students from the lowest 
quarter of the income distribution who did manage to enroll in college 
full-time, despite the low tuition and fees, the net total cost of 
attending a public 2-year college rose from 29 percent of income in 
1992-93 to 37 percent in 2003-4. In 2003-4, the net cost of attending a 
public 4-year college required 47 percent of income for these low-
income families, and at private colleges, the figure was 83 percent.
    Students from the second income quartile paid only 7 percent of 
their incomes for net tuition and fees at public 4-year colleges in 
2003-4, but the total net cost of attendance required over a quarter of 
family income. These lower-middle income families used 41 percent of 
their incomes to attend private non-profit colleges. Students enrolled 
in the for-profit sector pay net prices very close to those in private 
nonprofit institutions.\7\
---------------------------------------------------------------------------
    \7\ The College Board, Trends in College Pricing, 2005. Based on 
data from the National Postsecondary Student Aid Study.

                            Net Price as a Percentage of Income for Enrolled Students
----------------------------------------------------------------------------------------------------------------
                                    Lowest 25% by     2nd 25% by income   3rd 25% by income     Highest 25% by
                                   income  (in %)          (in %)              (in %)           income (in %)
                                --------------------------------------------------------------------------------
                                  1992-93   2003-04   1992-93   2003-04   1992-93   2003-04   1992-93   2003-04
----------------------------------------------------------------------------------------------------------------
Public 2-year
  Tuition & Fees...............         2         3         2         3         2         2         1          1
  Total Cost of Attendance.....        29        37        15        19        13        13         6          7
Public 4-year
  Tuition & Fees...............         7         8         5         7         5         6         3          4
  Total Cost of Attendance.....        41        47        22        26        16        18        10         11
Private 4-year
  Tuition & Fees...............        24        35        17        20        14        16        11         12
  Total Cost of Attendance.....        60        83        33        41        25        28        17         19
For-profit
  Tuition & Fees...............        29        34        14        19        12        11         6          7
  Total Cost of Attendance.....        70        78        29        36        24        24        13         15
----------------------------------------------------------------------------------------------------------------
Source: The College Board, Trends in College Pricing 2005.

