[Senate Hearing 110-877]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-877
 
           ENSURING ACCESS TO COLLEGE IN A TURBULENT ECONOMY

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



                             FIELD HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

          EXAMINING ENSURING ACCESS TO COLLEGE IN A TURBULENT 
         ECONOMY, FOCUSING ON THE NECESSARY STEPS TO ESTABLISH 
         INSTITUTIONAL PROTECTIONS ON WHICH FAMILIES CAN DEPEND

                               __________

                      MARCH 17, 2008 (BOSTON, MA)

                               __________

 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

                 Ilyse Schuman, Minority Staff Director

                                  (ii)



                            C O N T E N T S

                               __________

                               STATEMENTS

                         MONDAY, MARCH 17, 2008

                                                                   Page
Aoun, Joseph, President, Northeastern University, Boston, MA.....     1
Kennedy, Hon. Edward M., Chairman, Committee on Health, 
  Education, Labor, and Pensions, opening statement..............     1
Tucker, Sara Martinez, Under Secretary of Education, U.S. 
  Department of Education, Washington, DC........................     4
    Prepared statement...........................................     7
O'Leary, Eileen, Financial Aid Director, Stonehill College, 
  Easton, MA.....................................................    17
    Prepared statement...........................................    19
Loonin, Deanne, Director of the Student Loan Borrower Assistance 
  Project, National Consumer Law Center, Boston, MA..............    24
    Prepared statement...........................................    26
Graf, Thomas, Executive Director, MEFA, Boston, MA...............    31
    Prepared statement...........................................    32
Gonell, Eliaquin, Student, Salem State College, Salem, MA........    34
    Prepared statement...........................................    35

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Philip Day, Ed.D., President and CEO, National Association of 
      Student Financial Aid Administrators (NASFAA)..............    43
    Terry W. Hartle, Senior Vice President, American Council on 
      Education (ACE)............................................    46
    Harris N. Miller, President, Career College Association (CCA)    47

                                 (iii)



                     ENSURING ACCESS TO COLLEGE IN 
                          A TURBULENT ECONOMY

                              ----------                              


                         MONDAY, MARCH 17, 2008

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                        Boston, MA.
    The committee met, pursuant to notice, at 11:30 a.m. at 
Northeastern University, Egan Research Center, Raytheon 
Amphitheater, Boston, MA, Hon. Edward M. Kennedy, chairman of 
the committee, presiding.
    Present: Senator Kennedy.

                    STATEMENT OF JOSEPH AOUN

    Mr. Aoun. Good morning, everyone. My name is Joseph Aoun, 
and I'm the President of Northeastern University. I would like 
to welcome you all to our university. I would like to thank the 
Senator for organizing the hearing here at the university, and 
thank him for his leadership on this subject.
    As you know, we have announced that Northeastern will work 
as a direct with the Federal Government and help direct 
lending. Really, Senator, it was your leadership in this 
domain, and your inspiration and our values that led us to make 
this decision this weekend. Once again, we welcome you all, and 
thank you, Senator, for being here.
    I would like to thank, also, and welcome The Under 
Secretary of State for--Under Secretary of Education, I mean. 
Maybe she had a promotion?

    Ms. Tucker. No. I have enough trouble in Education.

                  Opening Statement of Senator Kennedy

    The Chairman. Thank you, President Aoun, so much for 
welcoming us here at Northeastern. This is really typical of 
Northeastern. I was mentioning earlier it wasn't long ago that 
Northeastern did a very extensive tribute to many of those who 
had fallen in Iraq. They had chosen different servicemen and 
women who had served nobly and bravely and courageously, and 
did a film about their past, their history, their family's 
history, and their history of service for the country.
    They then invited the family members of those who were 
lost. We had a very meaningful gathering here, and it was 
typical of Northeastern. I mentioned to the President on so 
many occasions, with a long life of experience in education, 
Northeastern has continued to thrive and to be one of our great 
educational resources, in not only Massachusetts, but 
nationwide, as an extremely interesting and challenging 
approach in education.
    Its sons and daughters go out to so many different 
opportunities in Massachusetts and throughout New England, and 
it opens its doors to so many others that would not have the 
opportunity for education in the areas and degrees that they 
offer, so I'm very, very grateful to have a chance to be back 
here at Northeastern.
    I welcome the chance to have this forum here, a meeting of 
our Education Committee. I've been on the Education Committee 
since I've been in the U.S. Senate. I think all of us in 
Massachusetts understand the importance of education. We're 
mindful that education has a special place in the life of the 
people of our State. John Adams, in 1780, the first 
Constitution that was written expressly designated the 
importance of support for education for the people of 
Massachusetts.
    We've taken that admonition seriously, better at some times 
than others. Horace Mann was a great educator, and had a 
profound impact here in terms of education in Massachusetts. 
We've seen the difference a commitment to education can make--
we saw it at the end of World War II, the G.I. Bill, the 
difference that it made for so many of those who served their 
country--including citizens here in Massachusetts, including 
members that also served in the Congress.
    Sil Conte, a Republican from the Berkshires, was probably 
the strongest and most effective advocate for continued 
education, and he always reminded us that for every dollar that 
was invested in education and the G.I. Bill, $7 was returned to 
the U.S. Treasury, as this was a sound investment. President 
Kennedy, in the 1960 campaign, had a very important impact in 
terms of higher education.
    The difference in the 1960 campaign was, on the one hand, 
President Kennedy offering as part of the program that he 
offered for the country, that every individual in Massachusetts 
and across the country who was able to gain entrance into a 
college or university on the basis of their ability should not 
be denied entrance because of the size of their wallet or their 
pocketbook. He believed we ought to be able to put together a 
combination of grants and some loans--although loans were very 
limited at that time, 22 or 23 percent of the total funding was 
loans and the rest was grants, which is completely reversed 
today--so that any individual would be able to go to college, 
because of the value of having young, talented men and women 
that were going to be able to help lead this country.
    Whether it's in industry or national security or in the 
devotion to the institutions of our Nation, now we have seen in 
the more recent time that we have moved back from that concept. 
We've moved back from that concept, and we find out that so 
many of the young people are faced with the challenge of 
gaining help and assistance through a combination of loans, 
Federal loans and private loans, to make up the difference.
    We see the enormous pressure that has been placed on these 
families. We see, first of all, this chart here demonstrates 
from 1993 to 2004, more students must take out loans to finance 
their education. If we look at the issue of indebtedness, we'll 
find out that the very important and significant increase in 
indebtedness from 1993 to 2004 has meant an average debt of 
about $19,000 in our State, and other States from $17,000 to 
$21,000. It's in that range for most States, the significant 
factor being the escalation in the cost of college.
    We also see one of the extraordinary burdens that families 
are facing is that the cost of education has gone up in the 
past 4 years 59 percent, while family income was increased only 
20 percent. This cost increase is particularly meaningful for 
Massachusetts, because we have seen over the period of recent 
years the gradual reduction, if we can believe it, in State 
support for higher education, a 23 percent reduction.
    That, I think, has been enormously troublesome. It should 
be there for those families that need help and assistance. We 
have also seen the explosion of fees for students over the 
years. We have seen the increase in the cost of a higher 
education. We've seen the decrease in support here at the State 
level. We've seen flattening in terms of salaries and the 
income of hardworking people.
    We're not going to take the time to go through the other 
kind of pressures that are on families from skyrocketing 
mortgage payments, fuel costs, and healthcare costs that have 
taken place over this period.
    Families are being squeezed, and families are going through 
an enormous challenge to continue their support for their 
children. Young people are being squeezed. Young people are 
asking themselves, ``How much indebtedness can I afford? '' 
We're going to hear from a student who is working three jobs in 
order to be able to stay in school.
    We have to ask ourselves--what is the impact of these 
financial struggles in terms of the ability of young people to 
be able to make progress academically? Going to school is about 
the academic riches of stimulating the mind, as well as the 
development of other skills that lend themselves to the 
educational atmosphere and climate.
    In my visits to so many schools and campuses, you find out 
that the young people aren't talking about the books that 
they've read in class, aren't talking about the teachers, 
they're talking about their job or their next job or where 
they're going to get another job.
    This is very concerning, particularly when you understand 
that Massachusetts doesn't have the great natural resources 
that exist in other parts of the country. We have depended upon 
the minds, the initiatives, the creativity, the brilliance of 
the citizens of our State in order to be leaders in this 
country, in industry and in security, in the arts, and in 
academic and cultural areas and other areas.
    Education is, for all of us, a key force and factor in our 
lives. At at this time, the purpose of this hearing is to 
recognize the pressures we face in terms of financing 
education. Parents are wondering will we just read every day 
about the stock market, about the credit markets, about the 
housing markets being in a state of a collapse? They're 
wondering about actions that have been taken by Congress, are 
they going to work? Aren't they going to work? What more is 
going to be done?
    In the back of their minds, they're wondering, what about 
those student loans? Are they going to be available? They're 
thinking I'm working hard. I'm trying to put my children 
through college. I'm sacrificing to do it. And if I find out 
that some action which I have no control over is going to take 
place, which is going to severely undermine my ability to 
educate my children, that's not something that I want to see 
happen. We are expecting our leaders in Congress, in the 
Senate, and the President to do something about it.
    We are here today to hear from some of those who have ideas 
and suggestions. They can interpret and give us information on 
what the current problem is, and make recommendations about the 
things that we ought to be doing.
    Our committee, our Education Committee, is committed to 
ensuring that we take the steps in the United States that are 
necessary to protect the families here in Massachusetts and in 
the rest of the country.
    We're very appreciative of those who are joined with us 
here today. We're going to hear from the Under Secretary of the 
Department of Education, Sara Martinez Tucker. Ms. Tucker is 
the Under Secretary of Education, and the former President and 
Chief Executive Officer of the Hispanic Scholarship Fund.
    Sara is a founding board member of the National Center for 
Educational Accountability, the National Scholarship Providers 
Association. A native of Loredo, TX, Time Magazine named her 
one of the 25 most influential Hispanics in America. She 
reminded me that she has degrees from--
    Ms. Tucker. Boston College and Notre Dame.
    The Chairman. Boston College and Notre Dame. You're welcome 
here. You can name all the other factors, but now you've just 
established yourself as someone worth listening to. We also 
have with us from the Department of Education Mr. Larry Warder, 
who has extensive experience with the Federal Student Aid 
program. We're very grateful, and we'll look forward to hearing 
from you.

     STATEMENT OF SARA MARTINEZ TUCKER, UNDER SECRETARY OF 
    EDUCATION, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, DC

    Ms. Tucker. Thank you, Senator Kennedy, both for your 
longstanding commitment to education, and for giving us, at the 
Department of Education, the opportunity to describe what we're 
doing to ensure uninterrupted access to Federal aid, 
particularly loans, during these times of economic 
uncertainties.
    You've introduced my colleagues here. And on their behalf, 
I'd like to also thank Northeastern University for hosting us 
here today. Senator, we submitted my formal testimony to you 
last week, but to give us ample opportunity to address your 
questions or concerns, I thought maybe I would just highlight 
three different segments from that so that we could move 
quickly to your questions.
    The first is what the Department is doing to ensure 
uninterrupted access to Federal aid. I think the first thing I 
would want to say is that I wanted to reassure American 
families--parents and students--that Federal aid will be there 
for them in this coming school year. There are two vibrant 
programs, in spite of these difficult economic times, both the 
Federal Family Education Loan Program and the Direct Lending 
Program are here and ready for students and families to access 
as they make their plans for the coming school year.
    In the Federal Family Education Loan Program, FFEL, we do 
have about 2,000 active lenders ready to originate loans. And 
to the extent that some lenders that identified areas where 
they're curtailing their activities or suspending their 
activities, the schools have been able to lay out other plans 
with alternate lenders so that their students are cared for. To 
date, we have not encountered any eligible student who has not 
had access to the Federal loans.
    However, in these times of economic uncertainty, as you 
pointed out, we must have contingency plans, and we want to 
demonstrate that we're being proactive in ensuring that all 
avenues that are open to students and families are planned for 
and cared for.
    The first is with our administration-wide partners, the 
Domestic Policy Council, the National Economic Council, as well 
as Treasury. On a daily basis, we're monitoring the markets to 
ensure the health of lenders.
    Second, we've done extensive outreach to ensure that our 
institutional partners are able to connect with us directly. 
Secretary Spellings, 2 weeks ago sent a letter out to the 
4,100-plus institutions that we have in the FFELP Program. 
Larry, Mr. Warder, followed up with letters to the financial 
aid officers. Thus far, again, we have not encountered any 
problems the schools are having in lining up lenders for their 
current and future students.
    As well, when a lender announces that they're curtailing 
activity, we're in the process of reaching out to any school 
that has more than 50 percent of their lending volume with 
those lenders. Again, we have not encountered any 
opportunities.
    Monitoring on a daily basis, outreach to students and 
families, and the institutions that support them, and then, 
finally, making sure that whatever backstops can be created, 
should there be a problem, are ready, willing, and able to go 
as soon as we see that problem.
    The first is Lender of Last Resort. Federal Student Aid has 
reached out to all 35 guaranty agencies to see what plans they 
have in place. We've reviewed all of their plans, and this 
week, Secretary Spellings will be sending out correspondence to 
the guaranty agencies, ensuring not only compliance with 
Federal statute, all Lender of Last Resort procedures, but also 
ensuring that they're up to date, and as well that they are 
consistently applied across the different agencies, so that 
borrower and taxpayer interest are cared for.
    We also have the Direct Lending Program that we support 
through Federal Student Aid. Mr. Warder's team has ensured that 
we can do two things with regard to direct lending: first, is 
handle increased volume in direct loans, direct lending by 
schools; and second, making the transition more easy and more 
user-friendly for the institutions that choose to make that 
switch.
    With regard to my first point, ensuring uninterrupted 
access to Federal aid, the daily monitoring of the markets for 
the health of the lenders, the outreach to the institutions 
that they have lenders available for their students, and then 
making sure that if all else fails we have Lender of Last 
Resort ready to go, and the ability to transfer schools from 
FFELP to Direct Lending.
    The second area that I want to talk about in my testimony, 
though, is that as you pointed out in your floor testimony is 
the concern over the private loans, and to the extent that we 
have students that have had to take out a second loan, a 
private loan, the Department is doing a couple of things.
    First, we're reaching out to families, we're reaching out 
to students, to make sure they understand Federal Aid First. 
We've released this new brochure, Federal Aid First, a user-
friendly way of helping parents and students understand how to 
maximize the Federal aid first, and then the unsubsidized 
loans, and then the subsidized loans, and then reminding 
parents and students that they have access to the PLUS Loans. 
For parents of undergraduate students, dependent students can 
take out loans with the Federal Government's support up to the 
full cost of attendance, as well as graduate students. We want 
to make sure they exhaust all their Federal opportunities 
before they move to the private loans.
    Last, as you've addressed in your opening remarks, the 
bigger issue for us is the cost of attendance and what's 
happened to students and families that are wanting to go to 
school over the last 15 years. In the last 2 weeks, I traveled 
to the University of Houston, Mount Vernon High School, and the 
University of Denver, and met with students. I also hosted the 
leaders of the Big 12 Conference schools in my office in 
Washington, DC.
    To a person, they did not indicate that they were having 
any problem lining up their Federal loans. What they pointed 
to, though, was the cost of attendance. As we look at the 
Federal numbers, they match up nicely or mirror what you've 
seen here in Massachusetts. In the last 15 years, the cost to a 
family for attending a 4-year public institution has risen at 
five times the increase in median income for families.
    The extent that these students are able to put documents 
like this together, as the Big 12 visited Washington, DC, their 
opening pitch, and they wanted to make sure that I knew, was a 
decline in family income of 2 percent, an increase in tuition 
and fees of 40 percent, and an increase in debt load of 66 
percent.
    Of course, after they presented this to me, their request 
was for more Federal aid. As I mentioned to them, in this same 
15-year window, total aid available to students has actually 
increased by 300 percent. In the last 15 years, annual aid 
going out to students from all sources has gone from just under 
$60 billion to around $160 billion, and our Federal investment 
has gone from about $32 billion to just under $100 billion per 
year. While we've added or increased aid available to students, 
enrollment rates and degree attainment rates have stayed 
relatively flat.
    From a student perspective, they have a right to be 
concerned. As you pointed in your charts, if you're in the 
bottom 50 percent of earners in this country today, after you 
cobble together nine different sources of aid--be they 
institutional, State, Federal--you still only get half to two-
thirds of the total cost of attendance paid for, too complex a 
system for families today.
    If you look at the pressure on families to come up with 
what's missing, families in the lower 50 percent of income 
earners in the United States have to dedicate 20 to 30 percent 
of their family's income to complement the balance that's not 
covered by aid. This is a time where we must do more to 
reassure students and families that college is possible for 
them.
    In closing, I'm reminded of a story that I'd like to share 
about a student, to the extent that you mentioned this young 
man is going to testify today and has three jobs, and how it 
gets in the way of his academics, the student leader from Iowa 
State University told me on Thursday in my office, Mrs. Tucker, 
what will the Federal Government be doing about the brain drain 
in Iowa? ''
    When I heard ``brain drain'' I said, ``Could you help me a 
little bit more?'' She said too many graduates from Iowa's 
colleges are graduating with such significant debt loads that 
when they take their jobs, given the cost of living in Iowa, 
they're taking other jobs in--they're taking similar jobs in 
other cities in the Midwest that pay more. We're not able to 
hold onto our college graduates in Iowa, because we can't pay 
enough with jobs so that the students can afford their student 
loans.
    My hope would be, Senator Kennedy, as I close, that we 
remember this young woman, and as we reconcile the House and 
Senate versions of the Higher Education Act, that we take this 
opportunity to step back and look at Federal student aid and 
address how to make it less complex, that we target more 
resources to those that need it the most, so that we can have 
more access to and success in higher education for the American 
public.
    And, with that, I'd like to say thank you again, and open 
it up to any questions or comments that you may have of us.
    [The prepared statement of Ms. Tucker follows:]
               Prepared Statement of Sara Martinez Tucker
    Thank you for inviting me here today, and thanks to Northeastern 
University for hosting this hearing. New England, and Boston in 
particular, are home to some of the oldest and most prestigious 
colleges and universities in the Nation. This is an especially 
appropriate venue to discuss what we're doing to ensure that students 
and families can access and afford higher education opportunities. I 
share your concern and appreciate your vigilance on this issue.
    First of all, let me assure you . . . and especially students and 
families . . . that Federal student aid will continue to be available. 
As your recent letter to Secretary Spellings noted, Mr. Chairman, 
disruptions in the private lending market have ``so far not negatively 
affected students' ability to access Federal loans.'' That's what we're 
seeing also.
    Student loans are more than a $400-billion enterprise, involving 
multiple Federal agencies, guaranty agencies, and secondary markets.
    Federal loans and other Federal aid comprise one piece of this 
sector. Of 18 million college students, more than 10 million receive 
financial aid from the Department.
    The two sources of Stafford loans are the Direct Loan program and 
the Federal Family Education Loan program--what we call FFEL. More than 
2,000 originating lenders participate in FFEL. As recent media reports 
have noted, a small number of these lenders have reduced their 
participation or stopped originating new loans.
    As you know, these actions are largely a result of broader stress 
across credit markets and the economy as a whole. Even in the cases 
where lenders have reduced participation in FFEL, other lenders have 
stepped in to meet student needs. The Department is in regular contact 
with schools. In our extensive outreach, no institutions have notified 
us that any eligible student has been denied access to Federal loans. 
And earlier this week, the Consumer Bankers Association reaffirmed that 
banks plan to continue making both guaranteed and private loans for the 
coming school year.
    Of course, we all understand the anxiety that students and families 
experience when they hear news accounts suggesting that Federal student 
loans could be at risk. We also understand that credit markets are 
under stress, and conditions may change rapidly.
    For that reason the Department of Education--in consultation with 
other offices and agencies across the executive branch such as the 
Domestic Policy Council, the National Economic Council, and the 
Treasury--is taking the following steps:

     First, we are monitoring the situation closely--just as 
you are doing. We're examining market conditions on a daily basis and 
working with the lending community . . . including the many 
stakeholders involved in Federal aid . . . to assess any potential 
impact on students.
    This first step will provide us with information on how best to 
proceed. For example, we are tracking the volume of loan originations 
for both FFEL and the Direct Loan program against previous years. We 
know that originations will peak, as they always do, in July and August 
before the school year starts. If origination trends shift, we will be 
prepared to act.
    We are also tracking inquiries daily into the Direct Loan program 
to be prepared for any significant shift in loan volume between the 
programs. Again, rest assured that we will be ready should such a shift 
occur.
     Second, we're engaging our customers--students, families, 
and institutions--by helping them understand all their options. 
Recently, we sent letters to college presidents and financial aid 
officers to assure them of the continued availability of Federal loans 
. . . and to ask for their help tracking developments, including any 
reduction of lender participation at their schools.
    In cases where the institutions are relying heavily on a single 
lender that chooses to reduce participation in FFEL, we have actually 
communicated with these institutions to ensure that their students will 
continue to be served, be this through a single lender or other new 
lenders.
     Third, we're reviewing the options and tools available 
should the situation warrant their use. For example, some are 
suggesting that we shift more of the Federal aid volume to the Direct 
Loan program. Whether to participate in the FFEL or Direct Loan 
programs are choices that schools make. The Administration continues to 
support having two strong Federal student loan programs. Currently, 850 
schools already authorized to make Direct Loans have chosen to remain 
with FFEL as their primary program. We stand ready to support them in 
whatever choices they make, now and in the future.

