[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



               INCREASING STUDENT AID THROUGH LOAN REFORM

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

                                HEARING

                               before the

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

              HEARING HELD IN WASHINGTON, DC, MAY 21, 2009

                               __________

                           Serial No. 111-24

                               __________

      Printed for the use of the Committee on Education and Labor


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                    COMMITTEE ON EDUCATION AND LABOR

                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon, 
    Chairman                             California,
Donald M. Payne, New Jersey            Senior Republican Member
Robert E. Andrews, New Jersey        Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia  Peter Hoekstra, Michigan
Lynn C. Woolsey, California          Michael N. Castle, Delaware
Ruben Hinojosa, Texas                Mark E. Souder, Indiana
Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts       Judy Biggert, Illinois
Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
David Wu, Oregon                     Joe Wilson, South Carolina
Rush D. Holt, New Jersey             John Kline, Minnesota
Susan A. Davis, California           Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Tom Price, Georgia
Timothy H. Bishop, New York          Rob Bishop, Utah
Joe Sestak, Pennsylvania             Brett Guthrie, Kentucky
David Loebsack, Iowa                 Bill Cassidy, Louisiana
Mazie Hirono, Hawaii                 Tom McClintock, California
Jason Altmire, Pennsylvania          Duncan Hunter, California
Phil Hare, Illinois                  David P. Roe, Tennessee
Yvette D. Clarke, New York           Glenn Thompson, Pennsylvania
Joe Courtney, Connecticut
Carol Shea-Porter, New Hampshire
Marcia L. Fudge, Ohio
Jared Polis, Colorado
Paul Tonko, New York
Pedro R. Pierluisi, Puerto Rico
Gregorio Kilili Camacho Sablan,
    Northern Mariana Islands
Dina Titus, Nevada
[Vacant]

                     Mark Zuckerman, Staff Director
                Sally Stroup, Republican Staff Director


















                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on May 21, 2009.....................................     1

Statement of Members:
    McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member, 
      Committee on Education and Labor...........................     4
        Prepared statement of....................................     8
        Additional submissions:
            ``Why I'm Sticking With FFELP,'' from Inside Higher 
              Ed, May 21, 2009...................................     6
            Letter, dated March 16, 2009, from the Arkansas 
              Association of Student Financial Aid 
              Administrators, Inc................................    82
            Letter, dated April 1, 2009, from College Goal Sunday    83
            Letter, dated March 20, 2009, from the Kentucky 
              Association of Student Financial Aid 
              Administrators, Inc................................    84
            Letter, dated March 17, 2009, from the Missouri 
              Association of Student Financial Aid Personnel.....    85
            Letter, dated March 13, 2009, from the North Carolina 
              Association of Student Financial Aid Administrators    86
            Letter, dated March 20, 2009, from the North Dakota 
              Association of Financial Aid Administrators........    87
            Letter, dated March 18, 2009, from the New York State 
              Financial Aid Administrators Association, Inc......    88
            Letter, dated March 19, 2009, from the Pennsylvania 
              Association of Student Financial Aid Administrators    90
            Letter from the Rhode Island Association of Student 
              Financial Aid Administrators.......................    91
            Letter, dated March 27, 2009, from the Southern 
              Association of Student Financial Aid 
              Administrators, Inc................................    92
            Letter, dated March 19, 2009, from the Virginia 
              Association of Student Financial Aid Administrators    93
            Letter, dated March 20, 2009, from the Western 
              Association of Student Financial Aid Administrators    94
            Letter, dated March 26, 2009, from the Wisconsin 
              Association of Student Financial Aid Administrators    95
            Statement of Dr. Philip R. Day, Jr., President and 
              CEO, National Association of Student Financial Aid 
              Administrators.....................................    96
            Statement of the Consumer Bankers Association........   103
            Statement of the Coalition of Higher Education 
              Assistance Organizations...........................   108
    Miller, Hon. George, Chairman, Committee on Education and 
      Labor......................................................     1
        Prepared statement of....................................     3
        Additional submissions:
            Letter, dated April 20, 2009, from Barry Keene, 
              chair, California Student Aid Commission...........    75
            Letter, dated May 21, 2009, from the National Direct 
              Student Loan Coalition.............................    76
            Letter, dated May 22, 2009, from Hon. Earl Pomeroy, a 
              Representative in Congress from the State of North 
              Dakota.............................................    78
            Letter, dated May 21, 2009, from Eric Hardmeyer, 
              president, Bank of North Dakota....................    78
            Prepared statement of Campus Progress Action.........    79
            Letter, dated April 29, 2009, from Mark G. Yudof, 
              president, University of California................    80
            Graphic: ``Pell Grant Maximum Award Levels''.........    81
            Questions submitted to Mr. Drouin....................   111
            Questions submitted to Mr. Shireman..................   112
            Questions submitted to Mr. Remondi...................   122
    Petri, Hon. Thomas E., a Representative in Congress from the 
      State of Wiscon, prepared statement of.....................    74
    Souder, Hon. Mark E., a Representative in Congress from the 
      State of Indiana, ``Cohort Default Rates'' graphs..........    63

Statement of Witnesses:
    Chapman, Chris, president and CEO, Access Group, Inc.........    44
        Prepared statement of....................................    45
    Drouin, Rene A., president and CEO, the NHHEAF Network 
      Organizations..............................................    38
        Prepared statement of....................................    40
        Responses to questions for the record....................   111
    Griswold, Anna M., assistant vice president for undergraduate 
      education, executive director, office of student aid, the 
      Pennsylvania State University..............................    33
        Prepared statement of....................................    35
    Reed, Charles B., chancellor, the California State University    17
        Prepared statement of....................................    18
        Additional submission: ``How a New Administration Can 
          Change Federal Policy for the Common Good''............    24
    Remondi, Jack, vice chairman and chief financial officer, 
      Sallie Mae.................................................    26
        Prepared statement of....................................    28
        Responses to questions for the record....................   123
    Shireman, Hon. Robert M., Deputy Under Secretary of 
      Education, U.S. Department of Education....................    11
        Prepared statement of....................................    13
        Responses to questions for the record....................   114
    Vedder, Richard, director, Center of College Afforability and 
      Productivity; distinguished professor of economics, Ohio 
      University; adjunct scholar, American Enterprise Institute.    48
        Prepared statement of....................................    49

 
                         INCREASING STUDENT AID
                          THROUGH LOAN REFORM

                              ----------                              


                         Thursday, May 21, 2009

                     U.S. House of Representatives

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The committee met, pursuant to call, at 10:05 a.m., in room 
2175, Rayburn House Office Building, Hon. George Miller 
[chairman of the committee] presiding.
    Present: Representatives Miller, Payne, Andrews, Woolsey, 
Hinojosa, Tierney, Kucinich, Wu, Holt, Davis, Bishop of New 
York, Loebsack, Hirono, Altmire, Hare, Clarke, Courtney, Shea-
Porter, Fudge, Polis, Tonko, Titus, McKeon, Petri, Castle, 
Souder, Biggert, Platts, Kline, McMorris Rodgers, Price, 
Guthrie, Cassidy, and Thompson.
    Staff present: Tylease Alli, Hearing Clerk; Jeff Appel, 
Senior Education Policy Advisor/Investigator; Alice Cain, 
Senior Education Policy Advisor (K-12); Fran-Victoria Cox, 
Staff Attorney; Denise Forte, Director of Education Policy; 
David Hartzler, Systems Administrator; Fred Jones, Staff 
Assistant, Education; Jessica Kahanek, Press Assistant; Mike 
Kruger, Online Outreach Specialist; Ricardo Martinez, Policy 
Advisor, Subcommittee on Higher Education, Lifelong Learning 
and Competitiveness; Stephanie Moore, General Counsel; Alex 
Nock, Deputy Staff Director; Joe Novotny, Chief Clerk; Rachel 
Racusen, Communications Director; Julie Radocchia, Senior 
Education Policy Advisor; Dray Thorne, Senior Systems 
Administrator; Margaret Young, Staff Assistant, Education; Mark 
Zuckerman, Staff Director; Stephanie Arras, Minority 
Legislative Assistant; Cameron Coursen, Minority Assistant 
Communications Director; Amy Raaf Jones, Minority Professional 
Staff Member; Alexa Marrero, Minority Communications Director; 
Susan Ross, Minority Director of Education and Human Services 
Policy; Linda Stevens, Minority Chief Clerk/Assistant to the 
General Counsel; and Sally Stroup, Minority Staff Director.
    Chairman Miller [presiding]. Everyone being present, the 
committee will come to order.
    I want to welcome everybody to the committee this morning. 
The meltdown in our economy as a result of the financial 
scandals has made the growing college affordability crisis 
worse for many American families. Escalating tuition prices and 
college loan payments have become even more burdensome in the 
face of lost jobs, income and benefits.
    Students are graduating with too much debt. We as a 
Congress need to refocus our efforts back on grant aid rather 
than loans. Twenty years ago, the maximum Pell Grant award 
covered about half of the in-state tuition. Today it covers 
about 30 percent. Over the last 3 years we have worked hard to 
reverse this trend by increasing the maximum Pell Grant award 
by $1,500, but work still needs to be done.
    Today, our committee will examine how we can continue to 
make college more affordable by significantly increasing grant 
aid for students. We can do this at no cost to the taxpayers by 
transforming the way our student loan programs operate.
    First, it is important to take stock of how we intertwine 
credit markets. Credit and economic crises have altered the 
student loan landscape. For years, the Department of Education 
has operated two programs that provide borrowers with the same 
federal college loans, at the same interest rates, terms and 
conditions.
    One is the Federal Family Education Loan program, or the 
FFEL program as it is known, under which private companies make 
loans to students and receive federal subsidies. These loans 
are virtually risk-free for lenders because they get reimbursed 
by the taxpayers when borrowers default on their loans.
    The other is the Direct Loan Program under which the 
federal government offers loans directly to students using 
Treasury capital. It is subsidy free and cheaper for taxpayers.
    Last year, as the credit markets froze, many FFEL lenders 
had trouble financing their lending activity. Some chose to 
discontinue making loans, while others became highly selective 
about whom they would lend to. With many students and families 
deeply worried about their student loan availability, Congress 
stepped in to perform emergency triage. Our goal was to make 
sure that families saw no interruption in the access to loans.
    We enacted a temporary program that to date has been 
successful. It allows the Secretary of Education to finance and 
purchase loans from lenders using Treasury funds, but this was 
never intended to be, and isn't, a permanent solution.
    Meanwhile, seeing that the Direct Loan Program remained 
insulated from the turmoil in the economy, hundreds of colleges 
and universities switched to the Direct Loans for the first 
time.
    Two undeniable lessons have emerged from the past year. 
First, the economic crisis has exposed serious vulnerabilities 
to the current FFEL structure and students shouldn't have to 
worry about whether the rollercoaster fluctuations of the 
financial market will hurt their college opportunities.
    Second, FFEL is currently on life support. In fact, the 
federal government through both the Direct Loan Program and its 
emergency program are now funding $6 out of every $10 in 
federal student loans made this year. In short, the status quo 
has become impossible to defend.
    Students and families are not being served as well as they 
could be and taxpayers are spending billions of dollars 
annually to finance a broken system. The momentum is building 
for reforms that will deliver aid to families in a more 
sustainable way, shielded from the many ups and downs in the 
markets.
    There are already several proposals on the table and we 
will take a close look at today. In his 2010 budget, President 
Obama proposed increasing Pell Grant Scholarships by ending 
lender subsidies and instead using the federal funds to 
originate all new federal student loans beginning in 2010.
    The Congressional Budget Office estimates that this would 
save about $94 billion over 10 years, all of which is to be 
redirected back to the students. I think this proposal sets the 
bar high. It yields an astonishing savings that will help 
students and make the most sense to the taxpayers and harness 
the private sector innovation for the public good.
    We also will hear about other proposals to reform our 
nation's student lending. While the means and reforms may be 
different, any workable plan must meet two basic benchmarks.
    It must increase the efficiency of the loan programs so 
that we have more to invest for our students, and it must 
increase reliability so the students and families are never 
again left wondering where to turn in a difficult economy.
    We will hear about the experience of one school that 
entered the Direct Loan Program last year and what other 
schools might expect under the President's proposal. We will 
learn more about student's financial needs and how we can best 
reform these programs to work on their campuses.
    Now there are some who like things the way that they are. 
They have already begun to fight this change, but I think it is 
the students who have framed the issue candidly. We either can 
continue sending billions of dollars to the lenders to act as 
intermediaries or we can start sending that same money to the 
students and their families who are trying to pay for college 
costs, the costs that continue to go up, costs that continue to 
go up faster than inflation and that more and more families 
find themselves struggling with.
    And I think that the question that is before us today is 
how do we go about providing the best deal for the taxpayers, 
the students, their families and the institutions? I look 
forward to today's testimony and I welcome all of the 
individuals who will be testifying and lending us their 
expertise and their experience in this field.
    And now, I would like to recognize Congressman McKeon, the 
senior republican on our committee for the purpose of his 
opening statement.
    [The statement of Mr. Miller follows:]

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

    The meltdown in our economy has made a growing college 
affordability crisis worse for American families.
    Escalating tuition prices and college loan payments have become 
even more burdensome in the face of lost jobs, incomes and benefits.
    Students are graduating with too much debt. We, as a Congress, need 
to re-focus our efforts back on grant aid, rather than loans.
    Twenty years ago, the maximum Pell Grant award covered about half 
of the average instate tuition. Today it covers about 30 percent.
    Over the last three years we have worked hard to reverse this trend 
by increasing the maximum Pell Grant award by $1,500. But work still 
needs to be done.
    Today, our committee will examine how we can continue to make 
college more affordable by significantly increasing grant aid for 
students.
    We can do this at no cost to the taxpayer by transforming the way 
our student loan programs operate.
    First, it's important to take stock of how the intertwined credit 
and economic crises have altered the student loan landscape.
    For years, the Department of Education has operated two programs 
that provide borrowers with the same federal college loans, at the same 
interest rates, terms and conditions.
    One is the federally guaranteed student loan program--or FFEL--
under which private companies make loans to students and receive 
federal subsidies. These loans are virtually risk-free for lenders 
because they get reimbursed by taxpayers when borrowers default on 
their loans.
    The other is the Direct Loan program, under which the federal 
government offers loans directly to students using Treasury capital. 
It's subsidy free and cheaper for taxpayers.
    Last year, as the credit markets froze, many FFEL lenders had 
trouble financing their lending activity. Some chose to discontinue 
making loans, while others became highly selective about whom they 
would lend to.
    With many students and families deeply worried about their student 
loan availability, Congress stepped in to perform emergency triage.
    Our goal was to make sure that families saw no interruption in 
their access to loans.
    We enacted a temporary program that to date has been successful. It 
allows the Secretary of Education to finance and purchase loans from 
lenders using Treasury funds. But this was never intended to be--and 
isn't--a permanent solution.
    Meanwhile, seeing that the Direct Loan Program remained insulated 
from turmoil in the economy, hundreds of colleges and universities 
switched to Direct Loans for the first time.
    Two undeniable lessons have emerged in the past year.
    First, the economic crisis has exposed serious vulnerabilities in 
the current FFEL structure. Students shouldn't have to worry whether 
the roller coaster fluctuations of the financial markets will hurt 
their college opportunities.
    Second, FFEL is on life support. In fact, the federal government, 
through both the Direct Loan program and this emergency program, is now 
funding six of every ten dollars in federal student loans made this 
year.
    In short, the status quo has become impossible to defend. Students 
and families are not being served as well as they could be. And 
taxpayers are spending billions of dollars annually to finance a broken 
system.
    Momentum is building for reforms that will deliver aid to families 
in a more sustainable way, shielded from any ups and downs in the 
markets.
    There are already several proposals on the table that we will take 
a close look at today.
    In his 2010 budget, President Obama has proposed increasing the 
Pell Grant scholarship by ending lender subsidies and instead using 
federal funds to originate all new federal student loans beginning in 
2010.
    The Congressional Budget Office estimates this would save $94 
billion over ten years--all of which would be redirected back to 
students. I think this proposal sets the bar high. It yields 
astonishing savings that will help students, makes the most sense for 
taxpayers, and harnesses private sector innovation for the public good.
    We'll also hear about other proposals to reform our nation's 
student lending.
    While the means of reform may be different, any workable plan must 
meet two basic benchmarks. It must increase the efficiency of the loan 
program so that we have more to invest in our students.
    And it must increase reliability so that students and families are 
never again left wondering where to turn in a difficult economy. We 
will hear about the experiences of one school that entered the Direct 
Loan Program last year and what other schools might expect under the 
President's proposal.
    We'll learn more about students' financial needs and how we can 
best reform these programs to work on their campuses. Now there are 
some out there who like things the way they are. They've already begun 
to fight change. But I think it's the students who have framed the 
choice candidly. We can either continue sending billions of dollars to 
banks and lenders or we can start sending it to students.
    As many people in this room know, student loan programs have 
historically been the subject of intense political debate. But this 
should not be about winning ideological battles. Instead, I hope that 
today begins an honest and constructive discussion that guides us 
toward a more reliable, effective and efficient program for students, 
families and taxpayers
                                 ______
                                 
    Mr. McKeon. Thank you, Chairman Miller and good morning. 
Education, especially a college education, is an engine that 
drives the American dream. I would like to see this committee 
do what it can to help those American dreams come true, and 
student loans are one tool that allow students and families to 
pursue that dream.
    Today we are going to hear about different student loan 
plans. We will discuss whether it is better to have loans come 
directly from the government or through other sources such as 
private lenders and nonprofits. I believe the American people 
have already made that choice.
    In the Federal Family Education Loan program, which 
features a public-private partnership, there are more than 
4,000 participating institutions. Students attending these 
institutions have received approximately $66 billion this year.
    In the Direct Loan Program, where the loans come directly 
from the government, there are roughly 1,700 institutions. 
Students attending these institutions have received 
approximately $22 billion this year.
    This is clearly a case of schools voting with their feet. 
Much like the secretary told us, families that do when it comes 
to picking an affordable college, institutions have selected 
their loan program of choice. They have moved to a program that 
provides the choice, flexibility, and options to make college 
affordable thanks to that public-private partnership.
    The administration has argued that the FFEL program is on 
life support and does not provide a stable source of capital. 
With all due respect, this is like arguing that the federal 
government should directly manufacture and sell cars because 
the administration is now assisting Chrysler and GM.
    Some in the administration may want to fully take over the 
automotive industry, but I don't think the American people 
would agree. Let us just consider the facts. Our nation is in 
the midst of a global economic meltdown.
    Our credit markets became paralyzed and no one, not 
mortgage lenders, not small business lenders, not consumer 
lenders and not student lenders was able to secure credit to 
keep capital flowing.
    The federal government stepped in with a temporary measure 
to restore liquidity, just like it did for the entire banking 
and financial system, but you don't hear calls for the federal 
government to make all mortgages or all small business loans, 
at least I hope not, or all car loans.
    No, it is only in the student loan market where political 
forces are taking advantage of economic peril to create a 
federal monopoly. So to those who claim the FFEL program does 
not work, I would only ask you to look back on the 40 plus 
years before the credit crisis that crippled our entire 
financial system.
    The private sector is a stable source of capital. It is one 
that has served millions of students and families for decades. 
Instead of trying to keep private capital and innovation out of 
the student lending permanently, perhaps we should be looking 
for ways to bring it back. We have also heard a lot about 
lender subsidies and so-called waste in this program.
    So let me just take a moment to set the record straight. 
This year, the federal government is expected to make a profit 
on the FFEL program. The only subsidies being paid are interest 
benefits so that low income students do not accrue interest 
costs while they are in school. But on the whole, the FFEL 
program is actually returning money to the U.S. Treasury this 
year.
    In a way, that means lenders are subsidizing the federal 
government and the administration's own budget clearly expects 
the programs included in the Ensuring Continued Access to 
Student Loans Act to continue to return money to the 
government. It seems to me that we should consider those 
programs as a viable alternative to a complete conversion to 
the Direct Loan Program.
    Finally, what about the 4,000 plus institutions across the 
country who have decided that the FFEL program works well for 
their students? Don't they get a say in all of this? In 1993 
when the Direct Loan Program was created, it came about mainly 
because some institutions were not happy with the FFEL program 
and wanted another option.
    If the more 4,000 institutions currently in the FFEL 
program are happy with the program and wish to keep it, I think 
we should listen to their wishes just like we did in 1993 to 
the institutions who wished for change. In that vein, I have 
several letters from financial aid officers from all around the 
country who want to keep the options available to them today 
through the FFEL program.
    But this is one of the things that people really don't like 
when the federal government or any government, local or state, 
wants to take choice away from them. Why would we want to do 
that? I would like to see these submitted into the record 
today.
    Mr. Chairman, what is best for schools and the students 
they serve seems to be lost in this debate and I am not the 
only one who thinks so. This morning, Inside Higher Ed 
published an op-ed written by the director of financial aid at 
Tallahassee Community College.
    The article is called ``Why I am sticking with FFEL,'' and 
he begins by saying, ``But for all the talk about budget 
numbers and politics, the views of college financial aid 
administrators have been largely lost in the shuffle.''
    I would also like to insert this article into the hearing 
record. I hope we will think about people like this financial 
aid director as the debate unfolds. With that, I would like to 
thank our witnesses for appearing today and look forward to 
learning more from them.
    [The information follows:]

                 [From Inside Higher Ed, May 21, 2009]

                      Why I'm Sticking With FFELP

                             By Bill Spiers

    President Obama's proposal to end the Federal Family Education Loan 
Program and make all federal student loans through the Direct Loan 
Program has gotten a lot of media attention. But for all the talk about 
budget numbers and politics, the views of college financial aid 
administrators have been largely lost in the shuffle. All FAOs have 
their own, differing reasons for choosing a particular federal student 
loan program for their institutions, but I'd like to explain why I 
favor the FFEL program and why my college will stick with it.
    It comes down to this: FFELP provides outstanding service to 
students and our college and helps our students avoid defaulting on 
their loans, and competition--between FFEL lenders and between FFEL and 
direct lending--has provided for choice and, ultimately, excellence.
    In the '90s, when direct lending was authorized, many of my friends 
moved to direct lending, for reasons I understood. Their decisions were 
based on solid logic and were in the best interest of their 
institutions. I supported their decision, and continue to support an 
institution's right to select the program that is in the best interest 
of the students they serve. Processing issues were abundant in the FFEL 
program at that time; today, however, the processing concerns are gone. 
Banks are responsive to students and schools. If needed, I can 
intervene and get things done for my students. The automation we pushed 
for in earlier years is now in place, and the infrastructure used in 
the program is solid.
    Students are the primary beneficiaries of the simplicity and strong 
service of the FFEL program. Providing them with options to submit 
paper applications or to e-sign their promissory note without having to 
visit the financial aid office makes their life easier. In addition, 
the automation and verification of eligibility for FFEL funds expedites 
the delivery of funds to students. Students are confident the funds 
they receive are accurate and that their promissory notes are securely 
maintained.
    As a community college, we have the responsibility to ensure that 
our students understand the potential impact borrowing will have after 
graduation. With the help of our guarantor partners we have implemented 
financial literacy seminars for all student borrowers. Each new 
borrower must attend a seminar before their loan funds are released. 
The materials for this program are provided by guarantors, who are 
there in person to help make the presentations to our students. The 
support we receive helps us educate our students about loans and 
ultimately makes them better consumers of financial products of all 
kinds. Current budget cuts and reduced manpower would make it 
impossible to continue a program like this without the support of our 
partners. In addition to financial literacy, we also receive 
information on exit interviews and repayment options that are vital to 
keeping students in repayment and out of default.
    For many years lenders, guarantors and servicers have been active 
participants in financial aid awareness activities. These organizations 
devoted considerable financial resources and man hours to help 
financial aid professionals educate families about federal financial 
aid programs. From creating publications to high school financial aid 
nights and community-wide events, students throughout my state and 
nationwide have benefited from this support. When they apply for 
financial aid early because of this advice, needy students often 
receive more grant assistance and reduce or even eliminate their need 
for loans. In addition to financial aid awareness activities, lenders, 
servicers and guarantors also offer substantial training opportunities 
to financial aid staff. The loss of training opportunities could be 
detrimental to my staff and ultimately to the students we serve.
    Default prevention and aversion are critical issues in the 
community college sector. At the institution I serve, our selection of 
lenders, guarantors and servicers is based on their company default 
rates and their default rate at our school. The basic due diligence 
requirements of the Federal Government in default prevention and 
aversion simply are not good enough to prevent defaults with the 
community college sector. Our lending partners must offer exceptional 
customer service and go well beyond the basic federal requirements for 
our students. We conduct a thorough review to ensure that our students 
are well served. We are confident that the people serving our borrowers 
understand the issues that young, inexperienced student borrowers face. 
Competition between lenders, guarantors and servicers has pushed them 
well beyond the basic measures to reach and assist these young 
borrowers
    With the loss of competition that would come from the Obama 
proposal, we must ask ourselves if this level of commitment to default 
prevention and aversion will continue. If we are forced to move to 
direct lending and find ourselves dissatisfied with the default 
prevention and aversion efforts, what are our choices? Who will help us 
reach our borrowers? Will our schools have to pay for an outside 
company to do what our guarantors, lenders and servicers have done free 
all these many years?
    For our students, customer service is vital. They must receive 
correct information that they can understand the first time they call. 
Students need help--someone to hold their hands because they are in a 
learning curve. They don't want to wait on the phone for 30 minutes for 
help and they won't. By selecting lenders committed to creating long 
term relationships with student borrowers, we have found that they go 
the extra mile, and sometimes two, to ensure students are treated well 
and receive the information they need. The clarity of the information 
provided from the first day the loan is issued until the student 
finishes repaying their loans can make a difference for a population 
that is naive in their approach to borrowing, credit and 
responsibility. Notice I didn't say ignorant because that isn't true. 
They do, however, need guidance as they move through this pilgrimage of 
learning about financial responsibility.
    One of the great benefits of FFELP is the ability of the student, 
and where it is appropriate, their parent to decide with whom they want 
to do business. Students in direct lending are not given this choice, a 
clear distinction between the two programs. While we provide a list of 
lenders that have acknowledged they work with community colleges, a 
student is free to select any lender willing to issue their loan. The 
student--not the school or the government--controls the choice of 
lender and has the opportunity to evaluate benefits offered by that 
lender. If a student has a solid relationship with a bank, he or she 
will often pick that bank as the lender for the student loan.
    Competition has fostered excellence in FFELP and DL. The 
innovations were a direct result of the push to stay viable and 
technologically advanced so that schools would select or continue to 
use that program Until recently When lenders also competed for 
borrowers which led to lower loan costs for our students The default 
prevention and aversion efforts we enjoy in the FFELP program represent 
efforts on the part of business partners to meet our demands and 
compete for marketability. Technology improvements in borrower 
interface are the result of competition between FFELP and DL. Our 
students have certainly benefited from that competition.
    While the media has focused on the profitability in the FFELP 
program, little has been said about the fact that the federal 
government must fund Federal Pell Grant Program increases off the backs 
of student borrowers. The government borrows money at very low rates, 
much lower than those available to lenders, yet the government would 
continue to charge the same interest rates as FFEL lenders. Under the 
current proposal the federal government isn't providing any breaks to 
the students and is actually making more off the program than lenders 
ever could. Wouldn't it be appropriate for the USDOE to set interest 
rates based on the student's expected family contribution? Or offer 
borrower benefits that help students during repayment based on their 
income? Or perhaps set an interest rate that is more in tune with 
financial markets and allow lenders to compete?
    I support FFELP because of the benefits it provides students, 
parents and institutions. My institution and our students have been 
well served by this program. Times are changing. I can only hope that 
the Congress will find a way to maintain a worthy program that has 
benefited students for decades. And maybe, just maybe, financial aid 
administrators at over 4100 institutions that currently use FFEL will 
have an opportunity to be heard.
    We are on the front lines every day. And we care about our 
students.

    Bill Spiers is director of financial aid at Tallahassee Community 
College.
                                 ______
                                 
    Mr. McKeon. Thank you, Mr. Chairman. I yield back.