    Students do not have adequate information about net price. Both the 
Federal Government and institutions must do a better job of providing 
them in advance with information about how much they will actually be 
expected to pay.
Why Is Tuition Rising so Rapidly?
                          state appropriations
    It is no surprise that the 34 percent real increase in tuition and 
fees at public 4-year colleges and universities between 1999 and 2004 
was so much larger than the 14 percent increase at private 4-year 
colleges, since State appropriations per student fell by 14 percent in 
inflation-adjusted dollars over this 5-year period.\8\ Examination of 
changes in tuition and fees at public institutions over time reveals a 
consistent pattern, with rapid increase coinciding with tight State 
budgets and more stable college prices prevailing when appropriations 
are more generous.
---------------------------------------------------------------------------
    \8\ State Higher Education Executive Officers. Data cited in Trends 
in College Pricing 2006, The College Board.
---------------------------------------------------------------------------
                              cost drivers
    Cycles in State funding do not, of course, explain private college 
tuition, nor do they provide a complete explanation for increases in 
public college tuition. While this answer never quite seems 
satisfactory, the explanation lies primarily with the labor-intensive 
nature of the process of educating students. While more innovations are 
certainly possible, it is much more difficult to increase productivity 
in education than in manufacturing industries propelled by 
technological innovation. Some prices will always rise more rapidly 
than the average price in the economy, while others rise more slowly. 
Education is likely to remain in the former category unless we settle 
for significant compromises in educational quality.
    Tuition increases in recent years have also been fueled by rising 
costs of health care, energy, and technology. Between 2000-1 and 2005-
6, the Consumer Price Index rose 14 percent, while the prices of the 
goods and services purchased by colleges and universities, as measured 
by the Higher Education Price Index, rose 22 percent. Colleges spent 72 
percent more on utilities in 2005-6 than they had 5 years earlier and 
31 percent more on fringe benefits for employees.\9\ Both student 
services and student aid consume increasing portions of campus budgets.
---------------------------------------------------------------------------
    \9\ The College Board, Trends in College Pricing 2006. Data from 
the Common Fund Institute.
---------------------------------------------------------------------------
    Competition for students is also a factor. Institutions find 
themselves in a sort of arms race, investing in ever more elaborate 
facilities and services in order to attract students to their 
particular campuses. Marketing expenses may enhance the bottom line, 
but they do little to further the quality of education available to 
students.
Federal Student Aid Is Not Responsible for Tuition Inflation
    Some participants in the debates over appropriate Federal policy 
for higher education have argued that more generous financial aid only 
serves to push prices higher as it increases the demand for college. 
While effective student aid policies do increase the number of students 
who are able and willing to pay for college, the clear consensus of 
empirical investigations into this issue is that publicly funded 
student aid does not significantly contribute to rising tuition levels.
    Perhaps the most obvious evidence in this regard is that neither 
Pell Grant levels nor Federal loan limits have been rising in the 
recent years of rapid tuition increases. One of the many factors 
fueling price increases may, in fact, be that colleges and universities 
supplement Federal and State aid with their own funds, so less generous 
publicly funded aid can increase pressure on institutional aid budgets.
    Concerns over the impact of third-party payment are exaggerated, 
since students and families pay the incremental costs when tuition 
rises. A few are eligible for more subsidized loans but in general, 
increases in tuition don't increase eligibility for non-institutional 
aid. The students who actually pay the published tuition price are not 
Federal aid recipients and their willingness and ability to pay are not 
increased when Federal aid becomes more generous. In other words, few 
institutions have the incentive to increase tuition in response to 
Federal aid availability.
What Can We do to Slow Tuition Increases?
    It is imperative that institutions find better ways to control 
costs without compromising quality. There are impressive efforts 
underway to develop strategies such as coordinating purchasing, using 
technology effectively, and reducing time to degree. But there is no 
doubt that resistance to innovation is a problem and that much more 
progress is needed.
    While there may be room for the Federal Government to encourage 
innovative cost-saving practices, no form of price controls or 
restriction on student aid is likely to solve the pricing problem. 
Students and families are already voting with their feet, choosing less 
expensive institutions with increasing frequency. Public policy should 
focus on assuring quality public higher education to all who can 
benefit from it, not on the few most visible high-price private 
colleges.
                              student aid
    Student aid is the best vehicle Congress has to increase college 
access and affordability. The focus should be on assuring that student 
aid programs are designed to optimize equity and efficiency, to be 
well-coordinated, and to minimize the burden of education debt for the 
many students who will continue to rely on borrowing. Basic principles 
for policy design include simplicity, predictability and targeting, in 
addition to adequacy of funding. Moreover, aid policies should be 
designed not only to provide funds for the transition to college, but 
also to encourage preparation and promote persistence to degree 
completion.
Simplification
    The need for simplification applies to both the application process 
and the array of programs and eligibility criteria, to the extent that 
they complicate the system from the student's perspective. Students 
should be aware of the aid available and the approximate amount for 
which they will be eligible early enough to allow them to take the 
necessary steps to prepare themselves academically for college. They 
should be able to apply for Federal financial aid without filling out a 
form that is more complicated than income tax forms. Susan Dynarski and 
Judith Scott-Clayton of Harvard University's Kennedy School of 
Government are among the researchers who have provided clear evidence 
that FAFSA could be considerably shortened without having a major 
impact on the distribution of Federal aid.\10\
---------------------------------------------------------------------------
    \10\ Susan Dynarski and Judith Scott-Clayton. ``The Cost of 
Complexity in Federal Student Aid: Lessons from Optimal Tax Theory and 
Behavioral Economics,'' Kennedy School of Government, 2006.
---------------------------------------------------------------------------
    Efforts to simplify the form and the process would likely be 
furthered by recognition that the Federal methodology creates an 
eligibility index; it is not a real need analysis or measure of 
financial capacity. In the longer run, it is surely possible to 
effectively use the existing income tax system to collect the 
information necessary to determine eligibility for Federal student aid.
Predictability
    It should also be possible to use the income tax system to provide 
advance information about student aid. For example, when families with 
children file their income tax returns, they could receive a statement 
informing them about their potential Pell Grant eligibility. Moreover, 
if the formula were simplified, it would be possible to construct a 
look-up table that would provide an estimation of the Pell Grant amount 
for which students and families with different income levels would be 
eligible.
Targeting
    Student aid from all sources--Federal and State Governments as well 
as colleges and universities themselves--is less targeted on those who 
rely on it to enroll and succeed in college than it was in the past. 
The Federal focus on tax benefits, particularly deductions, the trend 
towards basing eligibility for State aid on grades and test scores, and 
the use of institutional non-need-based aid to attract students, all 
deserve careful review. Financial aid may well serve purposes other 
than increasing access to educational opportunities, but those purposes 
should be clearly articulated and evaluated. The central goal of 
Federal student aid should be to increase educational attainment among 
students who are interested and able to benefit from higher education, 
but who do not have the resources to make this achievement a reality.
Federal Incentives for States and Institutions
    The Federal Government's role is broader than the distribution of 
Federal dollars. If the national agenda for student aid is based on 
increasing educational opportunities for those students for whom 
finances create insurmountable barriers and assuring the strength of 
the Nation's future labor force, Congress should also focus on 
influencing how other partners in the higher education financing 
process spend their money. This does not require new bureaucracy, but 
can be achieved through incentives. There is precedent for this 
strategy in the Leveraging Education Assistance Partnerships (LEAP) 
program, under which the Federal Government matches State need-based 
grant dollars. Efforts to revitalize this approach have the potential 
to maximize the effectiveness of limited Federal dollars.
    The Federal Government could use a similar approach to influence 
institutional policies, without creating new rules and regulations. If 
Congress were to provide financial incentives for colleges and 
universities to enroll and graduate low- and moderate-income students, 
institutions would find ways to help students succeed that would be 
most suitable to the specific circumstances on their own campuses. It 
is vital that these subsidies focus not only on enrollment, but also on 
successful transfer or completion, so as not to exacerbate the program 
of getting students into college but not through college. While there 
is, on average, a positive economic return to some college, even in the 
absence of a degree or certificate, that return is much lower than the 
return to completed credentials. Many students who enroll and then 
abandon their studies prematurely are left with debt that dwarfs any 
earnings premium they might enjoy. Encouraging degree completion should 
be a primary focus in the design of student aid programs.
Anti-Trust Regulations
    Another strategy likely to encourage institutions to focus their 
dollars on students with the most limited financial resources is to 
loosen the anti-trust restrictions now preventing colleges from 
communicating about financial aid. Destructive competition is pushing 
many of them to provide too generously for affluent students at the 
expense of those with higher levels of need. It is not the wealthiest 
or the most selective institutions that are engaged in the merit aid 
wars. The elite private institutions with the highest levels of 
tuition, as well as some prominent flagship publics, distribute very 
generous aid packages to low-income students and have largely avoided 
the strategic use of student aid for other purposes. But those colleges 
that have less secure finances, that sometimes struggle to fill their 
seats, and that tend to enroll fewer affluent students, are using many 
of their aid dollars to attract students with high test scores and/or 
deep pockets away from competitor institutions.
    In several States, the private college associations have expressed 
considerable concern about this problem and are seeking solutions. They 
find themselves unable to proceed because of the anti-trust 
restrictions preventing colleges from cooperating on efforts to direct 
more of their aid to low- and moderate-income students. Congress could 
act to relieve this situation and hold the institutions accountable for 
socially desirable results if they are granted the privilege of 
cooperation.
Federal Aid Allocation Methodology
    Another measure, and a simpler one, that would promote institutions 
meeting the financial need of their students, would be abolishing the 
over-award restrictions that prevent colleges from allocating as much 
need-based aid for many students as their assessment determines is 
necessary. Currently, students lose their eligibility for subsidized 
Stafford loans and Federal campus-based aid if the institution meets 
need that is not revealed by the Federal Methodology. Specific 
components of the Federal formula have made this problem increasingly 