    Congress included the Lender of Last Resort provisions in the 
Higher Education Act to provide a way for the Federal Government to 
ensure, should the need arise, that students and families can continue 
to access FFEL loans. These provisions are called ``last resort'' for a 
good reason--they're the final option for eligible students unable to 
access Federal loans. At present, the FFEL and Direct Loan programs 
continue to meet student needs. Lender of Last Resort provisions remain 
available, and guarantee agencies are already using their authorities 
as needed.
    Private loans can also be an important resource for students and 
families. However, many who use private loans haven't exhausted their 
Federal aid. To inform them of the more affordable Federal options, 
we've created materials like this Federal Aid First brochure--user-
friendly guides on how to apply for and receive Federal aid.
    As early as 2006, the Secretary's Commission on the Future of 
Higher Education called for streamlining the entire financial aid 
system by addressing the interrelated issues of cost, financing and 
consumer information. As you work to reauthorize the Higher Education 
Act, I hope you will take this opportunity to simplify the current 
system, which is burdensome and complex, and make it more responsive to 
students and families.
    Already, we've worked together to dramatically increase Pell 
Grants, to address the needs of 5.8 million low-income students. We 
achieved the largest increase in budget authority in 30 years, and the 
President has once again asked to increase the maximum annual award in 
his 2009 budget, to $4,800 per year.
    Post-secondary education grows more important by the day, and ever 
more necessary in our global knowledge economy. Times of economic 
uncertainty are all the more reason that Americans will look to higher 
education to acquire new skills and knowledge. Together, we can help 
more of them do so.
    Federal student loans are an important part of this effort, and the 
steps the Department is taking will help ensure that they remain 
available. Market conditions are dynamic, not static. As you said in 
your letter to Secretary Spellings, Mr. Chairman, while ``we expect 
that overall credit market conditions will soon improve . . . it is 
only prudent to prepare now to ensure that these conditions do not 
negatively impact students . . .''
    We at the Department look forward to working with you to ensure 
that students can continue to access and afford the invaluable 
opportunities of higher education.

    The Chairman. Well, thank you, particularly for your last 
references about what we're doing to provide some relief to 
families because you know, in our Higher Education bill last 
year, we took three major steps; first to expand the Pell 
Grant, which affects 5 million young people, by increasing the 
Pell Grant by $500 next year to $4,800 in the 2009 Budget, as 
you can see--
    Ms. Tucker. Yes.
    The Chairman [continuing]. It has been essentially flat 
since 2000. Now, we've raised it up to $4,800, and we're on a 
pathway to continuing to increase the Pell Grants by over 
$1,000 by 2012. But second, what has been most important, we 
set a limitation that no student will have to pay more than 15 
percent of their income to repay their student loan.
    For those individuals who have $70,000 or $80,000 of loans 
and want to work with special needs children for $35,000, 
they'll only have to pay 15 percent of their discretionary 
income. And third, after a period of years, that loan will be 
forgiven in its entirety.
    We're taking the sense of idealism that is out there among 
the young people here at Northeastern and around the country 
that want to give something back to their community, and have 
established a regime that if they work in public service or for 
a non-profit, they can have loan forgiveness; but even if they 
don't work in public service, they get the limitation of 15 
percent. That is a small down payment, and we made some other 
adjustments in terms of the interest payments, as well. These 
other three, I think, are enormously important, and I think 
they make a difference to students.
    One other very important problem that is all too common for 
these students is that they are not taking advantage of the 
full amount of Federal aid and assistance that's available to 
them. Why is that important? If they have to borrow at the 
private rate, they're paying a great deal higher interest rate 
than if they borrow at the government rate. And yet, our best 
estimate is that about $10 billion in government financial 
assistance rather than private is not being used.
    That is why, in our Higher Education Reauthorization--which 
we are working through with the Administration, and expect will 
be one of the few pieces of legislation that will probably get 
through--we have important provisions, dealing with a financial 
literacy program, so students understand financial aid options 
early in their high school career; a requirement that financial 
aid advisors at the colleges counsel students before they take 
out high-cost private loans; and third, a requirement that 
private lenders notify their students who may be eligible for 
lower-cost loans or aid through the institutions.
    That can save students billions of dollars, and it is 
something that can be done, and done now. I don't think we have 
different opinions, really, with the Administration on these 
issues. I think we'll have strong support, and we have a good 
prospect of getting those done.
    Now, Ms. Secretary, you've reached out to the schools--this 
is good news, from what you've told us. You see, this is just 
one newspaper--it talks about the buyout on Wall Street loans, 
the JP Morgan Chase troubles. It talks about what is happening 
to discount rates and target rates, and all of the housing 
rates, and people are wondering, what will happen because many 
families use the increased value of their home to finance the 
education of their children.
    That's true in this State. It's true in States across the 
country. They've seen the escalation of the value of their 
homes, and they've put that aside in order to use it over a 
period in the future. And when they see the value of their 
homes threatened, mortgages threatened, then they really wonder 
what this is going to mean in terms of educating their 
children, in terms of the future and indebtedness and access. 
And that's something that we are very, very conscious of.
    Now, you talk about what is the one surety--the Government 
Loan Program, the Direct Loan Program. It'll be there. It's 
guaranteed. It's solid. There's no worry about that. The Lender 
of Last Resort, with legislation included in our higher 
education bill, will be there, as well.
    Now, let me ask you. In 1998, we had some concern about 
what the circumstances were, and at that time, the Department 
of Education contracted to make sure that the Lender of Last 
Resort would be able to be implemented, to make sure that it 
was going to be guaranteed, and do what it was meant to. Are 
you looking at the past precedent to make sure that if we have 
to go to the Lender of Last Resort, that we not only have a 
framework, but a real framework, one that's going to be 
effectively bulletproof in terms of protecting families, to 
make sure that it's going to be there and work?
    Some have said that in 1998, when we had that guarantee in 
contract, we set that up to effectively give absolute assurance 
that it would be there. We haven't done that yet this time. And 
we want to know if you are going to do it, then why not do it 
now?
    Ms. Tucker. Thank you, Senator Kennedy. Yes. As I 
mentioned, we have reached out to all 35 guaranty agencies, and 
as we looked at Secretary Riley's plan, two things that I think 
that need to be pointed out: the first is the volume of student 
lending that has to be, in essence, carried out--as you, 
yourself, has said, the growth in loan volume is extraordinary, 
and so more and more guaranties have to be lined up; the 
second, though, is that the role of Sally Mae has changed 
dramatically since 1998 to today.
    As we look at the statute, the guaranty agencies have the 
statutory responsibility to either line up in Lenders of Last 
Resort or themselves serve as the Lenders of Last Resort. I 
think it's important to note that 25 out of the 35 guaranty 
agencies today have Lender of Last Resort loans out.
    The important role for the Department of Education is--No. 
1, to make sure that all of the guaranty agencies have Lender 
of Last Resort procedures that are consistent with statutory 
requirements, that are up-to-date, and that are consistently 
applied so that we protect the borrower and the taxpayer. Those 
letters will go out this week to ensure that the guaranty 
agencies have those plans in place to meet the spike that we 
see that happens in July and August, when the originations of 
the student loans take place.
    The Chairman. Well, that's going to be enormously 
important, and we're going to be interested in working with you 
to make sure that, with those letters that are going out, that 
we're setting up the system that is going to be the absolute 
guarantee, which this was intended to be. We'll work with your 
Council and others, I'm sure, and with the House, as well.
    You said you've reached out to these private lenders. How 
many private lenders have responded?
    Ms. Tucker. We reached out to the schools, the 
institutions. Then, when a lender has indicated either 
curtailing or suspending loan activities, we are in the process 
of reaching out to the schools that had maybe 50 percent or 
more of their loan volume with those lenders.
    Again, our relationship is with the institutions. We have 
met with lenders within the last month, and are hoping to have 
another meeting later this week, but our aggressive outreach 
has been to the institutions and to the guaranty agencies that 
guarantee the loans.
    The Chairman. All right. And how many of those now? How 
many of the schools have you reached out to?
    Ms. Tucker. We've reached out to--Secretary Spellings has 
reached out to 4,100 schools--4,155, I think is the exact 
number----
    Mr. Warder. Yes, that's right.
    Ms. Tucker. Four-thousand, one hundred and fifty-five 
schools. My colleague, Mr. Warder, then followed up with the 
financial aid officers at those 4,155 schools.
    The Chairman. And how many have you heard from, or how 
many--
    Ms. Tucker. We've heard--60 of the schools reacted so far 
to let us know that they have no problems. While we haven't 
heard from the great majority, our assumption has been that if 
they were in trouble, that they would let us know immediately. 
Nonetheless, the conversations with them are ongoing.
    The Chairman. Well, the 60 out of 4,155 is something that 
needs continued work on to draw our----
    Ms. Tucker. Right.
    The Chairman [continuing]. Conclusions about the magnitude 
of this problem. Do you plan to take additional steps to 
collect the information more broadly, particularly to determine 
whether lenders are making decisions----
    Ms. Tucker. Oh, absolutely.
    The Chairman [continuing]. Not to lend to certain types of 
schools--which would be inappropriate, if not illegal under the 
program?
    Ms. Tucker. We have reached out to all of the schools that 
have been cut off. Particularly, I think, the concern is around 
the proprietary schools. And thus far, those schools have had 
no trouble lining up other lenders to serve their students.
    The Chairman. Well, just out the 60 or so--do you have a 
projection about what number you're going to hear from over the 
period of these next----
    Ms. Tucker. Our understanding is that these schools are 
currently talking to lenders, lining up their lenders for the 
coming school year. And so, we're going to continue reaching 
out to them. We've reached out to them, for example, to 
distribute this brochure, Federal Aid, to make sure that they 
have it out for their students, to help the students understand 
how to maximize Federal dollars first.
    To the extent that we have ongoing communications from 
Federal Student Aid, yes, we are monitoring that situation with 
the schools very closely.
    The Chairman. Now, but there's still--this is a small 
number that have gotten back to you, and you have this 50 
percent sort of a framework, what happens when you have, let's 
say, two lenders each do 30 percent?
    Both of them bail out, so that's 60 percent or if they're 
each 35 percent, maybe 70 percent. And if you're up at a 50 
percent cut-off, how do we know that we're meeting the needs of 
the students?
    Ms. Tucker. I'm going to let Mr.----
    The Chairman. How did we decide to go to 50 rather than, 
say, 30?
    Ms. Tucker. With other lender activities that we've got 
going, just under 1,000 schools, we know, have 80 percent of 
their volume with just one lender. Of course, that change is 
coming up, but the 50 percent was a threshold that the Federal 
Student Aid figure would be a good start. Let me let Mr. Warder 
elaborate on that.
    Mr. Warder. We use 50, because generally it's the--those 
that have less than 50 do have alternative sources lined up, 
and they have other relationships now. If we find that we have 
a school that had two lenders, because we do have--we know who 
the lenders are by school, and we know their volume--we would 
then reach out to them, as well, if they lost 50 percent or 
more.
    The Chairman. So what you're saying is if you had one that 
was, what, 50 percent and one at 25 percent, you'd be looking 
at the 25 percent , as well, or----
    Mr. Warder. Well, we'd be looking at the school.
    The Chairman. All right.
    Mr. Warder. So they would be then losing 75 percent of 
their prior years' lending capacity, so we'd be reaching out to 
them to see if they could line up other FFELP lenders.
    The Chairman. Just to clarify, what are you telling me 
about the number of schools that may have, say, 40 and 20, or 
35 and 30? They're not getting looked at? Is there--
    Mr. Warder. It would----
    The Chairman. How many of those schools are there?
    Mr. Warder. If both of those lenders stop lending, we would 
then talk to them. So far, we haven't had that situation yet.
    The Chairman. You're telling me that if it reached 50 
percent total, you'd be talking to the school.
    Mr. Warder. Yes.
    The Chairman. Now, one of the points that you mentioned in 
your speech, in your presentation, Secretary, was the fact that 
if the students at the school wanted to go to direct lending, 
as we've seen at Northeastern, too--I, myself, have been a 
strong supporter of that program, and it has grown in spite of 
the fact that there have been efforts, and we won't take the 
time at this meeting to go over them, but to try and, I think, 
undermine that whole program--but, nonetheless, students have 
the opportunity, to go into the Direct Loan Program.
    They have the opportunity with the Direct Loan Program to 
have loan forgiveness for public service. I want to ask you, 
how difficult is it for them now, if you have these--I don't 
have the number. What did you say--2,000? How many loan 
programs do you have now that are for colleges?
    Ms. Tucker. For college?
    The Chairman. Yes. How many lenders are there?
    Ms. Tucker. Lenders. We have 1,952 lenders that are 
actively originating loans. Then, we have 2,200 that are 
servicing loans or doing other things with loans.
    The Chairman. So the student has the choice of the 1,900?
    Ms. Tucker. Yes. The student has the choice of----
    The Chairman. OK.
    Ms. Tucker [continuing]. The 1,900.
    Mr. Chairman. They don't have the choice to choose the 
Direct Loan program as one of those 1,900, do they?
    Ms. Tucker. With the Direct Lending Program, the 
relationship is, of course, with the Federal Government, with 
the Department of Education and Treasury.
    The Chairman. The student doesn't have that kind of choice, 
do they? I mean, when you offer FFEL the Direct Loan program is 
not available----
    Ms. Tucker. Yes.
    The Chairman. You have to set up machinery to see all of 
those. If they wanted to say now that they wanted to get in the 
Direct Loan Program--it's not included in--
    Ms. Tucker. It's not in the----
    The Chairman [continuing]. Those 1,900.
    Ms. Tucker. [continuing]. One thousand, nine hundred and 
fifty. No. It is not.
    The Chairman. Now, wouldn't it be----
    Ms. Tucker. The school----
    The Chairman [continuing]. Convenient? Wouldn't it be 
valuable to have the opportunity for students to be able to 
choose to get into that program?
    Ms. Tucker. The school makes the choice on whether they're 
direct lending or FFELP lending. In fact, we have about 300 
schools that are participating in both direct lending and FFELP 
lending. We have an additional 839 schools that have the 
authority to switch to direct lending, and have not done so 
yet; although, we've got 60 that have switched in the last--3 
weeks?
    Mr. Warder. Yes.
    Ms. Tucker. That have switched in the last 3 weeks. What 
Federal Student Aid is doing is ensuring that if a school makes 
that decision to switch, then not only can they do it easily, 
but that we also have the capacity to handle the loans from 
those schools.
    The Chairman. Why couldn't the student make the judgment 
decision and the choice, instead of the school?
    Ms. Tucker. The statute is set up so that the school makes 
the choice.
    Mr. Warder. Sir, the Direct Loan Program is set up so that 
each school that wants to participate signs an agreement with 
the Department of Education, whereby they say, ``We want to do 
direct lending,'' and then that's what they do.
    The Chairman. Of the ones that are set up, the 800 that you 
said could move toward that, how long would it take them to do 
that?
    Ms. Tucker. I'm going to let Larry be more specific, but 
the way we've got the software configuration right now, it 
would take 5 days internally, for us, to get them ready. After 
that, it would be whatever the school would need to do to make 
sure that they can go operational.
    Mr. Warder. That's correct. Our process, even if they 
didn't have authorization, we can get them authorized and able 
to operate within 5 to 10 days. The problem is, what is the 
administrative procedures and the software that the school has? 
How much change do they have to make? I think Northeastern 
could probably answer that question better than we can.
    Ms. Tucker. As an example, though, Penn State last week 
announced--and what they told us is--we were done with them, 
with Penn State--it'll take them 30 to 45 days to do the work 
at their end.
    The Chairman. Is that your general estimate in terms of the 
computer configuration?
    Mr. Warder. Yes. That's the general rule. And I'm sure----
    The Chairman. Two weeks here.
    Ms. Tucker. Here, yes.
    Mr. Warder. Well, it's even better than we thought.
    The Chairman. Good, good. Well, I think what we're getting 
at here is that we want to try and make this as student-
friendly as possible, and family-friendly as possible, and to 
work with the Department to make sure that we're, to the extent 
that we can, knocking down administrative barriers, so that 
students and families are going to be able to get the best deal 
that they can at this difficult time. I think that's really 
what we're interested in, and we want to try and work with you 
on these items.
    The Fed has taken some really unprecedented actions in the 
recent days to stabilize the financial markets. Is the 
Secretary talking to Treasury Secretary Paulson about how these 
actions might help students and protect students?
    Ms. Tucker. Absolutely. In fact, we're meeting with 
Secretary Paulson on Thursday. The Secretary and I are meeting 
with him at 11 o'clock on Thursday morning. Even before that 
meeting, as I mentioned in my testimony, on a daily basis, 
staff from Treasury and my team, as well as the Domestic Policy 
Council and the National Economic Council, are looking at 
market activity to see if any interventions are warranted, and 
staying on top of that to ensure--
    The Chairman. What are you going to talk about? What are 
you going to say to him and what's he going to say to you?
    Ms. Tucker. We're going to--as I mentioned, we have a 
scorecard that the Federal Student Aid Team and my team have 
put together that we review with metrics on a daily basis. 
We'll be sharing with him the metrics, as we see them.
    The Chairman. All right.
    Ms. Tucker. Then, making sure that we have a common 
understanding of all the tools and resources that are available 
to us, and then, how we would respond as an Administration, 
should they kick in.
    We don't anticipate that it'll happen, but just in case, we 
want to make sure that everybody's got a common context on what 
needs to take place.
    The Chairman. Well, we will--you know, we invite you with 
the Secretary to give us--I'm sure they're interested over in 
the House, as well, about what happens in that meeting, and we 
will--we might submit to you some suggestions in areas that we 
might have that might be useful and worthy to discuss.
    Ms. Tucker. In fact, we'd love to do that. Secretary 
Spellings is reaching out today to the four of you, the two on 
the Senate side and the two on the House, about maintaining 
regular communications, ongoing communications, with you. I 
know you'll be hearing from her shortly.
    The Chairman. All right. Just in a final wrap-up now, what 
could you tell us, just in sort of a final wrap-up, in terms of 
families here, in Massachusetts, and generally New England, 
that have this concern? They're troubled by the loss of what 
they call the SEOGS and the work-study programs, which they 
have used in the past to help students that are needy to do 
some additional work-study. I know the Administration has 
sought not to extend those. We're going to be working on that, 
and working to extend them, because it makes a difference to 
particularly hardworking students.
    Tell me precisely. What can you tell a family or students 
here who are borrowers and involved in the Student Loan 
Programs, how anxious should they be? How worried should they 
be? And, in terms of what has happened in the financial markets 
in these last few days, what you would anticipate?
    I'm also a member of the Joint Economic Committee, and most 
of the guidance that we're getting there is that there's still 
going to be some heavy weather ahead.
    Ms. Tucker. Yes.
    The Chairman. In terms of the financial markets, we'd like 
to know--people can take a challenge and can take problems, but 
they like to know what's coming and like to be at least as 
prepared as possible to deal with this. We have every intention 
of doing as much as we possibly can to make sure that it's 
going to be minimal. What can you tell us, Secretary, just 
finally, tell the families here in Massachusetts----
    Ms. Tucker. I----
    The Chairman [continuing]. About this issue?
    Ms. Tucker. Thank you, Senator Kennedy. For the families of 
Massachusetts, and for families of the United States, what I'd 
like to say is we greatly appreciate the economic uncertainty 
that we're under; but rest assured, the Federal Government will 
not be interrupted in supporting students with their college 
dreams.
    For the coming school year, Federal aid will be available. 
Whether it's the FFELP Program or the DL Program, the Consumer 
Bankers Association reached out last week to all financial aid 
administrators to let them know that the Federal money--I mean, 
the lending capacity was there, both for the guaranteed program 
as well as for private loans.
    The FFELP community is active, reaching out to financial 
aid administrators and letting them know that the FFELP money 
will be there, as well as private loans. And, to the extent 
that we need to kick in Lender of Last Resort or that we need 
to convert to direct lending, we as an Administration stand 
ready to support students to ensure that the money they need 
for college this fall will be available to them.
    The Chairman. Well, we thank you very much for your 
statement and comment. I think there's a great number of 
activities that we need to do to be prepared on this. It isn't 
just sort of programming.
    It's making sure that we are going to have real protections 
for families, and that's going to take, some activities on all 
of our parts to make sure that those guarantees, whether it's 
guaranteed or a Lender of Last Resort, we've got to make sure 
that the system is in place, it's reliable and dependable, and 
we have to make sure that young people are going to know now 
what's out there, what's available, at the best possible price.
    We're going to have to make sure that these financial 
institutions are going to--which underpin certainly a good part 
of the whole private loan program--we have to monitor those, 
and monitor those closely, because so many of the families here 
in Massachusetts are depending on them.
    We can certainly hope for the best, but we have to 
certainly act--we're talking about education, and families with 
scarce resources are hard-pressed to try and make this work. We 
have to make sure that we're going to give them our best shot 
in ensuring that those families' dreams are going to be 
achieved.
    I want to thank you all very much for joining with us.
    Ms. Tucker. Thank you.
    The Chairman. We noticed a little green button that you 
have up here. If you notice, I haven't been taking my eye off 
of it.
    Ms. Tucker. Well, for us Mexican-Americans, the Irish did a 
lot to help us with----
    The Chairman. There you go.
    Ms. Tucker [continuing]. Independence, and so I had to say 
thank you.
    The Chairman. Thank you. Thank you very, very much. Thank 
you. Thank you very, very much. Our next--thank you. Our next 
panelist will be Eileen O'Leary. Good morning, Eileen.
    Ms. O'Leary. Good morning.
    The Chairman. She's the Assistant Vice President and 
Director of Student Financial Services at Stonehill College. 
Her primary duties include handling the student financial aid 
for the university. She is also a former President of the 
Massachusetts Association of Student Financial Aid 
Administrators.
    Deanne Loonin is the Director of Student Loan Borrower 
Assistance, National Consumer Law Center. Deanne is a staff 
attorney with the National Consumer Law Center, and Director of 
the Student Loan Borrower Assistance Project. She's a co-author 
of numerous publications and reports, including the NCLC's 
publication, Student Loan Law and Guide to Surviving Debt. 
Prior to coming to the NCLC, Deanne worked as a legal aid 
attorney in Los Angeles.
    Tom Graf is the Executive Director of MEFA, the 
Massachusetts nonprofit student lender. Tom joined the 
Massachusetts Educational Finance Authority in 1999, where he 
serves as the Executive Director. For more than 30 years, MEFA 
has provided student loans to families across the Commonwealth. 
Prior to joining the Authority, Tom was Deputy Budget Director 
at Fiscal Affairs Division, and Director of Legislative Affairs 
and Fiscal Affairs for the Office of the Governor of the 
Commonwealth of Massachusetts.
    And Eliaquin Gonell--is that----
    Mr. Gonell. Yes.
    The Chairman. Did I do ok? Thank you. Is a student at Salem 
State College. He is a junior at Salem State College, where he 
is majoring in history, with a concentration in legal study. 
For the past summers, Eliaquin has been a staff member for the 
TRIO Program, working to help hundreds of low-income and at-
risk youth. Good for you.
    He is currently involved in organizing an up-and-coming 
statewide Massachusetts Student Association, working with 
students from public institutions across the Commonwealth--to 
unite campuses and advocate for college accessibility and 
affordability at the State level. Eliaquin is a first-
generation American. His parents emigrated from the Dominican 
Republic. He's the first of his family to attend college. 
Delighted to--it's a pleasure to have you.
    Mr. Gonell. Thank you.
    The Chairman. Eileen, well, it's good to see you again.
    Ms. O'Leary. Thank you, Senator.
    The Chairman. Thank you very much for all of your good work 
and leadership, in terms of college accessibility for students. 
It's been a great help to all of us in the Congress for a long 
period of time. We're delighted to have a chance to see you 
again.