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

    Thank you, Chairman Miller and good morning.
    Education--especially a college education--is an engine that drives 
the American Dream. I would like to see this committee do what it can 
to help those American Dreams come true.
    And student loans are one tool that allows students and families to 
pursue that dream.
    Today, we are going to hear about different student loan plans. We 
will discuss whether it's better to have loans come directly from the 
government, or through other sources such as private lenders and non-
profits.
    I believe the American people have already made that choice.
    In the Federal Family Education Loan program, which features a 
public-private partnership, there are more than 4,000 participating 
institutions. Students attending these institutions have received 
approximately $66 billion this year.
    In the Direct Loan program, where the loans come directly from the 
government, there are roughly 1,700 institutions. Students attending 
these institutions have received approximately $22 billion this year.
    This is clearly a case of schools ``voting with their feet.'' Much 
like the Secretary told us families would do when it comes to picking 
an affordable college, institutions have selected their loan program of 
choice. They have moved to a program that provides the choice, 
flexibility, and options to make college affordable, thanks to that 
public-private partnership.
    The Administration has argued that the FFEL program is ``on life 
support,'' and does not provide a stable source of capital. With all 
due respect, this is like arguing that the federal government should 
directly manufacture and sell cars because the Administration is now 
assisting Chrysler and GM.
    Some in the Administration may want to fully take over the 
automotive industry, but I don't think the American people would agree.
    Let's just consider the facts. Our nation is in the midst of a 
global economic meltdown. Our credit markets became paralyzed, and no 
one--not mortgage lenders, not small business lenders, not consumer 
lenders, and not student lenders--was able to secure credit to keep 
capital flowing.
    The federal government stepped in with a temporary measure to 
restore liquidity. Just like it did for the entire banking and 
financial system.
    But you don't hear calls for the federal government to make all 
mortgages, or all small business loans, or all car loans. No, it's only 
in the student loan market where political forces are taking advantage 
of economic peril to create a federal monopoly.
    So to those who claim the FFEL program does not work, I would only 
ask you to look back on the last 40+ years before the credit crisis 
that crippled our entire financial system. The private sector is a 
stable source of capital--it's one that has served millions of students 
and families for decades.
    Instead of trying to keep private capital and innovation out of 
student lending permanently, perhaps we should be looking for ways to 
bring it back.
    We've also heard a lot about lender subsidies and so-called waste 
in this program. So let me take just a moment to set the record 
straight.
    This year, the federal government is expected to make a profit on 
the FFEL program. The only subsidies being paid are interest benefits 
so that low-income students do not accrue interest costs while they're 
in school.
    But on the whole, the FFEL program is actually returning money to 
the U.S. Treasury this year. In a way, that means lenders are 
subsidizing the federal government. And the Administration's own budget 
clearly expects the programs included in the Ensuring Continued Access 
to Student Loans Act to continue to return money to the government. It 
seems to me that we should consider those programs as a viable 
alternative to a complete conversion to the Direct Loan program.
    Finally, what about the 4,000 plus institutions across the country 
who have decided that the FFEL program works well for their students? 
Don't they get a say in all of this? In 1993, when the Direct Loan 
program was created, it came about mainly because some institutions 
were not happy with the FFEL program and wanted another option.
    If the more than 4,000 institutions currently in the FFEL program 
are happy with the program and wish to keep it, I think we should 
listen to their wishes just like we did in 1993 to the institutions who 
wished for change. In that vein, I have several letters from financial 
aid officers from all around the country who want to keep the options 
available to them today through the FFEL program.
    I would like these to be submitted into the record today.
    Mr. Chairman, what's best for schools, and the students they serve, 
seems to be lost in this debate. And I'm not the only one who thinks 
so.
    This morning, Inside Higher Ed published an op-ed written by the 
director of financial aid at Tallahassee Community College. The article 
is called ``Why I'm Sticking With FFELP,'' and he begins by saying--
quote--``But for all the talk about budget numbers and politics, the 
views of college financial aid administrators have been largely lost in 
the shuffle.''
    I would also like to insert this article into the hearing record. I 
hope we'll think about people like this financial aid director as the 
debate unfolds.
    With that, I would like to thank our witnesses for appearing today, 
and I look forward to learning from them.
    Thank you, Chairman Miller. I yield back.
                                 ______
                                 
    Chairman Miller. Thank you. And I would like now to 
introduce our panel of witnesses. Robert Shireman is the Deputy 
Undersecretary at the U.S. Department of Education, a leading 
expert on college access and financial aid.
    Mr. Shireman has previously served as congressional 
appointee to the Federal Advisory Committee on Student 
Financial Assistance and as advisor to Senator Paul Simon and 
part of President Clinton's White House National Economic 
Council. Mr. Shireman is the founder of the Institute of 
College Access and Success and the Project on Student Debt.
    Dr. Charles Reed has served as chancellor of the California 
State University System since 1998. He provides leadership to 
46,000 faculty and staff and to 450,000 students on 23 campuses 
and seven off-campus centers.
    Prior to serving as chancellor of the California State 
University system, Dr. Reed was chancellor of the State 
University System of Florida from 1985 to 1998. Dr. Reed has 
served on a number of organizations, including the board of the 
Urban Serving Institutions, the President's Roundtable for the 
National Board of Professional Teaching Standards and on the 
board of the California Chamber of Commerce.
    Mr. John F. Remondi is the vice chairman and chief 
financial officer of Sallie Mae. Prior to joining Sallie Mae, 
Mr. Remondi worked as a portfolio manager for PAR Capital 
Management, a Boston-based private investment management firm.
    Mr. Remondi will address Sallie Mae's alternative proposal 
to reform the student lending program, which would allow the 
private companies to remain in the program while using federal 
capital to finance student loans.
    Ms. Anna Griswold is the assistant vice president of 
undergraduate education, executive director of student aid at 
Pennsylvania State University, which has one of the highest 
loan volumes of any institution in the country.
    Prior to working at Penn State, Ms. Griswold was the 
director of student aid at Washington State University and 
prior to that she was the director of student aid, Northern 
Virginia Community College at the Alexandria campus. Ms. 
Griswold has served in student aid administration for 39 years.
    This comes from Ms. Shea-Porter, whoI think is going to 
make the next introduction. Carol?
    Ms. Shea-Porter. Thank you, Mr. Chairman. It is my 
privilege to introduce Rene Drouin to the committee this 
morning. Rene is the president and chief executive officer of 
the New Hampshire Higher Education Assistance Foundation or 
NHHEAF as we call it. Mr. Drouin began his student loan career 
in 1978 as manager of the claims and recoveries division of New 
Hampshire Higher Education Assistance Foundation.
    He has served as president and CEO of both NHHEAF and the 
president of the Network Organization. During his over 30 years 
at NHHEAF, he has overseen a number of enhancements to the 
organizations' infrastructure, including the establishment of a 
NHHEAF network education foundation with half a million dollar 
endowment in 2004.
    The charitable mission of the organization has been 
fulfilled by Mr. Drouin's support for expansion of the Center 
for College Planning, which annually serves over 30,000 
individuals statewide with free college planning programs and 
services. Mr. Drouin also served as chairman of the board at 
the National Council of Higher Education Loan Programs from 
1999 to 2000.
    In October of 2003, Mr. Drouin received a congressional 
appointment to U.S, Department of Education's Advisory 
Committee on student financial assistance for a 3-year term and 
he was reappointed for an additional term in July, 2006. He 
knows the key to prosperity in this country for America's youth 
and for America's business is education and he has devoted his 
life to providing access.
    I am delighted that you are here today. Thank you, very 
much.
    Chairman Miller. Congressman Castle.
    Mr. Castle. Thank you, Mr. Chairman. I would like to 
welcome Chris Chapman to today's hearing. Mr. Chapman is the 
president and chief executive officer of Access Group, a 
national nonprofit lender and servicer based in my hometown of 
Wilmington, Delaware.
    Although Mr. Chapman joined Access Group last year, Mr. 
Chapman's been involved in the education financing field since 
1994. Immediately prior to his current position, Mr. Chapman 
served for almost 7 years as president and CEO of All Student 
Loan, a Los Angeles based nonprofit lender and secondary 
market.
    He has also served as vice president of Student Loan 
Funding Resources, Incorporated and a director of his joint 
venture servicing company, Intuition Holdings, Incorporated. 
Mr. Chapman has also maintained a private legal practice, 
primarily focused on the representation of a variety of FFEL 
participants in public finance and general corporate matters.
    Mr. Chapman's early career was spent working for two 
members of the U.S. House of Representatives and the mayor and 
city council of Cincinnati. Mr. Chapman earned his Bachelor of 
Arts degree from Xavier University in Ohio and his Juris 
Doctorate degree from the University of Cincinnati College of 
Law. We welcome you here, Mr. Chapman.
    Chairman Miller. Thank you and welcome to the committee. 
Our final witness on this panel will be Dr. Richard Vedder who 
is a professor of economics at Ohio University. He is the 
author of a number of books, including ``Going Broke by Degree, 
Why Colleges Cost Too Much.''
    Welcome to all of you. We look forward to your testimony. 
Some of you have testified before, in front of Congress, but we 
do have a lighting system. When you begin to testify, in the 
small boxes in front of you a green light will go on. We allow 
you 5 minutes. We hope that you can convey your thoughts in 
that period of time. I know it is always difficult.
    An orange light will go on when you have 1 minute remaining 
and you should think about wrapping up your testimony. And then 
at the end of 5 minutes, a red light will go on and we want you 
to finish in a coherent fashion, but we want you to be mindful 
there will be a lot of questions.
    And unfortunately, I am told that we can expect votes on 
the floor at around 11:00, so we will begin. Mr. Shireman, 
welcome to the committee.

  STATEMENT OF ROBERT SHIREMAN, DEPUTY UNDER SECRETARY, U.S. 
                    DEPARTMENT OF EDUCATION

    Mr. Shireman. Thank you. Chairman Miller, Mr. McKeon, thank 
you very much for the opportunity to testify today.
    In his speech to the joint session of Congress in February, 
President Obama established a bold goal for America and that is 
to restore our place as the country with the largest proportion 
of our adult population with college degrees. That was partly 
about education and the importance of education, but it is also 
critical to restoring our economy and our place in the world 
economy.
    To achieve that goal, we need our graduating high school 
seniors to continue on to college. We need our adults, who are 
either working or perhaps unemployed right now, to return to 
college. We need both those populations to thrive in the 
programs and colleges that they attend, be able to focus on 
their studies and we need them to complete their degrees. And 
that is how we can reach that goal for America.
    President Obama proposed a number of tools to get there. 
First, the $2,500 American Opportunity Tax Credit which was 
adopted for 2 years in the Recovery Act and which his fiscal 
year 2010 budget would make permanent.
    Second, a strong, secure Pell Grant entitlement. This is 
the core program for low and modest income families. And we 
need to make sure that money will be there, not just for the 
folks who are entering college in 6 months, but we need to be 
able to tell students in middle schools that this is a program 
that will be there, will be strong and secure, and will have 
enough for them to help them pay for college.
    That we have proposed increasing the Pell Grant instead of 
having--we have had a number of years where we have had just a 
flat Pell Grant. We want to be able to increase that by the 
consumer price index plus one percentage point into the future.
    Third, we need a reliable federal student loan program. We 
really dodged a bullet last year with--almost had a situation 
where schools had real trouble getting loans. In effect, what 
the Department of Education was able to do with the swift 
action of Congress was, in effect, to make direct loans to 
lenders so that they could make FFEL loans to students.
    What President Obama is proposing to do is to cut out the 
middleman, make those direct loans to students and schools. 
Schools already have a very efficient system of drawing down 
Pell Grant dollars for their campuses and it is that same 
system that is used for drawing down and reconciling Pell Grant 
dollars. So the switch over, from the perspective of a school, 
not all of it is new. It is an add-on to an existing system 
that works very well for colleges.
    We want to tap the expertise of private sector entities 
that are currently involved in the FFEL program to do the very 
important work of servicing student loans. We want to have a 
performance-based contract with these servicers that focuses on 
preventing defaults and delinquencies and making sure we have 
high levels of satisfaction of the borrowers whose questions 
need to be answered, as well as the schools that are involved 
in the program.
    By doing this, we save billions of dollars and that money 
can be poured into the Pell Grant Program. We also will be able 
to maintain a viable and growing student loan program. And I 
think there is a chart that will show the growth that we 
expect.
    While the current FFEL portfolio will decline slowly over 
time--and there has been a lot of talk about jobs--the FFEL 
loans will decline slowly over time. There will be a lot more 
loans overall. So overall, there will be more people employed 
in servicing in the United States than ever before.
    Another important element of the President's proposal is to 
reduce the amount of private student loans that students are 
having to take out. This is where students really get in 
trouble.
    Non-federal student loans, no cap on the interest rate and 
our Perkins Loan Proposal is designed to give college financial 
aid administrators the flexible loan funds they need to apply 
to situations where students need more than what is available 
in the Stafford Loan Program. We also want to distribute money 
in a way that encourages colleges to keep college affordable.
    Finally, we have proposed and access an completion 
innovation fund and they really are two important goals of this 
program. One is to allow state agencies and nonprofit 
organizations that have been doing important work with the 
funds that they have earned in the FFEL Program, getting out to 
high schools, providing information.
    We want to be able to allow them to continue those 
activities. We also want to encourage innovation at colleges 
and universities and in states on persistence and completion. 
We have to do a lot better job of helping students to complete 
those degrees.
    Thank you very much.
    [The statement of Mr. Shireman follows:]

 Prepared Statement of Hon. Robert M. Shireman, Deputy Under Secretary 
               of Education, U.S. Department of Education

    Mr. Chairman, Mr. McKeon, Members of the Committee: Thank you for 
this opportunity this morning to discuss the Administration's plan for 
higher education. As you know, President Obama has established a bold 
goal for America: to restore our place in the world as the country with 
the largest proportion of adults with college degrees. Having a more 
educated population is a worthy goal in and of itself. But this goal is 
about more than individual opportunity and social mobility. It is about 
the future of our economy and our place in the world. We must continue 
increasing the number of Americans pursuing higher education and 
redouble our efforts to ensure that more of them earn a credential.
    This renewed American commitment to education spans from cradle to 
career. The Administration's 2010 budget request lays the foundation 
for the expansion of early childhood education. It promotes world-class 
standards and supports and rewards effective teaching. It expands 
efforts to turn around low-performing schools, including dropout-
factory high schools. And for those students who make the grade, we 
must ensure that they are able to go on to higher education and 
training. That is what I am here to talk about today.
    The American Recovery and Reinvestment Act included a down payment 
on our higher education agenda. It expanded tax credits for higher 
education, making them larger and available to more families and to 
cover more types of expenses. It provided support to states to limit 
funding cuts and tuition increases at public universities. And it 
provided funding to pay for increasing Pell Grant costs and support a 
$500 increase in the maximum grant for students from lower-income 
families--combined with regular appropriations, the maximum grant will 
increase from $4,731 to $5,350 for the upcoming award year. We have 
taken further steps to help ensure that Americans who have lost their 
jobs know that their financial aid eligibility can be adjusted to 
reflect the fact that their prior income is no longer available.
    Our FY 2010 budget proposal for financial aid aims to (1) secure 
the future of the Pell Grant program beyond the Recovery Act, (2) 
ensure reliable access to federal student loans, and (3) partner with 
states to sustain college access efforts and to intensify the focus on 
college completion. It is only by improving college retention and 
completion--for both traditional-age students and returning adults--
that we can meet President Obama's challenge.
    Pell Grants serve the families who are most struggling in our 
economy and in our schools. We tend to think of the program as one that 
serves students who are high school seniors. But how we design the 
program also sends messages to students, parents, and teachers much, 
much earlier. We need to be able to tell students in middle school that 
the Pell Grant program is strong, and will be there for them in four to 
six years when they're ready to go.
    That is why the President's budget calls for making the Federal 
Pell Grant program an entitlement. It is imperative that our students--
from high school seniors to middle-school students--as well as their 
families, understand that indeed there will be money available for 
college when they're ready to apply. Research indicates that this is 
especially important if those students and their families are low 
income. Today's discretionary funding of Pell Grants leads to future 
uncertainty regarding the availability of student financial aid, and 
the near-term funding shortfalls of mandatory increases in the Pell 
Grant maximum award provided in the College Cost Reduction and Access 
Act (CCRAA) only increases that uncertainty. We firmly believe that 
concrete assurances today about the future availability of financial 
aid play a critical role in encouraging families to be certain their 
children undertake the academic preparation necessary for college.
    Putting the Pell Grant program on a strong and predictable 
financial footing does take considerable resources. Fortunately, our 
plans for the student loan programs generate significant budget 
savings. This is accomplished by originating all new loans under the 
Direct Loan program beginning with the 2010-2011 academic year. 
Reliable access to student loans is important not just for our students 
and their families, but also for our entire economy. We have seen the 
guaranteed Federal student loan system, known as the Federal Family 
Education Loan (FFEL) Program, come close to collapse this past year. 
Repeated interventions by the Congress and the Department were required 
to ensure that every student and parent who needed a Federal student 
loan received one. While I am pleased to report that these efforts were 
successful, I am less than pleased to report that the Department will 
have to replicate this year's efforts--and then some--to ensure 
continued FFEL availability for all for the 2009-10 academic year. This 
repair is only temporary, and Congress will need to decide the future 
of the Federal student loan system.
    There are three functions to the student loan system, whether the 
loan is direct or guaranteed. First is raising the capital--the money 
that is actually lent to the student or parent borrower. Second is loan 
origination--providing the money to the borrower in exchange for a 
promissory note, the borrower's promise to repay the debt. Third is 
``servicing'', which is the bulk of the actual work in carrying out a 
loan program. Servicing means sending out bills and payment notices, 
and receiving and applying payments to accounts. Servicing is following 
up when a borrower does not pay on time. Servicing is collecting on 
loans that have defaulted. Servicing means answering the telephone 
calls such as, ``Do I have a payment due?'' ``Am I eligible for a 
deferment?'' ``Where do I send my address change?'' Servicing is 
letting people know about the full range of options for repaying their 
loans. And much more.
    In regards to raising capital, absent the extraordinary 
intervention by the Federal Government with direct Federal funds, FFEL 
loans would not have been universally available during the current 
academic year. By extending the loan purchase authority added to the 
Higher Education Act of 1965 (HEA) by the Ensuring Continued Access to 
Student Loans Act (ECASLA), Congress has made sure that lenders will 
have access to capital sufficient to ensure that FFEL loans will be 
universally available in the 2009-2010 award year. Additionally, the 
Department has established an asset-backed commercial paper ``conduit'' 
to leverage the value investors place on federally-backed student loans 
to help further ensure the availability of FFEL loans next year. The 
Department's loan purchase authority, loan participation interest 
purchase and conduit programs, along with Direct Loans, have resulted 
this year, and will result next year, in the government's providing a 
large proportion of the capital to lend to federal student loan program 
borrowers. The 2010 Budget estimates that the Federal government will 
finance nearly three quarters of all student loans in both 2009-2010 
and 2010-2011 academic years. And, as I said earlier, these loan 
purchase authority programs will come to an end. Congress must make a 
decision about the future of the student loan programs. Instead of 
maintaining this elaborate web of programs designed to prop up the FFEL 
program, we should originate 100% of new loans through the less costly 
Direct Loan program.
    With respect to expanding the origination of Direct Loans, we 
already have a uniform, on-site system at every college, university and 
postsecondary trade and technical school in the country for 
originating, disbursing, and reporting Pell Grants. The Common 
Origination and Disbursement (COD) system is a contractor-operated 
platform through which schools receive their funding authority from the 
Department, draw down funds from the Department for payments to 
students, and then provide data back to the Department for those 
students who received Pell Grants.
    Expanding the capability of COD to originate and disburse student 
loans and then report that information back to the Department is an 
easy add-on for those schools that do not already disburse Direct 
Loans. In fact, not only do Direct Loan program participating 
institutions use COD for this purpose today, but the Department used 
COD's common student record approach to implement successfully the 
authorizing, disbursing and reporting requirements for the Academic 
Competitiveness, National SMART, and Teach Grant programs within 
extraordinarily condensed timeframes. The single significant difference 
between administering a Pell Grant and administering a student loan, 
whether guaranteed or direct, is the promissory note that must be 
signed by the borrower. In the FFEL program today, schools must follow 
certain lender-specific processes, and they must have a signed 
promissory note in hand prior to disbursing loan funds. Current Pell 
Grant participating institutions that move from FFEL into Direct Loans 
may have to learn a somewhat different process, but it is not something 
that is enormously complicated.
    Also with respect to student loan origination, it is important to 
note that FFEL program lenders by and large do not make the usual 
underwriting decisions that lenders otherwise make. Outside the student 
loan arena, lenders decide what interest rates to charge, how much to 
lend, and to whom to lend to. Indeed, we see this typical lender 
behavior in the private-label student loan market, in which FICO scores 
and type of institution attended are important underwriting 
considerations. In other words, lenders assess risk in making their 
lending decisions--except for federal student loans. Basically these 
underwriting decisions are replaced by criteria established by Congress 
for federal student loan borrowers, including annual and cumulative 
loan limits, the cost of attendance, and the availability and receipt 
of other student financial assistance by the borrower, and with the 
administration and coordination of all these activities accomplished by 
college and university financial aid administrators.
    Let me talk for a moment about loan servicing. In our view, 
servicing Federal student loans, irrespective of loan program, should 
address the two main goals that we want to achieve: default prevention 
and customer service.
    Regarding default prevention, the Department's cohort default rate 
data show wide variation in these rates over the years when arranged by 
lender. Certainly there may be good reasons for different lenders 
having different default rates--portfolio composition and expanding and 
contracting local economies, to name just two--but we do little, if 
anything, in the FFEL program to encourage FFEL institutions, and 
prospective and continuing FFEL borrowers to turn to those lenders (or 
their servicers) that seem to rise to the top of the list in terms of 
success in preventing defaults.
    In fact, before its 2007 repeal, the statutory provision that 
granted ``exceptional performer'' status--and thus increased insurance 
payments--to lenders, servicers, and guaranty agencies was based on an 
acceptably high compliance rate--97 percent--with the Department's due 
diligence requirements for loan servicing and collection rather than a 
straightforward, objective, and transparent measure of success in 
preventing defaults. In other words, we rewarded FFEL program 
participants for compliance with process rules instead of for achieving 
desired results.
    Guaranty agencies also have, at least nominally, a role in default 
prevention. However, the existing guaranty agency financing model 
creates incentives that arguably favor collecting on defaults instead 
of preventing defaults. In short, if more value is attached to 
collecting defaults than preventing defaults, then there are likely 
inadequate incentives to prevent defaults in the first place.
    Nevertheless, we believe many guaranty agencies provide significant 
and worthwhile services to students and families. The President's 
Budget calls for the creation of a State-Federal partnership fund aimed 
at improving college success and completion, particularly for students 
from disadvantaged backgrounds. States could use a portion of these 
funds to continue the college outreach and information activities now 
supported by federal subsidies to guaranty agencies and other state-
affiliated FFEL participants. If we think these services are valuable, 
then we as a Federal government should pay for these services directly 
instead of hoping that Guaranty Agencies will use a portion of their 
fees for these worthwhile activities.
    Regarding customer satisfaction, good customer satisfaction means 
that student and parent borrowers receive the information they need 
when they need it and in the form that they find most useful. So it is 
important to have the appropriate mechanisms in place to gauge customer 
satisfaction. The Department has employed such surveys in the past and 
we know that our Direct Loan servicer has performed as well, and 
sometimes better, under its contract than its FFEL industry 
counterparts. We also know that there are FFEL servicers with above-
average rated customer satisfaction performance. So, given our 
increasing portfolio, due both to the recent expansion of the Direct 
Loan program and our acquiring significant numbers of FFEL loans via 
the loan purchase authority, the Department will contract with multiple 
private-sector student loan servicers.
    We intend for our servicing contracts to leverage competition among 
private firms, so that those servicers that do a better job in terms of 
default prevention and customer satisfaction will receive an increased 
share of the Federal student loan portfolio to service. Conversely, 
those firms that are less adept will have a smaller share of that 
portfolio to service over time.
    We are sensitive to the concerns expressed by the FFEL program 
community and others regarding jobs. However, annual Federal student 
loan volume is not declining. We will need at least as many people in 
the private sector servicing student loans in the future--whether they 
are traditional FFEL loans, FFEL loans purchased by the Department, or 
Direct Loans--as we have today. It will be the Department's job to 
build into our contracts the proper set of incentives so that we get 
the best service for our borrowers and the taxpayers.
    We are sensitive as well to the needs of those students and 
families whose circumstances are such that the annual loan limits in 
the FFEL and Direct Loan programs are inadequate. But, in recent years, 
too many students have turned to private-label loans without ever 
considering these Federal loan programs.
    To address these issues we are proposing to reinvigorate and 
refocus the Federal Perkins Loan program. Merely increasing loan limits 
for all borrowers could lead to over-borrowing. Instead, under our 
budget proposal, the annual Perkins Loan volume would increase from 
approximately $1 billion per year to $6 billion. This would be in the 
form of lending authority for both undergraduate and graduates, 
allocated to institutions by a formula that may include factors to 
encourage colleges to control their costs and offer need-based aid to 
limit indebtedness, and reward colleges for enrolling and graduating 
students from low-and middle-income families. Our expanded and 
modernized Perkins Loan program would retain the current five percent 
interest rate and contain a ``hold harmless'' for schools currently in 
the program, while eliminating the burden on schools to service and 
collect on the new Perkins loans.
    In closing, our student aid proposals would address important 
servicing issues by providing for construction of loan servicing 
contracts with multiple private-sector firms with appropriate 
incentives to ensure high-quality customer service while minimizing 
defaults. Our proposals would minimize program transition issues for 
institutions through the use the existing common student record 
approach of the COD system to provide for student loan origination 
functions for all institutions. As for capital acquisition for federal 
student loans, it is clear that the Federal Government is now the sole 
reliable and sufficient source of Federal student loan capital. The 
Administration's proposed model would provide for a highly efficient 
student loan system by minimizing the layers between the source of loan 
capital and the borrower--the ultimate beneficiary of that loan 
capital. Alternative models add additional layers, which must be 
evaluated in terms of whether the often uncertain benefits of the 
additional layers outweigh their certain costs. We must preserve the 
maximum possible investment in the Pell Grant program and the future of 
America's college students.
    Thank you Mr. Chairman and I will answer any questions you and the 
other Committee Members might have.



                                 ______
                                 
    Chairman Miller. Thank you. Chancellor Reed, welcome to the 
committee and thank you for your service to the students in our 
state.

  STATEMENT OF CHARLES REED, CHANCELLOR, THE CALIFORNIA STATE 
                           UNIVERSITY

    Mr. Reed. Thank you Chairman Miller and ranking member 
McKeon and members of the committee. Thank you for the 
opportunity to discuss the California State University's 
experience with federal loan programs and with federal need-
based aid programs.
    As the chairman said, the CSU is the largest and most 
diverse 4-year university system in the country. We have more 
than 450,000 students. Fifty-five percent of our students are 
students of color, mostly from the underserved communities of 
California. Our mission is to provide high quality, affordable 
education to meet our state's ever-changing economic needs.
    During the 1990s, the direct lending program was created. 
Ten CSU campuses joined that program then. This year five more 
campuses have joined the direct lending program and the 
remaining eight campuses will join next year.
    Why this shift? Events of the past few years have 
contributed significantly. First, changes to federal law 
through the budget reconciliation process that reduced FFEL 
lender margins have led to a decline in FFEL lender service and 
reliability and to a reduction in borrower benefits.
    Second, our nation's financial crisis has raised 
significant concerns about the long-term viability of 
participating in FFEL.
    Third, previous concerns about the future viability of 
direct lending programs have been eliminated. Stability and 
reliability in a campus' student loan programs are tremendously 
important to our students and to our institutions.
    When it comes to student aid, the Pell Grant Program, with 
its focus on student need, is essential to the California State 
University closing the gap in college enrollment and completion 
that exists between low income students and their more affluent 
peers. This is true even at low cost institutions like the CSU.
    In the 2009-2010 school year, our average campus tuition 
plus fees will be $4,155 which is the lowest among any of our 
comparison institutions and among the lowest in the nation. 
Even so, many CSU students continue to have financial need.
    However, thanks in part to programs supported by Chairman 
Miller and Mr. McKeon, most CSU students with family incomes of 
$75,000 or less pay no student tuition or fees at the CSU. Both 
of you have always focused on our most needy students, so thank 
you.
    Pell is a huge part of this equation in California. This 
fall we estimate that more than 128,000 of our neediest 
students will receive Pell Grants for a total of more than $445 
million. Your support for Pell has also helped us maintain the 
CSU's long-standing policy.
    This is our policy, increases in federal and state grant 
programs should reduce our students' loan indebtedness dollar-
for-dollar. Over 57 percent of our CSU graduate recipients 
graduate without debt compared to the national average of 33 
percent. And the average debt in California of our students is 
a little less than $14,000 a year, well below the national 
average of $20,000.
    More than 35,000 Pell recipients received CSU Bachelor's 
degrees in 2008. The CSU endorses continued efforts to increase 
this vital aid for students.
    This new administration's proposed new $500 million per 
year post-secondary access and completion fund, which would 
provide grants to states and nonprofit organizations, to help 
the underserved population pursue and complete a post-secondary 
education is very important.
    The CSU is very supportive of this concept and would like 
to offer its experience in developing this new program, should 
Congress decide to authorize it. The CSU would also support 
including an incentive for maintaining state funding of higher 
education in this program, similar to the non-supplanting 
provision found in Title I of ESEA.
    I commend both Chairman Miller and ranking member McKeon 
for utilizing such maintenance of effort language. It is very 
helpful for public institutions.
    As this committee explores ways to improve educational 
attainment for lower income and under-represented students, I 
urge you to consider what I call a big and bold idea, and we 
sure don't need any more little ideas, and that is to resurrect 
a concept that was authorized in 1972, which was the original 
Pell.
    It envisioned direct institutional grants to colleges and 
universities to support the educational services necessary for 
these students to succeed. The concept was known as the cost of 
education allowances and was similar to the concept contained 
in the Elementary and Secondary Education Act of 1965.
    A Title I for higher education would provide a flat 
capitation grant per lower income student for every institution 
that meets an enrollment threshold of at least 20 percent of 
these students. The program could require that funds be used to 
support academic and student service programs designed to 
assist Pell eligible students.
    It would create incentives for public and private 
institutions to not only enroll but to retain and graduate low 
or lower middle class income students. Here, too, the amount of 
the grant award could be moderately increased or decreased 
based on the maintenance of effort for higher education.
    If we are going to improve our nation's achievements in 
higher education and reach the President's goal we have got to 
reach out to the underserved communities of this country.
    Thank you again for this opportunity, and I will be happy 
to answer your questions.
    [The statement of Mr. Reed follows:]

Prepared Statement of Charles B. Reed, Chancellor, the California State 
                               University