common.
    The other aspect of the Federal allocation system that is 
particularly damaging to educational opportunities is the work penalty 
embodied in the Federal methodology. Students who work many hours in 
order to supplement their family incomes and/or to make up for the 
inadequacy of their financial aid packages frequently lose future Pell 
eligibility as a result of their responsible behavior. The high 
assessment rate on student income discriminates against hard-working 
students, in favor of those who have access to other resources to 
supplement their aid awards.
Using Aid to Encourage Preparation
    The debate about whether the gaps in college enrollment and 
completion across socioeconomic groups are best explained by inadequate 
academic preparation or by financial constraints is not very 
constructive, since there is overwhelming evidence that both are major 
problems. Moreover, they are not entirely distinct. Young people from 
low-income families whose parents are not college-educated and who live 
in neighborhoods where college experience is rare are likely to believe 
that higher education is simply not an option for them. They have 
little incentive to prepare themselves to take advantage of an 
opportunity that is so far out of reach. Financial aid programs that 
provide not only early information about financial aid, but also early 
commitment of funds, have the potential to encourage academic 
preparation, in addition to alleviating financial constraints.
    Promising policy approaches for financial aid to encourage 
preparation include:
Matched Savings
    There is a growing movement across the country for individual 
development accounts, where savings of low- and moderate-income 
families are matched by public and/or private entities. These IDAs 
could serve as a model for the student aid system.
Savings Accounts for Low-Income Students
    The Federal Government encourages families to save for college, 
subsidizing them through tax-exempt savings plans. Young people whose 
parents do not have the resources to participate in these programs 
could receive Federal and State funding to serve the same purpose. 
Specific accounts for education, with earmarked deposits for young 
people from low-income families every year as they progress 
successfully through school would encourage academic success and help 
move our less-privileged youth into the so-called ownership 
society.\11\
---------------------------------------------------------------------------
    \11\ Sandy Baum, ``Approaching the Dilemma from Both Sides: PROMISE 
Credits for Young Students,'' in Course Corrections, The Lumina 
Foundation, 2005.
---------------------------------------------------------------------------
Partnerships
    Partnerships involving the Federal Government, with incentives for 
participation by States, institutions, and private entities, can 
combine early commitment of funds and information about aid with the 
personal mentoring and support systems that have proven to promote 
access to higher education for low- and moderate-income students.
                              student debt
Education Debt is Good Debt
    The typical student is not drowning in debt. The investment in 
college is an excellent one, both financially and in terms of other 
aspects of quality of life and opportunities. The median total debt 
level for students earning 4-year degrees was $19,300 in 2003-4 and 
will probably reach about $22,000 this year.\12\ Certainly college 
graduates would be happier not to face this debt, but with average 
earnings of about $50,000 a year for full-time workers who are repaying 
these loans--over $20,000 a year more than the earnings of high school 
graduates in the same age range--this burden is not excessive.
---------------------------------------------------------------------------
    \12\ U.S. Census Bureau, http://www.census.gov/hhes/www/income/
histinc/p26.html.
---------------------------------------------------------------------------
    A colleague of mine at Skidmore College, Ngina Chiteji, has 
analyzed data on young adult debt from the Federal Reserve Bank's 
Survey of Consumer Finances. She concludes that young adults do not 
appear to have an unusual or distinctly troublesome relationship to 
credit markets. Increases in housing debt best explain the increase in 
the average amount of debt over time for this age group.\13\
---------------------------------------------------------------------------
    \13\ Ngina Chiteji, ``To Have and To Hold: Young Adults and Credit 
Markets,'' Sheldon Danziger and Cecilia Rouse (eds), The Price of 
Independence: The Economics of Early Adulthood (New York: Russell Sage 
Foundation Press), forthcoming.
---------------------------------------------------------------------------
Many Students Do Need Debt Repayment Relief
    The fact that the typical college graduate can reasonably pay off 
the typical education debt without undue burden does not diminish the 
need for Federal policies to alleviate the problems of student debt. It 
does mean that these efforts should be appropriately targeted.
    Despite the high average earnings premium for college graduates, 
there is considerable variation in earnings among those repaying their 
student debts. Many never earn degrees. Others enter occupations where 
they make significant social contributions but sacrifice personal 
financial gains. The median income for college graduates between the 
ages of 25 and 34 working full-time is about $50,000. But 25 percent of 
this group earns less than $30,000 and another 25 percent earns more 
than $75,000.\14\ Clearly taking these earnings differentials into 
consideration is important in determining who requires additional 
subsidies from the taxpayers.
---------------------------------------------------------------------------
    \14\ U.S. Census Bureau, http://www.census.gov/hhes/www/income/
histinc/p26.html.
---------------------------------------------------------------------------
    Although the average 4-year public college graduate who borrows 
(about two-thirds do borrow for college), borrows only about $16,000, 
15 percent of these students have accumulated over $30,000 in debt.\15\ 
Clearly, focusing on the plight of these heavily indebted students is 
more constructive than searching for blanket 
solutions, as though any education debt were problematic. Efficient and 
equitable policies for alleviating the student debt burden must be 
targeted at those who are in particularly difficult situations.
---------------------------------------------------------------------------
    \15\ The College Board, Trends in Student Aid 2006.
---------------------------------------------------------------------------
Income-Contingent Repayment
    The solution to the student debt problem requires taking financial 
circumstances during loan repayment, not just financial circumstances 
before college, into consideration when allocating subsidies. The 
income-contingent loan repayment plans proposed in legislation offered 
by Senator Kennedy and by Senator Clinton exemplify the approach we 
should take to this issue. In my research with my colleague Saul 
Schwartz of Carleton University, I have developed principles for a 
sound loan repayment plan. The policy would eliminate payment 
obligations for borrowers with incomes below approximately 150 percent 
of the poverty level, assure that payments do not exceed more than 
about 10 percent of income for the typical borrower, and require higher 
percentages of income from borrowers with higher incomes than from 
those with lower incomes.\16\
---------------------------------------------------------------------------
    \16\ Sandy Baum and Saul Schwartz, How Much Debt is Too Much? 
Defining Benchmarks for Manageable Student Debt. The College Board and 
The Project on Student Debt. 2006.
---------------------------------------------------------------------------
    Congress should pass legislation embodying the principles 
incorporated in Senator Kennedy's Student Debt Relief Act and Senator 
Clinton's Student Borrower Bill of Rights, both of which propose 
comprehensive income-contingent repayment plans that would solve the 
problems of most former students.
Economic Hardship Provisions
    As long as we do not have comprehensive reform in this direction, 
the Fair Payment Assurance provisions in Senator Kennedy's Student Debt 
Relief Act would go far to mitigating the difficulties facing former 
students with excessive debt. Many of the most serious problems former 
students face are generated by compounding interest that causes the 
payment obligations of borrowers under financial duress to increase 
dramatically. The current system could be greatly strengthened by 
eliminating the all-or-nothing interest subsidy inherent in the current 
hardship provisions and removing some of the other work disincentives 
that have been highlighted by the Project on Student Debt in their 
analysis of current provisions for economic hardship.\17\
---------------------------------------------------------------------------
    \17\ Project on Student Debt, ``White Paper: Addressing Student 
Loan Repayment Burdens,'' 2006. http://projectonstudentdebt.org/files/
pub/WHITE_PAPER_FINAL_PDF.pdf.
---------------------------------------------------------------------------
Loan Forgiveness for Public Service
    Another approach to mitigating the problems some former students 
face because of their student debt involves a more comprehensive 
program of loan forgiveness for public service than we now have in 
place. I have recently developed a proposal together with Elizabeth 
Warren and Ganesh Sitaraman of Harvard Law School that we have called 
Service Pays. This program would forgive a year of debt for each year 
of public service performed by former students, in addition to assuring 
a living wage.\18\
---------------------------------------------------------------------------
    \18\ Elizabeth Warren, Sandy Baum, and Ganesh Sitaraman, ``A Ticket 
to the Middle Class: Working Off College Debt,'' Communities and 
Banking, Federal Reserve Bank of Boston, Winter 2007.
---------------------------------------------------------------------------
Stafford Loan Limits
    Finally, any policies designed to address the student debt problem 
must take into consideration the increasing reliance on private loans, 
which now constitute about 20 percent of education borrowing. Federal 
debt relief policies will not affect these loans, some of which carry 
stunningly high interest rates. Increasing Stafford loan limits is 
likely the only way to stem the growth of this rapidly growing market 
that has the potential to jeopardize the future financial security of 
college students.
                               conclusion
     Federal student aid policies have made and continue to 
make a significant contribution to increasing educational opportunities 
for American students.
     Financial barriers contribute to persistent and 
unacceptable gaps in college enrollment and success for students from 
the lower half of the income distribution.
     These financial barriers result from a combination of 
rapidly rising tuition and fee levels, the additional costs involved in 
attending college, and the inadequacy of student aid policies.
     It is the net price of college, after taking grant aid and 
tax benefits into consideration that determines how affordable college 
is for students and families. Focusing only on sticker prices is 
misleading and can lead to misguided public policy.
     Congress can best contribute to restraining growth in 
college prices by providing incentives for innovative cost-savings 
strategies on campus, assuring that students have adequate information, 
and maintaining well-funded and transparent student aid policies.
     Federal student aid processes and programs should be 
simple and predictable.
     To increase access to higher education, Congress should 
continue to increase Pell Grants and should simplify the application 
process.
     Congress should target its student aid on those students 
who need it most, focusing both on financial circumstances before 
college and on financial circumstances during the period of student 
loan repayment.
     The Federal Government should strengthen financial 
incentives for States and institutions to provide more generous need-
based aid to college students.
     Congress should implement programs to encourage 
preparation for college, including education savings accounts for 
students from low-income families.
     Through policies such as income-contingent repayment and 
expanded loan forgiveness for public service, student loan relief 
should be targeted at the sizeable minority of borrowers whose debt is 
out-of-proportion to their incomes.
     Other promising approaches to improving the student aid 
system include raising Stafford loan limits, reducing the work-penalty 
in the Federal Methodology, loosening anti-trust restrictions on 
cooperating to increase need-based aid, eliminating over-award 
restrictions, and rationalizing student loan repayment hardship 
provisions.