STATEMENT OF EILEEN O'LEARY, FINANCIAL AID DIRECTOR, STONEHILL 
                      COLLEGE, EASTON, MA

    Ms. O'Leary. Thank you. Thank you very much for this 
opportunity to provide testimony today at the field hearing of 
the HELP Committee.
    I've worked at Stonehill College in the financial aid area 
for nearly 25 years. What we find now is that, unfortunately, 
we've arrived at a confluence of events which is being used by 
some to characterize the Federal Student Loan Programs as in 
crisis, including the sub-prime mortgage debacle, the 
unfeasibility of financing Federal education loans through 
asset-backed securities markets, changes to illegal inducement 
and preferred lender list regulations, and reduction in lender 
profits in FFEL.
    Fear mongering and misinformation, whether intentional or 
not, is unfortunate, and may prove extremely harmful to 
students just as so many of our high school seniors decide not 
just what college to attend next year, but if they should go to 
college at all.
    First and foremost, as a financial aid administrator with 
25 years' experience, I can state with complete confidence that 
all eligible students can get Federal student loans now, and 
will be able to do so going forward. While lenders may be 
experiencing problems in securing capital or adjusting to the 
post-CCRAA world, this should not translate into problems for 
students. The Secretary of Education, other members of the 
Department, and many in the FFELP industry, the national higher 
education associations, as well as most financial aid 
administrators concur.
    I recently conducted an informal survey of Massachusetts 
schools, and every responding financial aid administrator 
indicated that they have not experienced an inability for their 
students to get FFELP loans this year, and they expect no 
change for next year. While a few have been notified that one 
or more of their historical lenders will reduce or stop FFELP 
participation, there are other lenders who have filled the 
resulting gap.
    However, we must err on the side of caution and be 
prepared. In the extremely unlikely event that FFELP schools do 
experience difficulties obtaining Federal student loans, 
Congress has already established two fail-safe means to ensure 
access, and we've spoken about them earlier this morning.
    First, Congress created the Lender of Last Resort to allow 
guaranty agencies to secure capital from the government to use 
to cover any shortfalls. Secretary Spellings and Martinez-
Tucker have stated that the Department is putting these 
mechanisms into place now. Second, Congress has already created 
the most efficient and reasonable means of ensuring against 
capital shortfalls in FFEL. In 1992, Congress created the 
Federal Direct Student Loan Program. Direct lending provides 
the same Federal loans to students as does FFEL; it is simply 
an alternative delivery system with capital provided by 
Treasury directly instead of through private lenders.
    Some believe that the Department cannot handle a major 
increase in DL volume, and we should remember that at its 
inception direct lending increased its market share from zero 
to one-third in 2 years, and as a new, unproven program, with 
no previous infrastructure. The Department proved it was 
extraordinarily capable of handling a large increase in volume 
then, and one would expect that after 15 years of improved 
technology and experience, it could rapidly and smoothly expand 
from its present market share of 20 percent.
    One of the efficiencies introduced by the Department over 
the DL Program's history is its movement to the Common 
Origination and Disbursement system, or COD. COD is used by 
every school to process Pell, ACG Smart, and the new TEACH 
Grants. Therefore, every school in the country is already up 
and running on a system necessary to process direct loans. 
Schools who believe their students may not continue to be well-
served through FFELP can move quickly into DL if they so 
choose.
    Today, nearly every college's management system software is 
DL-processing capable already. A school determined to shift 
from FFELP to DL has only to make the decision and follow the 
short course. The Department has stated that it's capable of 
doubling direct loan volume immediately, without any system or 
contract or upgrades, since they are currently underutilizing 
capacity. In addition, over a few months, they are confident 
that direct loan volume could increase to 60 percent of market 
share with relatively minor accommodations. Further increase 
would require some systems and contractor upgrades.
    There's been much misinformation about direct lending 
promulgated by those with a vested interest in its demise. In 
my experience, and that of over 1,100 other successful direct 
loan schools, it's a better alternative to FFELP for many 
reasons, which I've included in my written testimony. I will 
only mention one now, and it is that the Department of 
Education does not redline students at any school, and provides 
funds to all eligible students, and that's not always the case 
in FFELP.
    Finally, I would urge you to work with the Secretary of 
Education on these issues on a continuing basis. It is 
obviously not enough that the Department's capable of handling 
a sudden significant increase in direct loan volume. It must 
set the stage now to handle any major influx. I would suggest 
that the Secretary proactively inform FFELP schools of the 
necessary steps to move to direct lending if they so choose.
    The Secretary should write to FFELP college presidents and 
financial aid directors, and place simple instructions on the 
Department's Web site, as well. She should reassemble her team 
of internal experts to work with new DL schools to get them up 
and running in the shortest timeframe possible, a method that 
was highly successful in the beginning of the program.
    The Department has certainly proven itself capable of 
bringing up new programs quickly and efficiently, most 
recently, operationalizing both ACG and Smart on short notice. 
I have no doubt that with preplanning now, students will see no 
disruptions in Title IV Loan fund disbursements under any 
required Lender of Last Resort or direct loan expansion.
    I thank you for the opportunity to present testimony at the 
field hearing this morning, and I'd be pleased to answer any 
questions you have.
    [The prepared statement of Ms. O'Leary follows:]
                Prepared Statement of Eileen K. O'Leary
    Good morning Senator Kennedy and distinguished panel members. Thank 
you very much for the opportunity to provide testimony today at this 
field hearing of the U.S. Senate Health, Education, Labor, and Pensions 
Committee. Your willingness to hold this hearing to bring clarity and 
calm to the question of Federal student loan availability is very much 
necessary and appreciated.
    My name is Eileen O'Leary and I am Assistant Vice President and 
Director of Student Financial Services at Stonehill College in Easton, 
MA, where I have worked for nearly 25 years. I have operational and 
administrative experience with nearly every Federal title IV financial 
aid program and have counseled thousands of students seeking financial 
assistance to pay for their dream of earning a college education. I 
have administered the Federal Pell, ACG, SMART and SEOG programs; the 
Federal Perkins Loan program and Federal Work-Study programs; and I 
have processed student loans through both the Federal Family Education 
Loan Program (FFELP) and the Federal Direct Student Loan program (DL). 
My professional career has been very rewarding and I am grateful to 
Congress for its ongoing commitment to providing access to higher 
education. I am especially gratified by your recent bold and definitive 
action in passing the College Cost Reduction and Access Act of 2007 
(CCRAA) in which you chose students over private sector profits, 
providing the single largest increase to the Pell Grant in recent 
history, as well as reduced fees and interest rates on student loans 
and numerous other student benefits such as public service loan 
forgiveness, TEACH Grants, and the income-based repayment option.
    Unfortunately, we have arrived at a confluence of events which is 
being used by some to characterize the Federal student loan programs as 
``in crisis.'' These events are:

     the crisis in the credit markets resulting from the sub-
prime mortgage debacle which may affect the availability of capital for 
private (non-Federal) student loans;
     the credit market situation making unfeasible the 
financing of Federal education loans through the asset-backed 
securities market, particularly effecting the not-for-profit FFELP 
lenders; and
     the recent reduction in lender profits in FFELP through 
CCRAA.

    The executive director of the FFELP trade group America's Student 
Loan Providers has stated in The Daily Beacon that ``If conditions 
continue in the credit crisis, it's not unimaginable that next fall 
some families will find it difficult to find a Federal student loan.''
    Congressman Kanjorski (D-PA), in his March 4, 2008 press release 
``expressed concern that many lenders will soon decide . . . to leave 
the student loan market.''
    Many media outlets have reported--either through carelessness or 
misinformation--that there will not be sufficient capital or indeed 
lenders to provide students with Federal student loans going forward. 
In fact, the Wall Street Journal has reported that students with poor 
credit ``will likely have a harder time getting a government backed 
Federal loan.''
    Such blatant fear-mongering and misinformation (whether intentional 
or not) is unfortunate and may prove extremely harmful to students 
across the country, just as so many of our high school seniors 
currently decide not just what college to attend next year, but if they 
should go to college at all.
    Congress, schools and FFELP lenders alike seek to help qualified 
students get a college education. However, any attempt to foster the 
belief in a Federal student loan crisis is harmful, unconscionable, and 
counter to the national goal of increasing the number of college 
graduates. Thus, while citizens need to know the facts, these facts 
should be clearly stated with no attempt to cause panic or to 
misinform.
    First and foremost, as an experienced financial aid professional, I 
can state with complete confidence that there is no Federal student 
loan crisis--all eligible students can get Federal student loans now 
and will be able to do so going forward.
    While lenders may be experiencing problems in securing capital or 
adjusting to the post CCRAA world, this does not translate into 
problems for students. Students will still be able to obtain Federal 
student loans!
    I do not believe that the HELP Committee's goal is to ensure the 
continued viability of every player in the FFELP industry. It is, as 
the title of this hearing states, to Ensure Access to College. It is 
all about students--nothing more, nothing less.
    I fully realize that the financial markets are in crisis and many 
FFELP lenders are experiencing major shifts in their methods of 
securing capital, in their personnel requirements as they 
operationalize the recent changes to inducement and lender list 
regulations, and in the economies required under compressed profit 
margins.
    However, lender difficulties do not translate into an inability for 
students to get Federal loans for which they are eligible.
    Members of the U.S. Department of Education, the FFELP industry, 
national higher education organizations, and other financial aid 
administrators concur.

    1. Al Lord, Vice Chairman and CEO of Sallie Mae, the largest FFELP 
lender stated in his March 3, 2008 letter to financial aid directors 
that while:

          ``These issues . . . have created uncertainty among many who 
        rely on student lending . . . my purpose in sending this letter 
        is to remove the uncertainty. The capital market disruption is 
        the lenders' problem; Sallie Mae does not want it to be 
        yours.''

    2. JP Morgan Chase bank has announced that it will continue to make 
Federal student loans and is voluntarily cutting interest rates and 
fees on federally-backed student loans in order to gain greater market 
share.
    3. Mark Kantrowitz, the publisher of Finaid.org, a Web site 
sponsored by Citibank, a FFELP lender, has disseminated a list of 
lenders who have announced that they are leaving the FFELP program, or 
temporarily suspending new loan originations. His list of ``drop-outs'' 
includes fewer than two dozen lenders, some of whom were simply 
consolidation companies looking to make fast money--a process that is 
no longer attractive to students given the change from variable to 
fixed interest rates on Federal student loans. Since over 2,000 unique 
lenders made FFELP loans this year, the loss of a few dozen is 
inconsequential. Many of the remaining 1,900-plus lenders will 
certainly be willing to take on the added market-share.
    4. Mike Reardon, CEO and President of Citibank stated on February 
22, 2008, that:

          ``. . . this is an unprecedented and challenging time for the 
        FFELP community. The recent and upcoming legislative changes 
        are significantly impacting how we manage our business. 
        Congress has required us to do more with less and we are rising 
        to the challenge.''

    5. C.E. Andrews, President of Sallie Mae has stated on January 29, 
2008 that ``The changes we have announced reinforce our ability and 
commitment to provide the right saving- and paying-for-college 
solutions to our schools, students, and families.''
    6. Mike Dunlap, President and CEO of Nelnet wrote to financial aid 
directors on January 23, 2008, that:

           ``Nelnet is a stable business partner because of our 
        financial strength. We have made decisions for the long term 
        and have the capital, cash, and revenue we need to serve you 
        and be successful.''

    7. Secretary of Education Margaret Spellings has stated in her 
recent letter to college presidents that:

          ``While a few lenders have chosen or may choose to re-
        evaluate their continued participation in this program, we 
        expect other lenders will actively compete for this loan volume 
        and ensure that a competitive, efficient, and comprehensive 
        FFEL Program continues to provide a variety of lending options, 
        foster innovation, and improve customer service.''

    8. Anita Weier of the Capital Times reported that Richard George, 
president and CEO of Great Lakes Higher Education Guaranty Corporation, 
has stated that: ``there should not be any impact on Federal title IV 
loans'' as a result of the ``student loan troubles.'' Mr. George was 
further quoted in Weier's Student Loans are Safe Here article that: 
``lenders being affected by the spillover of the sub-prime mortgage 
loan crisis are largely nontraditional lending companies that have 
auctioned securitized student loans.''
    9. ``We're concerned, as everybody is, because there is turmoil in 
the financial markets, but so far we haven't found it in the student 
loan office . . . I'm afraid people are panicking with no reason to,'' 
stated Larry Warder of the U.S. Department of Education in that same 
article.
    10. The University of Wisconsin--Madison director of student 
financial services also stated in the Weier article that student loans 
will not be much of a problem at her institution. ``We are not in a 
panic mode at all.''
    11. The Executive Director of the Iowa College Student Aid 
Commission, Karen Misjak stated in a March 6, 2008 press release that 
``Many of our lender partners, both local and national, have stepped up 
to the plate to ensure that access . . . remains attainable and 
affordable.''
    12. Joe Belew, president of Consumer Bankers Association in his 
March 10, 2008 message to financial aid administrators stated that:

           ``There have been numerous reports of lenders throughout the 
        country announcing that they will no longer be making Federal 
        Family Education Loans or that they will be reducing or 
        stopping the lending of private education loans. We are writing 
        to let you know that despite a series of negative developments 
        . . . banks plan to continue making both FFELP and private 
        loans in academic year 2008-2009.''