    Chairman Miller, Ranking Member McKeon, and members of the 
committee, thank you for inviting me to discuss the California State 
University (CSU) programs that support access to California's neediest 
students and the importance of federal student financial aid to help 
achieve that goal. The CSU commends the committee for its attention to 
the important task of ensuring that every student that chooses to do so 
can pursue a postsecondary education. I am pleased to share with you 
our system's experience with federal student educational loan programs 
and with federal need-based aid programs.
The California State University--Background
    Few, if any, university systems can match the scope of the CSU 
system. The CSU is the largest four-year university system in the 
country, with 23 campuses, approximately 450,000 students and 47,000 
faculty and staff. The CSU's mission is to provide high-quality, 
affordable education to meet the ever-changing needs of the people of 
California. Since the system's creation in 1961, it has awarded almost 
2.5 million degrees. We currently award in excess of 91,000 degrees 
each year.
    The CSU plays a critical role in preparing outstanding candidates 
for the job market. Our graduates help drive California's aerospace, 
healthcare, entertainment, information technology, biomedical, 
international trade, education, and multimedia industries. Altogether, 
about half the bachelor's degrees and a third of the master's degrees 
awarded each year in California are from the CSU.
    The CSU faculty's applied research activities in agriculture, water 
resources, public health, biotechnology and homeland security, to name 
a few, emphasize real time solutions to support both decision-makers 
and practitioners.
    One key feature of the CSU is its affordability. For 2009-10, the 
CSU's systemwide fee for full-time undergraduate students will be 
$3,354. With individual campus fees added in, the CSU's total fees will 
average $4,155, which is the lowest among any of the CSU's comparison 
public institutions and among the lowest in the nation. Even with our 
low costs, many CSU students continue to have great financial need. 
More than half of our students (255,741) receive financial aid. Thanks 
in part to federal programs supported by this committee and to 
California's need-based aid programs, we have been able to keep costs 
down for those who need the most help; for example, most CSU students 
with family incomes of $75,000 or less pay no student fees at all.
The California State University--Its Students
    CSU students are not necessarily the traditional 18 to 22-year-
olds. A recent survey of CSU students revealed the following:
    --The average undergraduate age is 24,
    --About 92 percent are commuters,
    --39 percent are independent from their parents,
    --Nearly one in four have dependents,
    --Three out of four have jobs, and 18 percent work full time,
    --About 35 percent are the first generation in their family to 
attend college,
    --54 percent of CSU students are students of color.
    The CSU prides itself on its ability to provide college access to 
students across California's increasingly diverse population. More than 
half of our campuses are designated as Hispanic-Serving Institutions. 
The CSU provides more than half of all undergraduate degrees granted to 
the state's Latino, African American and Native American students.
    Additionally, CSU students are closely connected and committed to 
the communities in which they live. More than 194,000 CSU students 
participate in community service annually, donating nearly 32 million 
hours. The economic impact of this service equates to $624 million.
CSU Participation in the Direct Lending and FFEL Programs
    CSU campuses participate in federal student educational loan 
programs either through the Federal William D. Ford Direct Student Loan 
(Direct Lending) or the Federal Family Education Loan (FFEL) program. 
Between the two programs, roughly 147,000 CSU students borrowed just 
under $1 billion in 2007-08. During the 1990s, after the Direct Lending 
program was enacted, approximately ten CSU campuses made the transition 
to that program, and for the most part those campuses have remained 
with Direct Lending ever since. Earlier this decade, several other CSU 
campuses decided to make the switch to Direct Lending, such that by 
this coming fall fifteen of the twenty-three CSU campuses will be in 
the Direct Lending program.
    Historically, campuses that chose the Direct Lending program tended 
to view the following characteristics as advantageous:
     Single point of contact for schools, student, and parent 
borrowers o Easier for schools to administer
     Financial aid software incorporates the Direct Lending 
process much better than FFEL
     Easier for staff to deal with students and offer better 
customer service
     Direct Lending disbursement process mirrors Pell, ACG and 
SMART Grants in dealing with COD (Common Origination and Disbursement) 
system with US Department of Education
     Schools do not have to deal with multiple lenders, 
servicers, and guarantors o Elimination of inconsistencies between 
lenders and lender response times to students
     Faster origination and disbursement compared to FFEL
     Funds not tied to individual students and loan types o 
School can determine which students and loan types to disburse
     Re-allocating funds from Subsidized to Unsubsidized loans 
is much easier ? This situation is caused by recalculation of 
eligibility due to enrollment changes or other aid coming later such as 
scholarships and stipends
     Direct Lending offers standard borrower benefits
     Income Contingent Repayment Plan is better than FFEL
    At the same time, these campuses tended to deem some aspects of the 
FFEL program to be less desirable:
     Students and the university must deal with multiple 
lenders, servicers, third party systems for loan processing, guarantors
     Each entity wants to meet with university personnel 
(particularly those in financial aid) to promote their particular 
business/services to the school and its students
     The campus must initiate a Request for Information (RFI) 
to all lending partners in order to analyze services and benefits and 
determine if schools want to use them on their preferred lender lists
     University must adhere to ``sunshine'' provisions dealing 
with lending partners
     Students and the university must deal with multiple 
contacts with each entity to set up loan process o Guarantor flow, 
lender flow, school flow, etc.
     Campus must return funds to third party disbursing agent 
by Master Check for students rather than individual check for each 
student
    During the 1990s and into early this decade, roughly half of the 
CSU campuses continued to participate in the FFEL program. Those that 
chose to do so were apt to find the following characteristics of the 
program appealing:
     Multiple lenders, servicers, guarantors leads to 
competition; schools and students have choices
     Traditionally, customer service was thought to be better 
than it is with Direct Lending (though less true in current financial 
environment)
     Lenders and guarantors offered more default prevention 
activities and services to schools and borrowers
     Lenders were able to choose to give better borrower 
benefits than Direct Lending (many have now stopped or drastically 
reduced given the current fiscal situation)
    FFEL campuses also were likely to have the following concerns about 
the Direct Lending program:
     Single entity o The lack of competition could lead to 
complacency in addressing issues related to processing and customer 
service
     If there is a problem with a student record, must wait 
until Direct Lending Servicer fixes problem
     Political Uncertainty o In the mid to late 1990s, 
Congressional limitations on the percentage of institutions that could 
shift to Direct Lending kept many campuses from doing so
     Congressional debate and continuous attempts to eliminate 
the Direct Lending program raised concern about the future viability of 
the program
    In 2008-09, 10 CSU campuses participated in Direct Lending. For 
2009-10, 5 more CSU campuses have moved to Direct Lending, and the 
remaining 8 CSU campuses are in the process of moving to Direct Lending 
for 2010-2011.
    Many of these campuses were considering changing to Direct Lending 
anyway, but events of the past few years have contributed significantly 
to this shift. First, changes to federal law through the budget 
reconciliation process that reduced FFEL lender margins over the last 
two Congresses have led to a decline in FFEL lender service and 
reliability and a reduction in borrower benefits. Second, our nation's 
financial crisis, which has hit the banking industry particularly hard, 
has raised significant concerns about the long-term viability of 
participating in FFEL. Third, previous institutional concerns about the 
future viability of the Direct Lending Program have been eliminated.
    Stability and reliability in a campus's student loan program is 
tremendously important to our students and our institutions. Given this 
situation, coupled with the ready availability of a proven alternative 
in Direct Lending, beginning last year I strongly encouraged all of our 
remaining FFEL campuses to make the switch to Direct Lending.
Increases to Student Aid
            Pell Grants Increases
    The Pell Grant program continues to represent the foundation of 
federal student financial aid programs. As the most need-focused 
federal financial aid program, strengthening Pell is essential to 
closing the gap in college enrollment and completion that exists 
between low-income students and their more affluent peers. A continued 
commitment to the Pell Grant program, and to increases in the maximum 
Pell Grant award, are essential to ensuring access for disadvantaged 
students. Across the CSU System, 124,000 students received $364 million 
in Pell Grant awards in academic year 2007-2008 (the last year for 
which data are available). The average CSU Pell Grant recipient 
receives $2,943 per year from the program, and Pell Grants account for 
18 percent of the funds awarded to CSU students. The recently enacted 
American Recovery and Reinvestment Act includes a $619 increase in the 
size of the annual Pell Grant, raising the maximum grant to $5,350 in 
2009-10. We estimate that this will result in over 128,000 of our most 
financially needy students receiving an additional $81 million in 2009-
2010, bringing total Pell Grant funding received by our students to 
$445 million. CSU's long-standing financial aid policy will continue to 
require that increases in all federal and state grant programs reduce 
our students' loan indebtedness on a dollar-for-dollar basis. 
Approximately 30,000 Pell recipients received CSU bachelor's degrees in 
2006-2007. On behalf of CSU students across California, I would like to 
thank the members of the Committee for that support. The CSU endorses 
continued efforts to increase this vital aid for students.
            Effect of Increased Federal and State Grants on Loan 
                    Indebtedness for CSU Students
    CSU's relative affordability, coupled with increases in the Federal 
Pell Grant and increases in CSU's grant programs, have enabled us to 
hold down the extent to which CSU students incur debt to finance their 
education. Over 57% of our baccalaureate recipients graduate from CSU 
without any debt, compared to the national average of 33%. Of the 43% 
of our baccalaureate degree recipients who assume student loans, the 
average debt is substantially below state and national averages: 
$14,013 for CSU graduates, $17,215 for all other students graduating in 
California, and $20,098 for students who graduate nationally. Keeping 
student loan indebtedness low for CSU students is a direct result of 
the commitment of Congress to increase funding for the Federal Pell 
Grant.
    Furthermore, the CSU has taken an extra step in making this kind of 
financial information about student debt, lower-income student access, 
actual cost or ``Net Tuition'' available to students, families and 
taxpayers. The CSU has committed to providing data on student learning, 
student engagement, and enrollment and graduation as part of a national 
initiative called the Voluntary System of Accountability. Each of the 
23 CSU campuses has developed a web-based page called the College 
Portrait that is designed to specifically communicate accountability 
data to the public. In addition, the CSU is going beyond the VSA 
College Portrait and has developed its own unique ``public good'' 
contributions page. Included in this page is campus specific 
information on total degrees awarded, the contribution of CSU students 
to the workforce, the number of Pell Grant recipients, average net 
tuition to attend a CSU and fees paid per student, as well as the 
average loan debt for CSU bachelor's degree recipients. A copy of the 
CSU Systemwide Public Good page is also available. For more 
information, see http://www.calstate.edu/PA/news/2008/
accountability.shtml.
            Concern about Year-Round Pell Implementation
    The CSU is thankful to members of this Committee, and particularly 
to Chairman Miller and Ranking Member McKeon, for their inclusion of a 
year-round Pell Grant in the Higher Education Act. Year-round study 
enables students to complete their academic degree in less time than 
might otherwise be required. This reduces the amount of time that a 
student spends in school, saves the student money (and reduces 
borrowing), and permits more efficient use of campus facilities and 
resources at a time when those resources are being stretched due to 
increasing enrollments and tightening state budgets. Increasing 
enrollment demand will be a national trend for the foreseeable future, 
and we fully expect a number of institutions to utilize a year-round 
calendar as a resource management strategy. The CSU is concerned by 
reports that the Department of Education may be considering tightening 
the definition of students who are eligible for year-round Pell Grants 
by requiring them to have completed 24 hours of academic credit during 
an academic year to qualify for continuing Pell Grant funds during the 
following summer. As noted earlier, the average age of CSU 
undergraduates is twenty-four. In addition, seventy-five percent of our 
students work, and eighteen percent work full time. Consequently, many 
of our students are not in a position to enroll full-time each term. 
Requiring students to complete 24 hours of academic credit during an 
academic year to qualify for a year-round Pell Grant will disadvantage 
non-traditional students served by institutions like the CSU and the 
community colleges. We urge the committee to oppose such an 
interpretation if necessary.
Proposed Access and Completion Fund
    The CSU notes that the Administration has proposed a new $500 
million per year postsecondary ``Access and Completion Fund.'' This 
proposal would provide grants to states and non-profit organizations to 
help underserved populations pursue and complete a postsecondary 
education. Funding would be mandatory, and funding would be on a 
competitive basis. The CSU is very supportive of this concept, and 
would like to offer its experience in developing this new program, 
should Congress decide to authorize it.
    Access to and completion of a postsecondary education for low-
income and underrepresented individuals is a primary purpose and 
function of the CSU. The CSU provides more than half of all 
undergraduate degrees granted to the state's Latino, African American 
and Native American students, and roughly one-half of CSU campuses are 
Hispanic-Serving Institutions (HSIs). Approximately 35 percent of CSU 
students are the first in their family to attend college. For Academic 
Year 2006-2007, 37 percent of CSU's undergraduate students were Pell 
Grant recipients. Currently, over 50 percent of CSU students (255,741) 
receive some financial aid.
    In order to best serve these students and ensure that they have the 
tools to complete their education, the CSU has undertaken a number of 
initiatives. For example, the CSU encourages students from underserved 
populations to prepare early for and pursue college through initiatives 
such as its ``Steps to College'' poster, which describes for middle and 
high school students (grades 6-12) and their families the steps they 
need to take to prepare and apply for college and financial aid. More 
than 1 million copies of the award-winning poster in eight languages 
have been distributed to students throughout California and in many 
states throughout the country.
    CSU is also working with churches in the Southern California (Los 
Angeles Basin) and the Bay Area (Oakland, San Francisco, San Jose, and 
Vallejo) that serve African American congregations in an effort to 
increase the pool of African American students, particularly males, to 
become eligible to attend a four year university. In February/March 
2008, CSU held ``Super Sundays'' at 22 churches in Los Angeles, 
reaching over 57,800 people. In the Bay Area, CSU ``Super Sunday'' 
programs were held at 30 churches reaching over 29,285 people. CSU 
campus presidents, and members of the Board of Trustees and Board of 
Governors, are given the opportunity by the participating churches to 
speak about how to get to college as part of the church service. The 
participating campuses set up booths to distribute materials and answer 
any questions regarding college preparation, admittance, retention and 
graduation. CSU's ``Steps to College'' posters were distributed to over 
29,000 parents, grandparents and students. This program has resulted in 
the identification of a contact person at every church who is dedicated 
to college knowledge and college preparation.
    One of the most important tools the CSU has developed to reach high 
school students is the Early Assessment Program, known in California as 
simply the ``EAP.'' CSU created this early assessment of college 
readiness program in collaboration with the California Department of 
Education and the State Board of Education. It provides 11th grade 
students a `snapshot' of their mathematics and English/language arts 
proficiency. The test incorporates the CSU's placement standards into 
the California Standards Tests for English and math.
    The EAP identifies students--before their senior year--who need to 
do additional work in English and/or mathematics prior to entering the 
CSU. The EAP informs students, families, and high schools of a 
student's readiness for college-level work in these subjects. Most 
importantly, it provides an opportunity for the high school to work 
with the students while they are enrolled in 12th grade to help them to 
master the requisite English and math skills expected of a graduating 
high school senior. The three key components of the EAP are: (1) early 
assessment in 11th grade in English and mathematics, (2) supplemental 
high school preparation in 12th grade, and (3) teacher professional 
development designed to equip high school English and mathematics 
teachers with the tools necessary to ensure student mastery of the 
content standards. Although the EAP is voluntary, last year almost 
330,000 students took the EAP English test, and approximately 148,000 
took the mathematics test.
    The CSU is a major participant in the federal TRIO and GEAR UP 
programs, which provide low-income students the skills, encouragement, 
and academic preparation needed to enter and succeed in high school and 
postsecondary education through partnerships between schools, 
universities, the private sector, and community organizations. In 
academic year 2007-2008, the CSU received $6.8 million in TRIO funding 
to serve 56,500 students. Since 1999, the CSU has received $112 million 
in GEAR UP funds to serve 29 California schools and 12,144 students.
    Finally, the California State University is developing a new 
``Center to Close the Achievement Gap,'' which will be a partnership 
between the business community through California Business for 
Education Excellence (CBEE) and the CSU, and will transform preparation 
and performance of new teachers and administrators in participating CSU 
Colleges of Education across the state. Teachers and administrators 
graduating from participating campuses will have enhanced skills to: 
(1) significantly reduce achievement gaps in reading, writing and math; 
(2) prepare high school graduates with the skills to succeed at college 
level work; and (3) decrease college remediation rates while increasing 
degree completion rates.
    The CSU and similar institutions are building the foundation to 
ensure that all Americans have the chance to pursue and complete a 
college education, and gain the skills they need to play a productive 
role in the economy of the future. As you consider this proposal, we 
hope that you will allow us to play a key role.
Access and Completion: A CSU Proposal for a New Kind of Institutional 
        Aid
    As this committee contemplates ways to improve educational 
attainment for lower-income and underrepresented students, I also urge 
you to consider a bold, new direction. In the early legislative history 
of what is now the Pell Grant program, Congress developed federal 
student aid grants to help economically disadvantaged students attend 
higher education institutions of their choice. In recognizing the 
educational disadvantage and substantially higher cost for educational 
services that accrue to the colleges and universities where many lower-
income students enroll, the originally authorized Pell Grant or BEOG 
legislation envisioned direct institutional grants to colleges and 
universities that would accompany Pell Grant recipient students. These 
institutional grants were designed to provide the appropriate 
educational services necessary for these students to succeed and 
eventually graduate.
    This original program, which was authorized in 1972 but never 
funded, was known as the ``cost of education allowances'' and was based 
on a similar concept advanced in the Elementary and Secondary Education 
Act (ESEA) in 1965, known as Title I. At the heart of this concept is 
the widely accepted premise that economically disadvantaged students 
cost more money to educate than students from wealthier backgrounds. 
Title I was created to provide supplemental federal funding to those 
elementary and secondary schools with above-average numbers of lower-
income students. In 1972, the cost of education allowances program was 
authorized to achieve the same objective by providing supplemental 
resource support to colleges and universities in order to provide 
essential educational assistance to Pell Grant recipient students.
    The time has come to resurrect this idea. This policy would provide 
a specific flat ``capitation'' institutional grant per lower-income 
student to every college and university that meets a minimal enrollment 
threshold of 20 percent. To ensure that these funds are properly 
devoted to student enrichment, this current proposal could be shaped to 
require that federal funds must be used to support campus-based 
academic and student service programs specifically designed to assist 
Pell Grant-eligible students. Such a program could also create 
important and much needed fiscal incentives for public and private 
institutions to not only enroll, but to retain and graduate more lower-
income and lower-middle income students. Also, the amount of the 
federal flat grant award to institutions could be moderately increased 
or decreased, based on state support for higher education. This would 
provide an incentive for maintaining certain levels of public funding 
of higher education, similar to the non-supplanting provision found in 
Title I of ESEA. This additional maintenance of state effort provision 
could help better stabilize higher education funding, and thus better 
stabilize student tuition and fees as well. Developing new federal 
policies that encourage states to maintain their commitment to 
financing widespread access and completion in higher education is 
essential if our nation is to reverse the relative international 
decline that we have experienced over the last few decades. If we are 
going to improve our nation's achievements in higher education, America 
must invest in our most needy students, while also investing in those 
institutions that will serve them.
    A more detailed discussion of this proposal is attached as Appendix 
A.
Conclusion
    The CSU has long appreciated this committee's efforts to provide 
assistance to our neediest students. We welcome the opportunity to be a 
resource to you as you continue to explore ways to ensure access and 
success in higher education.
                                 ______
                                 
    [Additional material submitted by Mr. Reed follows:]

           Institutional Aid (Title I) and Higher Education:

                  How a New Administration Can Change
                   Federal Policy for the Common Good

                By Charles B. Reed and F. King Alexander

    In a February address to Congress, President Obama stated that by 
2020 our nation would need to regain its prominence as the world's 
higher education leader if we are to enjoy the same kinds of economic 
success and stability that we have experienced during previous decades. 
This marked the first real admission by a U.S. president that we are no 
longer the global leader in higher education access and educational 
attainment. Furthermore, this statement indicates that we can no longer 
continue business as usual in the world of higher education policy, and 
that we must do more than simply argue at the federal level every two 
to four years about how much to increase Pell Grant maximum or the 
aggregate subsidized loan cap for undergraduates. This limited 
discourse has resulted in stagnant progress for our nation while much 
of the rest of the world has developed new and more innovative 
policies. For us to get back on track and reach President Obama's 
higher education objective by 2020, we need much higher levels of 
educational attainment for lower-income and underrepresented students.
    Instead of promoting the same old arguments, we recommend a new 
direction--one that ironically has been excluded from federal policy 
dialogue for over 30 years--despite being an important component of the 
original Pell Grant or BEOG legislation in 1972.
    In the early legislative history of what is now the Pell Grant 
program, Congress developed federal student aid grants to help 
economically disadvantaged students attend higher education 
institutions of their choice. In recognizing the educational 
disadvantage and substantially higher cost for educational services 
that accrue to the colleges and universities where many lower-income 
students enroll, the originally authorized Pell Grant or BEOG 
legislation envisioned direct institutional grants to colleges and 
universities that would accompany Pell Grant recipient students. These 
institutional grants were designed to provide the appropriate 
educational services necessary for these students to succeed and 
eventually graduate.
    This original program, which was authorized in 1972 but never 
funded, was known as the ``cost of education allowances'' and was based 
on a similar concept advanced in the Elementary and Secondary Education 
Act (ESEA) in 1965 known as Title I. At the heart of this concept is 
the widely accepted premise that economically disadvantaged students 
cost more money to educate than students from wealthier backgrounds. 
Title I was created to provide supplemental federal funding to those 
elementary and secondary schools with above average numbers of lower-
income students. In 1972, the cost of education allowances program was 
authorized to achieve the same objective by providing supplemental 
resource support to colleges and universities in order to provide 
essential educational assistance to Pell Grant recipient students.
    The time has come to resurrect this idea. If we are going to change 
the way colleges and universities approach economically disadvantaged 
students, we need to provide actual federal funding for these ``cost of 
education allowances.'' Currently, there are no fiscal incentives for 
colleges and universities to attract and graduate lower-income 
students. In fact, current federal direct student aid programs in their 
totality encourage colleges and universities to pursue more free market 
agendas by providing incentives for tuition-based financial strategies. 
This essentially means that higher cost institutions, both public and 
private, have disproportionately benefited from federal student aid 
funding due to the cost sensitivity embedded within the system. 
Additionally, by supporting tuition and fee-based strategies, the 
federal government has also allowed state legislatures to more readily 
opt out of their funding responsibilities resulting in continuous 
reductions in state tax support of public higher education. An indirect 
result of this existing system is that there are no incentives for 
lower cost institutions that serve the masses or states that strive to 
keep higher education affordable. One important, but unanticipated, 
outcome has been that as states increasingly withdraw their public 
support of public institutions, many universities have found other 
alternatives to educate more costly lower-income students, such as 
increasing out-of-state enrollments in exchange for less wealthy in-
state students.
    Also working against colleges and universities enrolling more 
lower-income students are current national ranking systems and the use 
of very simplistic institutional measurements by state authorities. 
Rankings such as the popular U.S. News & World Report indirectly 
encourage universities to reduce their lower-income student enrollments 
by rewarding higher graduation rates, admissions selectivity, and other 
variables that are aimed at promoting institutional prestige above 
common purpose. This is just wrong. Many state authorities have also 
begun prioritizing very simplistic institutional measurements such as 
graduation rates without any regard for the aggregate numbers of 
graduates or the socioeconomic status of the students educated at the 
various institutions.
    In light of the many fiscal and cost-related disincentives for 
enrolling more lower-income students, it should not come as a surprise 
that we continue to see four-year public and private universities 
decrease their commitments to larger numbers of lower-income students. 
In fact, from 1972 to 2006 the nation has witnessed an overall decline 
in Pell Grant-eligible students as a percentage of the total student 
population. At public universities, the drop was from 41 percent to 34 
percent, and from nearly 22 percent to 14 percent on all private four-
year college and university campuses. These significant declines have 
occurred despite the nearly $100 billion in federal direct student aid 
grants, subsidized loans, and tax assistance currently available. We 
think this becomes a civil rights question.
    However, for the colleges and universities that have maintained 
their commitment to lower-income and economically disadvantaged 
students, which have primarily been state comprehensive universities 
like the California State University and community colleges, the fiscal 
disincentives remain problematic. Over the last 30 years, public 
comprehensive universities and community colleges have seen a 
substantial decline in fiscal competitiveness when compared with higher 
tuition public and private institutions. The irony, of course, is that 
those institutions that serve the broader public good are increasingly 
fiscally disadvantaged for maintaining these critical missions.
    To attempt to change this ominous direction to focus on the new 
generation of students with the greatest educational needs, it is 
imperative that we revisit the ``cost of education allowances'' program 
and develop a federal Title I type program for higher education 
institutions. This policy would provide a specific flat ``capitation'' 
institutional grant per lower-income student to every college and 
university that meets a minimal enrollment threshold of 20 percent. To 
ensure that these funds are properly devoted to student enrichment, 
this current proposal could be shaped to require that federal funds 
must be used to support campus-based academic and student service 
programs specifically designed to assist Pell grant eligible students. 
Such a program could also create important and much needed fiscal 
incentives for public and private institutions to not only enroll, but 
to retain and graduate more lower-income and lower-middle income 
students. Also, the amount of the federal flat grant award to 
institutions could be moderately increased or decreased, based on state 
support for higher education. This would provide incentive for 
maintaining certain levels of public funding of higher education, 
similar to the non-supplanting provision found in Title I of ESEA. This 
additional maintenance of state effort provision could help better 
stabilize higher education funding, and thus better stabilize student 
tuition and fees as well.
    This recommendation advanced by the California State University has 
earned support from numerous higher education economists and leaders, 
as well as from national organizations such as the American Association 
of State Colleges and Universities (AASCU) and in the College Board's 
recent report ``Rethinking Student Aid'' where a similar concept was 
advocated. Developing new federal policies that encourage states to 
maintain their commitment to finance widespread access and completion 
in higher education is essential if our nation is to reverse the 
relative international decline that we have experienced over the last 
few decades.
    For nearly four decades, the federal government has prioritized an 
individualistic and market-oriented approach to funding higher 
education by simply putting resources in the hands of students. While 
this approach has been worthwhile, it has created a series of perverse 
fiscal and institutional incentives that could be remedied by the 
implementation of a new policy already authorized as part of the 
original 1972 legislative strategy. Creating financial incentives for 
institutions to remain committed or to recommit themselves to the 
public needs of society should be among the federal government's 
highest priorities.
    If we are ever going to reach President Obama's goal of 2020, 
America is going to have to invest in our most needy students who are 
disproportionally students of color while also investing in those 
institutions that will serve them.

    Charles B. Reed is chancellor of the California State University. 
F. King Alexander is president of California State University, Long 
Beach.
                                 ______
                                 
    Chairman Miller. Mr. Remondi.

STATEMENT OF JOHN F. REMONDI, VICE CHAIRMAN AND CHIEF FINANCIAL 
                      OFFICER, SALLIE MAE

    Mr. Remondi. Good morning, Chairman Miller, ranking member 
McKeon and members of the committee. My name is Jack Remondi, 
and I am the vice chairman and chief financial officer of 
Sallie Mae.
    On behalf of Sallie Mae's 8,000 employees and the more than 
20 million college savings and student loan customers, I thank 
you for the opportunity to testify on federal student loan 
reform and the opportunity to provide for increasing student 
aid.
    The administration has made an important proposal to reform 
the federal student loan programs. At the outset, I want to 
underscore the significant agreement between Sallie Mae and the 
administration's objectives of reforming the federal student 
loan program and increased funding for Pell Grants.
    Sallie Mae proposes to build on this model, with 
modifications that would preserve beneficial competition in the 
delivery of loans, create incentives to materially reduce 
defaults, and eliminate the risk of requiring more than 4,000 
schools to convert to a new loan delivery process within the 
next 9 months.
    We believe our suggestions would preserve the value added 
by loan originators, including state and nonprofit providers, 
help all students better manage their debt burden, and increase 
the savings available for the Pell Grant Program.
    The President's proposal builds a solid foundation for a 
new federal student loan program by utilizing federal funding, 
establishing common loan terms and replacing the subsidy model 
with a fee for service model. We believe, however, that it 
could be made better.
    Specifically, we recommend the following six enhancements. 
One, we would allow schools to choose the loan originator that 
works best for them and the students that they serve. We would 
introduce risk sharing so that all servicers have skin in the 
game and loan defaults are minimized.
    We would allow originating lenders to retain servicing 
regardless of their size; and permit schools to choose their 
loan servicer. We would require the Department of Education to 
set origination fees via market mechanisms, to preserve a broad 
participation of originators, including state and nonprofit 
service providers.
    And finally, we would require the Department of Education 
to fund default prevention initiatives, such as financial 
literacy programs and student counseling.
    The benefits of these programs and these modifications are 
significant. Using the existing loan delivery infrastructure 
eliminates the risks and costs associated with the conversion 
of more than 4,000 schools to a loan origination platform that 
they did not choose.
    After 16 years of FFEL and direct lending competing side-
by-side, it is fair to say that schools have chosen the loan 
delivery system or process that works best for them and their 
students.
    Great products and services result from consistent 
competition. Competition through the choice of loan providers 
and servicers will drive innovation and improvement in these 
programs. Mandating that all schools use a single loan 
originator will eliminate this competition and any incentives 
in innovation for improvement.
    Today, loan originators add significant value beyond the 
delivery of funds. The new income-based repayment program or 
IBR is a great example of how competition adds value. IBR will 
help lower-income borrowers shrink their payments to a 
manageable portion of their income.
    For students to benefit from this new tool, however, they 
need to be aware of it and know how to use it. To make sure 
this is the case, Sallie Mae has held school-based workshops on 
IBR since January, 6 months before the launch and has been 
asked by several direct lending schools to provide these same 
workshops for their students.
    These efforts are an example of how competition creates 
enhanced services, because we compete, lenders, secondary 
markets and guarantee agencies are all incented to create 
value-added programs and services.
    These initiatives are particularly valuable to schools and 
families with limited resources and some of the examples 
include financial literacy programs and tools like paying for 
college calculators and seminars, customized technology 
interfaces for schools, and outreach programs that help 
families understand, plan, and pay for college including 
customized programs for Hispanic, Latino and African American 
students and families.
    A specific example is Sallie Mae's Education Investment 
Planner, a free tool that helps students and families save, 
plan and pay for college. I would also like to highlight the 
cost-saving aspects of our suggestions, some of which may not 
be captured by CBO models but are real nonetheless.
    Our risk sharing proposal would generate substantial 
savings. A modest 10 percent reduction in default rates, only 
one-third of the 30 percent that Sallie Mae has actually 
achieved, would prevent more than $1 billion in loans from 
defaulting, sparing several hundred thousand students from the 
negative consequences of default.
    A delay in the conversion of the more than 4,000 schools 
into the Department of Education's loan origination system 
would materially reduce the savings and could potentially 
disrupt student's access to loans. By allowing schools to use 
the origination platforms that work best for them, 
implementation is guaranteed and the savings would be realized.
    Finally, using a market-based process for setting fees will 
insure the lowest cost to the taxpayer year-after-year. I hope 
I have been clear. Sallie Mae supports the administration's 
objectives in reforming the federal student loan programs in 
increased funding for Pell Grants.
    We are not trying to preserve lender subsidies. We are 
offering recommendations that build on the foundation of the 
President's proposal, particularly the use of low-cost Treasury 
funding for all loans.
    And with such changes, we and our competitors can guarantee 
the seamless delivery of student loans and meet the financial 
objectives of the administration, this committee, and America's 
students and families.
    Thank you, and I would be pleased to answer any questions 
you may have.
    [The statement of Mr. Remondi follows:]

 Prepared Statement of Jack Remondi, Vice Chairman and Chief Financial 
                          Officer, Sallie Mae