    The Chairman. Very good. Thank you, very helpful. Let me 
ask you, Dr. Baum, what more should we be doing with regards to 
just tuition generally? I mean, what we're looking at here are 
student loans but we also hear the concern about the escalation 
of tuition. What are your suggestions? I mean, where should we 
be? Others on the panel might have some ideas as well. I mean, 
what is the Federal role? What is the State role? How do we get 
cooperation? How do we also not interfere with colleges that 
are trying to do innovative kinds of programs and offer greater 
variety and be on the cutting edge? How do we deal with these 
issues here? You might get into some ideas about working with 
the States. What should we be doing? I mean, exemption of 
antitrust provisions to permit the community colleges to 
purchase things together? Give us some of the suggestions and 
maybe the rest of the panel can talk to this as well, please.
    Ms. Baum. I think that's a very important and complicated 
question but the fact is, that one, if the Federal Government 
can do anything to stabilize and make State appropriations more 
reliable, that's very important. It's important to distinguish 
between cost and price. We do need to provide positive 
incentives for institutions to come up with innovative ways to 
control costs. Institutions are best positioned to figure out 
for their campuses, what the right way to do it is but we can 
provide incentives. And we need to make sure that when they 
control their costs, that that's reflected in price reductions. 
That's the problem, is that cost and price are two very 
different factors.
    You mentioned the antitrust provisions. I talked about that 
in my written testimony. It is true that colleges are afraid to 
cooperate on many fronts. They're afraid to cooperate in 
talking about agreements for providing services and purchasing. 
They're afraid to talk about cooperating to provide need-based 
aid. That would be a very important part of the enrollment 
management problem and the buying of students with non-need-
based aid comes from the fact that students are competing with 
each other and they can't agree not to compete because of the 
antitrust regulations.
    But we should not be punishing students----
    The Chairman. Isn't there a different provision? They can 
talk without it violating antitrust if it's about athletes or 
they can't with regards to students?
    Ms. Baum. Yeah, well, we have a lot of exemptions for 
athletes.
    The Chairman. Okay.
    Ms. Baum. So that way, the highest priority----
    The Chairman. This was not the central thrust of where I 
was going to go but I'll come back. Now, Dr. Oberg, do you want 
to comment or the rest of our panel, just on that? Or on my 
suggestions, please?
    Mr. Oberg. Yes. Yes, Mr. Chairman. One of my specific 
recom-
mendations----
    The Chairman. Let me just describe the issue--people will 
say, well, this is fine. Again, we're going to look back into 
the student loan programs and how they can be shaped and 
reorganized but there will be the suggestion by some, well, 
even if we are able to do something more for students, we're 
going to see the colleges will all jack up the price and this 
thing will be lost for these families. I mean, that will be out 
there. There is some interesting information showing that the 
schools where they have the greatest kind of dependency, have 
not raised tuition. Others have. I mean, that kind of responds 
to that issue. But I'm interested in the broader kind of 
question--that most parents will say, well, this is good, you 
keep working on it, but also we're seeing tuition continue to 
go up. I'd be interested in what you think we ought to be 
thinking about on this.
    Mr. Oberg. Mr. Chairman, I have one recommendation in my 
written testimony that deals with a previous effort that was 
led by this committee, Senator Dodd in particular, the COOL 
system, the College Opportunities Online. It is intended to be 
a help to students and families to figure out exactly what 
prices are and what aid might be at various colleges. One thing 
it doesn't do very well and it needs to change, is to be able 
to differentiate between sticker price and net price. Net price 
is what is paid. You can't tell from the COOL online system 
what net price might be and one of the things that this 
committee could do would be to instruct the Department of 
Education to make that system available to parents and families 
online.
    The Chairman. Dr. Draut.
    Ms. Draut. I would just underscore that any way that the 
Federal Government can incentivize States to stabilize and 
improve their funding of higher education should be looked at, 
whether that's providing rewards for those States who do not 
raise tuition faster than inflation. There is perhaps, maybe a 
range of ways that could be accomplished but in my mind, the 
rise in tuition is most directly attributed to the decline in 
State funding of higher education, which is now at a 25-year-
per-pupil low.
    The Chairman. Ms. Orman.
    Ms. Orman. Mr. Chairman, I'm always going to address this 
on the personal finance level for the actual people that are 
involved because that is my expertise here, which is this. 
While States can do things, while schools can do things, if the 
actual consumer, the one that uses that product, does not 
understand how it works, has no idea how to repay back a loan, 
what is available to them, so I think a lot of money has to go 
somewhere to educate the actual end use consumer of the things 
that are out there because they, today, do not have a clue. So 
we can not just ask States and the government and everybody to 
offer something when the people using it--they have got to be 
educated as to why they should use it because they don't have a 
clue today, in my opinion.
    The Chairman. Senator Isakson.