    He also elaborated that while some lenders will cease making FFELP 
loans, ``some banks plan to expand their lending in the upcoming 
academic year to ensure that students have the funds they need.''
    13. Dr. Phil Day, President and CEO of the National Association of 
Student Financial Aid Administrators (NASFAA) in his March 11, 2008 
letter to membership stated that:

           ``NASFAA is not aware of any student being denied a Federal 
        student loan due to market conditions . . . Even in instances 
        where student loan providers have suspended their loan 
        programs, other loan providers have stepped in to fill any 
        vacancies.''

    14. The Project on Student Debt has confirmed that ``Federal 
student loans are and will remain widely available to students and 
families at all income levels.''

    Currently, there are about 3,500 approved lenders in the Department 
of Education's database of eligible FFELP lenders. This means that 
there are approximately two schools for every lender. We also know, 
based on Department of Education records, that over 2,000 unique 
lenders are defined as ``active'' since they made loans to students 
during this academic year. Through media reports as well as lender 
statements, we can ascertain that less than two dozen of these lenders 
to date have decided to cutback or cease lending activities for the 
next academic year. This is a mere 1 percent of active lenders. There 
is no doubt that some of the remaining lenders will see this as an 
opportunity to increase their market share, and indeed a few have 
already indicated that they are ready and able to do so. These numbers 
also tell us that in any given year, all eligible lenders are not 
necessarily actively participating in FFELP, for unique business 
reasons unrelated to the current capital market crisis. These past 
hiatus' from lending have never caused a panic or lack of FFELP loan 
availability for students.
    I recently conducted an informal survey of Massachusetts colleges, 
universities and trade schools and every responding financial aid 
administrator indicated that they have not experienced an inability for 
their students to get FFELP loans this year, and expect no change for 
next year. While a minority have been notified that one or more of 
their historical lenders will reduce or stop FFELP participation, there 
are other lenders who have filled the resulting gap. They reported only 
that some loan terms have changed--not because of the credit crisis, 
but due to the smaller profit margins resulting from CCRAA. (As you 
know, the reduction in special allowance payments has resulted in the 
reduction of some lender-defined benefits enjoyed by some borrowers and 
instead Congress has moved these excess profits into significantly 
higher Pell Grants for all eligible needy students.)
    (It must be noted that we will, in all likelihood, see a tightening 
of credit requirements for private, non-Federal, alternative loans that 
are not federally guaranteed. Most typically, students with bad credit 
will be unable to obtain alternative loans with high interest and 
exorbitant fees at schools with high default rates and low graduation 
rates--loans that are not dischargeable, even in bankruptcy or death. I 
for one do not believe this is a bad thing.)
    We must, however, err on the side of caution and be prepared. In 
the extremely unlikely event that students at FFELP schools do 
experience difficulties obtaining their Federal student loans, Congress 
has already established two fail-safe means to insure access.
    First, Congress created the ``Lender of Last Resort'' option to 
allow guaranty agencies to secure capital from the government to use to 
cover any shortfalls of available funding for FFELP loans. While it has 
never been necessary to resort to this fall-back position to date, the 
U.S. Department of Education is putting the mechanisms in place to do 
so if necessary, according to the Secretary of Education, Margaret 
Spellings. This means that if lenders in general are unable to secure 
sufficient capital to meet the needs of students, then the Department 
of Education will insure that capital through the established guaranty 
agencies across the country.
    Second, Congress has already put into place the most efficient and 
reasonable means of insuring against capital shortfalls in FFELP and 
disruptions for students. In 1992 Congress created the Federal Direct 
Student Loan Program (DL). Direct Lending provides the same Federal 
loans to students as does FFELP; however, operationally it is an 
alternative delivery system for getting students their Federal loan 
proceeds. The capital is not provided by the private lending industry 
as in FFELP; instead, the Federal government provides the loan capital 
for DL directly from Treasury. There are currently about 1,100 schools 
across the country whose students receive their loan funds through the 
DL delivery method instead of through FFELP. This accounts for about 20 
percent of all student and parent Federal loan volume. In fact, DL has 
the largest market share of Federal student loans of any lender in the 
country, including the largest FFELP lender, Sallie Mae.
    Some FFELP lenders have stated that the Department of Education is 
not capable of increasing volume in DL if FFELP partially or fully 
fails. It appears, however, that it is basically the lenders who have 
this opinion, and that opinion is apparently based on no more than 
wishful musings. We must remember that at its inception, Direct Lending 
increased its market share from zero to one third of the market over a 
2-year period, as a new, unproven program with no previous 
infrastructure. The U.S. Department of Education proved it was 
extraordinarily capable of handling a large increase in volume then, 
and one would expect that after 15 years of improved technology and 
experience, it could rapidly and smoothly expand from its present 
market share of 20 percent. There is no basis in fact to assume that 
the Department is not fully capable of exceeding its initial success.
    One of the efficiencies introduced by the Department over the 
Direct Lending program's history is its movement to the Common 
Origination and Disbursement system, or COD. COD is the system used by 
every college, university, and trade school in the country to process 
Pell Grants, ACG, SMART, and the new TEACH grants. Therefore, every 
school is already up and running on the system necessary to process 
direct loans. Movement to Direct Lending, if necessary, is not akin to 
a systems change for schools, but rather an expanded use of the current 
Federal aid delivery system. Direct loans are simply Pell Grants with a 
promissory note.
    Schools who believe their students may not continue to be well-
served through FFELP can move quickly into the DL program if they so 
choose. For a school already approved for title IV program eligibility, 
the steps are few and simple: A change to the Program Participation 
Agreement (an on-line process) to include DL, expansion of use of 
EdExpress or similar file transfer method for COD, and internal process 
adjustment and training. After 15 years of Direct Lending, nearly every 
enterprise system used by schools are DL-processing capable already. A 
school determined to shift from FFELP to DL has only to make the 
decision and follow the short-course.
    While some acknowledge that the Department, over time, could handle 
a significant increase in direct loan volume, they have expressed 
concerns about an ability to do so in the short term. However, I have 
been advised by the Department that it is capable of doubling direct 
loan volume immediately, without any system or contractor upgrades 
since they are currently underutilizing capacity. In addition, over 
approximately 2 months, they are confident that direct loan volume 
could increase to 60 percent of market share (from the current 20 
percent) with relatively minor accommodations and adjustments. To 
increase further would require some systems and contractor upgrades. 
These upgrades, however, could be accomplished relatively quickly.
    There has been much misinformation about Direct Lending promulgated 
by those with a vested interest in its failure. In my experience, and 
the experience of over 1,100 other successful direct loan schools, it 
is a better alternative to FFELP for many reasons, including the 
following:

     The Department of Education does not redline students at 
any schools and provides funds to all eligible students. This is not 
always the case in FFELP.
     Direct Lending provides a simple, one-stop shopping 
alternative with great customer service to students and families.
     Direct Lending provides a high level of transparency and 
simplicity, reducing administrative time and expense.
     The streamlined process is easy for families to understand 
and navigate.
     While in FFELP borrowers may have multiple loan servicing 
agents and loans may be sold several times over the life of the loans, 
Direct Lending maintains a single point of service for the life of the 
loan.
     Direct Lending provides ease, predictability and 
reliability of obtaining funds to assist in cash flow predictions at 
the institutional level.
     Perkins Loans consolidated into Direct Lending do not lose 
their grace period.
     DL borrowers can change repayment plans at any time 
without loss of benefits; this is not always true in FFELP.
     Borrowers can take advantage of the new Public Service 
Loan Forgiveness available only in the DL program.

    Stonehill College's experience with Direct Lending can best be 
expressed in our latest estimated cohort default rate: 0 percent. The 
DL servicer is available, helpful, and committed to reducing defaults. 
They are highly successful, with the cohort default rate lower than in 
FFELP for every applicable year but one in the last 10 years.
    Finally, I would urge you to work with the Secretary of Education 
on these issues.
    It is obviously not enough that the Department is capable of 
handling a sudden, significant increase in direct loan volume. It must 
set the stage now to handle any major influx of schools.
    Over the past 8 years, the Department has not been actively 
advancing the Direct Loan Program, allowing a comfortable status quo to 
evolve. However, in the unlikely event that FFELP does degenerate and 
more schools decide to move quickly to Direct Lending, the Secretary 
must be prepared and that preparation should begin immediately.
    I would suggest that the Secretary pro-actively inform schools in 
FFELP of the steps necessary to move to Direct Lending if they so 
choose. These steps must assume current title IV eligibility and 
provide simple and concise instructions for approval and training both 
on-line and in person. I would advise that the Secretary immediately 
and conspicuously place these simple instructions on the Department's 
IFAP Web site.
    She should re-assemble her team of internal experts to work with 
new direct loan schools to get them up and running in the shortest 
timeframe possible to avoid disruptions to students, a method that was 
highly successful in the beginning of the program. This will allow 
schools to have a single-point-of-contact at the Department when it has 
implementation questions.
    If needed, both the Lender of Last Resort option and Direct Lending 
must be fully ready to relieve any FFELP emergency that may evolve, 
without delays. The Department of Education has certainly proven itself 
capable of bringing up new programs quickly and efficiently most 
recently operationalizing both ACG and SMART on short notice. I have no 
doubt that with pre-planning now, students will see no disruptions in 
title IV loan fund disbursements under any required Lender of Last 
Resort or Direct Loan expansion.
    I thank you again for the opportunity to present testimony at this 
Field Hearing. I urge you to continue to do your good work, insuring 
access to higher education for all qualified students, regardless of 
the financial circumstances into which they are born. I would be 
pleased to answer any questions that you may have.

    The Chairman. Fine. We'll come to the questions in just a 
moment--Deanne.

   STATEMENT OF DEANNE LOONIN, DIRECTOR OF THE STUDENT LOAN 
  BORROWER ASSISTANCE PROJECT, NATIONAL CONSUMER LAW CENTER, 
                           BOSTON, MA