    Good morning Chairman Miller, Ranking Member McKeon and Members of 
the Committee. My name is Jack Remondi. I am the Vice Chairman and 
Chief Financial Officer of Sallie Mae. I am here on behalf of Sallie 
Mae's 8,000 employees, 1 million college savings plan customers and 10 
million student loan customers, and I thank you for the opportunity to 
testify on federal student loan reform and the opportunities it 
provides for increasing student aid.
    The student loan reform proposal in the President's FY 2010 budget 
outline continues an important discussion about improving access to 
postsecondary education, and as a saving-, planning- and paying-for-
college company with a 37-year history of helping make higher education 
accessible and affordable for America's students, Sallie Mae is 
grateful for this opportunity to add our voice to the discussion.
Overview
    First, I'd like to take a moment to introduce you to Sallie Mae. 
Since our creation in 1972, we have helped more than 21 million 
Americans pay for college. Through our Upromise affiliates, the company 
manages more than $17 billion in 529 college-savings plans for more 
than 1 million families, and is a major, private source of college 
funding contributions in America with 10 million members and more than 
$475 million in member rewards.
    Sallie Mae is a shareholder-owned, for-profit business. We are 
proud to employ more than 8,000 workers in 17 states. As a participant 
in the Federal Family Education Loan Program (FFELP), Sallie Mae has 
raised billions in private sector capital to lend to students and 
parents to help them meet the cost of college. In the last decade 
alone, Sallie Mae has provided approximately $120 billion in federal 
student loans to students and parents.
    At the outset, I want to underscore significant areas of agreement 
between Sallie Mae and the Administration. Sallie Mae fully supports 
the Administration's objectives of assuring stable funding of the 
federal student loan program while generating tens of billions of 
dollars in taxpayer savings that can be used to increase need-based 
grant aid for students, specifically to put the Pell Grant program on 
stable footing. Sallie Mae also supports the objective of achieving the 
most efficient and effective student lending infrastructure, which 
should preserve an important role for private student loan originators, 
including smaller, regional, state and non-profit providers.
    Within this context, Sallie Mae proposes improvements to the 
Administration's outline that would meet these objectives, and do so in 
a manner that eliminates transition or implementation risk, and 
preserves beneficial competition in the delivery of service to schools 
and students.
    Our objective is straightforward: construct a responsive, evolving 
student loan program that best meets the needs of students and schools, 
while delivering the best value to taxpayers. We propose using a 
competitive student loan delivery infrastructure to originate, service 
and collect student loans on behalf of the government, on a fee-for-
service basis, using low-cost federal funding direct from the United 
States Treasury.
    We believe that the best program for the long term is one that 
allows consumer choice and competition to drive efficiency, innovation 
and improvement. The Administration's proposal acknowledges the 
benefits of competition by reserving a role for competitively bid loan 
servicing and collections. Retaining these positive forces in the loan 
origination process as well will ensure that the individual needs of 
students and schools will continue to be met in the new program. By 
combining choice, competition and innovation with low-cost and stable 
direct government funding, we will have a system that serves the needs 
of students, schools, taxpayers, and the 35,000 people who work 
directly for student loan providers--all without risk of transition 
problems or unnecessary additional school expenditure.
    And we do know for a fact that such a program would work, because 
it did this year.
    Sallie Mae's ability to meet the growing demand for federal student 
loans today is due to the programs established by the Ensuring 
Continued Access to Student Loans Act (ECASLA). ECASLA, which is the 
direct result of the leadership and hard work of this Committee, 
authorized the programs that allow every student at every school to 
have access to student loans this year and next. In fact, unlike 
virtually every other consumer loan market, with or without government 
support, every eligible student or parent who sought a federal student 
loan got one. This is an amazing statistic in this economic climate. 
Sallie Mae is very proud of the role it played in making this happen.
    The temporary ECASLA programs have done more than see students 
through this uncertain time; they have demonstrated a way forward.
    The Administration's proposal and the ECASLA programs share the 
savings-generating component of federal ownership of student loan 
assets. The major difference is the process and timing of how and when 
the government owns the asset. Under ECASLA, lenders originate the 
loans and decide whether or not to sell them to the government. Under 
the Administration's proposal, the loans are originated by the 
government and owned by the government. Our suggested modification to 
the Administration's proposal authorizes lenders to originate the loans 
for the government, with government capital, on a fee-for-service 
basis--ending lender subsidies altogether.
    Under this construct, as in the Administration's, the government, 
not the lender, enjoys the economic benefit of loan ownership from the 
beginning, so lender subsidies are eliminated. Under this construct, as 
under ECASLA, schools and students remain free to choose the loan 
origination process and service provider that works best for them.
    The Administration's proposal, once a detailed version of it is 
officially evaluated by the Congressional Budget Office (CBO), will 
likely generate tens of billions of dollars in budget savings that can 
be used to pay for increasing Pell Grants. We agree that major budget 
savings should be a feature of loan reform. Modifying the 
Administration's proposal as we suggest will likewise generate tens of 
billions of dollars of budget savings for Pell Grants, in addition to 
other benefits that may not be fully captured within the budget-scoring 
model.
    The Administration's proposal would end the politically set lender 
subsidy rates that have been the cause of so much contention. We 
support that outcome completely, and elimination of lender subsidies is 
a feature of the Administration's plan we would leave unchanged.
    The Administration's proposal guarantees that loan capital always 
will be available and insulated from volatile capital markets. We, too, 
support a structure that achieves that result.
    We enthusiastically support creation of a program that generates 
savings by capitalizing on low-cost federal funding--the heart of the 
Administration's proposal--and that offers students and schools the 
ability to choose the loan origination platform and processes that best 
meets their needs, fosters competition and shares risk to enhance the 
level of service, lowers costs for taxpayers and preserves 35,000 
existing private sector jobs in the student loan industry.
Specific Enhancements and the Resulting Benefits
    By utilizing federal funding, establishing common loan terms, and 
replacing a subsidy model with a fee-for-service model, the President's 
proposal builds a solid foundation for a new federal student loan 
program. We respectfully submit, however, that it could and should be 
made better to ensure it is even more accountable to students, schools 
and taxpayers. Specifically, we recommend the following key 
enhancements to the Administration's student lending reform proposal:
     Allow schools to choose the loan delivery platform and 
loan originator that works best for them, including the Department of 
Education's Direct Lending infrastructure;
     Introduce a new risk-sharing program that requires all 
student loan servicers to have ``skin in the game'' so loan defaults 
are minimized;
     Allow originating lenders the opportunity to retain 
servicing if they meet the Department's basic criteria (e.g., price, 
quality, financial controls, compliance, etc.), with no minimum 
thresholds for servicer size;
     Permit schools choosing the Direct Lending originations 
process, or those choosing private lenders who do not provide 
servicing, to choose a loan servicer from among the Department's 
servicing contractors;
     Require the Department to set origination fees via market 
mechanisms designed to preserve broad participation of originating 
lenders, including smaller, regional, state and non-profit lenders; and
     Require the Department to set parameters for other school-
based and borrower-based default prevention initiatives--such as 
financial literacy programs and borrower counseling.
Avoidance of Implementation Risk
    The Administration's proposal would require all schools to 
originate loans through a single, Department of Education-run platform. 
This would require more than 4,000 schools to convert from the platform 
of their choice.
    Moving to a Direct Lending-only delivery system would quadruple the 
volume of loans delivered by the federal government within one year, 
and rely on one delivery ``pipe'' for some 6,000 schools and $90 
billion in loans annually.
    In contemplating such a drastic increase in volume, one should 
consider that in 2008, in the midst of unprecedented fears over the 
credit crisis, only about 400 schools converted to the Direct Lending 
delivery platform and actually made loans through the Direct Lending 
system. A wholesale move to the Direct Lending platform by July 1, 2010 
would mean converting more than 10 times as many schools to the Direct 
Lending origination system than have ever converted in a single year. 
In fact, the July 1, 2010 date is misleading as most schools must start 
processing loans as early as February 2010, less than 9 months from 
now.
    By maintaining a competitive delivery network, such as the one that 
currently serves 75 percent of colleges and universities, the risks 
associated with requiring thousands of schools to switch to the Direct 
Lending origination platform--potentially disrupted student access to 
loans and the consequent lost savings for Pell Grants--are removed 
completely.
Preservation of Choice for Students
    Two years ago, Congress passed legislation requiring that schools 
participating in FFELP include at least three lenders on a preferred 
lender list. This requirement guarantees that borrowers have a choice 
of lender during the loan process, to say nothing of the fact that then 
and now borrowers have been free to choose any qualified lender, 
including their hometown bank or credit union. We know that competition 
and choice are good for consumers. Great products and services come 
from entities that have great competition. When customers can be lost 
through competition, the pressure to innovate and improve products and 
services is unrelenting.
    Competition from Direct Lending forced private lenders to invest in 
and improve their loan delivery systems. Undoubtedly, competition from 
private lenders forced Direct Lending to invest in its loan delivery 
system. Mandating that every student at every school must use a single 
loan originator, irrespective of suitability, will eliminate any 
incentives for future investments in a loan delivery system. 
Monopolies, even governmental ones, are antithetical to high-quality 
service and innovation. Absent competition and investment in loan 
origination systems, it is unlikely that what works for students today 
will continue to work for them tomorrow.
Preservation of Choice for Schools
    Since the inception of Direct Lending in 1993, schools have been 
free to convert to the Direct Lending program, and indeed many schools 
have. After peaking at 34 percent of volume in academic year 1998-99, 
the Direct Lending program now serves about 25 percent of colleges and 
universities. However, the fact that the Direct Lending origination 
platform works for some schools does not mean it will work for all of 
them. Schools utilizing the Direct Lending program tend to be larger 
schools, which are more comfortable dealing directly with a federal 
department and more adept at performing the required functions, such as 
reconciliation of funds and promissory note collection.
    To illustrate this point, I note that 30 percent of public, 4-year 
colleges are in the Direct Lending program. Only 10 percent of 
community colleges, which have smaller student bodies, lower tuition, 
and smaller staffs, are in the Direct Lending program today. Requiring 
all schools to use the Direct Lending origination platform may pose 
significant and ongoing burdens on schools least able to absorb 
additional implementation, programming and staffing costs. With the 
changes to the Administration's plan that we propose, no school would 
be required to convert to the Direct Lending delivery system, but every 
school would retain the freedom they have today to convert if they 
choose.
No Additional Costs to Schools
    By not requiring all schools to convert to Direct Lending, our 
proposal would save staff time and expense--sometimes ranging into the 
hundreds of thousands of dollars--that might otherwise be passed on to 
students or state taxpayers.
Risk Sharing in Loan Servicing
    We believe that it is in everyone's interest to require all 
servicers to have ``skin in the game'' by sharing in the performance of 
every loan. Loans originated and serviced by Sallie Mae have a roughly 
30 percent lower cohort default rate by school type compared with the 
Direct Lending Program. In fact, if Sallie Mae had been servicing the 
Direct Lending portfolio for borrowers entering repayment in 2005 and 
2006, we estimate that we could have helped 15,000 borrowers avoid the 
consequences of default, and saved taxpayers $200 million in avoided 
defaults.
    We attribute this superior performance to the fact that Sallie Mae 
has ``skin the game'' in the form of fees and costs we incur to 
originate loans and a three percent risk-sharing component that 
provides a strong incentive to reduce defaults. Direct Loans are 
serviced on a pure fee-for-service basis. To maintain the incentives 
that have driven superior default prevention results by Sallie Mae, we 
propose adding a three percent risk sharing arrangement to the 
servicing structure to create the incentives for all servicers to help 
borrowers avoid default and save taxpayer dollars. If this modification 
reduces defaults by only 10 percent, hundreds of thousands of students 
would avoid the increased fees, damaged credit, and obstacles to 
obtaining other credit, housing, and professional advancement that 
result from a default, while saving taxpayers billions of dollars.
Value-Added Services in Private Sector Loan Delivery
    Loan originators add significant value to students and schools 
beyond the delivery of funds. It is important to preserve the role they 
play at 75 percent of the nation's colleges and universities. In 
evaluating any one benefit or service, it is important to remember that 
from the student's perspective, the act of paying for college is not a 
series of steps that begins with ``origination'' and ends with 
``servicing.'' For the student, the process begins with planning and 
saving for college, continues with debt counseling, applying for a 
loan, receiving the funds, graduating, managing the debt and paying the 
money back.
    Student lenders bring expertise, insight and understanding to that 
entire borrowing lifecycle and know how to present the right 
information and options at the right time.
    The upcoming launch of Income Based Repayment (IBR) illustrates 
this concept. IBR is a welcome, new, borrower-friendly repayment option 
Congress provided to student borrowers starting July 1 of this year. 
IBR will help lower-income borrowers lower their monthly payments to a 
manageable portion of their income.
    This new benefit might be considered a ``servicing'' issue because 
it is technically a repayment option, but that would be a mistake. For 
students to benefit from this new tool, work needs to be done. Schools 
need to counsel their current students on this option before they leave 
campus. Future students need to learn about this option and what it 
means to them, and they need to have this information with them at 
application, during origination, and before going into repayment.
    Sallie Mae began holding workshops and in-person school visits to 
discuss IBR in January--six months before it becomes available. Sallie 
Mae has been asked by several Direct Lending schools to provide these 
same briefings on how students can get the most of a new benefit, an 
example of how competition leads directly to enhanced services.
    Starting in March, Sallie Mae began to identify students who are 
likely to benefit from the new program and started educating those 
individuals about it with targeted counseling. Sallie Mae has posted 
information and worksheets and employed an interactive presentation on 
our website to educate borrowers (www.salliemae.com/ibr). We have 
built, and will launch in early June, a robust payment calculator that 
allows borrowers to model whether IBR makes sense for them. In a non-
competitive environment, these value-added services would exist only if 
specifically called for by contract terms.
    In these economic times, it is more important than ever that the 
borrower benefits Congress builds into the federal student loan 
programs reach each eligible student. Student loan providers have the 
expertise, ability, and incentives to make that happen.
Other Examples of Loan Provider ``Value-Added'' Services
    School-Specific Services: Private sector loan originators tailor 
loan delivery systems and support services to meet the needs of every 
school type, regardless of IT systems, staffing levels, special 
requirements or sophistication.
    The real world of school financial aid is an often hectic 
environment with a seasonal crush of work at the beginning of the 
semester, serving students and families that are increasingly stressed 
by the weak economy. School financial aid offices range from one or two 
professionals to many dozens, and information systems range from name 
brand ``enterprise'' systems to those that are ``home grown.''
    In delivering loans to 75 percent of schools, competitive private 
sector loan providers have adapted to the needs of many different types 
of schools, with many different types of administrative systems to get 
the job done. The result is that schools are better able to manage the 
seasonal crush of volume and students and families have the opportunity 
to get high-quality service, regardless of the institution they attend.
    In addition to providing customized technology interfaces, private 
sector loan providers also offer schools extensive technical and 
program policy support. For example, Sallie Mae's dedicated school loan 
delivery services team provides comprehensive technical and process 
training to institutions and responds to approximately 750,000 school 
questions and requests for support every year at more than 4,000 
institutions.
    In contrast, a single origination platform would be a ``one size 
fits all'' approach. This may work for some schools, but it is not 
tested to address the tremendous diversity of administrative and 
technology environments and support needs represented by the school 
community as a whole.
    Front End Default Prevention Programs: Many loan originators and 
guarantors provide end-to-end debt management and default reduction 
programs that begin with education before students take out their first 
loan, and continue through successful repayment. Today, guarantee 
agencies also provide a variety of debt education and debt management 
programs, which further strengthens the quality of outreach at the 
``front end'' of the lending process.
    Other Value-Added Programs and Services: Because they compete for 
business, private sector lenders, secondary markets and guaranty 
agencies are incented to provide a variety of ``value added'' programs 
and services that directly support the needs of students and families, 
and strengthen the ability of schools to serve students and families. 
These initiatives are particularly valuable to schools and families 
with limited resources. Examples include:
     Financial literacy programs and tools (e.g., paying for 
college calculators, paying for college seminars, information on 
maintaining good credit). Sallie Mae's Education Investment Planner is 
a recent example of this. The Education Investment Planner is a free 
tool for students and families to show them that with planning, 
knowledge, and smart decisions, a college education is within their 
reach. It also provides families with the information they need to make 
knowledgeable decisions about which school is right for them. The 
Planner is available at www.salliemae.com/content/landing/planner/eip.
     Access programs (e.g., scholarship search tools, 
customized outreach programs--about college planning and funding--for 
Hispanic/Latino and African American students and families); and
     Tools to help schools counsel borrowers on changing 
regulations and repayment options.
    Innovation: Competition among loan providers and between the FFEL 
and the Direct Lending programs has made each program better over the 
years. Competition has driven investment and innovation in more 
automated and streamlined disbursement processes, and in web sites, 
brochures, and other materials that explain the myriad of financial aid 
options to students and families.
    Competition creates a culture of accountability for customer 
satisfaction. Removing incentives to innovation and accountability for 
customer satisfaction will result in a complex, nearly $100 billion per 
year lending program that will be left with just one model, prescribed 
completely by government specifications, with no choice for schools or 
borrowers to ``vote with their feet'' if their needs are not being met.
Preservation of Jobs
    In passing the budget resolution last month, this Congress clearly 
expressed a preference for moving forward in a way that minimizes job 
losses in this difficult economic time. It is worth reiterating that 
most of the savings of the Administration's proposal and the structure 
we recommend are driven by government ownership of student loan assets, 
not from the intentional elimination of good private sector jobs.
    Further, we believe that the job-preserving policy option, in which 
the existing structure is utilized, is the more promising, more 
efficient, less risky course of action, even if concern for jobs is 
taken out of the equation.
Additional Benefits to Taxpayers (and Financial Aid Recipients)
    I want to highlight that some additional benefits of the structure 
we are proposing may or may not be captured by the Congressional Budget 
Office's assumptions. Nonetheless, these benefits will bring value to 
the taxpayer and possibly generate additional resources for student 
aid. They are:
     Savings from Lower Defaults: The value of the lower 
defaults we expect to generate by introducing the risk-sharing 
component is substantial. Even assuming a modest reduction of 10 
percent from current default rates (e.g., 13.5 percent vs. 15 percent 
lifetime default rate), taxpayers would collect on more than $1 billion 
per year in loans that would have otherwise defaulted.
     Savings from Immediate Implementation: Much of the savings 
assumed by CBO occur in the first years of implementation. This means 
that any delay in the conversion of more than 4,000 schools to the 
Direct Lending program would have severe consequences to the estimated 
savings of the Administration's proposal. By using the existing FFEL 
loan delivery infrastructure, there is no risk of a delay in program 
implementation, and the savings are realized immediately.
     Savings from Competitive Fee Setting: We recommend that 
after two years of operating the new program with a set fee, a market-
based process be used to drive further efficiencies into the program, 
saving taxpayers yet more.
Conclusion
    In conclusion, Sallie Mae supports the Administration's objectives 
of reforming the federal student loan programs and increasing funding 
for Pell Grants. We are not trying to preserve lender subsidies, nor 
are we trying to preserve the FFEL program as we know it. We are 
offering recommendations that build from the foundation of the 
President's proposal, to make that proposal even better, and to 
guarantee that it seamlessly delivers the shared objectives of the 
Administration, this Committee, and America's students and families.
    Thank you. I would be pleased to answer any questions you may have.
    
    
                                 ______
                                 
    Chairman Miller. Thank you.
    Ms. Griswold?

  STATEMENT OF ANNA M. GRISWOLD, ASSISTANT VICE PRESIDENT FOR 
UNDERGRADUATE EDUCATION AND EXECUTIVE DIRECTOR FOR STUDENT AID, 
                 PENNSYLVANIA STATE UNIVERSITY

    Ms. Griswold. Good morning, Mr. Chairman and ranking member 
McKeon and members of the committee. My name is Anna Griswold, 
and I am the assistant vice president and executive director 
for student aid at Penn State University. Thank you for the 
opportunity to be here today to talk about Penn State's 
experience converting to the Direct Loan Program this past 
year.
    Penn State University is a large, public, multi-campus 
research university enrolling just over 90,000 undergraduate, 
graduate, medical and law students at 23 campuses. Seventy-
three percent of our students receive some form of financial 
aid. Twenty-three percent of our undergraduates receive Pell 
Grants. About one-third of our undergraduates are first 
generation college students for their families.
    The federal student loans represent over 50 percent of our 
student aid funding. Last year, more than 46,000 Penn State 
students borrowed $466 million in federal loans to help pay 
their education costs.
    Last year's turmoil in the financial markets threatened to 
destabilize both the federal student loans and our efforts to 
maintain an efficient and student-friendly loan delivery model 
in the FFEL program.
    As lenders across the country began to terminate or suspend 
their participation, this quickly became cause for alarm among 
our students and parents that relied heavily on Stafford Loans. 
To allay their concerns, we needed to act quickly and 
decisively to assure students that they would be able to get 
their loans.
    In our case, some 38,000 current student borrowers were 
with a single lender that announced it would have to suspend 
making loans last year. Given the uncertainty about future 
lender participation and the new restrictions that limit 
schools' use of preferred lenders, we knew this would be a 
challenge for our students.
    So, Direct Loans was really the logical solution for us. In 
March 2008, Penn State began implementing the Direct Loan 
Program. A core team of 10 to 12 existing staff from several 
Penn State offices started the conversion, linking our system 
to the department's common origination and disbursement system, 
one already familiar to us for processing Pell Grants.
    We also developed a communication plan to inform students 
and parents of the change in how they would secure their loans 
and the steps that they would need to take. Students readily 
accepted this change.
    Our existing staff did all the work. We did not hire 
additional staff to convert to direct lending and the cost to 
convert was within normal budgetary costs required for any new 
student aid program implantation that comes along.
    Our circumstances were quite unique last year. First, as I 
mentioned, there was a need to move quickly when we learned in 
February that our primary lender would no longer be serving our 
students for the coming year. We needed to move quickly and to 
convert to direct lending by July.
    We have one of the largest student loan volumes in the 
country, a homegrown computing environment, and our own 
programmers to run our student aid system. We do not use 
vendor-supported software.
    Most schools will not face these same circumstances and 
would not require the same resources that we used. Smaller 
schools with fewer resources will likely be able to convert to 
Direct Loans without too much trouble, especially if they have 
vendor-supported student aid systems or if they use the 
department's EDExpress software.
    Ample lead time may be necessary for most and is always 
something welcomed by aid administrators. It is testimony 
though to the streamlined nature of the Direct Loan process, 
the single point of contact model it represents, that we were 
able to convert fairly quickly. It helps that Direct Loans uses 
the same COD system that schools use for Pell.
    We had excellent technical support from the Department of 
Education's Direct Loan and COD staff. Our first Direct Loan 
disbursements went very smoothly. Our bursar's office reports 
great satisfaction with the disbursement and reconciliation 
functions, having reconciled summer 2008 loans in 4 months 
ahead of the required deadline.
    The cash draw down system, already familiar to us as well 
with other student aid programs, has greatly improved cash flow 
at Penn State. Our frontline staff reports that this program is 
very simple to explain to students.
    Staff feel more in control of advising them about the 
status of their loans and my written statement contains a 
number of comments from staff about their experience with 
Direct Loans.
    In summary, we believe that by entering the Direct Loan 
Program, we have shielded our students from uncertainty in the 
financial markets and we have gained greater efficiency in 
processing student loans.
    The state of the economy makes adequate student aid funding 
an even more important consideration for students and their 
families in deciding if college enrollment is possible. We 
encourage Congress to take whatever measures possible to 
increase appropriations in the Pell Grant Program as we all 
work toward insuring college access and affordability for 
students from low and moderate income families.
    I would be happy to answer any questions.
    [The statement of Ms. Griswold follows:]

 Prepared Statement of Anna M. Griswold, Assistant Vice President for 
Undergraduate Education, Executive Director Office of Student Aid, the 
                     Pennsylvania State University

    Good morning Mr. Chairman and members of the Committee. My name is 
Anna Griswold and I am the Assistant Vice President and Executive 
Director of Student Aid at the Pennsylvania State University. Penn 
State is a large public, multi-campus, research university enrolling 
just over 90,000 undergraduate, graduate, medical and law students at 
23 campuses. Over 60,000, or 73%, of our students receive some form of 
financial aid, including 23% of undergraduates receiving Pell Grants. 
About one-third of our undergraduates are the first generation in their 
families to attend college. Increased funding and simplifying and 
improving student aid programs and systems are matters of great 
importance at Penn State. The entire university is committed to 
maintaining a student-centered focus in all areas of service to 
students.
    The federal student and parent loans represent over 50 percent of 
all our student aid funding. Last year, more than 46,000 Penn State 
students borrowed $466 million in federal loans to help pay their 
education costs. However, last year's turmoil in the financial markets 
together with changes in federal regulations affecting school use of 
preferred lenders threatened to destabilize both the federal student 
loans and the efforts of our student aid office to maintain an 
efficient and student-friendly loan delivery model in the Federal 
Family Education Loan (FFEL) Program.
    As lenders across the country began to terminate or suspend 
participation in the FFEL Program, this quickly became a cause for 
alarm for students and parents that relied heavily on both the Stafford 
student loan and Federal PLUS/Parent Loan. To allay the concern of our 
students and their families, we needed to act quickly and decisively to 
reassure them that they would still be able to find federal student and 
parent loans to help pay their costs. We turned to the Federal Direct 
Loan Program. We had 38,000 current student borrowers using a single 
non-profit lender with whom we had worked for years and who had 
provided loans to our students, a lender that, unfortunately, had to 
suspend making loans last year. All these students were in need of 
locating another lender. Given the uncertainty about future lender 
participation, and the new restrictions that limit schools on advising 
students about lender selection, we felt we had few tools with which to 
guide our students. Direct Loans offered a logical alternative to the 
FFEL Program in light of our circumstances.
    I would like to add that for about a decade, with the majority of 
our students selecting the Pennsylvania Higher Education Assistance 
Agency (PHEAA) as their lender, we were able to build compatible 
systems between Penn State and PHEAA to better facilitate the data 
exchange between us for processing of student loans. This certainly 
served students and our institution well. By trying to use a single 
lender, we had replicated most of the Direct Loan model within the FFEL 
Program, with the exception of cash draw down and return of funds. 
However, students choosing lenders outside this process required 
different handling depending on the lender, guarantor or servicer. 
Having had a good experience in FFEL as long as the majority of our 
students used PHEAA, we are pleased that Direct Lending is designed as 
a single lender program. That, and the added features of cash draw down 
and return of funds further enhanced the model we previously had in 
place for processing student loans.
    In March, 2008, Penn State announced it would enter the Federal 
Direct Loan program. This offered several benefits to students 
including access to a secure source of funds, elimination of the need 
to find a new lender on their own, and providing a more efficient, 
single point of contact to transact their loans. In addition, Direct 
Loans would provide better loan repayment and loan forgiveness options.
    In early March we identified a core team of 10 to 12 existing staff 
from Administrative Information Systems, the Bursar's Office, and the 
Student Aid Office and began the work of developing new automated 
systems and processes between the U.S. Department of Education's Common 
Origination and Disbursement (COD) system and Penn State's homegrown 
integrated student information system. Other staff in these offices 
also participated in supporting roles during the period of 
implementation. For example, in addition to the technical programming 
work, we executed an extensive communication plan to ensure that 
students and parents understood the changes in how they would now 
secure their loans and the steps they would need to take. We heard 
little resistance to this change and students reported on the ease of 
signing their electronic master promissory notes on the Department of 
Education's Direct Loan website.
    Our existing staff did all the work; we did not hire additional 
staff to convert to direct lending and the cost to convert was within 
normal budgetary costs required for any adjustments that schools must 
make when regulations change. The work was not unlike implementing 
other new student aid programs such as ACG, SMART and Teach Grants in 
recent years. In some respects those programs presented greater 
challenges. During Direct Loan implementation, we were also 
implementing changes due to the increase in student borrowing limits 
and we were implementing new automation and the use of Commonline for 
alternative loan processing. When new programs are enacted into law or 
new regulations are passed, preparing systems to administer those 
programs is simply a part of the normal work of student aid offices. 
These types of changes do take extra time and effort. However, it is 
important to keep in mind Penn State's unique circumstance last year: 
1) the need to move quickly to convert to Direct Lending (four months), 
2) our loan volume and the large number of students across 23 campuses 
that we needed to inform ($466M and 46K borrowers), and 3) the fact 
that we have a homegrown computing environment and use our own computer 
programmers (no vendor supported software) to run our student aid 
program. Most schools will not face these circumstances and would not 
require the same resources.
    With adequate lead time, even most of the smaller schools will 
likely find converting to Direct Loans a manageable process, especially 
for those with vendor supported student aid software. I think most 
schools have such software. One smaller institution in Pennsylvania 
with whom I spoke began the conversion this January and is now ready to 
submit their first direct loan records to COD. They have vendor 
supported software and indicate that they were able to incorporate 
implementation tasks into the normal operational activity of their 
office. Since resources do vary across institutions I am certain that 
the Department of Education will be ready to offer assistance where 
needed for schools that may need help and, the Department's ED Express 
software works very well for schools with smaller loan volumes.
    It is testimony to the streamlined nature of the direct loan 
process and the single point of contact model it represents, that we 
were able to convert fairly quickly. Like most schools, we were already 
familiar with the COD system used for Pell Grant processing. Direct 
Loans uses this same system. We had excellent technical support from 
the Department of Education's Direct Loan and COD staff. Ideally, an 
institution would benefit from having a year's lead time to implement 
this program. But many schools that I am aware of have done so in less 
than a year. We often implement program changes with less time. Our 
first Direct Loan disbursements in summer of 2008 and the larger volume 
disbursed for the fall and spring semesters went very smoothly.
    Our Bursar's Office, with whom we partnered closely during the 
implementation, manages the loan disbursements, adjustments, cash 
drawdowns (G5), and reconciliation function. They indicated that the 
reconciliation in FFEL was not a required formal monthly process but 
was to match receipts with postings to students' accounts on a daily 
basis. Now, under direct lending, we formally reconcile monthly and 
this task takes about a few hours a month to perform. This adds greatly 
to program accountability. For summer 2008, we completed reconciliation 
four months ahead of the deadline. Other time savings with Direct Loans 
comes with the return of funds which are simply netted out of the cash 
drawdown. This compares to actual return of funds to the lender as 
required in the FFEL Program. Cash drawdown in direct lending takes us 
two days from origination of the loan to receipt of funds by the 
University. This is a one day improvement over the FFEL Program and 
represents a significant improvement in cash flow.
    In summary, we believe that by entering the Direct Loan Program, we 
have shielded our students from the impact of turmoil in the financial 
markets.
    The state of the economy will make the availability of student aid 
funding even more important considerations for families in choosing a 
college or in determining whether they can even send their children to 
college in the coming years. Returning adult students face this same 
challenge. We continue to work hard to advocate in the best interest of 
our students for increased funding in the federal and state student aid 
programs. We encourage Congress to take whatever measures possible to 
increase appropriations in the Pell Grant program as we all work toward 
ensuring access and affordability of higher education for students from 
low and moderate income families.
    I would be happy to address any questions you may have. Thank you.
Comments from Staff about Penn State's first year in the Direct Loan 
        Program
    As you know student lending has become very complicated and needs 
to be simplified. One loan from one lender seems to fit well. I can 
attest to this first hand because I have just spent the last week 
helping my graduating medical students sort out their loans, servicers 
and repayment options. It has been exhausting for all parties.
    Whenever a student makes an entry error in the system, an incorrect 
social security number or birth date, we can now easily fix the error 
on-line while we are talking with the student. Then we know that we can 
tell the student exactly when their funds will be available to them.
    We feel more in control of the process. The COD system is easy and 
quick to review and determine the status of a student's loan. We feel 
empowered to resolve problems for students quickly and efficiently. 
There is no need to call another agency to make the correction or to 
explain the student's problem.
    The students like it when they call with a question about their 
loan or when they need to change the amount of their loan and find out 
that we can help them without their needing to contact another entity. 
We can work on their behalf. It's easier for us and saves time for the 
student.
    The change to direct lending was the right decision at the right 
time for our office and our students.
    Direct lending gives schools the authority to be immediately 
responsive to the needs of its students without ``middle-men'', time 
delayed transactions.
    To reconcile multi-million dollar transactions to the PENNY raises 
the bar on accountability to unprecedented levels, unmatched in the 
FFEL Program.
    When several of the law school's preferred lenders quit lending 
last year, I was so grateful that we went into direct lending. I was 
not so sure at first because our lenders did a good job for our 
students. But direct loans provided an immediate solution and a less 
complicated and labor-intensive process.
    Parents of Penn State students with children at other colleges that 
are not Direct Loan schools often comment that they wish getting the 
loan we as easy at the other school as it is here at Penn State.
Time for Change and Value Added Opportunities
    Pennsylvania schools and students have benefited for decades from 
the services of the Pennsylvania Higher Education Assistance Agency in 
its role as the State Grant Agency and the Guaranty Agency. Agencies 
such as PHEAA certainly have a role to play in the Direct Loan Program, 
many with infrastructures and systems already in place to facilitate 
servicing. In addition, PHEAA and other agencies can offer value added 
services within the Direct Loan Program should Congress so chose to 
deploy them to accomplish new goals and objectives for federal student 
aid. Many offer financial literacy programs within their states or 
regions, debt management tools and college outreach programs to 
encourage access to and planning for college. Congress should consider 
this opportunity to blend the strengths of the Direct Loan Program with 
the strengths of higher education agencies for servicing and value 
added program delivery.
                                 ______
                                 
    Chairman Miller. Thank you.
    Mr. Drouin.