                  Opening Statement of Senator Isakson

    Senator Isakson. Thank you, Senator Kennedy, for holding 
the hearing. My three children subscribe to the Suze Orman 
recommendations of paying for my six grandchildrens' education. 
Every Christmas, I write six checks to their college fund 
rather than give them gifts so you've done a great job and I 
try to do the same thing. I want to go back to the statement 
you just made because I was getting ready to read directly from 
your written testimony, but I encourage you to also address the 
need for more and better education on how to handle student 
loans in the repayment period. It's a failure on our part when 
we just hand out money to young adults, credit cards or student 
loans, without truly making them understand the mechanics of 
how these agreements work.
    I cannot tell you how much I ratify that statement and 
Senator, one of our responsibilities as we look into the entire 
student loan issue is to figure ways where we can see to it 
that those students are better educated when they take--when 
credit is extended to them. I was in a business that depended 
on credit. I sold houses for 33 years and mortgages are the 
name of the game and we went through the Truth in Lending laws 
and Reg C and full disclosure to try and help people understand 
the component parts of finance. We have that same obligation, I 
think, on student loans and particularly with young people who, 
(a) think they are invincible, (b) think they'll live forever 
and have never, in many cases, yet had to deal with the 
responsibilities of credit and this is sometimes their very 
first experience.
    Can you give us any suggestions what we might do to help in 
that education process?
    Ms. Orman. Well, obviously financial education on the 
personal level needs to start the day a child enters grammar 
school, kindergarten up. Why we do not teach it in the majority 
of our schools, in fact, none of our schools is absolutely 
beyond me. Home economics should not just be about how you 
bake. It really needs to be about how do you balance a 
checkbook, how do you pay for things, where does the money come 
from, where does it go. It is totally a non-existent topic that 
is spoken about within a family unit.
    So the problem is today, many of the students are getting 
money. They are using that money for things other than their 
financial education. They do call into my show and they say, 
Suze, we don't need it right now. I have 4 years. What if I 
start to put it in the stock market? What if I do this? And I'm 
sitting there, how did you get money to begin with? So there 
are obviously gaps in who gets money, who doesn't get money, 
what's it used for. I would like to see it go directly to the 
school and not into the hands of the child, believe or not, 
because you cannot ask a child or a person to hold money and do 
something responsibly with it when they've never been taught 
responsibility to begin with. You would not place a child in 
the seat of a car and ask them to drive without actually having 
taught them how to do so because that is a legal weapon 
otherwise. The same is true with money. So we have got to start 
teaching it, but who is going to teach these children? Our 
teachers, that are all at poverty level to begin with? The 
parents don't know. Grandparents don't know so we have, in my 
opinion, for middle America--not the extreme ends but even 
middle America, a system that has failed them on every single 
level. They are seduced on the college campuses by credit card 
companies. They graduate college now with not only student loan 
debt but credit card debt. They don't understand a FICO score. 
Because they've paid their bills late, all across the way, they 
don't have a good FICO score so now they're not getting jobs, 
they're not getting apartments rented to them--they're moving 
back in with their parents and again, the whole system is 
failing. So I think it should be mandatory that before a child 
is allowed to graduate college--actually, let me put that 
different. Before a child is allowed to graduate high school, 
that they need to not only take the SATs, they should take the 
FATs--some financial exam that they have got to pass before 
they enter into the world of what could be their destruction 
rather than their creation because they don't understand money.
    Senator Isakson. Mr. Chairman, we didn't practice this. 
I've never had the privilege of meeting Ms. Orman until just 
now but she has just hit on the main thing we can do. I know 
nobody is for a national curriculum but when I chaired the 
State Board of Education in Georgia, we tried to embed in the 
curriculum in mathematics and home economics and all those 
things, examples, financial examples of every financial 
technique--the miracle of compound interest, the problems with 
add-on fees and things like that. If these kids do understand 
these things coming out, I think that's a responsibility of 
education to do so.
    One last thing because my time is almost out. The second 
thing--I know this is about student loans but I just want to 
make one statement. What is charged by the institutions is part 
of the problem. We make an increase in the grants and then they 
raise tuition--we experienced that in Georgia. We passed the 
Hope Scholarship. Every student graduating from high school in 
Georgia with a B average has a full scholarship to any State 
university. The University of Georgia--every freshman is on 
full scholarship but the problem we had is once we passed that, 
when we paid for tuition, books and fees and all of a sudden, 
books and fees started going up, particularly fees. And we 
can't fix that problem and shouldn't fix it--I'm not a price 
fixer. I don't want government meddling but the colleges and 
universities are still trying to, I think, do 20th century 
education in the 21st century. We've got too much money going 
into bricks and mortar and not enough into technology 
delivering content to our students, which is far more effective 
and my time is out but that is a huge--distance learning, use 
of technology. The non-traditional student of my day was the 
student that had to work to go to school. That today is the 
traditional student and both in time and in curriculum and in 
accessibility, I don't think the colleges and universities, as 
a whole, are doing everything they can do to meet the demands 
of that student and also deliver it in a more affordable 
fashion.
    And I apologize for making a speech rather than asking 
questions.
    The Chairman. Dr. Oberg.
    Mr. Oberg. Senator, I'd like to say, I certainly agree with 
your exchange here but to add another aspect of it, too and 
that is, how very complicated our system is. When I was at the 
Department of Education, I was frequently on the receiving ends 
of calls, from CPAs, who would say, I'm trying to fill out the 
FAFSA or I'm trying to fill out the profile--how does this 
system work? And I would get into trying to explain and saying, 
well, under the Federal methodology, here's the result and if 
you put the institutional methodology on top of that, then here 
is the result. And if you read the fine print on the various 
tax-favored instruments, you get a certain effect on your 
financial aid and if you read it the other way, you get another 
effect and it may be up to the institution.
    My point is, is that our process system is so complicated, 
I don't know any amount of financial education can adequately 
prepare a student and a family, even with the best intentions, 
if CPAs themselves are having difficulty in understanding the 
consequences.
    The Chairman. Just a--and I'd hope that the Senator would 
chime in at any time now, just on this point. We here in the 
Congress have made it more complicated, by and large, more 
difficult, as Senator Isakson has pointed out, for the student 
to understand it and the financial experts to understand it. 
And what we have seen in recent times is a the change of policy 
here in the Congress, where we targeted money to where the need 
was but that changed and the public debate said, look, you can 
get a two-for-one. You can do something for students and get 
also a tax cut. And that has more zip to it in terms of the 
politics of the time rather than a spending program that is 
going to be targeted to needy students. I mean, that happens, I 
believe, strongly, to have been the atmosphere and the politics 
of the more recent times. I think this has been true in my 
party as well as others and I think that has added to these 
complications, which is an unfortunate take, rather than 
getting the focus somewhere it's needed.
    But I was going to come to this question about the 
complication--I mean, we are going to try--I believe and we 
haven't gotten into it. Maybe, Dr. Oberg, you've been 
restrained when you talk about the 9.5 percent and you weren't 
going to get in and describe this. I'm interested in how we 
simplify this. What suggestions across the board do you have in 
terms of simplifying this system so that people do understand 
it? And the public understands where their money is going in 
terms of spending on education. Students understand this. We're 
going to wrap into the system, a good old concept, which people 
generally appreciate in this country and that's competition. I 
know we've got your points, Dr. Oberg and your footnotes, which 
we will look carefully through. But all of you have given this 
some thought--are we asking too much in trying to do that?
    Ms. Baum. Could I? I want to address the simplification 
question. First I'd like to comment on Senator Isakson's 
comments about the relationship between grant aid and price and 
what happened with Georgia Hope and I just want to clarify the 
difference between Georgia Hope and Pell is so extreme. Georgia 
Hope pays all of the cost for all of the students at this State 
university and so the State can decide to raise the price and 
for Pell grants, a small percentage of students at most 
institutions are receiving Pell grants. They cover far below 
the whole cost. A whole different picture, so raising Pell 
grants will be much more effective than the Georgia Hope in 
that regard.
    But on this simplification issue, I think we should abandon 
the notion that the Federal methodology is a need analysis 
system. We have a whole complicated system for trying to figure 
out exactly how much a family can afford to pay. We don't 
figure it out very well and then they have to pay a lot more 
than that, anyway. We should just say, here's an eligibility 
index. If your income is this level, this is how much Federal 
aid you are going to be eligible to get and then families would 
know, students would know. We wouldn't need a complicated form 
to get the information and everyone would understand the system 
much better.
    Mr. Oberg. I would certainly concur with my colleagues on 
the panel about this. In my written testimony, I also talk 
about the same thing and that is, if we can somehow spin off 
this information from our tax system, our income tax system and 
spin it off early and make it clear to people how much they are 
going to be eligible for, that would be an excellent change.
    There is a bit of an irony here in that the Federal system 
and all the questions that are asked on the FAFSA are thought 
to have something to do with how much aid a student gets. But 
it so complicated now that there isn't much relationship 
between much of what a person puts on the FAFSA and what the 
package actually is and I think a lot of this could be done 
away with and we could go to a much simpler system.
    The Chairman. I might just put up this chart. This is a 
GAO--Government Accountability Office chart--and it is the flow 
of funds for the Federal Family Education Loan program. As I 
understand, Dr. Oberg, you can look at that chart and you'll 
understand very clearly and I'm sure you can explain it to us 
all but we'll do that at another time. This is the complexity 
we've had, but there are alternatives. We have a program, the 
Direct Loan program, which is a good deal simpler. I think it's 
more cost effective, myself. Could you talk, the panelists, 
talk a little about what we ought to expect in terms of the 
competitive world out there, to advantage the students? No 
question--I was here when this legislation was first passed and 
the banks all testified at that table. In this same room. The 
banks were all out there and they said, we can't do it. We 
can't afford it. We haven't got the ability to do it and they 
had to sweeten it and sweeten it and sweeten it and sweeten it 
and it's gone on now and they are all benefitting. If you can 
start a bank with a credit card business and the student loans, 
you can head to Florida tomorrow because you're going to make 
so much money on these businesses. And we have turned to new 
Bankruptcy Act to be the enforcer on those credit card 
companies, many of which are hurting these students.
    But let me ask you, what is the role of competition? What 
should we expect? And then Ms. Draut--I wish the others would 
comment on this. Ms. Draut, would you like to say a word about 
that?
    Ms. Draut. Well, sure. The playing field isn't level 
between the Direct Loan program and the FFELP program. We know 
that. The idea was that the two would compete with each other 
and that the market--let the market work its magic. We now know 
that between preferred lender arrangements, that the FFELP 
program has a major upper hand over the Direct Loan program and 
the percentage of participating schools in the Direct Loan 
program has been on the decline since it was first started. So 
my preference is to save money and convert to the Direct Loan 
program, which I realize politically, is a very challenging and 
difficult thing to do. That being said, a couple of weeks ago, 
I was testifying in front of the Senate Banking Committee about 
credit cards and the role of our government--I keep coming back 
to this--is to set the fair rules of engagement and right now, 
the rules are so grossly slanted away from students and from 
consumers and toward the banks and the student lenders that we 
have a long way to go before we would sort of be over-
intervening in the market.
    The Chairman. How do you react to the statement, well that 
will be a government-run program and doesn't the government run 
very good programs? Why should we rely on it? Why would that be 
more efficient?
    Ms. Draut. Well, I think if you ask anybody who gets their 
Social Security check, how they feel about that question, I 
think they'll tell you that the government, when it puts its 
mind to it, can run a very efficient, great program and 
specific to the student financial aid system, I would say, back 
in 1965, after the Higher Education Act was passed and we 
actually put money behind the rhetoric of helping low-income 
people afford college, that the percentage of low-income 
students who went to college doubled in just 7 years. So yes, 
the government can do tremendous things. And we've gotten away 
from the power of the government to create the kind of 
opportunity where people can achieve their aspirations.
    The Chairman. Ms. Orman.
    Ms. Orman. Well, I'm not one for competition, believe it or 
not, in this area because I think competition implies that 
there are choices. When there are choices, there is confusion. 
When you have a child or parents that do not understand 
anything anyway about money, to ask them to choose this over 
this over that because that over this over that gives you this 
over that--all of a sudden, they don't know what to do and they 
do nothing. Or if they do make a choice, it's--they do eeny 
meeny miny mo. I would like to see one place--I would like to 
see, just as it was said, I would like to see the government 
involved with it. I would like to see that you take out the 
banking industry, so to speak, and somebody has got to look 
over them because in my opinion, they are all scoundrels, I'm 
sorry to say and they will do things that benefit their bottom 
lines at our own sacrifice. So I do think we need to step in 
here and say, this is how you do it. This is how it works. Not 
too many choices, again just for income eligibility, I think it 
is a little bit difficult because there are all different 
things that go into somebody's income, depending on where they 
live and what their expenses are so in the same way this panel 
has said, look at the net cost of a school, one should look at 
the net of somebody's income and where it has to go, in a 
different way. I just think to go across the board for income 
eligibility is really damaging in certain parts of this country 
where it is very expensive to live. So I would like the choices 
and the competition, believe it or not, to be taken out of it 
because we always lose when others are competing over our 
business.
    The Chairman. Thank you.
    Dr. Oberg.
    Mr. Oberg. Yes, Mr. Chairman, on the subject of 
competition, there are some ironies here. The Direct Loan 
program is actually contracted out on a competitive bid basis 
for loan origination to private industry. So there is a great 
deal of competition in that sense, in that there is bidding for 
it. It uses Treasury capital. Of course, that is a bidding 
process, too, in how the Treasury raises money. The FFEL 
program, on the other hand, the subsidy is not set by 
competition. It is set by legislation and unless you view the 
legislative process as competition as to how that is set, there 
is not competition in the same way. That is why there is some 
interest in bringing in auctions under different arrangements 
and there have been great studies done by GAO and others about 
the possibilities of bringing more competition into the system. 
The question is, of course, would savings through this 
competition exceed the amount of the reduction in the subsidy 
that has been proposed by the President? Fifty basis points on 
the subsidy is a substantial amount, which he would direct to 
Pell grants and I think that probably, competition through 
auctions would result in a reduction of greater than that 
amount but that is very difficult to say.
    The Chairman. Senator Isakson, do you----