    Ms. Loonin. Thank you, Senator Kennedy, for inviting us 
here today, and for your many years of support for students. My 
name is Deanne Loonin, and I offer my testimony here on behalf 
of the National Consumer Law Center's low-income clients.
    The National Consumer Law Center is a nonprofit 
organization based here in Boston, specializing in consumer 
issues on behalf of low-income people. Our Student Loan 
Borrower Assistance Project provides information about student 
loan rights and responsibilities for borrowers and advocates.
    The most important point I want to make today is that, with 
respect to student loans, the sky is not falling. It's 
destructive to students and their families to suggest that it 
is. As a society, we face many challenges in improving access 
to higher education. There is a very troubling gap at access 
and in college completion rates, based on economic class and 
race. We also face the challenge of expanding access, as you 
mentioned, during a time of less State support for public 
institutions and other support for public institutions, and 
skyrocketing costs.
    These are all serious concerns, some perhaps appropriately 
characterized as at a crisis level, but access to Federal 
student loans is not on this list. I won't belabor this point, 
because others have made it well here, but we agree that 
despite the current volatility in the credit markets, students 
and parents should have no problems accessing the existing 
Federal student loan programs.
    I want to focus a little bit more on the private loan side. 
In contrast, there may be some disruption in the availability 
of private student loans, particularly the highest-cost loans. 
However, this too is hardly a crisis. Rather, a tighter market 
for private student loans, if it occurs, should help pull aside 
the curtain and show the reality that in the long run expensive 
credit does not promote equal access to education. The road to 
equal access should not be paved with predatory loans.
    To the extent there is a crisis for students today, it is 
that heavy reliance on loans to finance education means that 
many students come out of college buried in debt. These 
problems are compounded by draconian collection powers that 
allow the government to pursue student loan borrowers to their 
graves, and even seize social security payments. Again, not to 
belabor the point, but we agree that the Department of 
Education has shown every indication that it is monitoring the 
Federal loan side, and has wisely tried to alleviate panic, and 
we hope that Congress will follow that lead.
    With respect to private loans, there is some volatility in 
the market and there have been some changes, mainly in response 
to the growing private loan failure rate. Regardless, I want to 
be sure that the changes to date are not overstated. Some 
lenders have announced they are getting out of the private 
student loan business, or more commonly that they will stop 
making loans to the highest risk borrowers. This has not yet 
developed into a larger trend, and it may be that the lenders 
will curtail business mostly in poorly-performing schools, 
including many proprietary schools.
    This is not only a needed market correction, but an 
opportunity to curb predatory student lending, which is harming 
the very students we most want to help get into and succeed in 
college. Tightening, if it occurs, is likely to shake out loans 
that never should have been made and that are harming students. 
It could also force schools and lenders to think twice before 
pushing these high-priced products.
    Private student loans are almost always more expensive than 
the strictly-regulated Federal loans. There are some decent 
products out there for sure, particularly for prime borrowers, 
but the borrowers with the lower credit scores or limited 
credit histories get the most expensive loans. Private loans 
also do not have the same range of protections for borrowers 
that government loans have. Charging the highest rates and 
adjusting the rates to the most vulnerable consumers has been a 
recipe for disaster in the mortgage lending industry. We're 
afraid that similar trends are emerging for private student 
loans.
    In some cases, the loans are so expensive that they are 
destined to fail. In addition, many borrowers run into 
unexpected life traumas, such as disabilities or family 
breakups, that ruin their dreams of upward mobility. 
Regardless, the student loan debt that was supposed to be an 
investment in their futures is dragging them down. We will not 
attain our goals of expanded access to education if the 
highest-risk students are forced to rely on the types of 
private loans we reviewed in our recent March 2008 report.
    The details of that report are summarized in the written 
testimony, but I just wanted to mention a few. We found that 
many of the loans were extremely high-priced. For example, the 
highest initial rate was close to 19 percent. The average was 
11.5 percent for the loans in our survey. Then, there's high 
fees, origination and other fees, that compound the problem. 
Other problems we found have received less publicity, but are 
just as harmful. For example, 61 percent of the loans we 
surveyed had mandatory arbitration clauses. All had provisions 
that required borrowers to defend lawsuits or bring claims in 
the State where the lender is located, not where the borrower 
lives.
    The idea of relying on private loans to make college 
affordable is even more harmful for students when you take into 
account the lack of relief or a safety net if the borrowers run 
into trouble down the road. Relief is rarely available for 
these borrowers. Private loan creditors may offer flexible 
repayment, the kind of flexible repayment you talked about that 
you and others recently passed with the Federal loan programs, 
but they are not required to do so.
    In our experiences representing borrowers in financial 
distress, lenders have not been willing to cancel loans or 
offer reasonable settlements. Private lenders generally do not 
cancel student loan debt, even upon death of the original 
borrower or cosigner. Unlike the Federal loan programs, long-
term flexible repayment or income-based repayment options are 
rare. And, due to the 2005 congressional change, these very 
high-cost loans are just as difficult to discharge in 
bankruptcy as the Federal student loans.
    In conclusion we are in a time of change, not crisis. 
Change understandably makes people nervous, but it is not a 
cause for panic. I urge you and the committee and others to 
keep the focus on helping students pay for school without 
taking on unsustainable debt burdens, rather than preserving an 
imperfect status quo because a few lenders are not making the 
profits they are accustomed to making.
    Thank you for the opportunity to testify today.
    [The prepared statement of Ms. Loonin follows:]
                  Prepared Statement of Deanne Loonin
    Mr. Chairman and members of the committee, the National Consumer 
Law Center (NCLC) thanks you for inviting us to testify today on 
ensuring access to college. We offer our testimony here on behalf of 
our low-income clients. The National Consumer Law Center is a nonprofit 
organization specializing in consumer issues on behalf of low-income 
people. We work with thousands of legal services, government and 
private attorneys, as well as community groups and organizations, from 
all States that represent low-income and elderly individuals on 
consumer issues.\1\ NCLC's Student Loan Borrower Assistance Project 
provides information about student loan rights and responsibilities for 
borrowers and advocates. We also seek to increase public understanding 
of student lending issues and to identify policy solutions to promote 
access to education, lessen student debt burdens and make loan 
repayment more manageable.\2\
---------------------------------------------------------------------------
    \1\ In addition, NCLC publishes and annually supplements practice 
treatises which describe the law currently applicable to all types of 
consumer transactions, including Student Loan Law (3d ed. 2006 and 
Supp.).
    \2\ See the Project's Web site at http://
www.studentloanborrowerassistance.org.
---------------------------------------------------------------------------
                  introduction: the sky is not falling
    As a society, we face many challenges in improving access to higher 
education. There is a very troubling gap in access to higher education 
and college completion rates based on economic class and race. Despite 
the widespread availability of student loans, low-income families are 
still about 32 percent less likely to send their children to college 
than families with higher incomes. Further, students from low-income 
families attend public 4-year institutions at about half the rate of 
equally qualified students from high-income families.
    We also face the challenge of expanding access during a time of 
decreased financial support for public higher education institutions, 
including community colleges. These problems are exacerbated by 
skyrocketing college costs and concerns about the preparation levels of 
high-risk students entering college.
    These are all serious concerns, some perhaps appropriately 
characterized as at a ``crisis'' level. Access to Federal student loans 
is very clearly not on this list. Despite the current volatility in the 
credit markets, students and parents should have no problems accessing 
the existing Federal student loan programs. In contrast, there may be 
some disruption in the availability of private student loans, 
particularly the highest cost loans. However, this is hardly a crisis. 
Rather, a tighter market for private student loans, if it occurs, 
should help pull aside the curtain and show the reality that in the 
long-run, expensive credit does not promote equal access to education. 
Private loans are not a solution to the problem of rising costs.
    To the extent there is a crisis for students today, it is that 
heavy reliance on loans to finance education means that many students 
come out of college buried in debt. These problems are exacerbated by 
draconian collection powers that allow the government to pursue student 
loan borrowers to their graves and even seize Social Security payments.
               access to federal student loans is secure
    The overall economic crisis has not, will not and should not affect 
access to Federal loans. A few lenders have recently left the business, 
but there are still over 2,000 lenders participating in the guaranteed 
loan programs. The few institutions that have experienced problems have 
been able to line up new lenders. Even the Pennsylvania Higher 
Education Authority, in its press release announcing its exit from the 
Federal guaranteed loan program, stated that its decision should have 
minimal effect on students. Some banks, particularly those that are not 
reliant on outside investors to raise capital, see an opportunity to 
move more aggressively into federally backed student lending.
    Even if more lenders start pulling out of the Federal guaranteed 
loan programs, there is adequate back-up to protect students. These 
safeguards include the Federal Direct loan program and lender as last 
resort provisions. If a borrower's current lender leaves the program, 
the borrower will still be able to get virtually the same loans through 
the Direct loan program or from other FFEL lenders. Borrowers may have 
to pay slightly more if some of the current incentives are reduced or 
eliminated, but the additional costs should be minimal and in many 
cases offset by reductions in interest rates for subsidized loans. 
Further, the recent expansion of PLUS loans to graduate and 
professional students makes Federal loans even more available to 
borrowers.
    There is no reason to prop up lenders simply to preserve the status 
quo. The heavy subsidies in the guaranteed loan program evolved in 
response to lenders' initial reluctance to participate in the program 
when it was first created. Times have changed. Federal guaranteed loans 
have been and will continue to be a profitable business. In addition, 
the Direct Loan program, created in the 1990's, helps ensure that 
borrowers have other choices.
    The Department of Education has shown every indication that it is 
monitoring the situation and has wisely tried to alleviate panic. 
Congress should follow their lead. It is destructive to mislead 
students and their families about a crisis that does not exist.
                  the dangers of private student loans
    Private student loans are made by lenders to students and families 
outside of the Federal student loan program. They are not subsidized or 
insured by the Federal Government and may be provided by banks, non-
profits, or other financial institutions. The borrowing limits in the 
Federal loan programs, the skyrocketing cost of higher education and 
aggressive lender marketing have fueled the growth of private student 
loans. Although still a smaller percentage of overall student loans, 
the yearly growth of private loans is outpacing that of Federal loans. 
Private loans now comprise about 24 percent of the Nation's total 
education loan volume.
    Private student loans are almost always more expensive than the 
strictly regulated Federal loans. This is especially true for borrowers 
with lower credit scores or limited credit histories. Private loans 
also do not have the same range of protections for borrowers that 
government loans have. Further, borrowers are more likely to borrow 
unaffordable amounts since, unlike most Federal loans, there are no 
loan limits for private loans.
    A main reason for the increased supply of private student loans is 
the profitability of this business. The private loan market has been 
profitable primarily because originators sell the loans with the 
intention of packaging them for investors. The market for securitized 
student loans jumped 76 percent in 2006, to $16.6 billion, from $9.4 
billion in 2005. Student loan asset-based securities (ABS) accounted 
for about 9 percent of total U.S. ABS issuance in 2005.
    Lenders must sell a certain amount of loans in order to generate 
sufficient pools of loans to sell to investors. As a result, creditors 
make and sell loans to borrowers, but with the specific goal of selling 
them to investors. Loan products are thus developed for the re-
packaging rather than to provide the most affordable and sustainable 
products for borrowers.
    Charging the highest rates and adjusting the rates to the most 
vulnerable consumers has been a recipe for disaster in the mortgage 
industry. Similar trends are emerging for private student loans. In 
some cases, the student loans are so expensive that they are destined 
to fail. In addition, many borrowers run into unexpected life traumas 
such as disabilities or divorces that ruin their dreams of upward 
mobility. Regardless, the student loan debt that was supposed to be an 
investment in their futures is dragging them down.
    We work with borrowers every day to help them address these 
problems. If you ask our client John D. whether there is a crisis, he 
would not point to a lack of access to credit, but rather the fact that 
the credit he did get is ruining his future plans. A few years ago, he 
took out a Federal loan and a high-cost private loan to attend a local 
proprietary school. John withdrew after one semester because the 
program the school promised he would be able to take was not being 
offered. John is 23 years old and suffers from severe depression. He 
has been unable to recover and go back to school and now faces a 
lawsuit for collection of his private loans.
    You will likely hear similar sentiments from the approximately 
2,500 former students of Silver State Helicopters, a Nevada-based for-
profit flight school that recently went into bankruptcy. Most of these 
students received private loans to cover costs and are stuck with 
incomplete educations from a school that has closed, while also facing 
demands from lenders insisting on repayment.
    Similarly, Patrick K. was 22 years old in 2006, just a semester 
away from graduating from the University of Rhode Island, when his life 
changed forever. He suffered a terrible accident, falling down a long 
escalator and suffering severe brain damage. His parents, doctors and 
nurses have fought hard to keep him alive, but the prognosis is not 
good. Patrick is in a minimally conscious state and is incapable of 
consistent communication, fully dependent upon others for all of the 
activities of daily life. Patrick's family has struggled to find 
resources to pay for his care. They are also using up their retirement 
and other resources to retrofit their home so that it will be 
accessible for Patrick when they bring him home.
    Patrick took out Federal loans to finance his education and also 
worked during the summers to earn money for college. His Federal loans 
were discharged based on permanent and total disability. He also used 
private loans to help fill the gap. To get a better rate, his mother 
co-signed on the loans. Because Patrick's Mom co-signed, they were able 
to get a decent interest rate. The problem is the lack of a safety net 
when this tragedy occurred.
         nclc report on the high cost of private student loans
    In a March 2008 report, NCLC reviewed 28 private loans issued 
between 2001 and 2006, looking for warning signs and potential 
problems.\3\ Key findings included:
---------------------------------------------------------------------------
    \3\ See National Consumer Law Center, ``Paying the Price: The High 
Cost of Private Student Loans and the Dangers for Student Borrowers'' 
(March 2008), available at: http://
www.studentloanborrowerassistance.org/uploads/File/
Report_PrivateLoans.pdf.
---------------------------------------------------------------------------
1. Pricing
    All of the loans in our survey had variable rates. The lowest 
initial rate in our sample was around 5 percent and the highest close 
to 19 percent. The average initial disclosed annual percentage rate 
(APR) for the loans in our survey was 11.5 percent.
    Some of the margins were shockingly high. Multiple loans in our 
survey had margins of close to 10 percent. The average margin was about 
4.8 percent. A borrower taking out a loan with a margin of 4.8 percent 
at the time the report was written would have an initial interest rate 
of 7.25 percent plus 4.8 percent or 12.05 percent. As a comparison, the 
average margin for 1-year adjustable rate mortgage loans in 2006 was 
2.76 percent.
    None of the loans we examined contained a rate ceiling. A few set 
floors. These floors are particularly unfair for borrowers in an 
environment of declining interest rates. Nearly all of the loan notes 
we examined stated explicitly that the borrower's school was a factor 
in pricing the loan. Pricing based on institution has raised concerns 
about possible discrimination against borrowers in protected racial 
groups.
2. Origination and Other Fees
    There are no limits on origination and other fees for private 
student loans. According to the loan disclosure statements we reviewed, 
there were origination charges in all but about 15 percent of the 
loans. For those with origination fees, the range was from a low of 2.8 
percent up to a high of 9.9 percent. The average in our survey was 4.5 
percent. Most of the lenders in the private student notes we surveyed 
reserved the right to charge additional fees for other services.
3. Flexible Repayment Plans
    Private loan creditors may offer flexible arrangements, but they 
are not required to do so. None of the loan notes we surveyed 
specifically provided for income-based repayment. A few stated that 
borrowers would be able to choose alternative repayment plans in 
certain circumstances. However, the specific criteria and circumstances 
were not spelled out in the agreements. Only a few mentioned that 
graduated repayment was possible. In these cases, the loan contract 
stated that these plans would be offered only if available. There is no 
information provided about when such plans are available.
    In our experience representing borrowers through the Student Loan 
Borrower Assistance Project, we have found private lenders to be 
universally inflexible in granting long-term repayment relief for 
borrowers. Even in cases of severe distress, the creditors we have 
contacted have offered no more than short-term interest-only repayment 
plans or forbearances. This experience holds true for both for-profit 
and non-profit lenders.
4. Postponing Payments
    As with flexible repayment, private loan creditors are not required 
to offer forbearance or deferment options. In most of the loan notes in 
our survey, the lenders provided an in-school deferment option. 
However, interest generally accrued during this period and borrowers 
were given the choice of paying the interest while in school or 
approving capitalization once they enter repayment.
    No forbearance rights were specified in nearly half of the loans in 
our survey. Creditors may offer these plans, but they do not inform 
borrowers about available choices ahead of time in the loan notes. All 
of the lenders who provided forbearances explained that the option was 
available for no more than 6 months, regardless of the number of 
forbearances requested. A number of lenders in our survey disclosed 
that they would charge fees to process forbearance and deferment 
requests. The fees were generally up to $50 for forbearances.
5. Work-Outs and Cancellations
    In our experiences representing borrowers in financial distress, 
lenders, including non-profit lenders, have not been willing to cancel 
loans or offer reasonable settlements. The lenders have said they will 
cancel loans only in very rare circumstances. Private lenders generally 
do not discharge student loan debt upon death of the original borrower 
or co-signer. A number of loans in our study stated explicitly that 
there will be no cancellation if the borrower or co-signer dies or 
becomes disabled.
6. Mandatory Arbitration Provisions
    In our survey, mandatory arbitration clauses were contained in 61 
percent of the loan notes. These clauses are just one example of 
lenders' systematic strategy to limit a borrower's ability to challenge 
problems with the loans or with the schools they attend. Mandatory 
arbitration clauses are very controversial and are hallmarks of 
predatory loans.
7. Default Triggers
    Borrowers are in default on Federal loans if they fail to make 
payments for a relatively long period of time, usually 9 months. They 
might also be in default if they fail to meet other terms of the 
promissory note. There are no similar standardized criteria for private 
loan defaults. Rather, default conditions for private student loans are 
specified in the loan contracts. In most cases, borrowers will not have 
a long period to resolve problems if they miss payments on a private 
student loan. Private loans may go into default as soon as one payment 
is missed. In many cases, lenders reserve the right to declare defaults 
if in the lender's judgment, the borrower experiences a significant 
lessening of ability to repay the loan or is in default on any other 
loan they already have with the lender, or any loan they might have in 
the future.
8. The Holder Notice and Other Borrower Defenses
    In order to minimize risk and make the loans more attractive for 
investors, private lenders have aggressively sought to limit a 
borrower's ability to raise defenses to the loan based on violations of 
the law or that the lender breached the contract or that the consumer 
does not owe the amount claimed. These rights are extremely important 
in the private loan context where many creditors have close 
arrangements with schools that allow them to market their private loan 
products. There have been very serious problems with some of these 
schools, including examples of schools that were not properly licensed 
or certified, pressuring borrowers to take out private loans.
    Some lenders have sought to evade potential liability in these 
cases. They have done so in a number of ways. Many simply do not 
include the Federal Trade Commission (FTC) holder notice in the loan 
notes.\4\ Nearly 40 percent of the loans in our survey followed this 
potentially illegal approach. Other lenders include the notice but 
attempt to deny borrowers its benefits by placing contradictory clauses 
in the notes. In our survey, 90 percent of the notes that included the 
Federal Trade Commission (FTC) notice undermined it in some way by 
attempting to prohibit borrowers from raising defenses.
---------------------------------------------------------------------------
    \4\ The FTC notice states that any holder of a consumer credit 
contract is subject to all claims and defenses which the consumer could 
assert against the seller. The notice must be inserted whenever the 
seller finances a sale or a creditor has a relationship with the seller 
and that creditor finances the sale. 16 CFR Sec. 433.2.
---------------------------------------------------------------------------
    These efforts to evade liability are harmful to future borrowers as 
well. Contrary to the basic purpose of the FTC holder notice, the 
lenders are placing the responsibility to police the schools on the 
students. Yet students have no recourse if they are given erroneous 
information by the schools.
9. Misleading and Deceptive Information About Borrower Bankruptcy 
        Rights
    Student loan creditors have pushed hard to limit the safety net for 
borrowers who get in trouble. One of the most notable examples is the 
2005 Congressional decision to make private student loans as difficult 
to discharge in bankruptcy as Federal loans. This was a severe blow to 
consumers. The rationale for limiting bankruptcy rights for Federal 
borrowers is also suspect, but is even less reasonable for private loan 
borrowers. These borrowers are often stuck with very high rate loans 
and fees. In contrast, most other unsecured debt is dischargeable in 
bankruptcy.
    Lenders have argued that the bankruptcy provision was necessary to 
encourage lenders to offer private loans at reasonable rates. In fact, 
there is no evidence that loans were more expensive prior to the 
bankruptcy change or less expensive afterwards. Volume has grown 
steadily throughout the years without regard to borrower bankruptcy 
rights, which have only been limited for private loans since 2005.
    Regardless of the rationale for the bankruptcy limitations, 61 
percent of the loan notes in our survey included a clause that 
mischaracterized a borrower's rights in bankruptcy. While it is useful 
for borrowers to know that they may have trouble discharging the loans 
in bankruptcy, it is not useful, and potentially a violation of 
consumer protection laws, to mislead borrowers about their rights.
10. Venue Restrictions
    All of the notes in our survey stated that any actions initiated by 
the lender or consumer would have to be filed in the lender's home 
State. These clauses are yet another effort by lenders to avoid 
potential liability and prevent borrowers from challenging improper or 
illegal behavior. Clearly most borrowers with limited resources will be 
unable to file lawsuits far from where they live. These clauses apply 
not only in cases where borrowers are affirmatively suing lenders, but 
also if the lender is suing the borrower.
              market volatility and private student loans
    There is no question that there is volatility in the private credit 
market. The causes and solutions are less clear. In fact, much of the 
volatility should be viewed as a market response to the growing private 
loan failure rate. Regardless, the changes to date in the private 
market should not be over-stated. Some private student lenders have 
announced they are getting out of the business or more commonly that 
they will stop making loans to the highest risk borrowers. This has not 
yet developed into a larger trend and it may be that the lenders will 
curtail business mostly in poorly performing schools, including many 
proprietary schools.
    This is not only a needed market correction, but an opportunity to 
curb predatory student lending, which is harming the very students we 
most want to help get into and succeed in college. Tightening, if it 
occurs, is likely to shake out loans that never should have been made 
and that are harming students. It could also force schools and lenders 
to think twice before pushing these high-priced products.
                         policy recommendations
    Higher education is the gateway to a secure economic future for 
many Americans. It is no secret that access to higher education is 
diminished by soaring costs. More and more, students are risking their 
financial futures by taking out expensive loans to finance education. 
Unfortunately, market failures and abusive lending practices are 
stripping the benefits of higher education from millions of students. 
This is especially true in the private student loan market where there 
is little regulation despite the high cost of these loans and lack of 
protections for borrowers.
    Below is a policy framework to help preserve access to affordable 
higher education by addressing problems with private student loans.
    Any new student financial assistance legislation should be based on 
the following principles:

     Eliminate unsustainable loans and develop fair 
underwriting standards;
     Eliminate incentives for schools and lenders to steer 
borrowers to abusive loans;
     Improve disclosures so that borrowers can know the true 
cost of private loan products and understand the difference between 
private and government loans;
     Require accurate and accountable loan servicing;
     Ensure effective rights and remedies for borrowers caught 
in unaffordable loans;
     Preserve essential Federal and State consumer safeguards; 
and
     Improve assistance to distressed borrowers.
                               conclusion
    We are in a time of change, not crisis. Change understandably makes 
people nervous, but it is not a cause for panic, especially since there 
is no evidence that the changes in the Federal loan programs are 
hurting students and their families.
    Rather than responding to economic changes by preserving an 
imperfect system, it is time to improve access to higher education by 
fixing what is wrong with student financial aid. This requires 
recognition that the road to equal access will not be paved with 
predatory loans.
    Thank you for the opportunity to testify today.

    The Chairman. Thank you.
    Mr. Graf.