    STATEMENT OF RENE DROUIN, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, NEW HAMPSHIRE HIGHER EDUCATION ASSISTANCE FOUNDATION

    Mr. Drouin. Chairman Miller, Mr. McKeon, and members of the 
committee, thank you for inviting me here today to testify. I 
also want to personally and professionally thank Congresswoman 
Shea-Porter for her dedication to higher education. For the 
record, I am Rene Drouin, and I am president and CEO of the 
nonprofit New Hampshire Higher Education Assistance Foundation 
NHHEAF network organizations.
    It is an honor to participate in this discussion on behalf 
of the students and parents that we serve and on behalf of the 
organization's dedicated and talented staff of over 200 New 
Hampshire residents.
    I have been asked to describe ideas for loan reform which 
increase student aid through cost-saving, make federal loan 
funding more reliable, and preserve the best aspects of the 
existing FFEL program and DL programs.
    I have dedicated 30 years of my life to making higher 
education more accessible through my work with the FFEL 
program. Still, I see clearly that the student aid program is 
in need of transformation. However, to suggest that the federal 
government or its big contractor located outside the state of 
New Hampshire could do a better job of supporting New Hampshire 
college students, their schools and their communities, is 
unimaginable.
    Under NHHEAF's proposal, a student completes the master 
promissory note from the designated local provider. That would 
be NHHEAF in the state of New Hampshire. All post-secondary 
schools would utilize the department's current systems to 
administer all federal aid, common origination disbursement 
system, COGS and G5 Web site.
    Once the loan is approved through COGS, NHHEAF would 
disburse the funds to the school. Both technologies were built 
with taxpayers dollars and should be used to administer this 
new loan program.
    The biggest advantage for schools should be, with these 
systems, includes managing payments and data across multiple 
programs. From the loan perspective, it would provide a uniform 
way for agencies and schools to share information for more 
efficient processing and, more importantly, default diversion 
practices.
    The credit crisis has made it clear that the federal 
student loan program would benefit from changes which ensure 
the availability of funding from the Treasury. NHHEAF would 
then participate each loan 15 days after the initial 
disbursement and then put the loan or sell the loan to the 
department after 120 days of final disbursement.
    The key is that NHHEAF continues to support schools and 
students with entrance and exit counseling, financial literacy 
programs and local compliance expertise. This leaves one loan 
program with standard terms, conditions and administration.
    It simplifies the process of students and schools while 
ensuring funding for the program and guaranteeing excellence in 
borrower education in compliance while the student is in 
school.
    Loans in periods of grace or repayment are then serviced by 
the originating private lender in line with the department's 
servicing and pricing standards. This creates life of loan 
servicing, which we credit in New Hampshire to our achievement 
of continuously low default rate. This drives service 
excellence with pay-for-performance pricing which will result 
in savings to the department and innovation in servicing.
    Moreover, it utilizes existing infrastructure and knowledge 
at the state and nonprofit agencies and supports borrowers from 
application through final payment. This is critical to 
successful default prevention. The most recent draft cohort 
default rate for NHHEAF is only 3.1 percent while the national 
default rate is 6.9 percent.
    It has been said that going to 100 percent DL puts the 
taxpayer's interest first. But the reality is that in every 
category of loan FFEL default rates are lower than DL's. We 
need a plan that allows students to enjoy higher level of 
service and effective default programs offered by FFEL 
agencies.
    Our reputation has been built on personalized service to 
students. Our greatest strength is by far the dedicated New 
Hampshire-based employees who provide borrowers in repayment 
with expertise throughout the life of their loan.
    There already exists the infrastructure to provide the K 
through 12 outreach, entrance and exit counseling, compliance 
for schools and community outreach program. Under the new 
budget proposal, no small nonprofit agency will qualify to 
service the Direct Loans, only the big players.
    I wholeheartedly believe that smaller, well-managed 
agencies can be most-effective because they are nimble and can 
respond to rapidly changing national priorities and local 
realities.
    Finally, this model allows agencies like ours to continue 
the commitment to creating a college going culture locally. 
President Obama has passionately expressed that expanding 
college access and success is a national priority. New 
Hampshire is well prepared to actualize this vision.
    In fact, increasing college aspirations has been NHHEAF's 
highest goal. We provide programs throughout the educational 
continuum for all populations of students, foster youth, adult 
learner, dislocated worker, rural student, and grad students.
    So the report that going 100 percent DL would help 
students, not lenders, simply does not apply to nonprofit loan 
providers. In New Hampshire, we serve 30,000 individuals each 
year with direct, personal service.
    This plan incorporates the best aspects of DL Web-based 
administrative tools and reliable funding. This plan also 
incorporates the best aspects of FFEL, expert default 
prevention practices, personalized and local service and 
commitment to creating a college going culture locally.
    The FFEL program has provided education funding to millions 
of Americans since its inception. I ask you to carefully 
consider the significance of eliminating FFEL nonprofit 
organizations like NHHEAF and instead choose to imagine a loan 
program that upholds the best aspects of the public, non-for-
profit, private partnerships which in so many ways has worked 
so very well for so very long. Thank you.
    [The statement of Mr. Drouin follows:]

  Prepared Statement of Rene A. Drouin, President and CEO, the NHHEAF 
                         Network Organizations

    Chairman Miller and Members of the Committee: For the record, I am 
Rene A. Drouin, a resident of New Hampshire and the President and CEO 
representing the nonprofit New Hampshire Higher Education Assistance 
Foundation (NHHEAF) Network Organizations. The Organizations are 
comprised of four 501(c)(3) nonprofit agencies that provide students 
and families with the resources and funding to pursue higher education 
aspirations. Funds generated by the Organizations make its charitable 
mission possible as student loan earnings are reinvested in programs 
and services that benefit citizens of New Hampshire.
    It is an honor to participate in these discussions on behalf of the 
students and parents we serve and on behalf of the Organizations' 
dedicated and talented staff of over 200 New Hampshire residents.
    I have been asked to describe ideas for loan reform which: increase 
student aid through cost saving, make federal loan funding more 
reliable and preserve the best aspects of the existing Federal Family 
Education Loan (FFEL) and Direct Loan (DL) programs.
    I began my career at NHHEAF in 1978 managing its default claims. I 
experienced first-hand the value that a local nonprofit agency can have 
on the repayment of federal loans. I have served as Chair of the 
National Council of Higher Education Loan Programs where I came to 
appreciate the importance of dedicated people and infrastructure in 
every region to serve students and parents. And, as a two-term member 
of the Advisory Committee on Student Financial Assistance, I have been 
actively involved in advocating for financial aid policy which 
increases opportunities for low-income students. I have dedicated 30 
years of my life to making higher education more accessible through my 
work with the FFEL program. Still, I see clearly, that the student aid 
program is in need of transformation. However, to suggest, as the 
President's 2010 budget proposal does, that the federal government, or 
its big contractor located outside of New Hampshire, could do a better 
job of supporting NH college students, their schools and their parents 
is unimaginable. So, the NHHEAF Network Organizations has developed the 
following conceptual loan program in response.
Proposed Loan Flow & Rationale
    Under NHHEAF's proposal, the following occurs:
    1. A student completes the Master Promissory Note (MPN) from the 
designated local provider (For discussion, in New Hampshire NHHEAF 
would be a designated provider.)
    2. All postsecondary schools would utilize the Department's current 
systems to administer all federal aid--Common Origination & 
Disbursement System (CODS) and G5 Website. Once the loan is approved 
through CODS, NHHEAF would disburse funds to the school. Both 
technologies were built with taxpayer dollars and should be used to 
administer this new loan program. The biggest advantage for schools 
with these systems includes managing payments and data across multiple 
programs. From the loan perspective, it would provide a uniform way for 
agencies and schools to share information for more efficient processing 
and default aversion practices.
    3. The credit crisis has made it clear that the federal student 
loan program would benefit from changes which ensure the availability 
of funding from Treasury. By leveraging federal funding, NHHEAF then 
participates the loan within 15 days of initial disbursement to the 
Department and sells or ``puts'' the loan within 120 days of final 
disbursement. The key is that NHHEAF continues to support schools and 
students with entrance and exit counseling, financial literacy programs 
and local compliance expertise. And, the Department holds the asset--
keeping the interest from the loans it already subsidizes resulting in 
cost savings to fund increases in Pell and other aid programs. This 
leaves one loan program with standard terms, conditions and 
administration. It simplifies the process for students and schools, 
while ensuring funding for the program and guaranteeing excellence in 
borrower education and compliance while the student is in school.
    4. Loans (in periods of grace or repayment) are then serviced by 
the originating private lender (in line with the Department's servicing 
and pricing standards). This creates ``life-of-loan'' servicing (which 
we credit with our achievement of continuously low default rates.) This 
drives service excellence with pay for performance pricing which will 
result in savings to the Department and innovation in servicing. 
Moreover, it utilizes existing infrastructure and knowledge at the 
state and nonprofit agencies, and supports borrowers from application 
through final payment. This is critical to successful default 
prevention. The most recent draft cohort default rate for NHHEAF is 
only 3.1%, while the national default rate is 6.9%. It has been said 
that going 100% DL puts the taxpayers' interests first. But, the 
reality is that in every category of loan, FFEL default rates are lower 
than DL's. We need a plan that allows students to enjoy high levels of 
service and effective default prevention programs offered by FFEL 
agencies. Our reputation has been built on personalized service for 
students. And, our greatest strength is, by far, the dedicated New 
Hampshire-based employees who provide borrowers in repayment with 
expertise throughout the life of their loan. There are 40,000 FFEL 
staff nationally. There already exists the infrastructure to provide 
the K-12 outreach, entrance and exit loan counseling, compliance for 
schools and community support. Under the new budget proposal, no small 
agency will qualify to service the Direct Loans but the big players. I 
wholeheartedly believe that smaller, well-managed agencies can be most 
effective because they are nimble and can respond rapidly to changing 
national priorities and local realities.
    Finally, this model allows agencies like ours to continue the 
commitment to creating a college-going culture locally. President Obama 
has passionately expressed that expanding college access and success is 
a national priority. New Hampshire is well prepared to actualize this 
vision. In fact, increasing college aspirations has been NHHEAF's 
highest goal. We provide programs throughout the educational continuum 
for all populations of student: foster youth, adult learner, dislocated 
worker, rural student, grad student. So, the retort that going 100% DL 
would ``help students, not lenders'' simply does not apply to nonprofit 
loan providers. In New Hampshire, we serve 30,000 individuals each year 
with direct service. And, ninety-three percent of the public high 
schools rely upon our programs and materials. When asked last year to 
describe how our agency has impacted his students, a very well-
respected and experienced guidance director replied, ``NHHEAF is the 
best thing to happen to higher education since I started teaching in 
1978.''
    This plan incorporates the best aspects of DL: web-based 
administrative tools and reliable funding. This plan also incorporates 
the best aspects of FFEL: expert default prevention practices, 
personalized and local service and commitment to creating a college-
going culture locally.
    A proposal like this could fundamentally change the way student 
loans are provided while simplifying and enhancing that which already 
exists. The FFEL Program has provided education funding to millions of 
Americans since its inception. As the Committee compares options, I ask 
you to carefully consider the significance of eliminating FFEL 
completely and, instead, to choose to imagine a loan program that 
upholds the best aspects of the public private partnership which in so 
many ways has worked so very well for so very long.
    Considerations in the Development of the Proposal Included:
     Preserve local nonprofit agencies' ability to facilitate 
college access and successful student loan repayment
     One common loan program for simplicity and standardization
     Access to federal agency COD system by non-profit 
participants
     Funding advantage with combination of public/private 
funding combining bridge funding and restructured participation and 
``put'' funding
     Support budget savings goals while maintaining competition 
and choice by preserving the best aspects of the FFELP & DL system
     Pay for performance incentives to ensure default 
prevention and customer service excellence
     Restructure guaranty agency role to focus on default 
prevention and financial literacy
Features
     Hybrid Private/Federal Funding--Private Loan Bridge 
Funding, Participation to ED within 15 days of disbursement, ``put'' to 
ED within 120 days of final disbursement.
     Participate direct to ED--no custodian
     Ability to participate daily
     Eliminate Lender Fee
     No SAP or Interest Subsidy
     Loan Terms--One loan program providing standard terms and 
conditions with two loan channels, direct and private.
     Lender provides short term funding and loan origination 
customer service support
     Servicing--Meet student/borrower needs by allowing 
existing nonprofit student lenders to choose a loan servicing provider 
in line with ED's servicing and pricing standard criteria.
     Guarantor restructuring to focus on default prevention 
activities for successful borrower repayment--pay for performance 
pricing.
     Monthly pre-claim letters during delinquency--a series of 
eight auto-generated preclaim letters sent monthly to delinquent 
borrowers.
     ``Don't Default'' Literature Mailing--outlines borrower 
options save prevent student loan default.
     Handwritten ``Quick Memo''--requests borrowers to contact 
us to assist them in preventing default.
     Late Stage Delinquency--persistent contact attempts via 
phone, email, and mail to borrowers and references
     Extensive Skip Tracing--to locate both borrowers and 
references, including the use of Internet tools.
     Borrower contact for education and assistance, focusing on 
life circumstances, completion of paperwork, and follow up to ensure 
the borrower completes the appropriate steps in order to prevent 
default.
Benefits
     Supports cost savings to the President's budget
     Strengthens default prevention programs through 
performance based pricing
     Provides stability, simplicity, and competition to benefit 
schools and borrowers
     Preserves best practices in the industry to support 
default prevention efforts, customer service excellence, and low cohort 
default rates
     Local support to schools and borrowers
       Minimizes local job loss
       Drives innovation, efficiency, and service excellence 
through competition performance based criteria


                                 ______
                                 
    Chairman Miller. Thank you.
    Mr. Chapman.

STATEMENT OF CHRISTOPHER CHAPMAN, PRESIDENT AND CHIEF EXECUTIVE 
                     OFFICER, ACCESS GROUP

    Mr. Chapman. Thank you, Mr. Chairman, ranking member 
McKeon, and members of the committee. My name is Chris Chapman, 
and I am the president and chief executive officer of Access 
Group, Incorporated, a national, nonprofit, student loan 
provider and loan servicer.
    Access Group was formed in 1983 and we currently originate 
more than $1 billion of FFELP loans annually and hold more than 
$6 billion of FFELP loans in our portfolio, making us one of 
the top 10 lenders nationwide.
    Access Group is mission-based. As I said, we are a not-for-
profit entity and mission-based, you know, implies more than 
making loans with low rates and good terms and excellent 
service.
    As you have heard today from some of the other members of 
the panel, there is much more that goes along with making loans 
that relate to outreach services, education services for 
schools, students, and parents. These are done all in support 
of our programs, and as a nonprofit who does student loans, 
nothing else, it is all that we do.
    Again, as I said this isn't unique to Access Group, 
certainly within the nonprofit arena. The more than three dozen 
nonprofit entities that currently operate all across the 
country and in many, many states perform these services and 
they, as Mr. Drouin mentioned, are adapted to local realities.
    In my career as I have had the opportunity to work in a 
number of entities in different geographic locations, the role 
we played has been very localized and very adaptive to the 
circumstances and the problems not only of the geography but of 
the time.
    I would also like to thank this committee and Congress for 
moving swiftly on ECASLA last year. The crisis that hit the 
financial world did not spare anyone including student lenders. 
Due to quick action and the quick implementation by the 
Department of Education and lenders getting together, no 
student was left without a loan or no student was materially 
disrupted in the timing of that loan last year.
    We also thank you for the extension into the 2009-2010 
academic year and we think this year will be even smoother.
    What I would like to focus my testimony on primarily is 
what is called phase two of the ECASLA which is the asset-
backed commercial paper conduit that has just been implemented 
and gone into effect within the past few weeks.
    As you may know the conduit is utilizing the federal 
liquidity out of the federal financing bank coupled with a 
program from the Department of Education to finance loans made 
under the Federal Family Education Loan program.
    The whole idea of the conduit is it is structured to 
utilize private capital in the program and not have to have 
federal government borrower $1 or utilize one Treasury dollar 
in order to fund the program.
    Though it has only been up a few weeks this is an extremely 
positive path. By June 4th about $10 billion will be funded in 
the program. The program is executed at pricing levels well 
within expectations and at levels which are very similar to 
those prior to the credit crisis.
    What this proves is that student loans can be financed in 
the private markets, even in today's environment. Given the 
right circumstances, which in this case includes potentially a 
federal back top, ensuring investors that if they need to get 
out of their investment they can, which in a credit crunch, 
during a credit crisis, is the crux of the problem.
    We are here to encourage continuation of the ECASLA 
principles as a means of going forward and funding the student 
loan programs under FFELP. The reason we say that is we believe 
keeping private capital in the program ensures continuing a 
diversity of providers, a diversity of origination systems, and 
diversity of servicers which will retain choice, competition, 
and the superior service that FFELP has provided for 40 years.
    Now I admit that as the conduit sits today it is not 
nirvana for everyone. There are some issues that need to be 
worked out with the conduit to ensure broader participation but 
they are certainly workable within the current structure and at 
no cost to the government.
    I want to conclude by emphasizing that there aren't just 
two choices here. There is not a choice of 100 percent direct 
lending or the status quo. You have heard a number of options 
that have come along the table as we have moved on here.
    I encourage the committee to look at them closely and I 
encourage you to retain the option that ensures the choice, 
competition, flexibility and superior service remain in the 
FFELP program for years to come. Thank you.
    [The statement of Mr. Chapman follows:]

        Prepared Statement of Chris Chapman, President and CEO,
                           Access Group, Inc.

    Mr. Chairman, Ranking Member McKeon, and members of the Committee, 
my name is Chris Chapman and I am the President and CEO of Access 
Group, a Delaware-based, national nonprofit student loan provider. 
During my career, I worked for several other nonprofit student loan 
entities--immediately prior to my current position, I served as 
President and Chief Executive Officer of ALL Student Loan Corporation, 
a nonprofit loan provider based in Los Angeles, California. I might 
also note that my career began as a staff member for a long-time House 
Democrat from Ohio named Tom Luken. Thank you for inviting me to come 
before you today and for holding a hearing to discuss the issue of 
student loan reform.
    Access Group is a nonprofit student loan provider with over 25 
years experience specializing in federal financial aid and graduate and 
professional student loans. Student loans are our only business. We 
originate more than $1 billion of FFELP loans annually and currently 
hold more than $6 billion of FFELP loans. Moreover to support and 
maximize our charitable mission to enhance access to higher education, 
we conduct outreach and educational programs that support students, 
parents, school administrators and other interested constituencies. Our 
in-person sessions that range from information about financing an 
education, to understanding and maintaining your credit score, to life 
after graduation, are supported by a panoply of free educational 
material, available online and in print.
    It may sound cliche that as a nonprofit entity we are free to focus 
on ``stakeholders'' rather than ``shareholders''. But it's true. 
Furthermore, as a board member of the Education Finance Council--the 
national trade group for nonprofit student loan providers--I can tell 
you that this outlook and sense of mission is broadly shared by the 
three dozen nonprofit student lenders based in states all across our 
Nation. These entities have historically and consistently channeled 
loan revenue back into the program in the form of discounted student 
loan rates, origination fee waivers, and the implementation of college 
outreach and access efforts. This is because the question that each of 
their management teams and boards of directors must face every day is 
``how do we help more Americans achieve their higher education 
dreams?'' rather than ``how do we maximize shareholder return?'' This 
is not a value judgment, and should not be interpreted as an indictment 
of for-profit entities--but, rather, it should be construed as the core 
basis for the distinction and importance of nonprofit loan providers in 
supporting the policy goals of a strong and diverse student loan 
program.
    I think I speak for all FFELP lenders in expressing thanks to this 
committee for drafting last spring the Ensuring Continued Access to 
Student Loans (ECASLA) legislation that has maintained the ability of 
all eligible students to get a FFELP loan during the 2008-09 academic 
year--and for extending the legislation through the upcoming 2009-10 
academic year. Access Group has financed more than $800 million of new 
FFELP loans for the 2008-09 academic year through the participation 
interest facility created by the Department of Education under the 
ECASLA authority. We are also among the first issuers to finance 
student loans through the student loan asset-backed commercial paper 
conduit, also created under ECASLA.
    I intend to focus in my testimony today on the commercial paper 
conduit facility, and its potential implications for the future of 
student loan finance.
    As mentioned earlier, just last week, Access Group became one of 
the initial lenders to issue commercial paper backed by loans financed 
through the conduit. $1 billion in commercial paper was issued on May 
11, of which $250 million was backed by Access Group loans. This 
successful funding was the culmination of months of shared effort put 
forth by members of the last Administration, members of the current 
Administration, and a number of private-sector entities
    I was a member of the initial conduit advisory board, which was 
created when the conduit was first being structured late last year, and 
I have continued as one of the five members of the advisory committee 
overseeing the implementation of the facility. I feel there are lessons 
to be learned from this effort that suggest a positive path forward for 
federal student lending and a way to keep private capital involved in 
the federal student loan program. This path could enable the 
Administration, the Congress and student loan providers to achieve the 
widely-shared objective of making available increased private funding 
for federal student aid at no additional budgetary cost. And it would 
simultaneously allow for the retention of the key virtues of the 
current FFELP, such as the maintenance of a diverse array of 
originators, servicers and financers of federal student loans, and the 
choice, competition, flexibility and service that only such diversity 
can deliver.
    As you are aware, ECASLA was enacted to address an environment in 
which the yield on FFELP loans was set at an all time-low and the 
financing costs had reached unprecedented highs due to the broad-based 
seizure of the credit markets. Student loans played no part in the 
creation of the financial crisis, but the capital markets effectively 
shut down, leaving lenders unable to finance new loans beyond already 
committed capital.
    Based on its initial performance, it appears that the conduit has 
been successfully structured to persuade investors to purchase student 
loan assets at yields similar to those that existed prior to the severe 
credit market downturn. This indicates that is possible to finance new 
FFELP originations--even at the existing low statutory yield and the 
current extremely abnormal capital market environment--so long as there 
is federal liquidity support involved.
    Of course, no discussion of federal student loan policy and the 
associated programs that support a given policy is complete without 
considering their budgetary impact.
    Direct lending scores large federal budget savings because--at 
least the way the program is scored--it allows the loans to be financed 
at Treasury bond rates. For instance, the Office of Management and 
Budget assumes that direct loans originated in Fiscal Year 2010 will be 
financed by Treasury notes yielding a weighted average of 2.8-percent. 
The most common borrower rate on these loans will be 6.8 percent, 
creating a 400-basis point spread for the Government. This works as 
long as long-term Treasury borrowing rates remain low--and as long as 
scorekeepers continue to omit consideration of the increased 
government-wide economic cost of that additional Treasury borrowing on 
the scale required to directly finance all federally-backed loans will 
bring. The Analytical Perspectives volume of the budget projects 
Government federal direct loan accounts (the largest of which is the 
direct student loan program) to grow from nearly $200 billion in 2008 
to $1.6 Trillion in 2019. Presumably, most of this $1.4 Trillion 
increase in the loan-backed public debt is attributable to the 
projected expansion of the direct student loan program.
    The conduit also can reduce program cost by leveraging Treasury 
support, but in this case the support comes not from leveraging 
Treasury borrowing directly, but rather from leveraging the Treasury's 
liquidity strength. The advantage of using only the liquidity support 
is that it would prevent the necessity of borrowing roughly $100 
billion a year to finance all new student loan originations. Under the 
conduit--or any other liquidity ``backstop''--the Government only needs 
to actually step in and finance loans when the conduit is unable to 
refinance maturing commercial paper--an event made extremely unlikely 
even in financial crises due to the existence of the backstop itself. 
This allows for a reduction in student loan financing costs that would 
simultaneously produce revenue to the Government. In short, the 
Administration's recommendation of leveraging Treasury support could be 
implemented in a manner that also leverages private capital.
    On May 7, the Administration released its detailed FY 2010 Budget 
Appendix, which shows that student loans subject to the various ECASLA 
programs created by the Department of Education are projected to 
perform at a level much better than the ``budget neutrality'' required 
by ECASLA. Rather, they are projected to generate more than $8 billion 
in income for the Treasury. The conduit alone is projected in the 
budget to generate $1.4 billion in net revenue from $25 billion in 
student loan volume--even after including life of loan administrative 
expenses. This revenue is generally from fee income, since participants 
pay 25 bps as a fixed liquidity fee and 5 bps (escalating to 25 bps 
over time as a fixed put fee. The actual savings could increase 
significantly beyond this projected total, as demand for the program 
increases and investors accept lower yields as more comfort with the 
program is achieved. This is because the Government captures 80-percent 
of the benefit if the financing cost sets below a specified target 
rate. So there is a significant additional upside potential to the 
Government, but virtually no downside. There is little downside because 
the expected conduit revenue included in the budget numbers is 
essentially fully collateralized fee income, which makes it more 
predictable and reliable than projected savings from the direct loan 
program--which are highly dependent on future interest rate 
projections.
    To illustrate the peril in projecting future interest rates, we 
need only to look to past student loan program projections. Indeed, 
according to the re-estimate chart in the President's Budget Appendix 
the actual cost of the $250 billion in direct loans disbursed since the 
program was created is nearly 20 times higher than original estimates--
$11.7 billion, rather than $600 million. Another way of looking at this 
is that direct loans when issued were scored as costing a fifth of a 
penny per dollar loaned out, but those same loans are now projected to 
cost close to five cents per dollar loaned. FFELP loans, in contrast, 
cumulatively cost $12.5 billion less than original projections. If this 
pattern were to hold going forward, the actual savings from a 
transition to 100-percent Treasury-financed student lending would save 
only a fraction of what scorekeepers currently project.
    In sum, the most recent budgetary data demonstrates that policy 
makers have a range of options available and considerations to take 
into account in pursuing the objective of increasing student aid 
spending through student loan reform.
    I will point out that the conduit as it stands is not financing 
nirvana for every student loan provider--especially nonprofit 
providers. While Access Group and several other nonprofit providers are 
able to utilize the facility effectively, its one-size-fits-all nature 
necessarily limits its accessibility for many. But this need not be the 
case going forward. More portable and flexible versions of the conduit 
could be created, operating under the same fundamental principle of 
federal liquidity support, provided in order to make possible low-cost 
capital for financing student loans, with lenders paying a fee(s) that 
generates revenue for the Government.
    Along these lines, it is worth noting that the House Financial 
Services Committee majority just last week posted on its website draft 
legislation--the ``Municipal Market Liquidity Enhancement Act of 
2009''--authorizing the Federal Reserve to establish new, federally-
supported liquidity facilities for the financing of certain municipal 
securities. That bill seems to clearly envision an array of liquidity 
facilities that need not conform to one specific format.
    There obviously needs to be some exploration of potential 
facilities, and how they could be best structured to encourage lender 
participation while generating projected budgetary revenue. The 
practical example of the existing student loan conduit, however, 
provides a useful new precedent that gives policymakers actual 
experience and data with which to work.
    Federal fiscal considerations aside, the bottom line consideration 
should be that, from the borrower and school standpoint, there is 
tremendous value in a system that enables a diverse array of student 
loan providers to continue to finance, originate and service federal 
student loans in a manner that maintains the long-standing, productive 
partnerships forged over time. Avoiding the massive job displacement 
and loss of experienced borrower support personnel that would arise 
from an uprooting of these partnerships should be a goal of any student 
loan reform effort.
    Students have benefited from having their choice of student loan 
provider and from all of the services provided by the FFELP community. 
I urge the committee to explore the use of federal liquidity support 
structures as an avenue for creating savings for student aid that 
preserves the best elements of the current student loan program.
                                 ______
                                 
    Chairman Miller. Thank you.
    Mr. Vedder?

   STATEMENT OF RICHARD VEDDER, PROFESSOR OF ECONOMICS, OHIO 
                           UNIVERSITY

    Mr. Vedder. Thank you, Chairman Miller. Belated happy 
birthday by the way and----
    Chairman Miller. Thank you.
    Mr. Vedder [continuing]. Mr. McKeon, you will be joining 
the Medicare generation in another year and be part of the----
    Chairman Miller. Thank you for your opening remarks. 
[Laughter.]
    Mr. Vedder. I have three points I want to make today. 
First, the law of unintended consequences has led to outcomes 
far different than intended as Federal Student Assistance has 
expanded over time.
    Proposed additional expansions will likely not have the 
intended effects on student participation, access and equality 
of educational opportunities. Second, the proposal to end the 
FFEL program and replace it with direct federal student lending 
will have negative consequences on students, it is fiscal 
madness and the alleged financial benefits to the federal 
government are likely illusionary.
    Third, the proposal to sharply expand the Pell Grant 
Program and make it an entitlement is likewise fiscally 
irresponsible and potentially might add to already inflated 
college costs.
    Turning to the first point, the rate of increase in 
educational attainment in the United States slowed 
significantly beginning in the mid 1970s. From the mid 1950s to 
the mid 1970s, before Pell Grants and large federal student 
loans programs higher education enrollments almost quadrupled.
    The era of exploding federal financial assistance has 
paralleled a significant slowdown in enrollment growth. The 
notion that federal financial aid has promoted college access 
to the United States is a myth not a reality.
    Expanding these programs will not promote higher access. 
Moreover, the era of greater federal aid is a period of 
declining equality of educational opportunities. When Chairman 
Miller completed his higher education in 1972, I have been 
reading up on you, before the Pell Grant Program, persons from 
the top quartile in the income distribution had about six times 
as likely a probability of earning a bachelor's degree by age 
24 as by persons in the bottom quartile.
    Today the upper income student has eight times the 
probability of getting the degree.
    Regarding the second point it is highly debatable whether 
an expanded direct student loan program will reduce federal 
budgeted outlays. CBO scoring appears to have ignored Direct 
Loan administrative costs and not scored the corporate income 
tax revenue loss in student loan firms.
    Moreover, people prefer choices to monopolies. FedEx, UPS, 
and email are booming while the federal postal monopoly wanes. 
Colleges have largely shunned the direct lending program 
because of the additional choices in services offered by 
private providers. As a financial aid person put it in an email 
to me yesterday, ``the direct lending program is more like an 
ATM machine, with very limited much needed personal contact 
with students.''
    Private providers are not earning monopoly profits from 
federal subsidies, as recent exits from the industry and 
falling stock prices that loan providers indicate. Moreover, 
federal financing of student loans increases federal government 
borrowing precisely when we are recklessly expanding public 
debt and expansion is foisting a large burden on future 
generations of Americans.
    This is not only fiscally irresponsible but immoral. The 
powerful are foisting burdens on young persons who are weak all 
in the name of frankly political expediency. Regarding the last 
point, as previously indicated empirical evidence quests 
whether the Pell Grant Program effectively promotes equal 
educational opportunities.
    Moreover, the present value of the funded, unfunded 
liabilities of federal entitlement programs now exceed $50 
trillion for the entire value of the physical capital stock of 
this nation. It is the height of irresponsibility to add to 
that liability; rather you should be working to reduce it.
    Finally, significantly expanding total federal student aid 
as proposed almost certainly will contribute to the tuition 
price bubble that is one factor in the slowdown in the growth 
in college participation.
    When someone else pays the bills, costs rise, and statutory 
moves to stop this will simply lead to denied student access, 
reductions in academic quality, and/or more bloated university 
bureaucracies. Thank you very much, Mr. Chairman.
    [The statement of Mr. Vedder follows:]

   Prepared Statement of Richard Vedder, Director, Center of College 
 Afforability and Productivity; Distinguished Professor of Economics, 
    Ohio University; Adjunct Scholar, American Enterprise Institute

    Chairman Miller and members of the committee. I appreciate the 
opportunity to be here. I have testified on several occasions before 
this committee and appreciate the opportunity to appear again today.
    I have three points I wish to make. In addition to this statement, 
my views are more elaborately outlined in the attached study on federal 
student financial assistance prepared by my colleague at the Center for 
College Affordability and Productivity, Andrew Gillen.
    First, the law of unintended consequences has led to higher 
education outcomes far different than intended as federal student 
assistance has expanded over the past 35 years. For example, I think it 
is hard to demonstrate that enhanced federal assistance has either 
significantly expanded college participation or brought about much 
greater access to higher education by those who are financially 
disadvantaged. In their totality, federal programs have contributed to 
the ``tuition bubble'' that has been an unfortunate feature of American 
higher education. The proposed additional expansions contemplated will 
likely not have the intended effects on student participation, access 
and equality of educational opportunity.
    Second, the proposal to end the Federal Family Education Loan 
(FFEL) program and replace it with direct federal student lending will 
have negative consequences on students quite independent of the alleged 
financial consequences to the federal government. People like to have 
choices, and private loan providers do not follow the one-size-fits-all 
model implicit in the federal direct loan program. I understand that 
there is some dispute on the potential savings arising from a budgetary 
perspective to going to direct loans, and I suspect the true savings 
are in fact exaggerated, but even if that is not the case, the move 
away from diversity in provider offerings is a step backward.
    Third, the proposal to sharply expand the Pell Grant program by 
making it an entitlement offered to far more students than presently, 
with larger sized grants, is fiscally irresponsible. It may even be a 
potential factor in raising college costs, statutory provisions to 
control costs notwithstanding.
    Turning to the first point, in their latest book Harvard professors 
Claudia Goldin and Lawrence Katz argue that the rate of increase in 
educational attainment in the United States slowed significantly 
beginning in the mid 1970s.\1\ Speaking of the twentieth century, 
Goldin and Katz assert that ``during the first three quarters of the 
century educational attainment rose rapidly, but during the last 
quarter of the century, it stagnated.'' \2\ It is not entirely a 
coincidence, I think, that the major federal grant program, Pell 
Grants, and, even more importantly, federal student loans, began around 
1975.
---------------------------------------------------------------------------
    \1\ Claudia Goldin and Lawrence Katz, The Race Between Education 
and Technology (Cambridge, MA: Harvard University Press, 2008).
    \2\ Goldin and Katz, p. 22.
---------------------------------------------------------------------------
    From the mid 1950s to the mid 1970s, higher education enrollments 
almost quadrupled, before Pell Grants existed and before federal 
student loans were large and universally available. Tuition tax credits 
were decades away during this era of huge enrollment growth. The era of 
exploding federal financial assistance has paralleled a significant 
slowdown in enrollment growth. From 1955 to 1975, enrollments grew at a 
compounded annual rate approaching 7.5 percent a year.\3\ From 1975 to 
2007, enrollments rose under 1.6 percent a year, not dramatically more 
than population growth. In the one-third of a century since 1975, when 
Pell Grants were just getting underway, enrollment growth has far less 
than doubled, at a time that the American population has grown well 
over 40 percent. America has fallen behind a double digit number of 
nations in the proportion of young adults with bachelor's degrees. The 
notion that federal financial aid has promoted college access in the 
United States is more a myth than a factual reality. Large expansion of 
these programs will almost certainly not promote higher access; this is 
particularly true of the student loan programs which are quantitatively 
larger in importance than Pell Grants, which have some possibility to 
have positive access attributes.
---------------------------------------------------------------------------
    \3\ This and subsequent statistics, unless otherwise indicated, are 
derived from various issues of the National Center for Education 
Statistics, Digest of Education Statistics.
---------------------------------------------------------------------------
    Now I am aware that other things are occurring in this era as well. 
Changes in income, the cost of college, the college-high school 
earnings differential, and changing state appropriations for colleges 
are a few variables that are relevant. Many of them, however, changed 
in ways that should increase enrollment. The point I am trying to make 
here is not that rising federal aid reduced the growth in participation 
itself, but rather that it is not correct to say that federal loan and 
grant programs have dramatically improved educational attainment in the 
U.S.--if anything, the evidence suggests the impact of the programs 
likely has been to lower, not raise participation.
    Why might that be? Most importantly, student aid potentially has 
increased the demand for higher education far more than it has 
increased supply, raising the price of colleges to students. If the 
price increases are substantial--as indeed they have been--it is 
possible that the enrollment reducing effects of higher federal student 
financial aid has more than offset the enrollment enhancement effects 
arising from lowering net effective prices to the student arising from 
student aid. If sticker prices have risen more than tuition 
discounting, counting federal aid as a form of that discounting, it is 
easy to arrive at a solution where the total college participation 
effect of student aid is negative.\4\ To be sure, this is a simple 
generalization, and Pell Grants have probably had significantly 
different effects than student loans and tuition tax credits, but in 
aggregate the federal programs have almost certainly pushed the cost of 
higher education upwards.
---------------------------------------------------------------------------
    \4\ This discussion barely scratches the surface of this issue. For 
more, see Richard Vedder, Going Broke By Degree: Why College Costs Too 
Much (Washington, D.C.: AEI Press, 2004), or Andrew Gillen, Financial 
Aid in Theory and Practice (Washington, D.C.: Center for College 
Affordability and Productivity, April 2009).
---------------------------------------------------------------------------
    Moreover, the era of greater federal aid is a period of declining 
equality of educational opportunity. When Chairman Miller completed his 
higher education, 1972, before a single Pell Grant had been awarded, 
persons from the top quartile of the income distribution had about six 
times as likely a probability of earning a bachelor's degree by age 24 
as persons in the bottom quartile. Today, the upper income student has 
nearly eight times the probability of getting a degree. See the 
enclosed graph prepared by Matthew Denhart, showing the trends over 
time in this factor; although there has been modest improvement in 
recent years, inequality is greater today than it was when the Pell 
Grant program began in the mid-1970s.