    Senator Isakson. Please, if I could. Five minutes? On the 
competition on the Direct Loan, that's on the origination fee, 
right?
    Mr. Oberg. That's on the origination of the loan itself. 
The Department of Education does not, in its bureaucracy, do 
all this. It contracts that out to originators who make those 
loans.
    Senator Isakson. But the capital is appropriated money or 
in effect, debt of the United States.
    Mr. Oberg. Yes.
    Senator Isakson. And in the competitive program in the 
private sector, where does the money come from?
    Mr. Oberg. It comes from private capital, from bank 
capital.
    Senator Isakson. Ms. Draut--is it doctor?
    Ms. Draut. No.
    Senator Isakson. I always ask that.
    Ms. Draut. Thank you.
    Senator Isakson. What rules are slanted toward lenders? You 
said the rules were slanted toward lenders. What rules are 
slanted toward lenders?
    Ms. Draut. Let me specifically answer that by talking about 
credit cards, which by the way, have become used by a quarter 
of students to pay for tuition.
    Senator Isakson. Okay but also, I want you to talk about 
rules as they relate to student loans.
    Ms. Draut. The credit card companies have the right to do 
something no other industry in this country has the right to do 
and that is, change the terms at any time for any reason and 
raise the price of the loan, going retroactively, applying it 
to your existing balance. So that truism right there, that 
reality by and of itself and there's all sorts of other tricks 
and traps that happen, makes it a market enormously slanted 
towards the lenders rather than the borrowers. In the student 
loan industry, I think that it's a little different in that the 
lenders are practically guaranteed a rate of return. So there 
is not much that they really need to do to be good providers 
towards the students. What is their incentive to create a 
product that is really the most convenient and easy to 
understand towards the student? There is no incentive there 
because they're going to get their rate of return, regardless 
of what they do. The other thing I would say is the reality 
that you can't discharge student loan debts, even under extreme 
illustration of financial devastation through bankruptcy laws 
and that is another way that the system is tilted toward the 
lender interests rather than the student interests.
    Senator Isakson. Thank you. That point, the latter on 
student loans, is what I was looking for. On the chart that 
Senator Kennedy put up and you folks are all a lot smarter than 
I am, but isn't it a fair statement to say, if you put FHA and 
VA loans up there instead of student loans, that you'd have the 
same type of flow chart? And the reason I ask the question--
that was my business and the government got in the business of 
FHA and VA financing to help people get into homes. It insures 
those loans. The secondary markets provide funds as private 
capital goes in but it's just as confusing in terms of the 
flow. But it's a tremendously advantageous program.
    Suze.
    Ms. Orman. I can't comment. I don't know.
    Senator Isakson. Okay. Well, my point is, Senator Kennedy, 
charts confuse me and especially around here. We get all kinds 
of confusing charts but any time you get the government 
incentivizing the private sector to put its capital into a 
worthy proposition, which certainly students going to college 
and people owning homes are, you're going to almost always 
get--you're going to get that confusing a chart unless the 
government is just borrowing the money and providing it to the 
people. So the private sector provides a tremendous need and we 
have Fannie Mae, Freddy Mac on the conventional loan today, 
government organizations that were started when the savings and 
loans failed, to create a capital market to be able to provide 
funds for housing. The same thing is true on the student loans 
as well. I'm not saying this in defense of lenders or in 
defense of anything except to say when you look at a confusing 
chart and say, wouldn't it be so much simpler if--you have to 
remember, can you get to the same place you are today in terms 
of the amount of available capital with just that?
    Dr. Baum.
    Ms. Baum. Can I comment on this? Yes. I think that this 
complexity issue relates both to the loan system and to the 
student aid system in general, and the complexity is what is a 
problem for students. The way the system is structured behind 
the scenes matters but it matters less than how students are 
affected so that for example, the issue of how can students 
navigate the student loan system, it's really true that you put 
27 options in front of a student, they can't make a decision. 
There's a warning about the current trend towards direct to 
consumer marketing of student loans. You get an e-mail message 
and it says, take out a loan and students are doing that and I 
think if there is anything we can do to regulate that, we 
should. But the dichotomy, the idea that what we have is direct 
lending, which is the government and FFELP programs, which are 
free market, is just wrong because obviously that's not the 
free market. We can make that more of a free market without 
generating increased complexity for students, which is the 
critical issue.
    Mr. Oberg. Senator, comparing the FFEL system with the VA 
or FHA and so on, I think there are differences in all----
    The Chairman. Bring the mic up a little closer, please.
    Mr. Oberg. There are differences in all the systems. One 
thing that is probably different is in the FFEL system, there 
is ultimately less risk to the lenders. It is--there is a 
guaranteed subsidy and there is very little risk because 
lenders--when students go into default, are guaranteed 97 
percent insurance and in some cases, 99 percent and in the 
President's budget, he has reduced--he has proposed to reduce 
that insurance from 97 to 95. I think it could go lower than 
that myself but that would be one difference and I think that 
is a recognition that the FFEL system may ought to be brought 
in to line with the other comparable systems in terms of 
subsidies and risks.
    The Chairman. You know, isn't one of the differences the 
subsidy? I mean, we have major subsidies in the loan program, 
which don't exist in the other programs and we do have a 
simpler system than the complicated one that we've just 
outlined here. Maybe we ought to look at the FHA and the VA. 
But we've got subsidies in this program, which people are 
paying for. I might ask, Dr. Oberg, we've just seen--I guess 
it's Missouri and Illinois, the State organizations, go and 
they have sold--they've grouped together all their student 
loans and then sold those for a 4 to 7 percent profit. Sallie 
Mae has picked those up. They think they can make a profit, 
after paying the 4 or 7 percent additional on these loans. Does 
that say there is some water in this boat or not? I mean, if we 
find out--and you're familiar with this because there was a 
question then about who ought to recover that, you know. I know 
that you think the States ought to recover it and some of us 
feel that if we are putting it up, the feds should--but that's 
a different issue. But if they are able, these States, which 
more of them and more of them are doing now, to put it together 
and then go out and sell the loans like that, if that doesn't 
send a message, we've got too much subsidy in this program, I 
don't know what does.
    Mr. Oberg. Mr. Chairman, yes. I think you've touched on a 
very important point and this is, we need to think of the 
future here about loan asset sales on a secondary market. 
Indeed, Sallie Mae and Nelnet did buy Illinois at quite a 
premium, which shows that those are very good subsidies and 
those are very--that guarantee is worth a lot. The proceeds of 
the loan asset sales by these secondary markets raises some 
interesting questions. I think that the Illinois example is one 
that is preferable to the Missouri example. Illinois is using 
its loan asset sales in order to improve student aid through 
its agency, through its student aid agency. The Missouri MOHELA 
loan sales are going to be used for purposes, I think, which 
are really outside the mission of the Higher Education Act and 
this is one thing that you might consider legislating on as you 
revise it. The Missouri loan assets are going to be used for 
capital construction at various campuses in the University of 
Missouri system, which raises the question of whether or not 
that is not a State obligation rather than the use of HEA 
funds. It also raises questions of inducements because 
institutions are being induced to participate in the MOHELA 
system and there are also strings attached to the Missouri loan 
sales that for example, the loan assets that would be used to 
build the buildings at the University of Missouri at Columbia 
could not be used for stem cell research and that is stretching 
the use of Federal loan assets into policies that I'm not sure 
that--my preference would be that the Congress would legislate 
on the appropriate uses of loan asset sales at the State 
secondary markets.
    The Chairman. Let me ask you. If they are doing that and 
they're making a profit, why don't we do that at the Federal 
level and sell off then loans, and make a profit, and return 
that to students?
    Mr. Oberg. Senator, that's the essence really, of the loan 
auction proposals that are floating around out there. There are 
many different kinds. One of them is to originate and then sell 
loan assets into the student loan industry at the Federal 
level, just as the States secondary market.
    The. Chairman. What are you talking about in terms of 
resources? What could we be making on that?
    Mr. Oberg. Well, the student loan originations are very 
large. We'd be talking in the billions of dollars, depending on 
how much we wanted to sell. There are some cautionary notes 
that ought to be added, however, and that is that one of the 
advantages of the Direct Loan program has been that that debt 
is held by the United States. The borrowers in the Direct Loan 
program always know who their servicer is. The loan doesn't get 
sold around to different servicers. They don't know who to 
contact and they might get in trouble and lose some of the 
borrower benefits by loans being sold.
    However, in the auction system, we're really talking about 
auctioning in the FFEL rather than Direct Loan system. As to 
how much, that is indeed the question and whether or not--I 
think that the proceeds would probably exceed the President's 
50 basis point cut on the subsidy but I can't be sure of that.
    The Chairman. Okay. Just before we leave this, Dr. Oberg, 
the Department of Education last month announced its settlement 
with Nelnet regarding the 9.5 loans. You brought this up to the 
Department in 2003. I guess the settlement didn't include in 
the recovery that Nelnet should refund the program. Should 
Nelnet have known that its efforts to expand the number of 
loans eligible for the high subsidy was questionable? What's 
your take?
    Mr. Oberg. Yes. I think they did know it was very 
questionable and I think the Secretary of Education last month, 
made the right decision to say that indeed, the process that 
Nelnet and other secondary markets were using was illegible and 
those were illegal payments and she cut off all future payments 
using that particular bond manipulation scheme. I think that 
was the right answer. I think, however, that part of that 
answer to forgive $322 million to Nelnet in past illegal 
payments was inappropriate and furthermore, if she also forgave 
in advance, other secondary markets for their illegal payments 
and before they have been audited, we don't know which 
secondary markets those might be or what kind of money might be 
at stake and that is the basis of my recommendation that before 
everything is approved at the Federal level, that the committee 
ask for some oversight through the Department of Justice.
    The Chairman. Did you have any comments on the auctioning 
off of student loans? Senator Isakson, anything further?
    Senator Isakson. No. I thank the panel for coming.
    The Chairman. Well, we're going to have some questions from 
some of our colleagues here. We thank you all. We had this 
hearing scheduled earlier and we've got several organizations 
in the higher ed community to submit testimony and we'll 
include that in the record.
    And we changed and altered that and inconvenienced you all 
but we're very grateful to you and if there were questions 
that--we'll submit some questions. I'll just mention one final 
thing today. In your book, I saw your reference to what the 
cost was of tuition at Harvard and my brother, Bobby, was a 
seaman on a destroyer but he came back to Harvard just at the 
end of the war and as you point out, it was $100 a course. A 
hundred dollars a course. And they took four courses at Harvard 
for the year and it was $50 for the books and $50 for athletic 
fees. And that was $500 and that's what they received. They got 
$500 a year for the education and then, I guess as you pointed 
out, the $50 a month, the stipend for living expenses. But it's 
how a whole generation of veterans got through in that post-war 
period. And my understanding, I heard from a wonderful friend, 
a good Republican, Sil Conte, who was from Massachusetts and 
followed this very, very closely all the time he was a member 
of the House Appropriations Committee. For every dollar that 
was invested, $7 came back to the Treasury. We've started to 
lose sight of this in our country that you couldn't spend a 
dollar that's more effective, I don't think, probably, than in 
these areas of education. I don't know if there is anything you 
want to add.
    Ms. Draut. Sure, a couple points. I agree with you 
completely. I mean, we built the middle class that we have 
today that is a signature strength of our Nation through 
efforts like the GI bill and I agree with you. It's an 
investment that at this point, we can't afford not to make and 
we are under-investing at this point in terms of the amount of 
money spent on need-based grant aid. I would like to take this 
opportunity to make one point about student loan debt because 
it hasn't been touched on. I do think the average amount of 
student loan debt today, which is around $19,000, is too much 
for the typical borrower. And let me tell you why. We make a 
lot of big deals--and I get asked this all the time. Why 
shouldn't students have to take on the responsibility of a 
$20,000 student loan payment if they're going to end up earning 
a million dollars more than somebody without a college degree 
and that's true. Absolutely, you will earn more if you have a 
college degree but what is also true is that the median 
earnings of a 25- to 34-year old with a college degree have 
declined in three decades, after you adjust for inflation. 
College--your typical college earners are no better off today 
than they were a generation ago yet we are asking them to add a 
significant--whether it's 8, 10, 12 percent to those earnings, 
which are again, less than they were a generation ago. At the 
same time, this generation also faces much higher costs for 
things like housing and health care. So this really is an undue 
burden if you look at it, if you step back and look at it in a 
larger economic context. That million dollar premium isn't 
coming because college earners earn so much more today than 
they used to. It's happening because high school degree workers 
are earning so much less and that's a really important 
distinction to think about when we talk about the average 
student loan debt that the typical graduate is paying today.
    The Chairman. Okay. I see.
    Ms. Baum. Could I make a brief comment to that?
    The Chairman. Sure, that's fine.
    Ms. Baum. I mean, somebody has to pay. It would be great if 
it were cheaper. We should try to make it cheaper to educate 
students but somebody has to pay and it's not the people who 
don't go to college who should bear a bigger burden and so 
people who do go to college do get a much bigger return that 
they would have a generation ago. Somebody has to pay. 
Certainly people who go to college and end up with the good 
return--not those people who don't benefit from going to 
college--but those who do have higher earnings have to make a 
contribution. Twenty thousand dollars--they borrowed $20,000 
after they graduate to buy a car. So there are many students 
with problems but it's not the general taxpayer who needs to 
bear--they need to bear a part of the burden, obviously there 
are very positive social benefits to higher education but 
students will continue to have to borrow.
    The Chairman. Ms. Orman, did you have anything to add?
    Ms. Orman. And the last thing is, because obviously there 
is a difference of opinion here but the $20,000 student loan 
isn't just $20,000 because we have not educated our students on 
compound interest, as you so wanted to teach everybody later on 
and we have offered them solutions--deferment, forbearance, 
whatever it may be, the students don't understand what it means 
when they do not pay back their student loan. They defer, they 
defer, they defer. The interest rate is then compounding and it 
is not then a $20,000 student loan, it is now a $60,000 or 
$80,000. They are not getting notices from the student loan 
companies. Nobody is showing them their balance growing. They 
just know they're in deferment and all of a sudden they get hit 
and they owe $80,000 when it started out as $20,000 and now we 
have ruined that person's life. Again, I go back because we did 
not educate them. We do not send them statements. We have not 
shown them at the age of seven what it will go into and it all 
starts and ends with education of the student.
    The Chairman. We thank all of you. It's been very 
interesting, very, very helpful. We thank all of the students. 
We don't know how many are missing class today. We'll give 
you--we won't dock you for that. Thank you very much. You tell 
them that Professor Kennedy gave you an A today. Thank you very 
much..
    The committee stands in recess.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