         STATEMENT OF THOMAS GRAF, EXECUTIVE DIRECTOR, 
                        MEFA, BOSTON, MA

    Mr. Graf. Good afternoon, Senator Kennedy, and 
distinguished members of the panel. Thank you for the 
opportunity, and I thank Northeastern for the opportunity to 
appear before you today and to discuss the access to college in 
a turbulent economy.
    My name is Tom Graf, and I serve as the Executive Director 
of MEFA, Massachusetts Educational Financing Authority. I'm 
honored to testify on behalf of MEFA for the Commonwealth. It's 
a self-financing, not-for-profit authority dedicated to meeting 
the challenges of financing higher education.
    For nearly 30 years, MEFA has served the Commonwealth well 
by hundreds of thousands of families with over $2.6 billion in 
low-cost student loans, the greatest impacting of which have 
been private alternative loans, designed to augment those 
offered through the Federal Government's FFELP, Stafford, and 
direct lending programs. Just this year alone, MEFA provided 
over 42,000 students and families with affordable loan proceeds 
in excess of $500 million.
    MEFA was created by the State Legislature in the early 
eighties at the request of colleges and universities to provide 
families with that stable source of capital to fund their 
higher education costs. There was little doubt over this 
extended period that needy families have come to depend on MEFA 
as a trusted education financing partner. Indeed, MEFA has 
sought to make college education more affordable for students 
and families.
    Underlying MEFA's programs has been a far-reaching 
education campaign to provide families with guidance through 
the entire financing process. Providing quality information to 
assist families has been essential to MEFA's message, and has 
emerged as a critical component during these unsettling 
economic times. While MEFA counsels families that every dollar 
saved is a dollar less in debt service, a growing number of 
families have come to depend on MEFA's low-cost loans.
    It's important to note that all MEFA loans are school 
channel loans, certified by the Financial Aid Office. Moreover, 
working in tandem with colleges and universities has 
contributed to MEFA's historically low default rate, which 
remains less than 1 percent. At this time, I would like to turn 
my remarks to the challenges facing the student loan entities 
across the country.
    There is little doubt that the unprecedented disruption in 
the capital markets, which began with the sub-prime mortgage 
crisis, has impacted student loan lenders. Market instability 
continues as investor confidence has been strained, creating a 
broad and far-reaching liquidity crisis. Today, liquidity 
necessary to fund student loans has nearly evaporated. There's 
also a number of lenders who have experienced difficulty in 
raising capital funds for the upcoming academic year. I remain 
concerned that parents will have fewer loan choices at a much 
higher cost.
    I want to show you today MEFA is working diligently to 
raise capital to fund loans for next year. Indeed, today's 
challenges are the most daunting MEFA has experienced in its 
nearly 30 years. At stake, MEFA's ability to provide families 
with affordable financing programs to maintain access to higher 
education. While MEFA continues to monitor closely the 
widespread dislocation in the markets, how much capital MEFA is 
able to secure is an open question, even though MEFA has one of 
the most well-regarded programs in the country.
    Indeed, MEFA has distinguished itself as a premiere 
education financing authority on Wall Street, and over the 
years developed nationally recognized programs promoting access 
and affordability. Notwithstanding, I must underscore these are 
challenging economic times, and access to capital markets has 
been difficult if not impossible for not-for-profit lenders.
    In the face of this continued economic instability, MEFA 
will steadfastly maintain its commitment to working with 
families in need of private student loans. MEFA remains hopeful 
and diligent in its efforts that it will raise the necessary 
capital to assist families in meeting next year's costs.
    In closing, let me assure you MEFA is unwavering in its 
commitment to make higher education accessible and affordable, 
through community education programs, college savings plans, 
and low-cost financing options. We have the courage to pursue 
every possible funding solution that enables families to access 
MEFA loans for decades. We will do so with vigor in the weeks 
ahead to help families achieve their dream of a college 
education.
    I thank the Senator and his staff for the opportunity, and 
I look forward to working with you, and answering any 
questions.
    [The prepared statement of Mr. Graf follows:]
                  Prepared Statement of Thomas M. Graf
    Good Morning Senator Kennedy and distinguished members of the 
panel.
    Thank you for the opportunity to appear before you today to discuss 
access to college in a turbulent economy. My name is Thomas M. Graf, 
and I serve as the Executive Director of MEFA, The Massachusetts 
Educational Financing Authority. I'm honored to provide testimony on 
behalf of MEFA, the Commonwealth's self-financing, not-for-profit State 
authority dedicated to assisting parents, students, colleges, and 
universities in meeting the challenges of financing higher education. 
For nearly 30 years, MEFA has served the Commonwealth well by providing 
hundreds of thousands of families with over $2.6 billion in low-cost 
student loans, the greatest percentage of which have been private 
alternative loans designed to augment those offered through the Federal 
Government's Stafford and Direct Lending Programs. Just this academic 
year alone, MEFA provided over 42,000 students and families with 
affordable loan proceeds in excess of $500 million.
    The Massachusetts Educational Financing Authority was created by 
the State legislature in the early eighties at the request of colleges 
and universities to provide families with a stable source of capital to 
fund higher education costs. There is little doubt over this extended 
period that families and colleges and universities have come to depend 
on MEFA as a trusted education financing partner. Indeed, MEFA has 
sought to make a college education more accessible and affordable for 
Massachusetts students and families, as well as those from across the 
Nation pursuing the outstanding higher education opportunities here in 
the Commonwealth.
    MEFA has created industry-leading education financing programs and 
has established a reputation for providing cost-saving programs 
combined with quality service. Underlying MEFA's programs has been a 
far reaching education campaign to provide families with guidance at 
every step throughout the financing process, beginning with the 
Commonwealth's innovative college savings plans for parents of young 
children preparing for future education expenses. Providing college 
planning and financing information to assist families has been central 
to MEFA's message and has emerged as a critical component during these 
unsettling economic times. And while MEFA counsels families that every 
dollar saved for college is a dollar less in debt service, a growing 
number of families have come to depend on MEFA's low-cost private loan 
programs, once they have exhausted Federal loan eligibility.
    It is important to note that all MEFA loans are school channel 
loans, certified by the financial aid office, and as such, MEFA works 
closely with colleges and universities. Moreover, working in tandem 
with colleges and universities has contributed to MEFA's historically 
low cumulative gross default rate that remains well below 1 percent.
    At this time, I'd like to turn my remarks to the challenges facing 
not-for-profit student loan entities across the country. There is 
little doubt that the unprecedented disruption in the capital markets, 
which began with the sub-prime mortgage crisis, has impacted student 
loan lenders. Market instability continues as investor confidence has 
been strained, creating a broad and far reaching liquidity crisis. 
Today, liquidity necessary to fund student loans has nearly evaporated. 
Thus, as has been widely reported in the press, a number of education 
lenders have experienced difficulty in obtaining capital to fund 
student loans for the remainder of the 2008 spring semester, along with 
difficulty in raising capital to fund loans for the upcoming academic 
year. I remain concerned that parents may have fewer loan choices at a 
higher cost.
    I want to assure you today, MEFA continues to offer students and 
families low-cost loans for the 2008 spring semester, and most 
importantly is working diligently to raise capital to fund loans for 
the 2008-09 academic term. Indeed, today's challenges are the most 
daunting MEFA has ever faced. At stake is MEFA's ability to provide 
families with affordable financing programs to achieve and maintain 
access to higher education.
    While MEFA continues to closely monitor the widespread dislocation 
in the capital markets in pursuit of funding opportunities, how much 
capital MEFA is able to secure remains an open question, even though 
MEFA has one of the strongest and most well-regarded programs in the 
country. Indeed, MEFA has distinguished itself as a premier education 
financing authority on Wall Street, and over the years developed 
nationally recognized programs promoting college access and 
affordability. Notwithstanding, I must underscore these are challenging 
economic times and access to the capital markets has been difficult, if 
not impossible for not-for-profit lenders.
    It is important to understand in the face of continued economic 
instability, that MEFA will steadfastly maintain its commitment to 
working with Massachusetts colleges and universities and most 
importantly families in need of private student loans for the upcoming 
academic season. MEFA remains hopeful and diligent in its efforts that 
it will raise the necessary capital to assist families in meeting next 
year's education costs.
    MEFA has and will continue to encourage families needing 2008-09 
financing beyond Federal loan eligibility to regularly visit MEFA's Web 
site. In addition, MEFA provides toll-free telephone services and e-
mail communications offering college financing advice. Again, MEFA 
remains hopeful that private education loan funds will be available to 
meet college costs in the fall and to that end, anticipates announcing 
2008-09 loan availability later this spring, well in advance of the 
fall semester.
    In closing, let me assure you that MEFA is unwavering in its 
commitment to make higher education accessible and affordable through 
community education programs, college savings plans, and low cost 
financing options. MEFA has the courage to pursue every possible 
funding solution that enables families to access MEFA loans for decades 
to come. We will do so with vigor in the coming days and weeks ahead to 
help families achieve the dream of a college education.
    Thank you for the opportunity to appear before you today. On behalf 
of the MEFA Team, we look forward to working with you and members of 
your staff to promote access to higher education through affordable 
financing programs.

    The Chairman. And we'd be glad to hear from you.

  STATEMENT OF ELIAQUIN GONELL, STUDENT, SALEM STATE COLLEGE, 
                           SALEM, MA

    Mr. Gonell. I would just first like to quickly say I just 
flew in from Washington, DC, where I attended a legislative 
conference with college students that is being held by the 
United States Student Association. I told them I would have to 
leave early to be here at this hearing, and they wanted me to 
make sure that I told you that we, the students of America, are 
very gracious that there are people in power that understand we 
are not the sole beneficiary of our education, that indeed it 
is our society as a whole that benefits from a well-educated 
populace.
    I would like to extend a great big thank you from the 
hundreds of student leaders and advocates from across the 
country with whom I attended this conference.
    The Chairman. Thank you very much.
    Mr. Gonell. I am a first-generation American, as well as a 
first-generation----
    The Chairman. What are they--what's the subject of their 
meeting down there?
    Mr. Gonell. How to--it's pretty much the stuff where 
they're teaching us how to better advocate for students' higher 
education needs.
    The Chairman. Good.
    Mr. Gonell. I am a first-generation American, as well as a 
first-generation college student. I am now in my third year at 
Salem State College, studying political science, secondary 
education, and history. When I graduate next year, I intend to 
pursue a job teaching in public education. I believe that an 
effective public education system is imperative in maintaining 
a confident society for our future. I want to teach, because I 
know the importance of educating our youth. And, like many 
students in my class and many people in my generation, I hope 
to use my education to give back to my community.
    These days, I find myself working three jobs, as you said--
one as a sales clerk in Salem, NH; one as a desk receptionist 
at the College Residence Hall; and, I am also a Resident 
Assistant. Through these three jobs, the emotional backing from 
my family, and with the help of financial aid, including the 
Pell Grant and Federal student loans, I am able to live a 
relatively happy life as a young guy in pursuit of his college 
education.
    That is not to say, however, that I am not constantly 
pressed by the hardships that come with living this sort of 
fast-paced and often stressful lifestyle. This is why I have 
become more involved in student advocacy, using what little 
free time I do have to get involved and try to change the 
situation for students.
    Students across the country face serious challenges 
figuring out how to pay for college. With college costs 
continuing to rise, the students turn increasingly to loans. As 
a result, the average American college student acquires just 
under $20,000 in debt by the time they graduate. In this 
current economy, many families are asking students to cover 
more and more of their college tuition. I, along with thousands 
of other college students across the country, can honestly say 
that without financial aid, my college education would not be a 
reality.
    Coming from the inner-city, I know that the high and ever-
rising cost of education has been the No. 1 reason preventing 
thousands of my peers from giving a higher education a chance. 
In the last 2 years, Congress has taken much-needed measures to 
help students afford college. Last summer, Congress passed the 
College Cost Reduction and Access Act, legislation authored by 
you, Senator Kennedy.
    The bill will lower interest rates for more than 5 million 
students with need-based Federal student loans. It increases 
the Pell Grant for low-income students, like myself, by nearly 
$400 this year. Finally, it includes a new loan repayment 
system that allows students to repay their loans according to 
their income. For public servants or nonprofit employees, using 
this income-based repayment, the government will forgive your 
loans after 10 years in repayment.
    While more must be done to keep up the State and Federal 
investment in higher education, the College Cost Reduction and 
Access Act is the largest investment made to higher education 
in the last 50 years. The fact of the matter is that the best 
loan opportunities for students continue to be available from 
the government. The best way to make college affordable for 
students is not through private loans with higher interest 
rates and unforgiving policies. The road to college 
affordability is paved by lowering tuition costs, increasing 
the amount of State and Federal grants, and encouraging 
students to apply for government loans.
    The College Cost Reduction and Access Act shows that we're 
on the right track. Thank you.
    [The prepared statement of Mr. Gonell follows:]
                 Prepared Statement of Eliaquin Gonell
    My name is Quin Gonell and I am a first generation American as well 
as a first generation college student. I am now in my third year at 
Salem State College studying history, political science, and secondary 
education. When I graduate next year I intend to pursue a job teaching 
in public education. I believe that an effective public education 
system is imperative in maintaining a competent society for our future. 
I want to teach because I know the importance of educating our youth 
and like many students in my class and many young people in my 
generation, I hope to use my education to give back to my community.
    These days I am working three jobs, one as a sales clerk in Salem, 
NH, one as a desk receptionist at the college residence hall, and I am 
also a Resident Assistant. Through these three jobs, emotional backing 
from my family, and with the help of financial aid, including the Pell 
Grant and Federal student loans, I am able to live a relatively happy 
life as a young man pursuing his college education. That is not to say, 
however, that I am not constantly pressed by the hardships that come 
with living this sort of fast paced and often stressful lifestyle. This 
is why I have become more involved in student advocacy, using what 
little free time I have to get involved and try to change this 
situation for the students.
    Last year, I ran for Student Government at Salem State and was 
appointed chair of the Governmental Relations Committee. Through this 
position I have been able to organize a visit by Salem State Students 
to a legislative conference in Washington, DC. I have been able to 
support the growing Public Higher Education Network of Massachusetts 
and help organize the up and coming Massachusetts' State-wide student 
association. I have also been able to shed much light among 
Massachusetts' students, on the progress that was made in Washington 
last summer.
    Students across the country face serious challenges figuring out 
how to pay for college. With college costs continuing to rise, students 
turn increasingly to loans. As a result the average American college 
student acquires just under $20,000 in debt by the time they graduate. 
In this current economy many families are asking students to cover more 
and more of the cost of their college education. I, along with 
thousands of other college students across the country, can honestly 
say that without financial aid, my college education would not be a 
reality. Coming from the inner city, I know that the high and ever 
rising cost of college has been the No. 1 reason for preventing 
thousands of my peers from giving higher education a chance.
    In the last 2 years, Congress has taken much-needed measures to 
help students afford college. Last summer Congress passed the College 
Cost Reduction and Access Act, legislation authored by Senator Kennedy. 
The bill will lower interest rates for the more than 5 million students 
with need-based Federal student loans. It increases the Pell Grant for 
low-income students like myself by nearly $400 this year. Finally, it 
includes a new loan repayment system that allows students to repay 
their loans according to their income. For public servants or non-
profit employees using this Income-Based Repayment the government will 
forgive your loans after 10 years in repayment. While more must be done 
to keep up the State and Federal investment in higher education, the 
College Cost Reduction and Access Act is the largest investment made to 
higher education in the last 50 years.
    The fact of the matter is that the best loan opportunities for 
students continue to be available from the government. The best way to 
make college affordable for students is not through private loans with 
higher interest rates and unforgiving policies. The road to college 
affordability is paved by lowering tuition costs, increasing the amount 
of State and Federal grants, and encouraging students to apply for 
governmental loans. The College Cost Reduction and Access Act shows 
that we're on the right track.

    The Chairman. Thank you very much, Eliaquin. Thank you for 
taking the time and being involved with the Student 
Association. I remember meeting you down in Washington, when we 
were working on this legislation, and you and your associates 
played a very, very important role in terms of achieving that 
legislation. So, your advocacy is making a difference, and 
we're grateful for your presence here now.
    Let me start off by asking, if we have these--which we do--
the availability of Federal funding at a lower rate than the 
private funding, what do the members of the panel think that we 
could do to help and assist students that are out there now? 
Our best estimate is more than $10 billion in unused Federal 
aid is out there and is not being used--grants and Federal 
loans at lower interest rates than the higher rates that are 
charged in the private sector. What more should we be doing?
    I mentioned that we are looking at a few ideas already. 
We've got the financial literacy programs, and we also have the 
financial advisors at colleges who counsel students before they 
take out the high-cost private loans, and the requirement that 
private lenders notify students that may be eligible for lower 
rate Federal loans. Those are just some ideas that are out 
there, but we've got people here who are on the firing line and 
know this stuff like the back of their hands.
    What do you think--would you think those ideas would be 
useful? What other kinds of ideas do you have? What suggestions 
do you have? Eileen?
    Ms. O'Leary. Well, Senator, we've seen a shift in 
responsibility for borrowing for meeting costs in excess of 
what Federal financial aid has been able to provide, and the 
shift has been from parents often being able to support their 
students while in school to the students taking out alternative 
private loans. And I think there are a few reasons behind that.
    One is great marketing, and another is that parents are not 
always able in this economy to take current income and use it 
to help their students, and so they feel as if their backs are 
against the wall, and they need to push the loan burdens on 
their students instead. I think that a strong marketing program 
on behalf of the Department of Education to help parents 
understand the Parent PLUS Loan Program as an option, 
especially if Congress could see clear to allow for deferment 
of payments during the in-school period.
    Right now, PLUS Loan repayments begin right away, so that 
can make it difficult for parents who may have more than one 
child in college, or others coming up to college who are very 
expensive to raise. If they were able to defer until after the 
college period, then there may be more who would be willing to 
take on the Federal PLUS Loan as an obligation, rather than 
pushing the students into the private loan markets.
    Mr. Graf. Senator, if I may suggest that--it may be 
contrary to what a few are saying--it's not all cases where 
private loans are the highest cost. In fact, not-for-profits 
like MEFA and others across the country often offer a cost at a 
much less or a less than some of the other loans out there. For 
instance, in this past year, our loan, a private loan, was less 
than the Stafford Loan, and less, significantly less, than the 
PLUS Loan.
    We see a real role for not-for-profits in the arena. What 
is happening is because of the liquidity crisis, the ability to 
access those funds is much more difficult and much more costly. 
We spoke earlier about some solutions maybe on the housing 
level being applied to the student loan level, and I think that 
is certainly worth looking into. I think not-for-profits have 
created a good niche in the lending arena, and that could be a 
way to play this out through this difficult time.
    The Chairman. Well, I'm going to ask you to give us some 
ideas about that conversation that Secretary Spellings is going 
to have with Secretary Paulson next week. I'm going to ask you 
to give us maybe a few ideas about subject matter that you 
think they ought to talk about at that meeting. I don't know 
whether you want to say anything briefly, but if you can give 
us some in writing as well--we've got a day or two to write it 
up.
    Mr. Graf. Yes. I think there's a couple of areas, and I 
wouldn't be presumptuous enough to suggest what the Secretary 
should say to the Treasury Secretary, but certainly the 
liquidity in the market is hurting lenders, not-for-profit 
lenders, with the loans that are secured with older debt. As 
the auction market has frozen or collapsed, our cost of debt 
has gone up significantly. Some liquidity will alleviate that 
problem, would allow us to access additional capital on a go-
forward basis where we could continue to offer the kinds of 
services.
    It's not just loans that we offer. It's a wide range of 
services--counseling, savings plans, payment plans, working 
with students all the way through--only after they've exhausted 
their Federal loan options would we ever suggest a private 
loan. I'd also suggest that one of the things that allows us, 
Senator, to give that great benefit is the tax-exempt bond cap 
that the Federal Government bestows on States. That's extremely 
competitive here in our State and many other States. As you 
know, it's capped per capita. You did increase that several 
years ago to inflation, I believe, and it's been going up, but 
much slower than the need.
    If there's some way that tax-exempt bond cap could be 
dedicated to not-for-profits for education loans, I think that 
would go a great distance to solving some of the problems we'll 
have next year and the years to come.
    The Chairman. I was just thinking of the combination of 
both the Federal and the State, how that's worked out. I guess 
there's room for both. That's something we'll pass on to the 
Governor----
    Mr. Graf. Thank you.
    The Chairman [continuing]. As well. Let me ask, Eliaquin, 
how did you hear about loans, student loans? Graduating from 
high school did you have a good financial aid officer? Did you 
pursue it yourself? What was the pathway you took in terms of 
taking out these loans? How did that all develop?
    Mr. Gonell. Well, I would have to apologize, because this 
is going to sound like a shameless plug for your office, but--
--
    The Chairman. I think I can take it.
    Mr. Gonell. I was--pretty much the only people that were 
helping students in my high school have access to FAFSA and 
helping students fill out the FAFSA and Federal loans were the 
TRIO Programs.
    The Chairman. Yes. Very good.
    Mr. Gonell. They were very aggressive at that. They were 
very helpful. I would even venture to say that, if not for 
them, there--I know of many, many students--
    The Chairman. You went through the TRIO Program. Did you go 
through TRIO?
    Mr. Gonell. They helped me fill out my FAFSA, but I was 
never a member of the actual program. I then went on to work 
for the program, though. I would venture to say that many 
students would not have gone to college if not for that help 
that they received.
    The Chairman. Now, that is just a superb program. I think 
we have 58 of those programs going in Massachusetts. The 
difference it's made in terms of the graduation rates and 
benefits to society we wanted to do what we could do. I mean, 
it's just a real issue of willingness to prioritize and to make 
a difference with that program.
    Let me ask Deanne, those loans you were talking about, 
those 19 percent and 11 percent loans, I know that still rings 
in my ears. You know, we took a long time to try and get rid of 
that 9.5 percent subsidy in the Federal guaranteed loan 
program. I mean, for anyone in the business community, how 
would you like that deal? You've got the loan guaranteed, and 
then you get 9 percent on top of it. I mean, it was a great 
deal for the banks--and we lost hundreds of millions of dollars 
on this loophole.
    It's just mind boggling when you're finding out these 
things --but what's your own view--how bad is this? Now, as you 
mentioned, on the Bankruptcy bill, which I opposed, that we 
passed some years ago, we have now--we're getting the Federal 
Government to collect for the credit card companies and, if 
these kids don't pay up on it, their credit for their lifetime 
is impacted in a very adverse way. And it's at a time of 
enormous delicacy in terms of their ability to handle this sort 
of thing, because they've got all these other kinds of 
pressures in their lives.
    Give us just a little bit of your own assessment. We have 
seen the growth of the private loan market. We've got the chart 
above. The growth of the private sector loans, over the 
public--oh, yes. We do. We have that one that shows the lines 
all flat.
    This says that student aid has not kept--I didn't want to 
get in a difference with the Secretary on it, but this is a 
chart here that shows what the cost of college has been. And 
then, the bottom lines, the pink is the Federal grant aid, you 
see, going back to 1987. It's just basically a very, very, very 
meager increase. We have the unsubsidized Stafford Loans that 
have gone along relatively flat, and we have the other Federal 
student loan programs that basically have sort of gone along 
flat.
    But the private loans have moved in to make up the 
difference for the most part. What can you tell us--how 
concerned should we be with all of this? The banks offering 
private loans make the case that they're playing a very 
important role. I heard Eileen talk about the pressure that's 
on the families. All of us understand the fact the State has 
cut back on help and assistance. The pressure that's on the 
family, there's no real good assistance to make up the 
dufference--the Federal Government is not working at increasing 
aid to keep up. We've taken very, very small, minor steps on 
this. We're all trying, but it's been very modest, and I'm 
hopeful we'll take larger steps.
    What can you tell us about these private loans that we 
ought to know?
    Ms. Loonin. Sure. Thank you. There is a range, as the MEFA 
program explained, but the loans that I was talking about, we 
looked at a range in our survey. Some were as low as 5 percent, 
and then, as I said, some were as high 19 percent. The 
important point, I think, is that those very high rate loans 
are going to the highest-risk borrowers, so often independent 
students, sometimes older, working adults, those who cannot 
find cosigners or don't have a parent or someone else who can 
cosign for them. That rate, for example, on that 19 percent, 
that's a variable-rate loan. That was the initial rate. That's 
going to go up.
    When we look at those loans, and again, the average in our 
study was about 11.5 percent, we look at those loans, we see 
who they're going to. To the highest-risk borrowers, to those 
who we really want to encourage--in a lot of ways--the most to 
go to college, but who are on the margins economically and 
otherwise may not succeed. We know when we look at those that a 
large number of those are going to fail. When I say a loan 
fails, I think of a failure for a person, really, is what it 
is. Those are the people who we work with.
    We work with people--what some people call sort of the back 
end. What happens--there's so much more we can do to help 
prevent the problem, to work at the front end, but the back 
end, there are a lot of people who cannot afford those loans. 
We're seeing that happening now. What that means is people like 
some of my clients, who are being sued now or facing lawsuits, 
facing collection efforts, don't have the kind of relief I 
mentioned, flexible relief available, including bankruptcy 
relief.
    Some of those people, some of my clients, have said, ``This 
has been such a stress,'' or it's such a horror for them, 
they're not going to try school again. They're not going to go 
back to education again, even though that's really what, of 
course, we want the loans to be, a tool for access. So, no, 
it's not all of the loans that are out there, but it's a huge 
problem, and again, it's something that we want--we're 
concerned about it, and we hope that to the extent that there 
is reliance on these private loans, that we'll look at those 
back end issues, too, and look at what kind of relief there is 
for borrowers.
    The Chairman. Well, as you pointed out, it's enormously 
distressing, because they drop out and to try to get those 
individuals involved and engaged and self-sufficient in 
pursuing an education is really the point--it's really working 
at cross purposes to put them in such a bad position with such 
high rate loans, and that's something that we have to focus on.
    We have Clantha McCurdy, who is the Vice Chancellor for 
Student Financial Assistance. Clantha works at the 
Massachusetts Board of Higher Education--helped put together 
the Board's 2006 Task Force Report on student financial 
assistance. I just wanted to ask you, we heard from Under 
Secretary Tucker that the U.S. Department of Education had been 
in touch with colleges, and had heard from some of them about 
lenders leaving the FFEL Program. Has the Massachusetts Board 
of Higher Education done similar outreach?
    Ms. McClurdy. Not at this point, in the sense of making 
contact with the institutions. We've relied heavily on our 
State association, and we've been monitoring this issue, and on 
top of it. I would say that our concern, though, is primarily 
on how this issue may impact all of our students, because the 
report that you just referenced, a couple of years ago, we 
found that 88,000 students in Massachusetts had an unmet need 
on the average of $4,500.
    As costs continue to rise, our concern is if students who 
need to find money to fill that gap after exhausting all 
Federal, State, and institutional resources, what then will 
happen? We expect that a number of students who will fall in 
this category may be those who cannot find credit-worthy 
cosigners, and if so, they may be challenged in this area, and 
they'd have to rely on the high-cost loans, as the panel and 
others have discussed this morning.
    The Chairman. Well, that's enormously important, an 
important point. We have a chart showing an example of unmet 
need. Let's look at a typical family. Expected family 
contribution $8,000 to $10,000, and a cost of college of 
$17,000--you still have unmet need after grants and loans of 
$2,600. Is this the point that you're making?
    Ms. McClurdy. Yes. And we found our unmet need, average 
unmet need, is $4,500.
    The Chairman. Four-thousand and five hundred dollars. This 
is a reality that's taking place out there. But what's the 
answer? I mean, is it an increase Federal loan limits? This is, 
I think, all of us are aware that there are dual arguments on 
that, but what's your assessment?
    Ms. McClurdy. Well, I think, certainly, if loan limits were 
increased, that would be helpful. From where we sit, we'd like 
to see more grant aid that's available to students, and I think 
in representing my colleagues here, I think we would all agree 
that if there were a larger pool of Federal and State resources 
to eliminate the need for students to increase their loan debt, 
that would be favorable, and the direction to head into.
    Senator, whatever you can do to help us out, that would be 
wonderful.
    The Chairman. There you go. Thank you very much. I'm glad I 
called on you. Just finally on this other point, from the State 
point of view, are you going to take a look at the schools and 
colleges, and talk to the financial aid directors to see what's 
happening out there? Would you--and would you let us know what 
you're finding out?
    Ms. McClurdy. We will certainly do that. And I'd really 
like to say thank you for being proactive with this issue, 
because at the drop of a hat the climate could change, and we 
really want to be prepared to help our students and their 
families.
    The Chairman. Well, I thank you for mentioning that. In the 
Budget Act that we passed last week, I had an amendment on that 
to make sure that we do have a solution--I mean, it's one thing 
to have a plan. They had a plan for Katrina, and it didn't work 
out. You need something more than just a plan. You've got to 
have the ability for immediate implementation--that's what is 
absolutely essential. That's what we want to have on deck, in 
place.
    Now, if we don't need it, that's fine. If it is necessary, 
we don't want to be unprepared--we've had sufficient warning, 
in terms of housing, and sufficient warning across the board in 
other areas, and we have some very important advantages, but we 
sure don't want to have a problem on our watch. We'll do 
everything we can to avoid it.
    I want to thank all of the panel, and all of our audience. 
I think that this has been a good meeting, and I think that we 
tried to understand the problem better. This is a complex 
issue. I think there's certainly a different situation in the 
loan programs than exists in the housing market, but I think 
there's also a recognition that we ought to be prepared, and we 
ought to be ahead of the game. The lesson of these past months 
is that the unexpected has happened.
    When we're talking about education and families, we have 
the responsibility to take the steps to make sure that if we're 
going to face unexpected needs, that we're going to have in 
place to the greatest extent possible the institutional 
protections that a family can depend on.
    That's certainly what our objective is. We're going to be 
active and involved in following this issue, but today we had 
some excellent suggestions, good recommendations. We have every 
intention of following up with Secretary Spellings as she meets 
with the Secretary of Treasury. We'll continue to report to the 
students up here in Massachusetts as to what's happening, and 
obviously, to the universities.
    This has been a useful and helpful meeting. We thank all of 
those who worked with us to make it so. Our committee will 
stand in recess. Thank you.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