    Part of the explanation for this trend relates to non-aid related 
factors, such as the fact that some schools have deliberately 
restricted supply, especially for marginally achieving students, many 
of whom are low income, as part of an academic arms race where colleges 
try to gain prestige in published rankings that depend in part on the 
quality of students admitted and the proportion of students denied 
admission. But part no doubt relates to the fact that student loan 
programs have become very much a phenomenon utilized by comparatively 
affluent students who come from families with incomes exceeding the 
national median.
    Department of Education data affirm this. For example, take 
Stafford loans. For dependent students from families of less than 
$20,000 income, 47.2 percent received Stafford loans in 2007-08, about 
the same percent (45.1 percent) as for students from families with over 
$80,000 income, a figure well above the median family income. Over 35 
percent of students from families with over $100,000 income received 
such loans.\5\
---------------------------------------------------------------------------
    \5\ National Center for Education Statistics, 2007-08 National 
Postsecondary Student Aid Study (NPSAS:08) (Washington, D.C.: U.S. 
Department of Education, April 2009), p. 9.
---------------------------------------------------------------------------
    The President has spoken about his goal of dramatically expanding 
college participation. This is not the forum to discuss whether than 
goal is either practically reasonable or desirable. However, I can say 
that I very much doubt that the totality of the proposed legislative 
changes with respect to student aid will substantially further either 
the president's goal with respect to participation or with respect to 
equalizing educational opportunities among Americans.
    Regarding the second point, it may be true that the direct student 
loan program will reduce the budgeted outlays of the federal 
government, but even the extent to which that is true I believe is open 
to debate. For example, with expanded lending occurring in a deep 
recession environment, can one predict with any accuracy student loan 
default rates? As the ratio of debts to starting postgraduate incomes 
rise, will not default on loans become a bigger issue? Indeed, are we 
perhaps setting some students up to fail, luring marginally qualified 
students to college, only to have them not succeed in graduating, but 
nonetheless incurring large debts?
    But I want to emphasize a different point. Our government is one of 
the people, by the people, and for the people. And the people prefer 
choices to monopoly. We rejoice that technology has robbed the Post 
Office of much of its monopoly power, and reduced our reliance on 
unreliable delivery and long lines to buy stamps. Similarly, we find it 
far more pleasant to buy insurance for a new car from competitive 
insurance agents and companies than buying license plates for the car 
from the monopolistic Bureau of Motor Vehicles. Colleges have rightly 
mostly shunned the direct lending program because of the additional 
choices and services offered by private providers. To win business, the 
private providers have to please the customer, an incentive totally 
lacking if the government is the only major game in town. Are private 
providers earning monopoly profits from federal subsidies? Hardly, if 
recent exits from the industry and the stock prices of loan providers 
are valid indicators of profitability, as I think they are. I would 
note that in the past year, the price of Sallie Mae stock has plunged 
71 percent, the Student Loan Corporation stock has fallen 62 percent, 
and that of Nelnet by 38 percent.\6\ The loss in wealth to 
stockholders, including pension funds, in these companies, in addition 
to the potential unemployment of workers, is another reason you should 
give pause before endorsing the Obama Administration proposals, the 
testimony of Sallie Mae notwithstanding. Have some private providers 
engaged in dubious ethical or outright illegal practices in consort 
with universities? Probably, and they should be punished severely, 
perhaps by being forced to attend and write summaries of 100 
congressional hearings, or some other form of near torture. But we 
should not deny students the opportunity to choose amongst multiple 
options because of a few ethically challenged individuals or 
institutions.
---------------------------------------------------------------------------
    \6\ As of May 18, 2009. Calculations are by Luke Myers of the 
Center for College Affordability and Productivity.
---------------------------------------------------------------------------
    Moreover, any federal financing of student loans requires 
additional borrowing from a government that has engaged in 
extraordinarily reckless long term expansions in its own debt, an 
expansion that foists a large burden on future generations of 
Americans. The Congressional Budget Office tells us we will have nine 
trillion dollars in deficits over the next decade, which on average is 
more than $100,000 debt for each family of four. To me, this is not 
only fiscally irresponsible, but downright immoral, since powerful 
persons, namely Congress and the Administration, are foisting burdens 
on young persons who adults should be protecting rather than harming--
all in the name of short term political expediency. I am a patriotic 
American who loves our representative democracy, but with a heavy heart 
I must say, ``shame on you.''
    Moreover, the present value of the unfunded liabilities of federal 
entitlement programs now well exceeds 50 trillion dollars, or the 
entire value of the physical capital stock of this nation. Most of this 
is the Medicare and Social Security entitlement programs. It is the 
height of irresponsibility to add to that liability; rather, you should 
be working to whittle it down, for example, by reforming Social 
Security.
    Let me also reiterate that the empirical evidence is unclear in my 
judgment whether the Pell Grant program is an effective means of 
promoting equal educational opportunity. My colleague Andrew Gillen has 
shown beautifully how Pell Grants can have positive enrollment effects 
without severe effects on tuition costs, but there is some empirical 
evidence to the contrary, and the historical evidence does not make one 
confident that Pell Grants have powerfully promoted equal economic 
opportunity given rising higher education inequality. Proposed 
revisions in the Perkins loan program are harder to interpret owing to 
a lack of detailed explanations, but both my colleague Dr. Gillen and I 
suspect that the proposals will serve to raise tuition costs.
    Also, a significant expansion in federal aid programs, especially 
student loans, almost certainly will contribute to the tuition price 
explosion. When someone else is paying the bills, costs always rise, 
and all sorts of clever regulatory moves to stop this will simply 
either lead to denied student access, reductions in academic quality, 
and/or increased university bureaucracies, already obscenely large. In 
the past, the Pell Grant program has had relatively little tuition fee 
impact in my judgment, for reasons explained in the enclosed study by 
Dr. Gillen. But as Pell Grants increasingly become a middle class 
entitlement going to students who otherwise would go to college anyway, 
and grow in size, the probability that Pell expansion will be 
relatively tuition fee neutral becomes more problematic. Pell Grants 
are dwarfed in magnitude by student loan programs in any case. In 
total, the law of unintended consequences is at work, as the tuition 
bubble that federal policies such as student loans and tax credits have 
contributed to have undone any positive impacts that otherwise would 
occur.
    Thank you for your attention.
                                 ______
                                 
    Chairman Miller. Thank you. Mr. Shireman, as you have 
outlined in your testimony, what the administration is trying 
to do here is trying to get additional resources into the Pell 
Grant. I don't know if we have the chart but it is up, but here 
you can sort of see where we have been with the Pell Grant.
    The green is where the administration is under its 
proposal--it is a lot--I can't read any of that from here but--
see I am waiting for Medicare to get my glasses.
    Not going to get covered. [Laughter.]
    All right, let us get back to the subject here. It is not 
about me. So what they would like to do is to provide the 
direction it would take to get us back to where we were for low 
income students--a greater portion of their opportunity at 
college would be covered by a grants, the grant that is made 
available in the Pell Grant Program, is that correct?
    Mr. Shireman. Absolutely. We want to make sure that the 
Pell Grant Program grows at a little bit more than inflation, 
not college inflation because we need to bring that down but we 
need to provide not just those graduating high school seniors 
but students in middle school with the assurance that Pell 
Grant Program will be there and that it will be significant 
enough to really help them pay for college.
    Chairman Miller. And Ms. Griswold, your testimony is that 
as you switched over at your institution, I don't want to 
paraphrase as you described it, but it appeared in your 
testimony that this was relatively easy to do for you because 
of the common platforms between the Pell program and the 
requirements of the Direct Loan Program?
    Ms. Griswold. That is correct. It was an undertaking in 
that we had a pretty short timeframe to be up and running. We 
needed within 6 weeks of realizing we had some significant 
changes coming in how our students would need to get their 
loans, we had a very short period of time to be talking both to 
our incoming class and as well as our returning students about 
how they would receive their student loans.
    We were getting ready to award financial aid that included 
their loans, and with that comes imparting information about 
how that program works and what students need to do.
    But the mechanics of getting it done were relatively 
straightforward. With the departments help and the technical 
manuals that are available and there are a number of schools 
out there in direct lending that we turned to. To get some 
questions answered, the promptness of the department was 
exceptional in responding to us, so for us the experience went 
very well.
    Chairman Miller. Thank you. Chancellor Reed, two things. 
You have institutions that have done it both ways and you are 
planning, as I understand it, as a system to convert to the 
Direct Loan program in its entirety over the next year is it?
    Mr. Reed. Next year.
    Chairman Miller. Yes, next year. Okay. Your written 
testimony suggests that it has worked for the institution. It 
has made a decision. It seems to have worked fine?
    Mr. Reed. Yes, has and as my colleague said it has gone 
very smoothly. What we have found is it is not brought an 
additional burden or cost to our institutions, especially our 
institutions that are mid-sized, 16,000 to 20,000 students.
    We have found that the institution of 40,000 plus students 
have added one employee at about $40,000 to $50,000 salary 
including their benefits. So that has been our experience in 
the conversion.
    Chairman Miller. In your testimony you spoke to it, but you 
obviously believe that this trade off, if we could increase 
Pell as the administration is suggesting, you think will in 
fact help those students?
    Mr. Reed. Absolutely. We have an outreach program that goes 
out into the middle schools and the high schools. We have Super 
Saturdays, Super Sundays, in the African American churches 
where we really carry the message about Pell especially and the 
availability of Pell.
    In the CSU we have a $2 billion student aid program, about 
$1 billion in loans and $1 billion in grants and we try to get 
that information out as early as we can in the middle schools.
    Chairman Miller. Thank you, Mr. Shireman, the question of 
default rates has come up and the suggestion was made I think 
by Mr. Chapman that in any category at any time the default 
rates are worse in the DL program than they are in the FFEL 
program. Is that accurate?
    Mr. Shireman. No it is not, it is really the opposite. If 
you look at by type of school defaults rates in the Direct Loan 
Program by type of school are either comparable or lower than 
in the FFEL program.
    Chairman Miller. Do we not inherit some defaults from the 
FFEL program?
    Mr. Shireman. Some of the numbers that you can look at are 
looking at the whole Direct Loan Program and the Direct Loan 
Program does take in defaulted loans from the FFEL program. 
Those are more likely to default again so some of the numbers 
can appear as if there is a higher default rate in the Direct 
Loan Program for that reason.
    Chairman Miller. Chancellor Reed?
    Mr. Reed. Mr. Chairman, just to report in 2006 we had 13 of 
our institutions in FFEL, their average default rate was 2.56 
percent. Our 10 direct lending institutions average default 
rate was 2.4 so that was you know a difference there.
    Chairman Miller. Mr. McKeon? Thank you.
    Mr. McKeon. Thank you, Mr. Chairman. Dr. Vedder, we have 
long valued your opinion on the college cost crisis with a lot 
of talk here, but no talk that I have heard is really talking 
about lowering the costs of education.
    We are talking about putting more money in and giving more 
money to students and you have written about that. You 
understand the problem, and how it is facing the country. The 
Chronicle of Higher Education recently published an article 
arguing that the higher education sector would be the next 
bubble to burst.
    How should the higher education community reform itself to 
avoid a crash like we have seen in other industries?
    Mr. Vedder. Well, thank you for that shrewd observation, 
which of course is mine. [Laughter.]
    The cost of college has been rising at three times the rate 
of inflation, two times, three times the rate of inflation for 
30, 40 years. That is precisely the period, by the way, since 
loan programs and the Pell Grant Program began back in the 
early 1970s late 1960s we started into this.
    The demand for education has been rising faster than the 
supply. Now, part of the problem is that colleges, and I am not 
talking about Charlie's colleges so much as other colleges, the 
elite universities, he wanted me to say that by the way, the 
elite universities put limits on.
    So you drop more money over at Harvard University or over 
to the University of Michigan, or the University of California 
Berkeley. You give more money to kids it allows them to raise 
tuition more.
    Tuitions have gone up because they can. And you have been 
part--you, generically, collectively, have been part of the 
problem. Now, you are trying to solve the problem. You need to 
look at it from a different way.
    How can we change the incentives, the behavior, of college 
administrators to get them to think small, to get them to cut 
costs and so forth? You need to look at a different paradigm.
    Mr. McKeon. Thank you. Mr. Chapman, the conduit saves the 
federal government money and it keeps private capital in the 
program, which means it went for students, schools and 
employees who are hoping to keep their jobs past July 1st, 
2010.
    As a member of the initial conduit advisory board and one 
of the members of the advisory board overseeing the 
implementation of the facility, could you comment on whether 
you have been approached by Secretary Duncan or other high 
level officials at the Department of Education, who have been 
interested in talking to you about the availability of the 
conduit as a more permanent financing structure?
    Mr. Chapman. To date I have not been, and to my knowledge 
no one on the committee has been as well.
    Mr. McKeon. If Congress implemented some version of the 
conduit, what changes in loan delivery, availability of service 
or services will institutions and students see on their end, as 
compared to the changes they would experience if we went to 100 
percent direct lending?
    Mr. Chapman. Well, I am not sure I can speak exactly to 
what changes it would experience if they went to direct 
lending. What I can tell you is with respect to maintaining 
private sector financing and the diversity of lenders, 
originators, and servicers that exist today and existed over 
the last 40 years, schools would see the continued great 
service, the continued value-added services that have been 
provided over all these years.
    From a funding standpoint, it would be seamless and blind. 
The lenders today in the program finance loans in many 
different ways in the background and that is all for school 
perspective, for student perspective, for a parent perspective, 
it is seamless, so they would see no change.
    And in fact, you know, not only not a deterioration but 
probably an improvement by where if there was a consistent and 
reliable source of funding that we could see out into the 
future.
    Mr. McKeon. Remember the meeting that we had with Mr. 
Shireman and the secretary and the lady that was a financial 
aid administrator at the University of Maryland? Her comment, 
how she is helping China now, where they have a one-of-a-kind 
system where the government provides everything.
    And they want to reach out to bring competition into their 
lending market at the same time as we are talking about moving 
it all to the government. Do you have any comments on that?
    Mr. Chapman. I will just note that she said those comments 
with a lot of irony in her voice, but I think, you know. I 
think those comments get to, again, choice. And I think, you 
know, what is critical to this discussion, what is critical to 
these direct lending versus FFELP debate, you know, we can talk 
about savings and dollars and numbers and whether they are real 
or not.
    But what is critical, and what when I think about what the 
best deal for the taxpayers is, it is not all about dollars and 
cents. It is about what the full package is. It is best, not 
cheapest and sometimes the best isn't the cheapest.
    I think that financial aid officers point and I think, you 
know, the overarching point of comments about keeping private 
capital in the program and keeping the diversity of lenders in 
the program is that taxpayers, students, and schools are better 
served by maintaining competition, by maintaining choice 
because it leads to better outcomes over the long term.
    Mr. McKeon. I think the competition has been good. I fought 
direct lending when they first brought it in, but over 16 years 
we have seen where the competition, I think, has made both 
programs better. One side has 4,000 institutions, one has 
1,700.
    I think the people have accepted and understood, and I 
think competition is better and I am really sorry to see the 
government moving in so many areas, but especially in this one 
to take over the whole program.
    Chairman Miller. Mr. Andrews?
    Mr. Andrews. Thank you, Mr. Chairman. I am glad to hear 
that my friend from California, Mr. McKeon believes that 
competition between public and private is a good thing. I am 
sure he will reflect that view in the health care debate when 
the public option.
    Mr. McKeon. Oh, exactly----
    Mr. Andrews. I am sure he will. The word irony was used a 
few minutes ago, there is an irony overarching our discussion 
this morning. I think it was brought out in Mr. Shireman's 
testimony.
    Mr. Shireman, I think I heard you say that 60 percent of 
the capital in the private bank program is coming from the 
taxpayers at this point, is that right?
    Mr. Shireman. Yes, it is money we are providing through the 
participation----
    Mr. Andrews. So, the way this is working now that an 
institution gets taxpayer money, lends it out, and then we pay 
them a premium on top of what the student would otherwise pay 
to reward them for taking a risk with our money? Is that 
essentially right?
    Mr. Shireman. Effectively, if they--especially if they keep 
it they have the option, they can buy it from us ultimately or 
give it back to us and we pay them a fee for their work. But in 
the meantime, we could have just made the loans directly and 
that is really the point.
    Mr. Andrews. But either way the taxpayers are absorbing the 
risk of that capital not the person in the private sector.
    Mr. Shireman. Yes, any way we do this it is a government 
program run by private sector participation.
    Mr. Andrews. With respect to 60 percent of what is being 
called private loans here this morning, with respect to 60 
percent of those loans the taxpayer is, in fact, absorbing the 
risk and we are paying someone a premium to take a risk with 
our money. Is that right?
    Mr. Shireman. Exactly. When they say they are leveraging 
our liquidity strength that means they are using our borrowing 
ability.
    Mr. Andrews. Yes. The ranking member also in his opening 
statement talked about--he made an analogy to the auto 
industry. And it seems to me the analogy falls apart in that 
although we did advance a substantial amount of money to some 
auto industries, we did not supplement the price of the car, 
did we? If somebody buys a $20,000 car we don't pay the 
automaker $24,000?
    Mr. Shireman. That is exactly right. We have a whole 
federal financial aid system for Pell Grants and student loans 
where the decisions about who can borrow, what institution they 
can borrow at, how much they can borrow and what the interest 
rate is, are all a part of the federal financial aid system. 
And we don't have that in auto loans, home loans, so the 
analogy does not really work.
    Mr. Andrews. Ms. Griswold, we are hearing all the horror 
stories of these additional administrative costs that will be 
visited upon institutions that make the switch. What was Penn 
State's experience in a vast system, making the switch from the 
FFEL program to direct loans, in terms of your internal 
administrative costs.
    Ms. Griswold. Right. It was a matter of shifting priorities 
and some pretty intense work for about a 4-month period to get 
up and running. We did not hire additional staff----
    Mr. Andrews. You didn't have to hire anybody else?
    Ms. Griswold. No, we did not. We did not need $400,000, a 
figure that grew to $1 million the second time I heard it on 
the streets, to pay any cost associated with this. Any time we 
implement a new program or a new system at the university, a 
new financial aid process or a change in regulation, there is 
always cost associated in terms of staff priorities.
    You shift staff where they need to be. This happens all the 
time; it is the way student aid offices work. And so the notion 
that we had to go find $100,000, $200,000, $300,000 to be able 
to bring direct lending up couldn't be further from the truth. 
I am not sure where that came from.
    Mr. Andrews. Mr. Shireman testified that essentially the 
only different between processing the Pell Grant and the direct 
loan is the student signs a note for the direct loan and not 
the Pell Grant, is that essentially right?
    Ms. Griswold. Yes, it is.
    Mr. Andrews. So that is the only one administrative step 
that is really added.
    Dr. Vedder, I want to ask you one thing. You testified that 
the CBO score for the savings on direct loans did not take into 
account additional administrative costs or foregone corporate 
tax revenues. What is the source of your testimony for that 
statement?
    Mr. Vedder. I received that information from members of the 
minority.
    Mr. Andrews. But do you know, independently know it is 
true?
    Mr. Vedder. I have not first-handed, scored it, and in my 
full testimony I made it very clear that I understand----
    Mr. Andrews. Have you read the CBO documents that 
underscored this?
    Mr. Vedder. I have looked at them; I have not read them 
carefully.
    Mr. Andrews. So are you sure that what you said is right?
    Mr. Vedder. I am not sure I am sounding right, but neither 
are you.
    Mr. Andrews. I am not--that is why I am asking. You made 
the statement that they did not take into account 
administrative costs or foregone tax?
    Mr. Vedder. The scoring on things like--I am an economist, 
Representative Andrews, and I understand that the people at CBO 
are honest people. I am not saying that----
    Mr. Andrews. They sure are.
    Mr. Vedder. And they are good people. They are professional 
people. I used to work with them. But economists make mistakes 
and if you look at, for example, default rates, can you predict 
default rates?
    Mr. Andrews. My time is up, but I just want to be clear 
that you don't know whether that is true or not, right?
    Mr. Vedder. I don't know that it is true.
    Mr. Andrews. Thank you very much.
    Chairman Miller. Mr. Petri?
    Mr. Petri. Thank you very much, Mr. Chairman. Thank you all 
for your testimony. This has been fascinating for me because I 
can remember when I just was a new member of this committee. 
The head of the Wisconsin Higher Education Agency came to my 
office and in a response to a question, saying that in his 
experience the guarantee program was wildly costly to the 
government, and suggesting a direct-type loan program, which he 
thought would be much more efficient both for students and for 
the taxpayers.
    We did try it out despite a lot of doubts on a three school 
basis including Marquette in my own state, and now it has been 
expanded and we have seen competition between the two. And now 
we are finding that the direct program is being scored, I can't 
believe it.
    I think it is excessive, a $94 billion saving over 10 
years, $9 billion a year couldn't possibly--I mean, obviously, 
with that much money you can provide a few perks and little 
extra tweaks and bells. But I am not sure it is worth it to the 
taxpayer when the terms of the loans are the same to the 
students and the schools.
    So I just would like to ask Mr. Shireman if you could tell 
us how you are doing to lay the groundwork for expanding the 
Direct Loan Program? I mean you are going to try to switch by 
July 1st, 2010. Could you tell me how many schools do not have 
their participation agreements set so that they can move to the 
Direct Loan Program if they choose to do that?
    Mr. Shireman. I don't have a precise answer to that 
question, but we are conducting outreach right now on 
contacting schools that are not yet making direct loans, or 
have not conducted those initial steps.
    And we have also invited the Higher Education Association, 
as well as members of Congress, to let us know about the 
schools they are most worried about, the schools where there 
is, you know, maybe one staff person who is handling federal 
aid. And it is important to get them in early, talk to them 
about what the steps are so that they can take those steps.
    Because it is a relatively minor addition to the existing 
efficient Pell Grant process that is run by Accenture, that 
front-end origination side is not the biggest concern. The 
biggest concern is we have to ramp up the servicing capability 
to collect on those loans and the previous administration 
actually started that process with an RFP that we are in the 
process of completing.
    Mr. Petri. And now other countries have gone to a Direct 
Loan Program, I think Great Britain and Australia and New 
Zealand. They have an additional feature which gives borrowers 
the option of repaying their loans through the Inland Revenue 
Service or their equivalent of the IRS.
    And if we do have a direct loan program we could save 
collection costs and default costs and so on by giving people 
the option of having, say, up to 15 percent of their income 
withheld from each paycheck, and the loan is automatically 
rescheduled through the withholding process of the IRS.
    Would the administration be at all open to looking and 
exploring whether doing in the United States what is already 
being done in the United Kingdom, Australia, and New Zealand 
would make sense?
    Mr. Shireman. In those other countries, which are very 
interesting programs, all of the participants are paying off 
their loans as a percentage of their income. And we have made 
the policy decision here that the majority of borrowers are 
probably going to be fine paying a flat payment based on the 
amount that they borrowed, but that there are some that need 
income-based repayment and that type of help.
    So it is more on an exception basis here, so it probably 
doesn't fit with the system that we have. I would be glad to go 
back and take a look at it, but at this point we are focusing 
on really using the system that we have developed over time 
here.
    Mr. Petri. One other area, several people--I think someone 
testified here from Vermont and the guarantee agency in that 
state. It is my understanding that guarantee agencies in many 
cases have close relationships with private lenders, and one of 
their missions is to provide oversight over lenders.
    Is that an area where we should be, our self, exercising 
more oversight to make sure that they haven't gotten in bed 
with each other rather than supervising?
    Mr. Shireman. Well, certainly there are some situations 
where there are close relationships between lenders, our 
secondary market and guarantee agencies. There has been some 
increased oversight of that situation over the past couple of 
years, and it is an area that we will continue to look at. It 
is of concern.
    Chairman Miller. Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Mr. Chairman. I enjoyed 
yesterday's hearing that you brought to us, and this one seems 
to be just additional information that I am enjoying very much. 
I want to direct my first question to Chancellor Reed.
    I am very happy to hear your statement and how your 
university system focuses on the most needy students and 
underserved families helping them access higher education, and 
you highlighted in your testimony that your system includes 
many HSIs and involves many first generation college students, 
residents who need the most financial, academic, and social 
support to successfully complete college.
    What do you see as the core services that will help low 
income first generation minority students successfully manage 
their student loans and college financing?
    Mr. Reed. Mr. Hinojosa, one of the things that I have found 
is to reach out to the families and the students together, and 
in California we have initiated an outreach program into the 
middle schools, including the distribution of over 3 million 
posters that have financial aid information, both grant and 
loan information.
    As you know, the Latino community does not have a history 
of borrowing money and one of the things that we try to reach 
into the middle school is to have Super Saturdays where we 
bring parents and students together to the campuses to share 
with them the different kinds of financial aid that they will 
be eligible for and let them know how to apply for it, when to 
apply for it and give them the assistance that they need.
    Mr. Hinojosa. Chancellor Reed, I come from a Mexican 
American family and that practice is a European practice that 
you don't borrow money, you save money and you pay for it in 
cash. So I understand it very well and I would like to direct 
my next question to Secretary Shireman.
    In your testimony you said that it would be the 
department's job to build into contracts the proper incentives 
to get the best service for students and I couldn't agree more. 
I like those incentives, proper incentives, and that there will 
be competition amongst the universities to show that it can be 
done, just as Ms. Griswold shows that at Penn State they didn't 
need to hire more people to get this Direct Student Loan 
Program in.
    So let me say that in the State of Texas, Secretary 
Shireman, our state guarantee agency and nonprofit secondary 
markets have provided valuable financial illiteracy education 
and outreach programming for students and families and 
technical support for colleges and universities.
    So I am going to ask you a question. It was interesting to 
also hear CEO Rene Drouin talk about one of the parts--I think 
it was on page two, bullet number three. It says the key is 
that your organization, your foundation, continues to support 
schools and students with entrance and exit counseling, 
financial literacy education programs and local compliance 
expertise.
    So I ask you, Secretary Shireman, will you agree with me 
that we in Congress make this component of financial literacy 
education a mandatory as we are trying to finish out our 
legislation?
    Mr. Shireman. Certainly as part of our college access and 
completion innovation fund we want to include that type of 
financial literacy education, helping students know about 
college, how to plan for college, how to pay for college and so 
that can be a very important part of that program.
    Mr. Hinojosa. Excellent. The next question I want to ask 
the gentleman from that foundation, the experience that you all 
have had, in terms of minority students going to college, do 
you find that they are able to repay their loans, or do they 
have a high percentage that are failing and cannot pay their 
loans?
    Mr. Drouin. Congressman from the State of New Hampshire our 
Latino population is one of the fastest growing populations 
within our state. We have programs that we have designed 
specifically for our Latino group, and what we find is they 
need early awareness and often and we find that with all of our 
individuals.
    Mr. Hinojosa. Okay, thank you. I yield back, Mr. Chairman.
    Chairman Miller. Mr. Souder.
    Mr. Souder. Thank you Mr. Chairman. This is a pretty 
amazing hearing, the party of Andrew Jackson who opposed the 
national banks not only proposing another national bank and 
advocating common stock in existing national banks. It is an 
amazing turn of events that I find this hearing ironic in so 
many different ways.
    As we are debating about Fannie Mae and how Fannie Mae was 
undergirding much of our financial crisis, by not being 
careful, we are proposing, in fact, to duplicate Fannie Mae and 
the problems that occurred in Fannie Mae.
    At a time when California is begging on their knees, we are 
being held up as California a model of how they did low income 
and affordability in college. I am sorry. It has been a great 
university system. It is not the only problem in California but 
I wouldn't hold it up as our economic model.
    At a time when we are debating health care, my friend from 
New Jersey said, that there is an option on the table for 
public and private. If you want to know why republicans have no 
trust whatsoever that the purpose of the public part isn't to 
drive out the part that is private just look at today.
    Just look at today. If there is a single republican who 
will take the word of the other party that says when there is a 
public and private offered that the intent isn't to drive out 
the private, look at this example, 74 percent of colleges chose 
the private.
    That just can't be. We just can't allow that. The public 
side has to take it over, and I would like to ask Mr. Chapman 
why since this is humiliating to have a duplicate public-
private and only 26 percent take the private, why would they 
choose you?
    What is it, is there a bias in the system? Is it rigged? 
Why did they choose the private sector over the public?
    Mr. Chapman. I would say as a general response to that 
question is private sector was chosen because of the service 
that was provided and not only the service in terms of loan 
delivery, in terms of customer service, but in terms of value-
added services that we provided to their students through 
outreach services, these literacy services.
    How do you pay back your loan when you get out? You know, 
it is a competition and admittedly when I got into this 
business and when direct lending first came about, the private 
side of the student lending business was struggling as far as 
service went.
    So, but over time then very quickly common standards, it 
solved most of the administrative issues that schools were 
having with the private sector.
    I come from Ohio originally. And The Ohio State University, 
I believe in 1992, had students from all fifty states. They had 
approximately 275 lenders, I believe, who all had different 
applications.
    Those days are long over, and they were long over, you 
know, probably by 1993 or 1994, and the service improved 
benefits to students as far as lower prices, quicker 
turnarounds as far as loan delivery happened and for those 
schools that have stayed in the private loan program that is 
who they have liked.
    The schools that were doing direct lending have, you know, 
they have made their decision, and I am glad they had the 
ability to make that decision. I am glad Penn State had the 
ability to make the decision they made, but cutting off that 
choice we believe will be very problematic.
    Mr. Souder. In 1997 basically the direct lending system 
failed and that led to a lot of trying to make sure there was 
diversification to be able to handle changing loan amounts and 
the rigidity of the federal system basically collapsed and the 
private sector had to bail the federal sector out.
    Was that partly when and why a lot of people moved to the 
private sector? There was an 8-month delay that unlike this 
where the federal government provides a back up in tough times 
to the private sector to keep it moving smoothly, when the 
federal government took over the whole thing and then had 
problems and got 8 months behind there was nobody.
    They had to go back out to the private sector, and it took 
8 months to fix the problem. That is the risk of just one 
national system, and I was wondering, were you involved at that 
particular point in time or familiar with that?
    Mr. Chapman. Well, as far as that particular time, I am not 
sure I can speak to that. But again it goes to, for the same 
reason Penn State and some other schools have been able in 
times of concern about availability of loan funds or students, 
switched to the Direct Loan Program. But at that time where the 
situation was reversed, the schools had the option to switch 
back to a more reliable source of funds at that time.
    Mr. Souder. Mr. Chairman, I know my time is up, I would 
like to announce consent to insert into the record these are 
from USA Funds, an Indiana Company, on their default rates 
which were 2 percent over 6 years lower than the direct lending 
including for Hispanics.
    [The information follows:]
    