                Prepared Statement of Senator Alexander

    I am pleased that the committee is starting the new 
Congress with a hearing on the costs of higher education. About 
one half of American college students have a Federal grant or 
loan to help pay their tuition.
    It is necessary to remember that the Federal Government 
plays an important role in imposing costs on our institutions 
of higher learning through regulatory policies that Congress 
and the executive branch establish. Every time we impose a new 
policy, a new data system, a new requirement on colleges and 
universities, we impose costs. We must be diligent in our 
efforts to reduce the regulatory burden on higher education, or 
else all of our other efforts to improve student aid or reduce 
student costs will be vastly diminished.
    I believe the greatest threat to the quality of American 
higher education is not underfunding, it is overregulation. The 
key to the quality of our higher education system is that it is 
NOT a system. It is a marketplace of 6,000 autonomous 
institutions. Yet, thanks largely to the last two rounds of 
reauthorization of the Federal Higher Education Act, each one 
of our 6,000 higher education institutions that accepts 
students with Federal grants and loans must wade through 7,000 
regulations. The President of Stanford has said that 7 cents of 
every tuition dollar is spent on compliance with governmental 
regulations.
    It is also important to remember that the rising costs of 
Medicaid have soaked up State tax dollars that States otherwise 
would have spent on higher education, and that has been a major 
cause of rising tuition. To be specific, nationally, during the 
5-year period 2000 to 2004, State spending for medicaid was up 
35 percent, while State spending for higher education was up 
only 6.8 percent. As one result, tuition was up 38 percent at 
State institutions.
    The story in Tennessee has been worse. Medicaid spending 
was up 71 percent, while higher education was up 10 percent, 
and tuition was up 43 percent. By the way, during this same 5 
years Federal spending for higher education was up 71 percent.
    When I left the Governors office in 1987, Tennessee was 
spending 51 cents of each State tax dollar on education and 16 
cents on health care, mainly Medicaid. Today it is about 40 
cents on education and 26 cents on health care, mainly 
Medicaid.
    To give governors and legislatures the authority properly 
to allocate resources, congress should give States more 
authority over Medicaid standards and more ability to terminate 
outdated Federal court consent decrees that remove decision 
making authority from elected officials. Those would be 
important steps in reducing the cost of higher education for 
many students.
    I would also like to focus some attention today on the 
Direct Loan program. The Direct Loan program was created in 
1992, while I was Secretary of Education. Although it was 
started as a pilot program, I was skeptical about the program 
from its beginning. It did not make sense to me to add billions 
of dollars to the Federal deficit by borrowing to start such a 
huge program. And I could not imagine the government managing 
such a large enterprise more efficiently than the private 
sector. My views have not changed.
    As we debate the Direct Loan program and the Federal Family 
Education Loan (FFEL) program in general, I look forward to 
learning more about the true cost of the Direct Loan program. I 
am concerned that the current methods of estimating the costs 
of the program aren't accurate and rely on generous 
assumptions. I am also concerned that the operational costs 
borne by the Department of Education are not factored into the 
program. These questions must be resolved so that we can have a 
fair comparison between the two programs.
    As we look at the Federal Family Education Loan (FFEL) 
program, I share the concern about the expense of the program. 
I am willing to explore policies to change or improve the FFEL 
program. But I caution my colleagues, and the Administration, 
that we must be careful in any changes that we make.
    We need to think carefully about the role of private 
lenders in the FFEL program. We must ensure that a vibrant and 
competitive market remains for colleges and universities, and 
most importantly for our students. The success of our economy 
is based in large part on our successful higher education 
system, and any significant changes that could impede the 
ability of our citizens to obtain a high quality education must 
be viewed with great scrutiny.
    I look forward to working together with my colleagues to 
find practical solutions to the costs of higher education, and 
ensuring that American families can afford to send their 
children to college.
           Prepared Statement of Consumer Bankers Association
    The Consumer Bankers Association (CBA)\1\ is pleased to submit this 
statement for the record in connection with the committee's hearing 
today. CBA is the national trade association specializing in retail, 
consumer and small business banking. Our members hold 75 percent of the 
Nation's bank deposits and are engaged in the full array of consumer 
loans and financial services products to help our customers, their 
families, and their financial futures. CBA is the leading association 
of bank lenders participating in the Federal Family Education Loan 
program.
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    \1\ The CBA is the recognized voice on retail banking issues in the 
Nation's capital. Member institutions are the leaders in education 
finance, consumer, auto, and home equity, electronic retail delivery 
systems, privacy, fair lending, bank sales of investment products, 
small business services and community development. The CBA was founded 
in 1919 to provide a progressive voice in the retail banking industry. 
The CBA represents over 750 federally insured financial institutions 
that collectively hold more than 70 percent of all consumer credit held 
by federally insured depository institutions in the United States. CBA 
members regularly include arbitration agreements in their consumer loan 
documents and deposit contracts.
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    In recent weeks, a number of ideas have been raised on how to help 
students and other borrowers cope with rising student loan debt 
resulting from rising college tuition costs. Today's hearing includes 
testimony on ideas on how to ``reform'' the student loan program. In 
this statement we hope to provide you with the perspectives of banks in 
the FFEL program and to share our thoughts on what is at stake in the 
current debate.
    First, let there be no mistake about the position of banks on the 
issue of student debt: We share the concerns of all members of this 
committee about rising levels of debt. We welcome constructive 
amendments to the Higher Education Act to assist borrowers that find 
themselves facing increasing debt burdens.
    Second, we note with some reluctance that the primary cause of 
rising student loan debt is not the existence of the current Federal 
student loan programs, but the fact that the cost of education 
continues to rise faster than the rate of inflation. In this regard, 
CBA is pleased that one of your four witnesses today, Dr. Sandy Baum, 
is an expert in this area and will be able to shed some light on this 
central element of the college affordability debate.
    Third, we note that all known solutions to making college loans 
more affordable are expensive. We also understand that in the current 
political and fiscal environment, members of both political parties are 
unwilling to call for a new Federal investment in education to meet 
these costs, and thus members of both parties are looking to cuts in 
the FFEL program as a short-term means of meeting them.
    Because of these three circumstances, loan providers in the FFEL 
program find themselves in the curious position of having to defend 
private sector participation in the student loan program. The program, 
as you all know, is currently subject to proposals ranging from multi-
billion reductions in lender yield, to paying schools to quit the 
program in favor of the presumably less-expensive Direct Loan program, 
to naive proposals such as eliminating the guarantee on FFEL loans 
while at the same time presumably not increasing interest rates on any 
borrowers.
    FFEL loan providers believe that Congress and the Bush 
administration are in immediate danger of throwing the baby out with 
the bathwater. In this case, private sector participation in the 
student loan programs is the baby.
    Lenders, guarantors, services, and others involved in the FFEL 
program offer considerable added value to students, to parents, to 
schools and to taxpayers. This added value, however, seems to have been 
forgotten or ignored in a hurried rush to craft solutions to the 
problem described as borrower over-indebtedness.
    The added values offered by FFEL loan providers fall into four 
categories:
    Reliability: Put as simply as possible, loans are available for all 
students who need them. This is currently the case and has been the 
case for over 42 years. In contrast, in its relatively short history, 
the Direct Loan program has already been subject to one catastrophic 
failure. This occurred in 1997 when the Department of Education's 
contractor for processing Direct Consolidation Loans was overwhelmed by 
the volume of applications received, resulting in months-long delays 
for borrowers. After hearing from numerous constituents whose plans to 
buy a home or car were put on hold, Congress eventually addressed the 
situation by enacting the Emergency Loan Consolidation Act, Public Law 
105-78.
    Proven Effectiveness in Addressing Defaults: The FFEL program has 
been very successful in reducing borrower defaults and delinquencies. 
Defaults in the student loan programs reached 22.4 percent in fiscal 
year 1990. For fiscal year 2004, the most recent year for which rates 
have been published, that rate had dropped to 5.4 percent. This 
remarkable progress results, in large part, from investments in 
technology and customer service by lenders, guarantors, and loan 
servicers.
    Much of the human and capital investment behind this achievement 
occurred not as a result of new Department of Education regulation or 
even the desire to avoid losses on borrower defaults--it occurred as a 
result of competition between loan participants in the marketplace 
attempting to meet the needs of their customers, both borrowers and 
schools. Today, the cohort default rates on Direct Loans are higher 
than those on FFEL loans for every category of loans.
    World-Class Technology and Customer Service: FFEL program 
participants have adopted world-class technology to facilitate every 
aspect of the administration of student loans. Schools have access to 
ELM Resources to facilitate loan origination and to track account data. 
Borrowers can apply for loans on-line and use an electronic signature. 
Borrowers can also access their account data and conduct transactions 
relating to their accounts, such as applying for deferments, on-line.
    None of these investments were mandated by regulation or statute. 
They occurred both because FFELP loan providers want the program to 
work for borrowers and because marketplace competition requires them to 
match the best efforts of their competitors.
    Lower Cost Loans to Borrowers: Generally speaking, FFELP student 
and parent loans cost less than Direct student and parent loans. This 
occurs because FFELP loan providers invest part of their own earnings 
to discount origination fees and interest rates for borrowers. As is 
the case with the quality of loan servicing, none of these discounts is 
required under the Higher Education Act or regulations. They result 
from marketplace competition--competition between private lenders.
    Recent legislative proposals, including some put forward this week, 
would greatly reduce or eliminate the value-added in the FFEL program. 
They would reduce lender return below the level that makes offering 
these benefits possible. Worse, they would shrink the FFELP market by 
paying schools to use the Direct Loan program, notwithstanding the 
schools' obvious decisions that FFEL best meets the needs of their 
students.
    In addition, the cuts to FFELP loan providers proposed in the 
President's fiscal year 2008 budget make no sense on two counts. If we 
assume the Department of Education is interested in students having 
access to the lowest-cost loans supported by the highest-possible 
customer service, they make no sense. Second, the Direct Loan program 
serves only about 20 percent of the overall Federal student loan 
market. If we assume, as many do, that the Department would have 
trouble doubling or tripling its capacity in 12 to 18 months, the cuts 
certainly make absolutely no sense.
    Let's turn specifically to the STAR Act, one of the proposals 
currently pending. This legislation represents bad education and fiscal 
policy from a number of perspectives.
    Reliance on unreliable budget estimates. The STAR Act is based on 
budget scoring rules that have been questioned repeatedly by budget 
experts. More importantly, the act relies on cost estimates that have 
proven to be unreliable. For example, the President's fiscal year 2008 
budget ``re-estimates'' the cost of the Direct Loan Program, revising 
its costs upward by over a billion dollars above estimates issued just 
1 year ago. These upward re-estimates of costs have taken place 
numerous times during the short history of the Direct Loan Program. Yet 
the STAR Act would immediately seize projected savings--that, is hoped-
for savings that may never be realized--and spend them now to pay 
schools to quit the FFEL program.
    To bankers, this scheme seems like bad financial policy, especially 
since Direct Loan administrative costs would probably shoot up if loan 
volume skyrocketed as a result of this legislation.
    Reliance on the same inducements proposed to be made illegal in the 
Student Loan Sunshine Act. The STAR Act is also bad education policy 
because it incorporates the use of inducements to persuade schools to 
deny their student and parent borrowers a choice of lender. In many 
cases, such a restriction will result in denial of access to a lower 
cost loan. In all cases, borrowers will have no choice but the 
Department of Education as their loan servicer.
    If providing inducements to secure loan applications is wrong in 
the FFEL program--and CBA and its members believe it is--it should also 
be wrong in the Direct Loan program. And, unlike some of the 
inducements in FFEL that are currently considered improper, those 
proposed in the STAR Act will, in almost every case, deny a borrower 
access to a lower cost loan.
    The FFEL program has served America well. It should not be 
jeopardized by new cuts on top of the more than $18 billion in cuts to 
FFELP loan providers that were enacted as part of the Higher Education 
Reconciliation Act in 2006. It should not be jeopardized by schemes 
like the STAR Act, nor by an auction of the right to make, hold, 
guarantee or service student loans.
    A priority for this committee and for the Congress should be to 
support a reliable, innovative, and responsive student loan program. 
FFELP is such a program.
    CBA and its members urge the Committee on Health, Education, Labor, 
and Pensions to reject the easy temptation to seek short-term savings 
from the FFEL program that jeopardize its vitality, even if the savings 
are to be used to pay for new benefits for borrowers or for new grant 
aid. We urge the committee to take a measured, longer view of the good 
the FFEL Program has done for our country over the past 40 years and 
preserve this very successful private-public partnership for the good 
of future students.
    Congress and the administration should work together to address the 
problem of student debt and to find new resources to fund needed 
changes. CBA and its members would welcome the opportunity to work with 
you on this goal.
                                 ______
                                 