                Prepared Statement of Philip Day, Ed.D.
    Mr. Chairman and members of the committee, on behalf of the 
National Association of Student Financial Aid Administrators (NASFAA), 
I am pleased to offer this statement. I am Dr. Philip Day, President 
and CEO of NASFAA. Formed over 40 years ago, NASFAA represents student 
financial aid administrators at some 3,000 postsecondary institutions 
across the nation.
    Our association illustrates the diversity of our higher education 
enterprise with members from private and public institutions, community 
colleges, 4-year schools, proprietary schools, and graduate/
professional institutions. At these schools, NASFAA represents 
approximately 12,000 financial aid professionals who are dedicated to 
helping families apply for and receive the funds they need to send 
their students to college. Each year, financial aid professionals help 
more than 16 million students receive funding for postsecondary 
education. Given the complexity of the State, Federal, and 
institutional aid programs, it is necessary to have someone with that 
kind of expertise guiding students and families through the process.
    I want to begin by complementing the work of you, Mr. Chairman, and 
the members of the committee for all you have accomplished providing 
additional numbers of students with opportunities to gain a 
postsecondary education. The College Cost Reduction and Access Act 
(CCRAA) is magnificent testimony to your commitment to the title IV 
programs.
    Just to name two examples of that commitment found in the CCRAA are 
the substantial increases in the Pell Grant maximum award and 
establishment of the Teach Grant program. These two programs illustrate 
your devotion to serving the needs of students expeditiously and 
creatively. We applaud mandatory spending increases for the Pell Grant. 
We likewise welcome inventive programs like the TEACH Grant that seek 
to help meet the unique needs of specific students.
    The Committee on Health, Education, Labor, and Pensions will soon 
complete reauthorization of the Higher Education Act. S. 1642, The 
Higher Education Amendments of 2007, also contributes to your record of 
success. S. 1642 authorizes year-round Pell Grants, simplifies the 
granting of deferments and allows for better consumer information on 
the impact of consolidation loans, and simplifies the FAFSA.
    Again, Mr. Chairman, I thank you and the committee for your 
accomplishments in the 110th Congress that will help so many students 
and families. This is a record of success you can justly be proud of 
and NASFAA salutes your efforts and contributions to making college 
affordable and making the student aid process more effective and 
simpler.
    Today's hearing is timely. Last week I wrote to my membership. Here 
is what I told them.

          ``Alarming reports in the media about disruptions in the 
        credit markets that are affecting student loans have many 
        families worried that they won't be able to get student loans 
        in the fall. I have assured financial aid administrators, 
        students, and parents that the likelihood of disruptions in 
        Federal student loans remains low.

          To date NASFAA is not aware of any student being denied a 
        Federal student loan due to market conditions.

          Some news reports fail to distinguish between Federal and 
        private student loans, but understanding the difference between 
        the two is crucial. The vast majority of student borrowers use 
        Federal student loans. Federal student loans--like Perkins, 
        Stafford, and PLUS loans--that are backed by the Federal 
        Government. Federal student loans are not dependent on 
        borrowers' credit scores; the repayment terms and conditions 
        are specified by Federal law, and are better than private 
        loans. Interest rates and fees on Federal student loans will 
        not increase. Low-cost Federal student loans are still 
        available. Even in instances where student loan providers have 
        suspended their loan programs, other loan providers have 
        stepped in to fill any vacancies.

          A far smaller group of students rely on private student loans 
        or other forms of consumer financing like home equity loans. 
        These students turn to private loans if they cannot cover their 
        cost of attendance with Federal, State, and institutional 
        financial aid--including Federal loans. Like other consumer 
        loans affected by the subprime mortgage meltdown, private 
        student loans will be costlier for some borrowers at some 
        institutions this academic year. However, students and parents 
        should only use private education loans as a last resort. 
        Before borrowing private loans, students should exhaust all the 
        Federal, State and institutional financial aid available to 
        them.''

    NASFAA understands that what is happening in the student loan 
market is fluid. The liquidity that exists today to continue funding 
Federal student loans could be gone tomorrow if the markets worsen. Of 
particular concern are the liquidity problems that State and non-profit 
secondary market lenders face. Unlike traditional banks, nonprofit 
State agencies that operate secondary markets raise capital through 
bond auctions. As you know, these bond markets are currently frozen and 
they are unable to raise enough money to provide additional liquidity 
to other lenders. Their inability to raise capital serves as another 
warning sign that all is not well in the student loan markets.
    Nonprofit loan providers fill an important niche in the student 
loan market and often times purposefully target low-cost loans to 
specific, underserved populations or offer specific loan benefits to 
particular populations such as future teachers, nurses and military 
veterans. These are the students and families that are often-times 
overlooked by other lenders and the types of students the Federal 
student aid programs were created to help. A total departure by State 
agencies and nonprofit lenders would be detrimental to students and 
parents, especially those attending schools that lenders have deemed 
``at-risk.'' While Federal student loans remain available for the 
majority of students, we are hearing reports that some loan providers 
are shying away from schools with students who need low-cost loans the 
most. It is conceivable that, if the nonprofit lenders are unable to 
offer loans this fall, the students who would be harmed most would be 
from our community colleges, proprietary schools, and other urban-based 
public and private institutions. Special measures may be necessary to 
assist these nonprofit, state-based organizations to ensure their 
continued presence in the Federal student loan market.
    If conditions worsen to the point where the availability of Federal 
student loans becomes threatened, the following alternatives are in 
place.

     The Department of Education could utilize the ``Lender of 
Last Resort'' provision, where federally-designated guaranty agencies 
would line up lenders to continue making loans to students or would be 
given funds directly from the government to disburse to students.
     A school that has a problem accessing Federal student 
loans through the Federal Family Education Loan Program (FFELP) can 
join the Federal Government's Direct Student Loan program (DL), where 
the government lends the money directly to students without using any 
lender.

    To ensure a smooth financial transition into college this next 
academic year, NASFAA advises students and families to apply for 
financial aid early by using the Free Application for Federal Student 
Aid (FAFSA). We are telling students to work closely with their 
school's financial aid office to complete the financial aid process--
including applying for Federal student loans--as early as possible. 
Students and parents with any questions or doubts about the 
availability of student loans or other forms of financial aid should 
always contact their financial aid office for specific information.
    There are also things that legislators and the Department can do to 
ensure there are no disruptions in Federal student loans. Schools who 
are interested in moving to the Direct Loan Program face many system 
conversion costs. Given that we are only 5 months away from the 
beginning of fall term, other schools question whether there is enough 
time to move into the Direct Loan Program. We advocate the Department 
take extraordinary steps to ensure that such a transition is as 
seamless as possible for schools.
    Lender-of-last resort provisions should also be examined to ensure 
that students have direct access to Federal loan funds without some of 
the roadblocks currently stipulated in regulation. For example, current 
ED regulations allow guarantors to require proof that a borrower has 
been denied a loan by as many as two lenders before a lender-of-last 
resort loan can be approved. This requirement requires diligence and an 
understanding of the student loan process, which puts an undue burden 
on the student borrower. Another example is the requirement that a 
guaranty agency act on the borrower's lender-of-last resort application 
within 60-days. Certainly, we believe most agencies would not take 60-
days. But, the lender-of-last resort statutory and regulatory 
provisions should be reexamined in light of their possible widespread 
use.
    As we move forward, NASFAA will continue to research and identify 
workable solutions that should be taken to ensure the continued 
availability of Federal student loans.
    Let me say a word or two about private educational loans. 
Approximately 25 percent of student loan volume comes from these 
educational loans. Those loans are made when a student's financial aid 
package (Federal grants, work/study, and loans, plus any State aid or 
school-based grants) is insufficient to cover their educational costs.
    Our members are telling us that private educational loans are 
changing for some borrowers. The credit score needed to secure these 
loans are rising. Interest rates and origination fees are also 
increasing. Access to private loans could be a problem in certain 
sectors of higher education, such as proprietary schools, community 
colleges and urban-based colleges and universities, all of whom serve a 
disproportionately large number of high-risk, economically 
disadvantaged students. Correspondingly, and to the best of our 
knowledge, most traditional colleges are not experiencing access 
problems.
    We believe that as a nation we should do everything in our power to 
decrease the need and growing dependence on private student loans. To 
that end, NASFAA recommends fully funding the Pell Grant Program to 
prevent the neediest students from having to borrow at all. We also 
believe the campus-based programs should be funded at sufficient levels 
to help middle-income families. Finally, we believe the Federal student 
loan programs' annual and aggregate loan limits should be significantly 
increased to reduce reliance on private educational loan borrowing and 
keep borrowers within the safety of the Federal loan programs. In order 
to accomplish that objective we want to strongly express our support 
for Senator Kennedy's amendment offered on the Budget Resolution to 
modify the provision establishing a Higher Education Reserve Fund to 
allow for increases in the Federal loan program's loan limits. Thank 
you, Mr. Chairman!
    These actions will go a long way towards fulfilling the promises 
made by the Higher Education Act when it was signed into law nearly 43 
years ago.
    When President Johnson signed the Higher Education Act into law on 
November 8, 1965, he said,

          ``[W]hen you look into the faces of your students and your 
        children and your grandchildren, tell them that you were there 
        when it began. Tell them that a promise has been made to them. 
        Tell them that the leadership of your country believes it is 
        the obligation of your Nation to provide and permit and assist 
        every child born in these borders to receive all the education 
        that he can take. . . And tell them that we have opened the 
        road and we have pulled the gates down and the way is open, and 
        we expect them to travel it. And when we meet back here again a 
        few years from now, there will be many more than the 1,300 and 
        the 5,500 that will be here seeking and receiving the knowledge 
        that is an absolute necessity if we are to maintain our freedom 
        in a highly competitive world.''

    My members know all too well how far away we are from achieving the 
goal of equal opportunity to postsecondary education for low- and 
middle-income families and students. But we are getting closer. Our 
focus, first and foremost, must be on meeting the financial needs of 
the disadvantaged. I know we all share President Johnson's commitment 
to make his dream our Nation's reality.
    I pledge NASFAA's support--along with the 12,000 aid administrators 
that I represent--to assist you, Mr. Chairman, and to assist your 
colleagues as you address the issues involved in today's hearing. You 
must cajole when cajoling is necessary. You must act when action is 
necessary. I do not believe the American people will tolerate a 
meltdown in access to Federal student loans similar to what they're 
seeing in other credit markets.
    The good news is that tools are available at your and the 
Department of Education's disposal to deal with any disruptions in 
Federal student loans, no matter how unlikely that may be. While the 
law has solutions in place, it is critical that we test these solutions 
and prepare for the worst case scenario today. In addition, new tools 
can be created as needed to meet specific needs that the Congress 
believes are appropriate to prevent problems. Waiting until the height 
of the lending season in July through September is not an option. All 
parties should meet to discuss solutions and develop plans to prevent a 
possible train wreck this fall. We look forward to working with you to 
ensure all our citizens credit needs are met in paying for a 
postsecondary education.
                                 ______
                                 
               American Council on Education (ACE),
                     Government and Public Affairs,
                                      Washington, DC 20036,
                                                    March 14, 2008.
Hon. Edward M. Kennedy,
U.S. Senate,
Washington, DC 20510.