    
    
                                ------                                

    Chairman Miller. Thank you. The gentleman's time has 
expired. We are going to try one more question here. Mr. 
Bishop, you will just have to work out the clock with yourself 
Mr. Bishop how long you want to keep asking questions but we 
are in the middle of a vote.
    We have a series of votes. I plan to recess the committee 
here so we can make the vote. We will probably not be back 
before 12 o'clock so if that creates time problems for some of 
you, I understand that and feel free to leave.
    I would hope that those who can remain would remain because 
I think there are clearly questions that the members of the 
committee have--this is an important proposal before the 
committee.
    Mr. Bishop?
    Mr. Bishop. Thanks, Mr. Chairman, and I will try to be 
quick.
    Chairman Miller. It is your voting record, not mine. 
[Laughter.]
    Mr. Bishop. Thank you, Mr. Chairman. I appreciate that 
reminder. I have listened very carefully to Mr. Souder's 
questions and just for clarification had we not passed ECASLA, 
what would have happened to student loan availability in the 
current academic year, Mr. Shireman?
    Mr. Shireman. Many, many schools would have shifted to 
direct lending, and they would have had to do it in a very 
rushed way, and we would have seen delays in terms of students 
getting funding.
    Mr. Bishop. And $6 out of every $10 is being made available 
to students currently enrolled right now in the student loan 
program is a federal dollar, is that correct?
    Mr. Shireman. Yes.
    Mr. Bishop. It may be originated privately but it is 
supported publicly, correct?
    Mr. Shireman. Right. And it is important to point out that 
both of these programs are public programs that involve the 
private sector doing the work and the difference is really how 
we pay.
    Mr. Bishop. We have heard an awful lot of discussion this 
morning about choice and that certainly is a sort of a 
seductive argument. I did student financial aid for 7 or 8 
years back in the dark ages. I was a college administrator for 
29 years. Every day practically that I was on my campus I dealt 
with students in terms of how to pay their bills.
    I never once heard a student say, ``God, I wish I had a 
choice.'' They were grateful to know that there was a source of 
money available to them. They wanted to know how much, they 
wanted to know what the terms and conditions of repayment were, 
and they wanted to know that it was available to them.
    Ms. Griswold, is that your experience as well?
    Ms. Griswold. That is my exact experience, that students 
are far more concerned about the availability, the efficiency 
and getting their funds, less concerned about who the provider 
of those funds are. We had years where students who understand 
that many banks participate in making the loans.
    We regularly got the question, which one should I pick, and 
the other, you know, the other thought and the notion of 
competition with these loans has always been my lament, and I 
shared this with my colleagues in the FFELP community, as well 
as in the Direct Loan community, that lack of standardization 
is sort of a sad thing.
    A student in a rural community, at a small university, 
hopefully, hopefully, has a school that has worked sufficiently 
with lenders to negotiate service and availability of loans 
that are at the best rates. Not all students get the same 
benefits that come and as the national program it would seem 
those benefits for students should be equal across all 
students.
    Mr. Bishop. Thank you. I only have time for one more.
    Dr. Vedder there are many things that you have said in your 
testimony. I have heard you testify before. I have read much of 
what you have written, and I have a lot I could engage you on. 
I have about 30 seconds.
    In 1974 when the Pell Grant began, the maximum award was 
$1,400. Is it your contention that had that award stayed at 
$1,400 or some reasonable variant thereof, that tuitions would 
not have increased?
    Mr. Vedder. It is my contention if we had not put in the 
Pell Grant or the Student Loan Program we would have as many 
students enrolled in American universities today as in fact----
    Mr. Bishop. So if I may interrupt, so if you were 
constructing a student financial aid portfolio now, federal, 
state, institutional, what would it look like from your vantage 
point? Would you have student aid?
    Mr. Vedder. If I were the czar which, thank God I am not--
--
    Mr. Bishop. I am sort of thanking God I am not also, but--
--
    [Laughter.]
    Mr. Vedder. You should pray every day that I am not. You 
should--I would not--the federal government would get out of 
the student loan business completely. The federal government 
has corrupted higher education with the disincentive effects 
that it has provided to universities to engage in bloated 
bureaucracies, arrogance, elitism, and so forth that has caused 
these problems.
    Mr. Bishop. I think my time has expired, Mr. Chairman. 
Thank you very much. [Laughter.]
    Chairman Miller. Recess. I want to thank all of you for 
your testimony. If you can remain, I would hope that you would 
and we will return as quickly as possible.
    [Recess.]
    Chairman Miller. Thank you very much for being willing to 
remain. My, well, there are no apologies. This is just the way 
it is on the Hill. Most of you are familiar with the Congress, 
but I wanted to make sure my colleagues, some of them said they 
will return. If they do they will have to do it inside my 
question period, otherwise we are going to let you all be free.
    Just a couple of things, Chancellor Reed, as the gentleman, 
Mr. Vedder, was talking that he thought the federal loan, 
federal financial assistance should be abolished, or 
dismantled, you were moving around in your chair a little bit. 
Do want to comment?
    Mr. Reed. Well, America's future workforce is going to come 
from a majority of the underserved students of color in this 
nation, and I don't look at either the Pell Grants or the 
Student Loan Programs as expenditures.
    I look at that as investments in America's future, and 
those are very good economic investments in the future of this 
country. And providing a college education is something that 
can be shared by the individual, by the states, and by the 
federal government.
    One of the things that you have tried in the last couple of 
years is to focus on making states maintain their effort. And I 
think this is a shared partnership and when one of the 
questions was why has tuition and fees increased, and I think, 
my experience has been, because states have withdrawn the kind 
of support that they need to be as a part of their partnership 
in this effort.
    So I don't look at this as an expenditure and breaking 
America's back. I look at it as making America stronger.
    Chairman Miller. Well, thank you and, you know, I don't 
think any of us who have sat on this committee--I mean we have 
listened to so many people, certainly out of the business world 
and economists, you know, that this investment we make in 
education probably returns more than any other investment that 
we make.
    We all know what it leads to in whatever field that it is, 
and the idea that somehow we would then dismantle the program 
and that it would return to the days when I was in school.
    If you drive by San Francisco State or if you drive by the 
University of California at Davis, it is a far different campus 
with far more of opportunities available to that student body 
and that student body is far different than when I went there.
    Certainly it is a very different law school today than when 
I went there and the diversity of people who have the 
opportunity now to pursue that education. So that idea that 
somehow we can return there if we just dismantle the federal 
student assistance that somehow that is a credible position 
that the nation would be well served, I just didn't want to 
leave on the record at that point.
    Mr. Remondi, in your testimony you have essentially said 
that this program is going to have to change given what has 
transpired over the last couple of years, and it is a pretty 
fundamental change that you are talking about.
    Mr. Remondi. Yes.
    Chairman Miller. I just wanted to be able to make sure that 
people on the record understand that. I mean I have looked at 
your proposal. We are giving it very serious consideration and 
discussing it among members and staff, but I think there is 
sometimes the characterization that you are here saying, ``No, 
we just want to go back to where we were,'' and I don't think 
that--I want to clarify that is not your position.
    You recognize that whatever happens is going to be very 
different than in the past.
    Mr. Remondi. That is right. And I think, you know, the 
federal loan programs kind of mirrored what was going on in the 
capital markets and as the capital markets continue to ratchet 
down credit spreads, we were the beneficiaries of that. And the 
federal loan programs kind of followed and tried to keep step 
with it. One sometimes often got ahead of the other.
    In 2007, that environment changed completely and credit 
spreads have widened to levels I don't think any of us could 
have predicted. We used to raise money at about 10 basis points 
over LIBOR. Now that same bond would cost us about 200 basis 
points over LIBOR. Obviously, it doesn't work with the 
economics that are built into the Student Loan Program today.
    But we also see that the funding environment is not going 
to return to those same old levels, and so if there is a 
predicted and consistently large spread between where the 
private sector can borrow money and where the federal 
government can borrow money, it does create an opportunity to 
utilize that to create savings that can be used to expand the 
Pell Grant Programs and fully support that.
    Chairman Miller. Mr. Guthrie?
    Mr. Guthrie. Thank you, Mr. Chairman. And it is great to be 
here. I think the number one issue for all of us regardless of 
where we stand is how do we make college more affordable? I 
think that is the biggest concern. I know it is the biggest 
concern within middle class America right now.
    Maybe it is because I have one heading that way and so 
those are the kind of parents that I talk to every day when I 
am home at soccer fields and so forth, but really concerned 
about the ability to send their children to college. And so 
that is where we are going. Whatever program we do, I think 
that has got to be our end result and that is everybody's 
interest.
    The question that I, and I kind of caught on it Monday when 
I was kind of studying for this, and if Mr. Shireman, on the 
score for the CBO, the $90 billion plus score for the CBO, my 
understanding with that, and please correct me if I am wrong, 
is that is not necessarily money that we send to the private 
lenders or it is not money we send to the private lenders.
    It is what would be gained by the Direct Loan Program being 
able to borrow at lower rates and then also charging the same 
rate that the private industry does to our, I guess middle 
class students who would be doing these student loans. And then 
that money is used to subsidize the Pell Grants in the 
proposal?
    Mr. Shireman. I think this is the way to think about it. 
Remember that these are fixed rate loans to students at 6.8 
percent, in some cases lower than 6.8 percent. So you have got 
a 6.8 percent fixed rate loan over the next 10 to 25 years. Our 
borrowing, say our cost of funds is here. The amount that we 
have to pay in the FFEL program so that loans are made in FFEL 
is here.
    Mr. Guthrie. Right.
    Mr. Shireman. And there is a gap there and if we make the 
loans in direct loans, when interest rates are low in the 
economy, that is an amount that comes to us. When interest 
rates are high, it is an amount that we actually pay to----
    Mr. Guthrie. Right.
    Mr. Shireman [continuing]. The FFEL participants. So 
depending on interest rates over the next 25 years, sometimes 
we have more money come in because we do direct loans instead 
of FFEL and sometimes we have less money going out----
    Mr. Guthrie. But the last couple of years----
    Mr. Shireman [continuing]. With direct loans than FFEL.
    Mr. Guthrie [continuing]. There has been money coming in. 
Would it be, and I understand the increase in the Pell and I 
think honest people can disagree on whether there should be an 
entitlement or the Congress every year decide how much money is 
going into the Pell program.
    I think that is a reasonable area to discuss and debate. 
But my understanding is though, if 6.8 percent is the fix and 
we can borrow as the government at a lower rate, why 
shouldn't--why is 6.8 the number?
    I mean why shouldn't it be 5.5 or when the times are--when 
money is coming in and these middle class, typically middle 
class people who are struggling and then the moderate and lower 
income or the Pell Grants, why not give a lower interest rate 
to the people going to college?
    I can't understand why we wouldn't have that policy and 
then when it goes up and then 6.8 percent is what we decide as 
a Congress and as an executive branch is the right level.
    Mr. Shireman. It is a decision that Congress can make. A 
few years ago we had a variable rate approach. I mean the 
tradeoff is usually that a variable rate approach can go to a 
higher rate, so we had a variable rate with a cap of 8\1/2\ 
percent. When we went to a fixed rate, Congress decided to go 
to that 6.8 percent.
    So if there was a shift, and obviously, in the private 
student loan market, non-FFEL, non-guaranteed, they are almost 
all variable rate loans, with no cap at all.
    Mr. Guthrie. Right.
    Mr. Shireman. So if we have interest rates at 12, 14, 18, 
25 percent, we don't want to have that kind of a variable rate 
program----
    Mr. Guthrie. And I agree with you on that.
    Mr. Shireman [continuing]. And so there are tradeoffs there 
and the tradeoff can involve some federal costs, so that is the 
kind of decision that Congress needs to make.
    I will say that you cannot get a personal loan at 6.8 
percent fixed rate right now, so from the standpoint of whether 
this is a good deal for students, these are good loans, 
personal finance experts will say this is the loan to take.
    Mr. Guthrie. I am not saying they are not good, but it 
could be better. It could be better if Congress----
    Mr. Shireman. All the costs to make it better and that is 
the kind of decisions, you know, those are the kinds of 
decisions that Congress----
    Mr. Guthrie. But in the score, isn't that 6.8 percent 
versus what Congress can borrow for or what the federal 
government can borrow for? Isn't that the score of the $90 
billion?
    Mr. Shireman. Well, you have to remember that 6.8 is a 
long-term rate, so we are going to see interest rates, whether 
it is next winter or next year or 5 years from now, we are 
going to see interest rates change a lot over time.
    Mr. Guthrie. Right, so you could be upside down or the 
federal government could be upside down.
    Mr. Shireman. Absolutely. There will be times when we are 
putting money out----
    Mr. Guthrie. But the scoring of CBO assumes that there will 
be more money coming in than going out, and that money is 
used----
    Mr. Shireman. CBO currently uses----
    Mr. Guthrie [continuing]. To create----
    Mr. Shireman [continuing]. Relatively low interest rates 
into the future. What really doesn't change that much is the 
fact that there is a gap. So the gap exists whether we are 
above the fixed rate and paying money out or below the fixed 
rate and having money coming in.
    Mr. Guthrie. And my time is up, but we could loan money to 
students at the cost of the federal government borrowing, plus 
servicing or whatever kind of--and it would be cheaper than 6.8 
in today's numbers, right?
    Mr. Shireman. It would involve work with CBO to figure out 
what that would cost and compare that to investing in Pell 
Grants.
    Mr. Guthrie. In current times, the students' money would 
subsidize----
    Mr. Shireman. Well, students are getting----
    Mr. Guthrie [continuing]. Pell Grants, given the way you 
are moving on that.
    Mr. Shireman. Well, students are getting a loan at a rate 
that they cannot get in the private sector right now, at the 
rate that is being offered right now, so whether it should be 
even lower than that, at a cost to the federal government, 
which would mean we couldn't do as much for Pell Grants, that 
is not the choice that the administration has made.
    We think we have a rate that works for students and we keep 
that rate and put more funding into Pell Grants.
    Chairman Miller. Ms. Shea-Porter.
    Ms. Shea-Porter. Thank you very much. I guess you know who 
I am going to be talking to first, right?
    Could you please explain to me--I have some questions about 
the program there. And in your testimony, you talk about 
``needs life-of-loan servicing.'' Could you please explain, in 
greater detail, what you meant by this and the benefits that 
you see?
    Mr. Drouin. Yes, thank you, Congresswoman. From our 
standpoint, in the state of New Hampshire, we have never sold a 
loan outside the state of New Hampshire since the secondary 
market came into an existence. We have got about $1.5 billion 
outstanding right now in the student loan program, on that 
side.
    We attribute that to the fact that, as far as not selling a 
loan, curtails the default rate and delinquency rate on these 
loans. It also, from the standpoint of--we are the only 
constant that that student has throughout the life of this 
loan. We were there at the early awareness programs and we are 
there when they make their final payment on their student loan.
    It creates, as far as I am considered, a better, if you 
will, a better mousetrap, if you will, from the standpoint of 
looking at the student and making sure that they understand who 
they can deal with, throughout the life of their loan.
    Ms. Shea-Porter. Okay. So you are minimizing all the 
additional layers there.
    Mr. Drouin. We do. We do, and as I have said before, we 
have always kind of looked at ourselves as the mini direct loan 
program in the state of New Hampshire for quite a few years. We 
were established in 1962, 3 years prior to the federal 
government even thinking about student loans.
    And so I think we have a lot of history there. And when I 
say a mini direct loan program, basically, it is from soup to 
nuts. We do the origination, the upfront work, right through 
payout.
    Ms. Shea-Porter. Do you think this would work just for New 
Hampshire or do you think this could help other states as well?
    Mr. Drouin. Oh, I think we are not the ones who solely that 
invented this. There are quite a few agencies just like us. 
They call us bundled agencies. And I think it works out well 
from the standpoint of cost savings and I think it can work 
across the country.
    Ms. Shea-Porter. Okay, thank you. And, Mr. Shireman, 
President Obama's budget and your testimony make reference to 
the department contracting out servicing to private sector 
student loan services.
    We have heard Mr. Drouin's testimony that because of some 
of the thresholds set in recent opportunities to bid for 
servicing of the loans that the small, nonprofits, like NHHEAF, 
were shut out of the process and will be shut out of the 
process going forward.
    Given NHHEAF's exceptionally low default rates and its 
well-respected and appreciated status in New Hampshire, and I 
can attest to that, doesn't NHHEAF represent exactly the type 
of services that you would like to retain and what steps are 
being taken by the department to ensure that services like 
NHHEAF will have this opportunity going forward?
    Mr. Shireman. Well, we are in the middle of a procurement. 
It is currently being negotiated, so the amount that we can 
talk about some of the servicing issues, we will be able to 
talk more about that in coming months.
    But I would say that we have seen a lot of state agencies 
and state affiliated nonprofit organizations that are doing all 
things for students, in terms of financial literacy, outreach, 
and information, and that is the reason that we created a fund 
that goes to states that can be used for those kinds of 
purposes because we see the value in those.
    So we may need to have different kinds of funding 
mechanisms to continue these important works, but they are 
valuable and something we would like to continue.
    Ms. Shea-Porter. But in the end are you saying there is 
life for NHHEAF?
    Mr. Shireman. Whether it will be exactly the same type of 
entity, I think there will be change and there already is 
change because of what we have seen in the market, but having 
state agencies that are involved in helping students, not just 
with their student loans, but with understanding college 
financial aid generally is something we need more of.
    Ms. Shea-Porter. Okay, and will organizations like NHHEAF 
be at the table, as you work out these details and decide what 
direction you want to go?
    Mr. Shireman. Absolutely. We have been meeting with all of 
the different associations and many of the entities for the 
past--during the transition, as well as since we have been in 
the administration.
    Ms. Shea-Porter. Okay. Thank you, and I yield back.
    Chairman Miller. If the gentlewoman would just yield, just 
on this point, my understanding is whether it is Sallie Mae or 
Citicorp or New Hampshire, that they would all continue to 
service their existing portfolio; is that correct?
    Mr. Shireman. The current FFEL portfolio would continue----
    Chairman Miller. Whatever they have?
    Mr. Shireman [continuing]. So there would not be some 
immediate end to the current portfolio of FFEL loans, so there 
will be a ramp down over time, a lot more loans in the Direct 
Loan Program, and those would be serviced by private sector 
entities that we contract with.
    Chairman Miller. And that--okay. I won't complicate it. 
Okay, thank you.
    Ms. Shea-Porter. Could I----
    Chairman Miller. It is complicated, but yes.
    Ms. Shea-Porter. Could I ask for one more minute, please, 
Mr. Chairman?
    Chairman Miller. Yes, you still have some time.
    Ms. Shea-Porter. Okay, thank you. I just wanted to make 
clear that, under the Ensuring Continued Access to Student 
Loans Act will they be servicing those loans?
    Mr. Shireman. The loans that are being purchased by the 
department over the coming months, at least at the start, will 
need to be serviced by entities that we have contracts with, by 
the end of this summer and those would be the ones that are in 
the current procurement that was begun by the prior 
administration.
    The question of whether beyond that there might be more and 
more opportunity is something that we will entertain, when the 
current procurement is done, in the next month or so.
    Ms. Shea-Porter. Thank you. I yield back, thank you.
    Chairman Miller. Thank you.
    Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman. I am glad this is all 
so crystal clear. Earlier we talked and we heard some of our 
colleagues talk earlier about all the wonders of competition on 
that. It seems to me that, you know, there really isn't any 
pure competition in this at all.
    We have one pool of money, Mr. Shireman, I guess we have 
one pool of money, and if it were private companies or non-
governmental companies I should say, on the other side, then 
they wouldn't be getting subsidies and they wouldn't be getting 
guarantees.
    So, if we really want a competition and allow them into the 
game and not give them subsidies and not give them guarantees, 
how would that change the competition do you think? Would those 
people stay in the business or would they get out?
    Mr. Shireman. Well, I checked last night to find out what 
the interest rate would be on a personal, unsecured loan with 
somebody with good credit, like me, and it was 14\1/2\ percent, 
fixed rate. That was a fixed rate.
    It looked maybe there were some where maybe I could get it 
down to eight or nine, in some special kind of circumstances, 
but people would be paying much, much higher interest rates, if 
they could get a loan. And usually, students at 18, 19 years 
old, don't have much of a credit rating.
    Mr. Tierney. Right. I mean so it looks like we are just 
finding a way here to funnel money to the FFEL program people 
as an alternative to a direct loan, where we could just keep it 
on the direct loan here. The only difference might be some of 
the services, which you are also providing for in the new 
proposal, am I right?
    Mr. Shireman. Absolutely. We are talking about two 
different ways of running a government program that uses the 
private sector and it is not a true government vs. private----
    Mr. Tierney. And picks up costs along the way of marketing, 
of higher salaries, of profits----
    Mr. Shireman. Yes.
    Mr. Tierney [continuing]. Of all those things that means 
that the student gets a worse deal on his loan and the taxpayer 
gets a worse deal.
    Mr. Shireman. Yes, there are a lot of added transactions 
there.
    Mr. Tierney. Right. So just one final thing on that point 
that my colleague raised a second, we right now are looking at 
a 6.8 percent rate. Congress could change that rate, which 
would mean that the borrower student would actually get a 
benefit and pay less.
    When you talk about that being a cost, what you really mean 
is it would be less revenue into the government, not that you 
would have to put money out-of-pocket, but less revenue.
    Mr. Shireman. It would be less revenue. In a low interest 
rate environment----
    Mr. Tierney. Right, it would be less revenue.
    Mr. Shireman. Right.
    Mr. Tierney. So it is not a cost, it is just less revenue.
    Mr. Shireman. In the current environment, yes.
    Mr. Tierney. Right. And then that less revenue would mean 
less to go into a Pell Grant proposal that you have?
    Mr. Shireman. Right.
    Mr. Tierney. So Congress could decide to split the baby on 
that and change the interest rate, put some more into Pell, but 
also give that student borrower more of an advantage than they 
currently have.
    Mr. Shireman. Congress could make that decision, yes, sir.
    Mr. Tierney. Thank you very much.
    Mr. Shireman. The President would have to sign the bill.
    Mr. Tierney. I have heard about that process. Thank you. I 
yield back.
    Chairman Miller. Mr. Kildee.
    Mr. Kildee. Thank you, Mr. Chairman. I apologize for not 
being here before. We had another hearing. First of all I see 
in the audience, Tom Butts who worked with Bill Ford to--you 
were kind of the obstetrician of the direct loan bill and he 
was the father of it. Good to see you here, Tom. I know the 
University of Michigan has used that very much and glad to see 
you here today.
    When I went to college back in 1947, you mentioned that you 
go by San Francisco State University and how huge it is now 
and, you know, that is true all over the country.
    Even small, community colleges, we didn't have many 
community colleges in those days, but in my city, Mott 
Community College has grown and that is the entry point for so 
many students now and there has been a proliferation of that.
    So, higher education has really grown throughout the 
country, with a combination of financial means to get that 
student into a college. My dad had couldn't borrow from the 
bank.
    I didn't have any value to the bank or anything that they 
could get the money back on, so he just put his money together 
somehow and sent only one of his five children to college. That 
is all he could afford.
    So the loan program has been tremendous and I, myself, have 
felt that the Direct Loan Program has been a very, very 
important program in this, in helping students. I know the 
University of Michigan has used it very, very well in 
attracting students not only to its campus in Ann Arbor, where 
I went to school, but also its campus in Flint.
    But I do think that we have an enormous responsibility to 
make sure that the bottom line for this is what loan program or 
programs will best serve the students and best serve the 
taxpayers of this country, and I will be reading the testimony 
to try to learn more about that. I thank you for the hearing 
this morning.
    Chairman Miller. Thank you. Earlier on, I referred to a 
chart that we had that sort of demonstrates where we have been 
and what we have tried to do in the last couple of years, and 
that was really a transfer of money from the FFEL Program to 
the Pell Program that we did in the last 2 years, and then you 
see where the President wants to take us.
    I don't think anybody involved in education, and again 
understanding the opportunity that we are trying to extend in 
this country to all qualified students to go and pursue a 
college education, cannot appreciate how serious of a decision 
this is.
    That is a significant amount of resources to be made 
available to those who struggle most financially, and again, we 
have a fair amount of evidence, good evidence, that a 
significant number of those students are deciding not to pursue 
a college education because they don't believe that they can 
afford it.
    I think I can persuade most of them, certainly in the state 
of California, that they can knit together the resources to do 
that and receive a first class education. But as we have talked 
with various universities and colleges and community colleges 
around the country, I don't think there is anyone that has 
suggested that this would not be a major boost to attracting 
those individuals to college.
    So to the question of, you know, we have had a fundamental 
change in this program because of the credit markets. We didn't 
create it, you didn't create it. It is part of the tragedy of 
the financial scandals. They spilled over onto every facet of 
financial life in this country and we are reeling from those 
activities that were undertaken.
    But the fact of the matter is we now have to decide, since 
we are essentially the only real player in the game here, with 
certainty, what we do. And, you know, we are still discussing 
with CBO what these various programs and changes would mean or 
not mean.
    But the idea that we could just leave money on the table 
here when we know the struggle that these students and families 
are engaged in to try to pay for an education is not a minor 
decision.
    And the administration has given us a proposal where they 
want to go. Whether it is an entitlement or not an entitlement, 
certainly over the next 10 years you can see your way clear to 
a very significant addition of resources.
    You know, what we don't want to have happen is where we are 
back to the left of the chart there, where we were sort of on a 
flat line, but the cost of college never broke a sweat, you 
know, in going above that and we saw the ability to afford that 
continue to be diminished for these individuals or, well, 
diminished and they ended up taking on much more debt.
    And I think there is sort of a consensus in the country 
that more and more debt is not the answer. Chancellor Reed and 
a lot of other people at this table agree, something more has 
to--Buck McKeon has been a leader on this--something more has 
to be done to get support.
    We need some partners with these institutions, especially 
the public institutions where the states, for a whole host of 
reasons, walked away from maintaining that effort that they had 
10 years ago and 15 years ago. We somehow have to recreate that 
partnership.
    But I know that, you know, there has been some suggestion 
that this is all a done deal, that this has all been very 
cavalier. This is a very big important question. We are moving 
from a system that, in many ways, worked very well.
    I always thought it was too expensive, and I was always 
stunned every year when George Bush's budget said, well, you 
know, here is the money on the table if you guys want to do 
something about it, and finally it happened.
    I mean I think there is agreement that there is a serious 
cost to the way that this program has been run. What we do with 
that is an important question for the members of the committee, 
and I think you saw that in the attendance of the first part of 
this hearing. Unfortunately, we were interrupted by a vote.
    But what we would like to do is to stay in touch with you, 
obviously, as we wind our way through this and consider what 
options we want to put before the committee and the Congress, 
but I think it is very important that this committee do address 
this matter.
    And I haven't gotten in the habit of telling President 
Obama ``no'' yet, so we will proceed here, because it is a 
very, very important decision in terms of the resources that we 
can put behind those most financially challenged to educate 
their children.
    It is just not much more complicated than that and we are 
talking about young people who are fully qualified to take 
advantage of a college education, and that is what this 
committee exists for is to try to expand that opportunity.
    So, thank you for your time, your expertise and my 
apologies for the interruption. I know some of my colleagues, 
because I was talking to them on the floor, they had scheduling 
conflicts, but I think they may have some questions for you.
    I would hope if we submit them to you, you would be able to 
get them back to us. We will have them single spaced and typed 
or double spaced and typed. But I think they do have some 
questions.
    And so no objections, the committee will stand adjourned. 
Thank you very much.
    [The prepared statement of Mr. Petri follows:]

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

    I want to thank Chairman Miller and Ranking Member McKeon for 
holding today's hearing on student loan reform.
    I fully support the President's proposal to end the Family Federal 
Education Loan (FFEL) Program and originate all new federal student 
loans through the Direct Loan Program.
    For over two decades, I have argued that our student loan system 
has unnecessarily lined the pockets of lenders and middlemen at the 
expense of students and taxpayers. Recently, the Congressional Budget 
Office reported that this change would save $94 billion over ten years. 
That's a fantastic amount, and it illustrates how rich the subsidies 
are to the financial institutions which participate in the student loan 
program, and why they have fought tooth and nail to keep the guarantee 
program going.
    Besides being costly to taxpayers, the FFEL program has also been 
plagued by abuse and scandal. For instance, last Congress it was found 
that from 2001-2006 nonprofit lenders illegally claimed, according to 
one estimate, over $1 billion in improper subsidies by knowingly 
manipulating a loophole in the law. And then there was the ``pay for 
play'' scandal when it was revealed that college aid administrators and 
Department of Education officials in charge of overseeing FFEL received 
special favors, benefits and kickbacks from lenders in exchange for 
steering students to their loans.
    Last year, the credit crunch further highlighted the drawbacks of 
FFEL. Many lenders cut back their lending to certain institutions, 
particularly community colleges. Finding FFEL unreliable, hundreds of 
schools switched to the Direct Loan Program where the availability of 
money has never been in question. Congress was forced to pass emergency 
legislation to allow access to Treasury funds so they could continue to 
make their loans. Therefore, according to the President's Budget for 
the 2008-2009 school year, 75% of all federal student loans will be 
financed by Treasury funds.
    Today's hearing will highlight the benefits of originating all new 
loans through the Direct Loan Program. Besides the tremendous cost 
savings to taxpayers, I expect several of the witnesses to detail their 
school's positive experience switching to the Direct Loan Program and 
the benefits the program provides to both students and college aid 
administrators.
    Advocates of FFEL will also present various complex counter 
proposals to keep their role in the federal student loan program. One 
only has to look at the author of the various proposals to understand 
the winners and losers. The fact is that for far too long the FFEL 
program has been structured in the interests of lenders and other 
middlemen. The Direct Loan Program is tested and has proven to be the 
most cost effective, reliable, and efficient federal student loan 
program.
                                 ______
                                 
    [Additional materials submitted by Mr. Miller follow:]