                                            Nelnet,
                                         Lincoln, NE 68508,
                                                 February 16, 2007.
Hon. Edward M. Kennedy,
Chairman,
Committee of Health, Education, Labor, and Pensions,
U.S. Senate.
Hon. Michael B. Enzi,
Ranking Member,
Committee of Health, Education, Labor, and Pensions,
U.S. Senate.
    Dear Chairman Kennedy and Senator Enzi: I am writing to respond to 
misstatements concerning Nelnet in Jon H. Oberg's written testimony, 
which will be presented to this committee at its hearing today. 
Specifically, his characterization that the Secretary of Education 
determined that Nelnet's billings for 9.5 percent special allowance 
payments (SAP) were illegal is simply wrong. Neither the Department of 
Education nor the Department's Office of Inspector General (OIG) 
questioned the legality of the billings, and actually the issues raised 
amount to nothing more than a good faith dispute. To suggest that there 
was something different is a gross mischaracterization of the facts, 
and one that unfairly attempts to taint Nelnet and the entire student 
loan industry.
    Nelnet's qualification of loans for the 9.5 percent SAP conformed 
to existing Department regulations and interpretations that have been 
long understood by the Department. In fact, it was Nelnet that 
approached the Department and brought to its attention how lenders 
could qualify additional loans for the 9.5 percent SAP under existing 
regulations.
    Throughout the extensive policy debate on this issue, no one ever 
raised any question with Nelnet about the manner in which it qualified 
loans for the 9.5 percent SAP until the OIG challenged the practice in 
an audit. The OIG presented a novel--and highly dubious--re-
interpretation of the applicable statute and regulations to challenge 
the 9.5 percent payments to Nelnet for what the OIG newly labeled as 
``third-generation loans.''
    Nelnet vigorously disputed the OIG's conclusions, presenting 
detailed analyses showing that the OIG's interpretation ignored the 
realities of student loan financings, was inconsistent with the 
Department's public statements and its longstanding practice of making 
9.5 percent payments on third-generation loans, and conflicted with two 
pieces of legislation that restricted eligibility for 9.5 percent SAP 
prospectively, thereby grandfathering what were almost certainly third-
generation or later loans.
    To resolve the dispute, the Department and Nelnet entered into a 
settlement agreement. In the agreement, the Department recognized that, 
at a minimum, there were ``bona fide, good faith disputes and 
controversies'' regarding the issue. The Department's acknowledgement 
of the existence of ``bona fide, good faith disputes and 
controversies'' is utterly inconsistent with Dr. Oberg's 
characterization of Nelnet's actions and the Department's views.
    There simply is no basis for Dr. Oberg's claims. When Nelnet 
submitted requests for 9.5 percent SAP, the Department understood the 
basis for those requests and appropriately paid them. Any claims to the 
contrary are simply wrong, and the committee should not credit them.
            Sincerely,
                                            Jeff Noordhoek,
                                                         President.
                                 ______
                                 
Questions of Senator Enzi for Suze Orman, Tamara Draut, Jon Oberg, and 
                               Sandy Baum
                        questions for suze orman
    Question 1. I commend you for all you have done to raise the level 
of financial literacy in the country today. You have raised the 
consciousness about the need to have good financial information and 
make good financial decisions. How can we help prospective students ask 
the right questions to find out how much specific colleges will cost 
them so they make informed decisions?

    Question 2. Many of you have talked about the problems young adults 
face with managing their finances. But I wonder if we're really 
addressing the core issues. The need analysis concepts we use and the 
financial aid programs we use are rooted in the past, when the typical 
postsecondary student was an 18-22 year-old dependent student. The 
typical postsecondary student now is a ``non-traditional student,'' an 
adult who may have family responsibilities. How would you change the 
way we evaluate student resources and expenses to serve today's 
students better?

    Question 3. We've talked about the cost of college and the cost of 
money, but what about the value of the education students are getting? 
How can students tell what they are getting for their money and if it 
is what they need?

    Question 4. There has been discussion about student loans as ``good 
debt,'' but one we need to manage better, begs the question how we go 
about doing that. Should we consider getting the Department of 
Education and private lenders out of the student loan business and 
running the student loan programs out of the Department of Treasury, 
advancing funds and collecting repayment through the Internal Revenue 
Service?

[Editor's Note: Responses to the above questions were not available at 
time of print.]
                       questions for tamara draut
    Question 1. Many of you have talked about the problems young adults 
face with managing their finances. But I wonder if we're really 
addressing the core issues. The need analysis concepts we use and the 
financial aid programs we use are rooted in the past, when the typical 
postsecondary student was an 18-22 year-old dependent student. The 
typical postsecondary student now is a ``non-traditional student,'' an 
adult who may have family responsibilities. How would you change the 
way we evaluate student resources and expenses to serve today's 
students better?

    Question 2. We have both need- and merit-based student financial 
aid. What role does each kind of aid serve, particularly at public 
institutions?

    Question 3. The college degree of today is like the high school 
diploma of the 1950's. It's the key to success. Yet many people leave 
the educational process before they attain the degree. Some drop out of 
high school. Some finish high school, but do not have the knowledge and 
skills they need to succeed in either postsecondary education or the 
workforce. They may start postsecondary education, but then drop out, 
leading to a sense of defeat. What can we do to turn this around, to 
improve college entrance and completion rates?

    Question 4. We've talked about the cost of college and the cost of 
money, but what about the value of the education students are getting? 
How can students tell what they are getting for their money and if it 
is what they need?

    Question 5. There has been discussion about student loans as ``good 
debt,'' but one we need to manage better, begs the question how we go 
about doing that. Should we consider getting the Department of 
Education and private lenders out of the student loan business and 
running the student loan programs out of the Department of Treasury, 
advancing funds and collecting repayment through the Internal Revenue 
Service?

[Editor's Note: Responses to the above questions were not available at 
time of print.]
                        questions for jon oberg
    Question 1. Many of you have talked about the problems young adults 
face with managing their finances. But I wonder if we're really 
addressing the core issues. The need analysis concepts we use and the 
financial aid programs we use are rooted in the past, when the typical 
postsecondary student was an 18-22 year-old dependent student. The 
typical postsecondary student now is a ``non-traditional student,'' an 
adult who may have family responsibilities. How would you change the 
way we evaluate student resources and expenses to serve today's 
students better?

    Question 2. Students of all ages, and their families, need easy to 
understand information on costs and available assistance. Both of you 
have pointed out that the current financial aid form, the Free 
Application for Federal Student Assistance, or FAFSA, is long and hard 
to fill out. Should we think about a change in the mechanism we have 
for determining student aid eligibility? Would it make sense to let 
taxpayers ask for an eligibility determination when they file their tax 
forms?

    Question 3. We've talked about the cost of college and the cost of 
money, but what about the value of the education students are getting? 
How can students tell what they are getting for their money and if it 
is what they need?

    Question 4. You have testified that your research has showed that a 
substantial number of students with remaining Federal eligibility loan 
eligibility were taking out private loans at less favorable terms. Can 
you tell us more about the amount of remaining eligibility we're 
talking about? And what needs to be done to provide students 
information to make informed decisions.

[Editor's Note: Responses to the above questions were not available at 
time of print.]
                        questions for sandy baum
    Question 1. Many of you have talked about the problems young adults 
face with managing their finances. But I wonder if we're really 
addressing the core issues. The need analysis concepts we use and the 
financial aid programs we use are rooted in the past, when the typical 
postsecondary student was an 18-22 year-old dependent student. The 
typical postsecondary student now is a ``non-traditional student,'' an 
adult who may have family responsibilities. How would you change the 
way we evaluate student resources and expenses to serve today's 
students better?

    Question 2. Students of all ages, and their families, need easy to 
understand information on costs and available assistance. Both of you 
have pointed out that the current financial aid form, the Free 
Application for Federal Student Assistance, or FAFSA, is long and hard 
to fill out. Should we think about a change in the mechanism we have 
for determining student aid eligibility? Would it make sense to let 
taxpayers ask for an eligibility determination when they file their tax 
forms?

    Question 3. You have noted that there are unacceptable gaps in 
college enrollment and completion rates between students from 
privileged backgrounds and those from low to moderate income 
backgrounds and that this is due to a combination of inadequate 
academic preparation and financial barriers. What more can we do to 
address the root problems?

    Question 4. The college degree of today is like the high school 
diploma of the 1950's. It's the key to success. Yet many people leave 
the educational process before they attain the degree. Some drop out of 
high school. Some finish high school, but do not have the knowledge and 
skills they need to succeed in either postsecondary education or the 
workforce. They may start postsecondary education, but then drop out, 
leading to a sense of defeat. What can we do to turn this around, to 
improve college entrance and completion rates?

    Question 5. We've talked about the cost of college and the cost of 
money, but what about the value of the education students are getting? 
How can students tell what they are getting for their money and if it 
is what they need?

    Question 6. You have explained that net price is what students 
actually pay. Yet most students focus on the quoted tuition price and 
constant increases in tuition. What can we do to slow the tuition 
increases? And what can we do to help students get a better 
understanding of what postsecondary education will actually cost them?

[Editor's Note: Responses to the above questions were not available at 
time of print.]

    [Whereupon, at 11:25 a.m., the hearing was adjourned.]