    Dear Senator: I write to thank you for your plans to hold a hearing 
on Monday in Boston on issues related to the availability of student 
loans. We share your unease about this issue and deeply appreciate your 
leadership on it.
    I raise this issue as a possible area of concern whenever I meet 
with college and university officials. Most recently, I discussed it 
with roughly 20 presidents that I spoke to at the Southern University 
Conference last weekend in Georgia. While there was widespread 
awareness of a potential problem, none of the schools expressed alarm 
on behalf of their own institution. This is consistent with the 
feedback I have received on this issue since the first of the year when 
I began to flag it for presidents and senior administrators.
    Popular discussion about the availability of student loans next 
fall tends to conflate two different issues. The first is the impact of 
the subsidy cuts that Congress approved last year as part of the 
College Cost Reduction and Access Act (CCRAA) of 2007 and their impact 
on the Federal Family Education Loan program (FFELP). When Congress was 
considering CCRAA, lenders indicated that the reduction in subsidies 
might lead them to reduce borrower benefits, stop lending to some 
schools, or leave the FFELP program altogether.
    To date, around 30 of the more than 2,000 student loan providers 
have announced their intention to abandon or suspend participation in 
the FFELP. Each of these developments is noteworthy, as was the case a 
couple of weeks ago when the Pennsylvania Higher Education Assistance 
Authority announced that they would temporarily suspend participation 
in FFELP loans, prompting the announcement of a switch out of FFELP 
into the Direct Loan Program (DLP) by the Pennsylvania State 
University. All of our campuses are carefully monitoring the situation, 
and all are engaged in some degree of contingency planning.
    I have discussed this issue with Diane Jones, the Department of 
Education's Assistant Secretary for Postsecondary Education. She has 
assured me that they are monitoring the situation, proactively reaching 
out to schools that are impacted by lenders leaving the program, and 
discussing the issue with their counterparts at the Treasury 
Department, among others. She has indicated that the Department is 
poised to step up its lender-of-last resort capabilities through both 
the existing FFEL mechanisms and preparing to facilitate an easy and 
seamless transition into the DLP for any school wishing to make such a 
change.
    Indeed, the direct lending program does provide a backstop. 
According to the Department, more than 850 schools are approved as 
direct lenders but are not currently participating in the program. If 
necessary to ensure access to Federal student loans, these schools can 
move quickly into direct lending --as Penn State has just done.
    The second dimension of the issue relates to loans made directly 
between lenders and student borrowers without any guarantee by the 
Federal Government. These private loans are a new and largely 
unregulated part of educational finance. Indeed, colleges may not even 
be aware that their students have accepted such loans. Unsecured loans 
for college tuition began to emerge about a decade ago. They have grown 
very rapidly. According to the best estimates, such loans increased 
from, $1.6 billion in 1996 to $17.1 billion in 2006, a gain of almost 
1,000 percent.
    There is an obvious parallel with the rapid expansion of the sub-
prime mortgage market in recent years. And, just tighter credit markets 
have forced mortgage lenders to abandon practices that were popular a 
short while ago, so have lenders who make private loans altered their 
lending rules. We know that changes are taking place but it is too soon 
to see what they are with enough clarity to design public policy 
solutions.
    Most of the concern on this score is among private colleges and 
universities and trade schools who may feel a pinch in so-called gap 
loans--loans necessary to fill the gap between Federal loan limits and 
cost of attendance. Some lenders have indicated that they will no 
longer make private loans to students in proprietary schools and this 
will be a hardship to those schools and their students if other lenders 
do not step forward to meet the demand. Private colleges and 
universities are concerned about the extent to which gap loans may also 
dry up for their students, but the picture will not come into clear 
focus until June or July when loan processing for the fall semester 
reaches its peak. In short, much depends on whether the credit markets 
relax or contract in the next couple months.
    Right now the most basic question may well be the steps that the 
Federal Government should take if the lack of access to private label 
loans becomes a severe problem and threatens the ability of a large 
number of students to begin or continue their education.
    For now, I think you are pursuing exactly the right course of 
action--first, by holding a hearing to gather information; second, by 
asking Secretary Spellings to assess and test the options she has 
available if intervention becomes necessary; third, by working with 
Senator Dodd to examine the situation from the standpoint of the 
Banking Committee; and finally, by providing for a budget reserve fund 
against the possible need to increase loan limits or take other steps 
the might be needed to amend the Stafford loan program.
    The advantage of your approach is that it allows time to assess the 
problem precisely and to identify which solution, if one is needed, is 
best suited to the exact problem that needs to be solved.
    I would be happy to have ACE help in whatever way you feel would be 
useful. We will continue to monitor this situation very carefully and 
will stay in close contact with your staff to let them know what we 
learn. We will continue to compare notes on this situation with the 
Department of Education. Finally, if it becomes apparent that there is 
a need for legislative action, we will work with you to identify 
targeted solutions to address the problem.
    Student loans are absolutely critical to access to higher education 
in the United States. A serious interruption in the availability of 
loans will create great hardships for students, families and 
institutions. While I do not believe that the situation at present 
calls for Federal action, we must watch this situation very closely.
    Thanks again for all that you are doing on this issue and so many 
others. Please let me know if there is anyway that I can be helpful to 
you. Best wishes.
            Sincerely,
                                           Terry W. Hartle,
                                             Senior Vice President.
                                 ______
                                 
                  Career College Association (CCA),
                                      Washington, DC 20036,
                                                    March 17, 2009.

    I am Harris Miller, president of the Career College Association, 
and I am pleased to submit this statement to the committee. We commend 
the committee, particularly Chairman Kennedy and Ranking Member Enzi, 
for their leadership and vision in responding to this far-reaching 
challenge to higher education students.
    The Career College Association (CCA) is a voluntary membership 
organization of accredited, private postsecondary schools, institutes, 
colleges and universities that provide career-specific educational 
programs. CCA has more than 1,400 members that educate and support over 
1 million students each year for employment in over 200 occupational 
fields. CCA member institutions provide the full range of higher 
education programs: masters and doctoral degree programs, baccalaureate 
degree programs, associate degree programs, and short-term certificate 
and diploma programs. All CCA members must be licensed by the State in 
which they are located; accredited by a national or regional 
accrediting body that is recognized by the U.S. Department of 
Education; and approved by the U.S. Department of Education. Many also 
participate in other Federal, State and local education and workforce 
training programs.
                          making it in america
    Although the history of career-oriented schools in America can be 
traced back to colonial times, from a macroeconomic perspective, the 
need for career education has never been greater than it is today. We 
are a country of almost 150 million working adults. College-going is on 
the rise in the last 50 years, but there is still plenty of room for 
progress. According to Census data, well over one-half of adults 25 
years or older lack a college degree. In fact, almost half of adults 
have never been to college. And approximately three-quarters lack a 
baccalaureate or higher degree. According to the Organization for 
Economic Cooperation and Development, the U.S. has dropped from first 
in the world in terms of college graduates to tenth in a single 
generation.\1\
---------------------------------------------------------------------------
    \1\ Organization for Economic Cooperation and Development, 
Education at a Glance, 2007.
---------------------------------------------------------------------------
    At the same time we're losing this ground, we know that 
postsecondary education is very important to attaining high value, high 
paying jobs and careers. This is particularly true in an era in which 
high speed telecommunications, lowered trade barriers and State 
sponsored advances in public education have begun to erase what 
economists refer to as the comparative advantages between nations. To 
stay ahead of the global competition, Americans need a high degree of 
skill attainment.
    Unfortunately, millions of our fellow citizens lack these advanced 
skills. And to be frank, the ``same old/same old'' approach to the 
problem--the commonly shared belief in our society that only a 
traditional college degree is the only real ticket to upward mobility--
is both harmful and wrong. Career education, driven by the 
transformative power of the free enterprise system, holds the key to 
moving our workforce to where it needs to be.
    The American people appear to agree. In academic year 2006-07, 
there were almost 2,700 career colleges representing almost 40 percent 
of all title IV eligible institutions. The number of degree-granting 
title IV-eligible career colleges climbed 22 percent between academic 
year 2000-2001 and 2005-06, offering students a wider range of 
educational alternatives. And students seized the opportunity. Annual 
enrollment at 4-year career colleges increased 25 percent between 
academic years 2003-04 and 2006-07 and, between fall 2005 and fall 
2006, 4-year degrees conferred by career colleges increased 20 percent, 
compared to the 3.4 percent increase for all types of 4-year 
institutions during that period.\2\
---------------------------------------------------------------------------
    \2\ U.S. Department of Education, national Center for Education 
Statistics, IPEDS.
---------------------------------------------------------------------------
                            gathering storm
    So times should be good in the career education sector. Instead, 
storm clouds are gathering over the U.S. economy, the American people 
and higher education institutions of every stripe. Whether we are 
already in a recession, approaching a recession or just coping with a 
very chilly economic cool down, I will leave it to others to assess. I 
do know that the economy shed over 100,000 jobs last month, the highest 
such loss in 5 years. One of the biggest factors roiling the economic 
waters has been the slowdown in the housing market, a market on which 
many consumers have relied to make their major spending decisions and 
to draw overall confidence in the future.
    In particular, turbulence in the subprime mortgage marketplace has 
spilled over into the $85 billion student lending marketplace. Of this 
total, about 75 percent of lending involves federally backed student 
loans and, because Federal student lending program ceilings have not 
kept pace with tuition increases, another 25 percent involves non-
federal private or alternative lending. Because it is backed by the 
Federal Government, the Federal Family Education Loan Program (FFELP) 
and Plus Loan programs should be stable sources of education financing, 
regardless of conditions in other markets.
    Unfortunately, this is not the case. More than 25 lenders have 
announced plans to either leave or curtail their participation in 
Federal education loan programs, and another nine have indicated that 
they will cease making private student loans. On the Federal loan side, 
these lenders represent about 10 percent of all loan volume to higher 
education students. Factoring in the potential disruption caused by 
failures in the private bond market, the impact on access to capital in 
the Federal student loan market could be three times this high.\3\
---------------------------------------------------------------------------
    \3\ Mark Kantrowitz, FinAid.org.
---------------------------------------------------------------------------
    While it is true that schools that are unable to find FFELP lenders 
can shift to the Direct Loan (DL) program for their students, we must 
be cognizant of the practical obstacles to a sudden shift of thousands 
of schools and millions of students in a very short time period.
    We must also realize that from the students' perspectives, loans 
from the DL program can be more expensive than those from many of the 
FFELP programs, because the FFELP lenders often offer the students 
discounts. As one of my school Presidents recently explained to me, 
when he shows students a chart comparing the costs to the students of 
direct loans and FFELP loans, they always choose the FFELP loans.
    But the problems affecting the FFELP and Direct Loan programs are 
not the whole story. It is indisputable that the private loan market 
for lower income students has collapsed. Many students today cannot 
obtain the financing they need to pay for the gap between the total 
cost of higher education and what the Federal student aid programs will 
cover. Irrespective of the conditions and capabilities in the FFELP and 
Direct Loan programs, the inability to obtain gap financing will 
critically injure access for lower income students right now.
    So exactly during a time when tens of thousands of Americans may be 
looking to improve their skills in order to become more competitive, 
lending conditions in student loan markets are starting to bar the 
door.
    That's a problem for prospective students, their families, 
institutions, employers and the economy overall.
    Access to adequate financing is important to many college and 
university students. To career college students, it is absolutely 
critical. A substantial percentage of career college students come to 
higher education without the financial and other supports of typical 
college students. For these students, life is not 4 years cloistered on 
a college campus. Career college students are predominantly working 
adults. Thirty-seven percent are minorities and almost 50 percent are 
the first generation in their families to pursue higher education. Over 
50 percent of dependent career college students come from families with 
income of less than $40,000. More than 75 percent of students are 
employed while enrolled in career colleges. Not surprisingly, many need 
student loans to see them through.
                          lenders pulling back
    I said the storm clouds are gathering. Within our sector, the 
downpour has not yet started and, with prudent action now on the part 
of stakeholders, it does not have to start. We do not need wait to have 
students on the street to take action. Those who listen carefully can 
hear the sound of thunder not very far away. Career college students 
enroll on a year-round basis, so our institutions are beginning to 
experience and report the lending practice changes now. We believe 
traditional colleges and universities, who generally start their 
classes in the fall, will be encountering the same situation for their 
students shortly.
    The Career College Association has polled its members twice since 
the beginning of the year to ascertain the impact of perturbations in 
the student lending marketplace; the first in January, the second early 
this month after several student lenders had announced they were 
pulling out of or substantially cutting back on student lending and 
after the credit market situation deteriorated. The results represent a 
broad cross-section of the CCA membership. Top line findings include:

     Gap financing is becoming harder to find. According to the 
initial results of the March survey, 55 percent of respondents indicate 
that lenders have ended private, non-federal loans to students. Back in 
January, less than 40 percent of the respondents said they had been so 
notified.
     Lender pullbacks from the Federal student loan market are 
spreading. With respect to the Federal Family Education Loan (FFEL) 
program, in January, slightly less than one-fourth of respondents had 
been informed their lenders would no longer make FFEL loans to their 
students; that percentage has grown to 37 percent.
     Lenders are changing their programs to reduce benefits to 
students. One-fourth of the respondents in January indicated there 
would be some additional costs pushed onto institutions and/or 
students. Now 55 percent of respondents report benefit reductions to 
borrowers.
     Concern among schools is growing. Sixty-six percent of 
those answering the survey in January expressed concern about their 
students' future ability to access both Federal and non-Federal loan 
funds to finance their education. Today the ``concern rate'' among 
career colleges is over 80 percent. Almost 60 percent said the loan 
access situation has deteriorated since January.

    If left unaddressed, tens of thousands of higher education students 
may find themselves unable to obtain adequate loans for college this 
summer and fall. In particular, students who need private loans because 
the Federal aid does not cover their higher education costs, creating a 
need for ``gap financing,'' are at risk. This would be a disaster, 
forcing these individuals to defer and perhaps abandon their pursuit of 
a certificate, diploma or degree. Just the difference in earning (and 
therefore tax paying) potential between the holder of a 2-year degree 
and a high school diploma will end up costing the Federal Government 
billions of dollars.
    The student lending shortfall will hurt career college students, 
but it will also hurt any student not lucky enough to be born into 
comfortable circumstances and a healthy line of credit, whichever type 
of institution they attend. You may find a few such students at 
America's most prestigious colleges and universities. You will find 
most of these students at community colleges, historically black 
colleges, State colleges and universities, even some traditional 
private colleges and universities (facing their own funding challenges 
in many States that have budget deficits) and career colleges.
                          restoring confidence
    Just as not one circumstance precipitated the student loan credit 
crunch, not just one initiative is likely to solve it. Luckily, there 
are several creative solutions that would go far toward restoring 
confidence and liquidity to lending markets. The most important overall 
philosophy is to reduce the need for students, especially students who 
may not have strong credit or a parental cosigner, to obtain private 
loans by increasing the amount of government backed loans available. 
The simple reason students have moved to more expensive--and, these 
days, more problematic private loans--over the past few years is that 
the Federal student loan programs and grants have not kept up with the 
costs of higher education.
    We have learned of several promising ideas available to address 
these problems. There are perhaps others that can be explored. Congress 
could raise the aggregate limits on Stafford loans and, particularly 
the limits on unsubsidized Federal student loans. Aggregate limits on 
Stafford loans have been in place since 1992.\4\ During that time, 
student loan limits have not reflected the rate of general inflation. 
We emphasize raising unsubsidized Stafford lending limits because 
according to the Office of Management and Budget analysis, unsubsidized 
Stafford loans have a negative subsidy rate, which means they generate 
revenue for the Federal Government. When I mention this fact to most 
people, they seem skeptical, but the data are clear. This additional 
revenue to the government that would come from an increase in 
unsubsidized Stafford loans could then be used to increase further Pell 
grants, thus reducing the need for student borrowing. Just as 
importantly, raising the lending limits in the Federal student loan 
program would decrease the dependence of working class and low-income 
students on more expensive private loans, even assuming such are 
available.
---------------------------------------------------------------------------
    \4\ Mark Kantrowitz, FinAid.org.
---------------------------------------------------------------------------
    Congress could also broaden the Plus Loan program to include all 
undergraduate students, not just those with parental borrowers, as 
under current law. Tens of thousands of hard working young adults, no 
longer living as dependents, are denied the ability to seek lower 
interest, federally backed Plus Loans because they do not have parental 
borrowers. They are not graduate students and thus are not eligible for 
the Graduate Plus program. College students come from all walks of 
life, and quite often these pathways to higher education do not include 
more affluent parents, ready and able to either provide college funding 
or to help secure the credit necessary to make it happen. Indeed, more 
than one-half of those attending college are ``non-traditional'' 
students. Enlarging the Plus Loan program would better reflect and 
serve the student population as it exists today and would likewise 
diminish the need for students to rely on more costly commercial loans.
    Also, as with unsubsidized Stafford loans, PLUS loans have a 
negative subsidy rate, which again means they generate revenue for the 
government. This surplus could also be used to increase Pell grants.
    A key caveat, however, is that if Congress increases the Federal 
aid available to students as we and many others recommend, it is 
critical they also address the 90/10 issue as it applies to this new 
form of aid for career college students. We have several ideas on how 
to do so, which we would be pleased to discuss with the committee. But, 
in sum, it would be patently unfair and counterproductive to replace 
private loan funding, which has allowed many career colleges to meet 
the 90-10 rule, with new government loan funding, which would make it 
impossible for these schools to comply with the rule. The cure to the 
threats to access for lower income students must not kill that access.
    Many career schools would like to provide ``gap'' funding, the 
difference between Pell Grants and Federal loans and the cost of the 
education, to their students because lenders are leaving the student 
loan market. Current 90-10 rules make it difficult or impossible for 
career schools to begin a program to loan funds, because currently only 
the amount of money paid back by student borrowers in a given year is 
counted toward 90-10 compliance. Career colleges would like to offer 
scholarships, as do traditional colleges and universities, to students 
with special academic achievements or difficult financial needs based 
on clear criteria, but do not do so because of the current 90/10 
interpretation. 90-10 rules need to be revised to allow institutional 
loans and institutional scholarships to be applied to the mandated 10 
percent of non-Federal monies. We are pleased that the House version of 
the Higher Education Act reauthorization provides a solution to the 
institutional loan issue and the Senate version provides a solution to 
the institutional scholarship issue, and hope the conferees will 
include both provisions in the final bill.
    Finally, the Higher Education Act reauthorization now in conference 
contains language that potentially could make it impossible for schools 
to arrange recourse loans for their students. We believe an important 
clarification is in order in the final bill because we do not believe 
it is Congressional intent, based on conversations we have had with 
committee members, to eliminate recourse loans. Recourse loans are a 
common and acceptable form of consumer financing for individuals that 
present higher credit risks. As applicable to higher education, 
students with low credit scores who need private loans may still gain 
access to credit to finance their education if the educational 
institution is willing to share in the risk with the lender. The bill 
contains broad prohibitions on lender inducements that are being read 
by some lenders to prohibit recourse loans. We look forward to working 
with the committee to get the necessary clarification.
                               conclusion
    Higher education is critically important to building and 
maintaining a globally competitive 21st century American workforce. 
Unfortunately, inflation has placed a college education beyond the 
means of typical families either to fund out of savings or to pay out 
of cash flow. Instead, Americans look to the credit markets to gain the 
necessary financing. These sources of college funds are now at risk, 
placing access to higher education itself at risk for thousands of 
working class and low-income individuals.
    Years ago, the typical hard working American could carve out a 
comfortable middle class lifestyle with a broad back and a willingness 
to use it. Today, employers are looking for the kind of skills needed 
to drive a services economy. High school is no longer sufficient to 
produce these skills. America may seek to leave no child behind, but 
many young people do not graduate from high school. In fact, almost one 
in every three students who enter ninth grade do not walk across a high 
school stage with their class 4 years later.\5\
---------------------------------------------------------------------------
    \5\ John Bridgeland et al., The Silent Epidemic, March 2006.
---------------------------------------------------------------------------
    In the face of a rising storm, vision and common sense often begin 
to become distorted. In the credit markets, conventional wisdom that 
seemed reasonable and rational only a few months ago appears to make 
little sense today. Yet with the passing of the storm comes the clarity 
of fundamental truth and abiding knowledge.
    We know, for instance, that America has seen wrenching economic 
transformations in the past. The ingredients of success may change as 
the economy changes but the ability to strive for upward mobility, 
fairly and without social or political constraint, remains unchanged. 
We know the race is on to bring higher value products and services to a 
global marketplace. Comparative advantage is diminished in a flatter 
world but our willingness to compete is woven into the national fabric. 
We know that this fabric must stretch to include not just the elite few 
but all who will work and contribute to America's place in the world. 
And we know that higher education is the only avenue for producing the 
requisite skills to sustain a broadly accessible American middle class.
    From this perspective, the course is clear. Do what is necessary to 
preserve the greatest access to higher education for the greatest 
number of American people.

                                          Harris N. Miller,
                                                         President.

    [Whereupon, at 12:35 p.m. the hearing was adjourned.]

                                   

      
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