                                                    April 20, 2009.
Hon. George Miller,
U.S. Congress, 7th District, Rayburn House Office Building, Washington, 
        DC.
    Dear Representative Miller: As Chair of the California Student Aid 
Commission, I write to inform you that the California Student Aid 
Commission has voted to support President Obama's concept in the 2010 
Budget proposal to originate all new federal student loans through the 
Direct Loan Program and to use the savings to create a stronger and 
more reliable Pell Grant program.
    The Commission supports the President's proposal even though, 
perhaps ironically, we are designated by the United States Department 
of Education as the student loan guarantee agency for California under 
the Federal Family Education Loan Program (FFEL Program), and are the 
second largest guarantee agency in the country. If you make 
California's position known, it may well induce other states to follow. 
We shall certainly communicate it to all members of our congressional 
delegation.
    In addition to its FFEL Program responsibilities, the Commission is 
the primary agency in California responsible for the administration of 
student financial aid programs supported by the state and federal 
governments, including the state-funded Cal Grant Program.
    Since the State of California has determined that the student loan 
guarantee business is not a core mission of state government--to the 
extent that the State is currently attempting to sell its student loan 
guarantee program assets and forego the State's involvement in FFEL 
Program administration--I believe the Commission's perspective on this 
issue emanates solely from a desire to act in the best interests of 
students.
    We agree that the President's goal of reducing unnecessary lending 
costs in order to strengthen the Pell Grant program is in the best 
interests of students.
    The Commission also adopted a motion stating that the Direct Loan 
Program should provide quality services essential for students, 
including, among other things, default aversion, outreach, early 
withdrawal counseling, and training for financial aid officers, and 
that those services should specifically address the diverse needs of 
the students and institutions.
    The Commission, however, does not have in mind any particular 
proposal by which these services would be provided.
    I and the Commission's Executive Director, Diana Fuentes-Michel, 
would be pleased to discuss these matters with you. The Executive 
Director and I serve as the Commission's contacts on all matters 
relating to the President's Budget Proposal and Direct Loan Program. We 
applaud your continuing good work in this vital area, and we want to 
help in any way that we can.
            Sincerely,
                                        Barry Keene, Chair,
                                 California Student Aid Commission.
                                 ______
                                 
                    National Direct Student Loan Coalition,
                                                      May 21, 2009.
Hon. George Miller, Chairman,
Committee on Education and Labor, U.S. House of Representatives, 
        Washington, DC.
    Dear Chairman Miller: President Obama's proposal to transfer $94 
billion in lender subsidies to students merits your support.* The 
President's education budget proposal includes changes to the status 
quo of higher education funding that will result in stabilizing and 
increasing Federal Pell Grant aid for needy, qualified students. Under 
the President's plan, Pell Grants for financially at-risk students 
would not only increase significantly in the short term, but also 
increase systematically going forward by moving Pell from discretionary 
to entitlement spending and indexing increases to the Consumer Price 
Index (CPI) plus 1%. It is not fiscally responsible for the government 
to support two student loan delivery systems. However, for the past 15 
years, Congress has supported both the Federal Family Education Loan 
Program (FFELP) and the Federal Direct Student Loan Program (DL).
---------------------------------------------------------------------------
    *Congressional Budget Office (CBO) March 2009 estimate of the 
effect of President Obama's budget proposal to cancel the Federal 
Family Education Loan Program (FFELP) and move all student loans into 
the Federal Direct Student Loan Program (DL).
---------------------------------------------------------------------------
     FFELP ideally (though not currently) uses private capital 
to loan to students, encouraged to do so by statutorily set federal 
subsidies, special allowance payments, and guarantees against defaults. 
Recently, however, it has been funded by the Treasury just like DL. 
There are thousands of entities who participate in FFELP loan delivery, 
including thousands of banks and other lenders, more than 30 guaranty 
agencies and numerous servicers.
     The DL is a simplified system in which students receive 
their loans from the Department of Education, through their school, 
using the same process for delivering Pell, ACG, and SMART.
    Today, Congress leaves the choice of loan delivery selection to the 
discretion of schools. However, this allows colleges and universities 
to decide how $94 billion in taxpayer subsidies will be spent. We are 
not aware of any other government program where this is allowed.
    You have undoubtedly heard from FFELP industry lobbyists arguing 
against the President's proposal, as well as from organizations 
proposing hybrid loan delivery ideas that are incomplete, unproven, and 
inherently more expensive for taxpayers than DL. As a grass-roots 
organization representing financial aid administrators at over 1600 
Direct Loan schools, we want to reassure you that the DL program is 
strong, proven and simple and has been working very well for students 
and schools for over 15 years. We have prepared the enclosed fact sheet 
to provide you additional information on the DL program that we hope 
will assist you as you deliberate this historic proposal to shift 
precious federal resources from lenders to students. Please accept our 
best wishes and heartfelt thanks for all you do for our students, 
assisting them in affording the higher education they so desperately 
want and our country needs. You may call upon any member of the NDSLC's 
executive board for further information, data, or clarification.
            Sincerely,
                                    Roberta Johnson, Chair,
 National Direct Student Loan Coalition Executive Council, 2008-09.
Direct Loan Facts
    Is choice of lender or delivery system an essential element of a 
successful federal student loan system?
     In no other federal financial aid program are schools or 
recipients provided a choice of fund delivery methods
     Loan benefits are statutorily set and virtually no FFELP 
lenders are providing differentiated benefits; the concept of 
``choice'' is not relevant.
    Won't a move to DL increase the national debt?
     Direct Loans are an investment that pay for themselves and 
even make a profit for the government. While the proceeds of Treasury 
auctions used for DL may be temporarily part of the national debt, the 
debt is paid for by the repayment of the loans. FFELP loans are 
considered a ``contingent liability'' of the federal government and, as 
such, are also a part of the total real debt of the government.
     Issues with private liquidity led to passage of the 
Ensuring Continued Access to Student Loan Act of 2008. Through ECASLA, 
many of the FFELP loans made for FY08 are already owned directly by the 
federal government.
    Can the Department of Education provide superior, consistent 
service in DL?
     Proven through repeated internal measurements and feedback 
from DL schools and borrowers, the U.S. Department of Education 
provides consistent and superlative service from origination of loans 
and borrower contact, through servicing and eventual collections. 
Schools continue to report their high satisfaction with contractors 
selected and hired by the Department to handle the DL operations. These 
contractors are selected based on competitive bidding process with 
compensation tied to performance measures.
     Servicing in DL is handled by private sector companies, 
under competitive contract to the government Current FFELP servicers 
are now bidding on these contracts as DL expands. It is disingenuous to 
argue that the service would be worse, given the servicers would be the 
same as in FFELP.
     FFELP schools are reporting that they are having trouble 
finding lenders for their students, with many community colleges 
virtually black-listed by FFELP lenders.
    Will default rates go up if all schools use the DL delivery system?
     The Department of Education has published the comparative 
default rates for DL and FFELP for each year in which the programs have 
operated concurrently. In each year except two, the DL default rate has 
been about 20% lower than in FFELP.
     In the FFELP profit model, there exists a perverse 
incentive in which profits are increased when borrowers default, as 
late fees, penalties, and collection costs are capitalized before 
lenders are reimbursed for the defaulted loans. Balances are so high as 
a result, that many borrowers can never recover.
     In the DL model, there is no profit motive driving 
servicers to increase borrower indebtedness. In fact, they are rewarded 
for keeping defaults down. Borrowers have no reason to default since 
Income Based Repayment and Income Contingent Repayment options can 
provide relief to all, regardless of their financial circumstances.
    What about the loss of services that lenders and guaranty agencies 
provide?
     The non-statutory outreach programs currently provided by 
many guarantors can be worthwhile. However, the continued existence of 
these programs is not contingent upon FFELP's existence, and could 
certainly be paid for by Congress outside of the guaranty agency 
funding structure.
     Some FFELP lenders, guarantors, and servicers provide 
training to FFELP schools, as well as assistance in default management 
and financial literacy programming; however, their training programs 
are duplicative and therefore unnecessary:
     The Department of Education provides extensive training to 
all schools in all areas of federal financial aid management, including 
DL.
     The Department provides annual conferences, webinars, Dear 
Colleague Letters, etc., to educate financial aid administrators and 
others in legislative, regulatory, and operational issues.
     The Department has a default management program called 
``Late Stage Delinquency'' which has successfully assisted borrowers to 
prevent default. Schools are able to participate in the process or may 
leave the efforts to the Department.
     Schools are not and should not be dependent upon lenders 
and guaranty agencies for financial literacy information for their 
students. Many schools have mandatory financial literacy courses, and 
others provide superior web programs, including an exceptional course 
from the National Endowment for Financial Education available to all 
institutions at no cost.
    Will the loss of FFELP mean employee layoffs?
     It is expected that current FFELP entities will 
participate in the competitive bidding process and become new DL 
contractors for the U.S. Department of Education as volume shifts from 
FFELP to DL. (Sallie, NelNet, and other FFELP lenders have already 
announced their intention to do so.) Therefore, many FFELP employees 
will not see job loss, just job change.
     Many of the employees engaged in FFELP activities are 
involved in FFELP servicing operations. Their companies have billions 
in outstanding student loans that will continue to need servicing and 
these FFELP servicers are in a position to compete for servicing 
contracts with the government. It is incorrect to state that all of 
these employees will be laid off if the President's proposal is 
adopted.
    Has competition among FFELP lenders and between DL and FFELP really 
resulted in improvements to both programs?
     Undoubtedly, the competition among FFELP lenders has 
resulted in improvements to FFELP.
     Historically, the U.S. Department of Education has not 
sought to increase DL market share since its inception and as such has 
not competed with FFELP for market share. As a result, the Department's 
improvements have been instigated by their mandate to manage all 
federal financial aid programs to the highest standards.
     The most significant improvement to DL delivery in recent 
years is the implementation of the Common Origination and Delivery 
(COD) system, which was created as a simplified and single method for 
all student financial aid to be disbursed to students, including PELL, 
ACG, SMART, and DL.
    Will it cost schools a significant amount of money or time to 
convert to Direct Lending?
     Nearly 700 schools transitioned into the DL program for 
the 2008-09 academic year. Not one has indicated inordinate resources 
were required to convert to DL.
     Many schools utilize enterprise software systems which 
already include DL modules as an option. Also, the U.S. Department of 
Education offers a software program (ED Express) which many schools use 
to process all federal aid. ED Express includes a DL module.
     Schools that participate in PELL, ACG, or SMART already 
interface with the COD system. Transitioning to DL requires 
transmission of a few additional data fields. Schools can actually save 
money by not operating one computer platform for PELL, ACG, and SMART 
and a separate platform for loans. Staff and resources now spent 
operating two systems can be spent assisting students.
                                 ______
                                 
                                             U.S. Congress,
                                      Washington, DC, May 22, 2009.
Hon. George Miller, Chairman;
Hon. Howard P. ``Buck'' McKeon, Senior Republican Member,
Committee on Education and Labor, Rayburn House Office Building, 
        Washington, DC.
    Dear Chairman Miller and Ranking Member McKeon: I respectfully 
request to submit the following letter to the record from the Bank of 
North Dakota for the hearing the Education and Labor committee held on 
May 21, 2009, entitled, ``Increasing Student Aid through Loan Reform''. 
I believe the Bank of North Dakota's insights will significantly 
contribute to this hearing. I appreciate your attention to this 
request.
            Sincerely,
                                              Earl Pomeroy,
                                                Member of Congress.
                                 ______
                                 
                                                      May 21, 2009.
Hon. Earl Pomeroy,
U.S. House of Representatives, Washington, DC.
    Dear Mr. Pomeroy: Bank of North Dakota (BND) is the only state-
owned Bank in the country. Our mission, established in 1919, is to 
promote agriculture, commerce, and industry. An educated workforce is 
crucial to further development of our state and that is why we strongly 
tie education to our mission.
    BND has been involved in the federal student loan program since 
1967 when the program was called the Federally Insured Student Loan 
Program. In fact, BND made the first federally insured student loan in 
the nation. North Dakota has ensured that students attending school in 
the state will have access to a student loan program--either through a 
federal student loan program or by a state administered program in 
state statute. Our residents are assured that reaching a higher 
education is possible and that the state supports BND as the 
administrator of such program(s).
    Also by state statute, BND administers the North Dakota guaranty 
agency. This agency guarantees loans for lenders, provides financial 
literacy education and training to students and colleges, and provides 
additional assistance to lenders in order to prevent defaults from 
occurring. The default rate for the guaranty agency is 3.1 percent. 
This rate is a compilation of all lenders with loans guaranteed in 
North Dakota for FY2006. BND's rate as a loan originator is 1.8 
percent.
    BND serves a state that is 100 percent Federal Family Education 
Loan Program (FFELP). We have worked hard to gain the support of all 
the higher education institutions in North Dakota--both public and 
private. Today BND guarantees, originates, and services in excess of 70 
percent of all student loans in the state. We pride ourselves on 
providing the best customer service possible and it is done locally, 
not through a national servicer.
    Profitability is not our primary motivator; BND is one of a few 
lenders who fulfill federal requirements while continuing to provide 
borrower benefits to keep student costs down. BND profits have 
traditionally been sent back to the state general fund used to grow 
capital or to provide new economic development tools.
    Building on supporting an educated workforce; BND provides a 
companion alternative loan program--the Dakota Education Alternative 
Loan (DEAL) that fills the gap when the federal program limits have 
been reached. Unlike most alternative loans, DEAL loans are guaranteed 
by the North Dakota guaranty agency. As education costs continue to 
climb, we have used this program increasingly to meet student needs. 
Currently, BND processes our DEAL loans at a 5.99 percent fixed 
interest or a 2.69 percent variable interest rate. We understand the 
increasingly large debt burden students carry and believe that by 
pricing their loans fairly, we can maximize their ability to succeed in 
repaying their student loan debt.
    This philosophy may differ from other lenders. We believe we have 
North Dakota's students' best interests at heart.
    In addition to its administration role in student loans, BND also 
administers the state's 529 college savings plan along with acting as 
the state administrator for all of North Dakota Dollars for Scholars 
chapters. Both programs assist North Dakota students reach their higher 
education goals without debt burden.
    In summary, BND, for the past 42 years, has been synonymous with 
student lending and that is what the citizens of North Dakota would 
like to preserve.
            Sincerely,
                                 Eric Hardmeyer, President.
                                 ______
                                 

              Prepared Statement of Campus Progress Action

    Campus Progress Action, the youth division of the Center for 
American Progress Action Fund, a 501(c)(4) organization, respectfully 
submits this statement to the Committee on Education and Labor. We are 
grateful for the opportunity to share our views.
    Campus Progress Action works with and for young people to bring 
about progressive change on the issues of most importance to them, from 
economic opportunity, to environmental sustainability, to human rights. 
Campus Progress Action also works to train the next generation of young 
people, so our country will have leaders with the preparation, vision, 
and determination to address our nation's most critical challenges.
    President Obama's student lending proposal, contained in the budget 
he submitted to Congress, and included in the budget resolution passed 
by Congress on April 29, is a common sense idea that would help 
thousands of low- and middle-income Americans go to college. Because 
student loan repayment is guaranteed by the federal government, private 
lenders assume very little risk under the Federal Family Education Loan 
Program (FFELP), and yet they are rewarded handsomely--a subsidy that 
makes little economic sense. The President's plan would end these 
wasteful, expensive subsidies and use government funds to lend directly 
to students under the Direct Lending Program. The savings would help 
support the President's proposal to increase Pell grants to $5,550 for 
the 2010-11 school year and to make the Pell grant a mandatory 
government program guaranteed an increase (inflation plus 1 percent) 
each year.
    Campus Progress Action and our partner 501(c)(3) entities Campus 
Progress and the Center for American Progress have long advocated for a 
move to direct lending. See the articles collected at: http://
fundingourfuture.campusprogress.org/2009/04/291/ See also Pedro de la 
Torre III and Carmen Berkley, Aid for Students, Not Banks, Inside 
Higher Ed, April 21, 2009, http://www.insidehighered.com/views/2009/04/
21/delatorre
    The President's proposal supports his pledge that ``by 2020, 
America will once again have the highest proportion of college 
graduates in the world.'' With the Lumina Foundation for Education 
estimating that by 2025 we will face a shortage of 16 million college-
educated workers, this is an urgent call to action. The current 
economic crisis reminds us of the critical need to draw on talent 
across all communities in our country and give them the education and 
training needed to lead all sectors of our economy and society. In 
addition, Campus Progress Action is committed to economic opportunity 
and mobility for young people, and we want to work toward a world in 
which economic and social disadvantage do not prevent qualified young 
people from obtaining access to higher education.
    As President Obama noted, in reaction to his proposal student loan 
companies ``have mobilized an army of lobbyists'' to protect their 
subsidies. These companies have powerful allies in Congress, whose 
support for the student loan industry cannot be separated from the 
extensive campaign contributions the industry provides to federal 
lawmakers. As New York Attorney General Andrew Cuomo found in an 
extensive investigation, the loan companies also have used gifts to 
colleges and college administrators to gain allegiances on some 
campuses. Despite the support the loan companies have garnered through 
such questionable practices, many of the leading higher education 
associations have signed a letter supporting the President's proposal.
    That the current FFELP system is rife with such corruption is one 
more argument for its elimination. In addition to the practices 
documented by Attorney General Cuomo, some lenders and guarantee 
agencies, such as NelNet, aggressively and, many argue, illegally, grew 
the volume of loans that would earn them extra subsidies from the 
Department of Education; these overpayments, now called the ``9.5% 
scandal,'' totaled more than $1.2 billion over six years.
    Beyond its susceptibility to improper practices by loan companies, 
FFELP is also less reliable for students. In fact, Congress was forced 
to put the industry on life support--by purchasing FFELP loans in order 
to provide struggling companies with fresh capital--late last year.
    Campus Progress Action is moving swiftly and aggressively to 
promote public understanding of and support for the President's 
proposal and to ensure that the voices of millions of young Americans--
those paying for college and those who cannot afford to do so--are 
heard in the debate. Through research, events, grassroots organizing, 
social networking, and multimedia, Campus Progress will use real 
stories from young people to demonstrate how every dollar saved from 
the switch to direct lending can have a meaningful impact on the lives 
of students.
    Young people from all economic backgrounds deserve access to a 
higher education, and that access should in no way be limited or 
hindered by wasteful subsidies to private companies.
    We are urging people to take action on this issue by visiting: 
http://www.campusprogress.org/StudentsOverBanks
                                 ______
                                 
                          University of California,
                                           Franklin Street,
                                       Oakland, CA, April 29, 2009.
Hon. George Miller,
2205 Rayburn House Office Building, Washington, DC.
    Dear Chairman Miller: The University of California, with more than 
220,000 students on ten campuses, supports the proposal President Obama 
outlined in his FY 2010 budget to fund Pell Grants with mandatory 
dollars and make this program a true student entitlement. Congress has 
an opportunity this year to add significant new funds to student 
financial aid and to provide regular, predictable annual adjustments to 
the maximum Pell Grant award.
    To help achieve the increase in funding for the Pell Grant program, 
UC supports the President's proposal to save $94 billion by eliminating 
the Federal Family Education Loan Program. UC will work with Congress 
to ensure a smooth transition for institutions that would need to 
convert to the Direct Loan Program.
    Nearly one-third of UC undergraduates received Pell Grants--55,000 
students--totaling more than $170 million in academic year 2007-2008, 
and there are even more today. These students and families, as well as 
students across the nation, will benefit from the
    Administration's efforts to revitalize Pell and stabilize the 
funding to avoid the problems created by chronic shortfalls.
    The University urges your support for this proposal, which makes 
sound economic sense, represents good public policy, and is needed to 
improve meaningful access to college.
            Sincerely yours,
                                  Mark G. Yudof, President,
                                          University of California.
                                 ______
                                 
                                 
                                 
                                ------                                

    [Additional materials submitted by Mr. McKeon follow:]

    
    
                                ------                                


  Prepared Statement of the Coalition of Higher Education Assistance 
                             Organizations

    To Members of the U.S. House of Representatives, Committee on 
Education and Labor: Thank you for the opportunity to present testimony 
to the Education and Labor Committee's hearing on Increasing Student 
Aid Through Loan Reform. This testimony is presented on behalf of the 
Board of Directors of the Coalition of Higher Education Assistance 
Organizations. COHEAO is a coalition of more than 300 colleges, 
universities and commercial organizations with a shared interest in 
fostering improved access to postsecondary education. Our focus is on 
legislative and regulatory advocacy for Perkins and other campus-based 
student loan programs.
    The Perkins Loan Program is a campus-based program that represents 
a partnership between the Federal Government and the participating 
institutions of higher education. The institutions contribute one-third 
or more of Perkins funds as a match to the federal capital 
contribution. This amounts to institutional risk sharing in the Perkins 
Program, and it also serves to multiply the federal taxpayer 
contribution to the Perkins Fund.
    As a result of the Federal-institutional partnership, the Perkins 
Loan is the best student loan available. No interest accrues during the 
in-school, nine-month grace, and deferment periods, an important 
benefit to students. There are no origination or guarantee fees, and 
the interest rate is fixed at 5%. There is a 10-year repayment period.
    The Perkins Loan program plays a critical role in our nation's 
financial aid system, especially for the lowest-income and lower 
middle-income students. The Perkins Loan Program provides flexibility 
to the financial aid office so it can direct these low-cost loans to 
the students who most need them. For many who have no other options, 
Perkins makes the difference between attending college or not being 
able to go.
    COHEAO has advocated for many years for funding of the Perkins Loan 
Program and for improvements in it so that it can best serve students. 
In the Higher Education Amendments of 2008, several important 
improvements were made, including increasing the loan limits, expanding 
loan forgiveness options to firefighters, the military and some 
librarians, and increasing the authorized level for appropriations to 
$300 million. In addition, Congress expressed strong support for the 
program, noting in the final Conference Report: ``It is the sense of 
Congress that the Federal Perkins Loan Program, which provides low-
interest loans to help needy students finance the costs of 
postsecondary education, is an important part of Federal student aid, 
and should remain a campus-based aid program at colleges and 
universities.''
    In addition, the revolving funds system results in the funds being 
repaid and reused over and over again, so that future students will 
continue to benefit from capital contributions made as long ago as 
1958. This is a unique feature in the student aid area, one that COHEAO 
believes is important to the functioning of the program and that will 
be increasingly important in years ahead.
    President Obama and Secretary Duncan have taken the welcome step of 
proposing a major expansion of the Perkins student loan program, 
calling for these lowest-interest, public service-oriented loans to be 
made to more students at more institutions. COHEAO has advocated 
funding for this critical loan program for many years, and has fought 
attempts to close it as misguided and lacking an understanding of the 
program's value to students.
    However, COHEAO believes that students and the American people will 
be best served by maintaining the well-established infrastructure for 
operating a broadly expanded Perkins Loan program. We believe this can 
be accomplished while still accomplishing the worthy goal of expanding 
the program to include many more students and schools. The main hurdles 
that have to be overcome are federal accounting issues that actually do 
not affect federal expenditures. It is important to deal with these 
issues on their own terms rather than being forced to eliminate the 
campus-based backbone of the Perkins Loan program in order to deal with 
them.
    COHEAO urges Congress to retain the current subsidized Perkins Loan 
Program. Perkins Loan borrowers are students with high need and often 
have other loans. However, the proposed expanded program would not 
provide for that interest subsidy. Since students can seldom make 
interest payments while in school, interest would accumulate and 
significantly increase debt levels upon graduation.
    Families with Dependent Undergraduate Students comprise the largest 
percentage of Perkins borrowers. During Award Year 2006-2007, 27% 
percent of these families had an income under $25,000. Twenty-one 
percent of Perkins Loan borrowers are independent students. Thirty-six 
percent of these students have incomes below $12,000 with an additional 
11% falling in the $12,000-$19,999 income range. Thus, 47% of 
independent students have incomes less than $20,000.
    An undergraduate who borrows the maximum Perkins Loan each year 
would owe an additional $5,000 upon graduation. Some students would be 
forced to seek excessive part-time work that may be inconsistent with 
their studies, especially since many low-income students are challenged 
in preparation for college due to inadequate elementary and secondary 
education systems. We understand the desire to generate savings from 
the Perkins Loan Program, but we don't believe that this should be done 
at the expense of Perkins Loan borrowers.
    Here are more of our proposals:
    Expand funding for the Perkins Loan Program so that it can serve 
more students and retain the in-school interest benefit. Expanding the 
program and providing for its ongoing funding could make higher 
education affordable to thousands more students every year.
    Make Perkins Loans available to more students at more schools 
without penalizing current students. The formula for allocating Perkins 
Loan federal capital contributions to schools for lending was designed 
to make sure that needy students at older schools were not hurt when 
new schools joined the program. Making additional funds available will 
ensure that students at schools who don't presently participate in the 
Perkins Program aren't simply taking aid from students at schools who 
do participate. The controversial allocation formula for Perkins Loan 
capital contributions, which also is used for other campus-based aid 
programs, can be scrapped without hurting students at participating 
schools if Perkins is adequately funded, as the President proposes. 
COHEAO supports modifying the formula for Perkins Loan funding so that 
funds are targeted to institutions with high populations of students 
with substantial financial need. We believe this can be done without 
penalizing students at schools who now participate in the program, 
given the President's expanded funding proposal.
    Make use of schools' expertise in managing the Perkins Loan Program 
to best serve their students' needs. Since the Perkins Loan Program was 
created in 1958 as the National Defense Loan Program, colleges have had 
the flexibility to make loans available to students according to their 
need. Today, Perkins Loans remain a key tool for financial aid 
administrators to tailor aid to their students. Schools also collect 
loan repayments, either directly or by hiring a service provider who is 
accountable to them. Those that wish to remain responsible for loan 
collection should be allowed to do so. They have been successfully 
collecting Perkins Loans for many years. The latest Perkins default 
rate of 5.5% is comparable to the Direct Loan and FFELP default rates, 
an important achievement considering that Perkins Loans are 
specifically targeted to low-income students. In addition, schools have 
instituted financial literacy and customized default prevention 
programs to help their students on an individual basis.
    Retain the institutional match but phase it in for new schools 
There is no other entity within the federal loan processes that has a 
greater vested interest in the borrower's successful repayment than 
that of the institution participating in the Perkins Loan Program. This 
is especially true since the institution has a substantial amount of 
its own funds involved, a risk sharing concept that should be retained 
in order to keep loan costs down. COHEAO does believe, however, that 
provisions should be made to reduce the institutional match in special 
circumstances. For example, new institutions that are joining the 
program could have their match requirement phased in over five years, 
with no match during the first year, when there would be additional 
administrative burdens on the institution. In addition, institutions 
with unusual funding constraints, such as those facing state budget 
cuts, could apply for a waiver of the institutional match requirement 
for a particular year.
    Allow schools to continue loan collection in order to achieve the 
best results for the program and its students. The experienced 
professionals at schools are best equipped to work with their former 
students. COHEAO members have found that a borrower who is behind on 
his or her payments will set things right once they realize that they 
are denying opportunity to other students at their alma mater. Rather 
than having the federal government responsible for all collections, 
COHEAO supports giving schools additional flexibility and tools that 
can be used before involving the government in the collection process. 
This is in the best interest of borrowers who may have circumstances 
that deserve careful, individualized consideration.
    Retain the public service cancellation benefits that are available 
now in the Perkins Program. These are more generous than in the 
Stafford Program and have drawn hundreds of thousands of students into 
public service over the years. Since the inception of the Federal 
Perkins Loan Program in 1958, over $1.16 billion in Perkins Loans have 
been forgiven for students who took advantage of program benefits. 
Today, Perkins Loan cancellation is available to public servants who 
work in 16 different professions, including teaching, nursing, the 
military, law enforcement, the Peace Corps, firefighting, librarians 
and social work.
    For example, one COHEAO member university has received a total 
since 1958 of $166 million in federal capital contributions to its 
Perkins Loan revolving fund. It has contributed a total of $53 million 
in institutional funds to its Perkins Loan fund. Yet is has lent $912 
million, benefiting 392,141 students. In addition, the University's 
students now receive over $1 million in annual public service 
cancellations.
    Another COHEAO member university has contributed a total of $140 
million in federal and institutional funds to the Perkins Loan 
revolving fund, but has made $690 million in loans to date. This has 
helped 429,500 students pay for college. A total of $30.2 million has 
been cancelled for students who worked in public service professions, 
21.5 percent of the total loaned.
    The Perkins Loan cancellation benefits are especially advantageous 
to students because with a Perkins Loan, the borrower gets credit for 
each year he or she works in the qualifying public service profession, 
with full cancellation after five years. This recognizes that borrowers 
should get credit for what they accomplish, without being punished by 
losing all cancellation benefits if their circumstances change. We 
believe this sort of incentive serves as a truly powerful way to 
attract young people to public service and, at the same time, reduces 
their loan indebtedness.
    In summary, COHEAO's members are excited by the prospect of an 
Administration that joins with Congress to recognize that the Perkins 
Loan Program is an essential part of the financial aid system that 
makes higher education possible for millions of Americans. Expanding 
the funding available will make millions of additional students 
eligible for the program. We look forward to working with the 
Committee, the Congress and the Administration on ways to meet our 
mutual goals of expanding the program to more students and schools 
while also continuing to take advantage of the hands-on experience that 
schools have in administering the program for their students.
    We appreciate the opportunity to submit testimony to the Committee. 
Please contact us or any member of the Board of Directors if you have 
any questions. Please see our website is www.coheao.org for information 
about our association or contact the executive director, Harrison 
Wadsworth at [email protected] or 202-289-3900.
                                 ______
                                 
    [Questions submitted to the witnesses and their responses 
follow:]
                                     [Via Electronic Mail],
                                                      May 28, 2009.
Rene Drouin, President and Chief Executive Officer,
Granite State Management & Resources, Concord, NH.
    Dear Mr. Drouin: Thank you for testifying at the May 21, 2009 
hearing of the Committee on Education and Labor on ``Increasing Student 
Aid through Loan Reform.''
    Representative Carol Shea-Porter (D-NH), member of the Healthy 
Families and Communities Subcommittee and member of the Workforce 
Protections Subcommittee, has asked that you respond in writing to the 
following question:
    1. In your testimony you mention that you were unable to compete 
under the previous RFP. What specifically prevented NHHEAF's 
participation in bidding for a servicing contract?
    Please send an electronic version of your written response to the 
questions to the Committee staff by close of business on Wednesday, 
June 3, 2009--the date on which the hearing record will close. If you 
have any questions, please do not hesitate to contact the Committee.
            Sincerely,
                                             George Miller,
                                                          Chairman.
                                 ______
                                 
                                     [Via Electronic Mail],
                                                      June 1, 2009.
Chairman George Miller,
Committee on Education and Labor, Rayburn House Office Building, U.S. 
        House of Representatives, Washington, DC.
    Dear Chairman Miller: Thank you for the opportunity to testify 
before your committee and the opportunity to clarify my remarks 
regarding the NHHEAF Networks inability to bid for its own loans for 
servicing under the ECASLA program. I have responded to your question 
regarding NHHEAF's participation in bidding for a service contract 
below:
    1. In your testimony you mention that you were unable to compete 
under the previous RFP. What specifically prevented NHHEAF's 
participation in bidding for a servicing contract?
Constraints to NHHEAF Participating in Title IV Student Loan 
        Management/Servicing
            Background
    NHHELCO, the lending arm of The NHHEAF Network Organizations, 
participated 2008/2009 school year loans under ECASLA. Participated 
loans must be redeemed or PUT by September 30, 2009. In the event of a 
PUT ED becomes the owner of the participated loans and servicing is 
transferred to ED's servicer. Granite State Management and Resources 
(GSM&R), the servicing arm of The NHHEAF Network Organizations, 
prepared to submit an RFP response for the
    Phase I Solicitation Number: FSA-Title IV-09, Title IV Student Loan 
Management/Servicing in order to continue servicing NH originated loans 
as well as other loan volumes deemed appropriate by ED. Based on ED's 
minimum loan volume servicing requirement in the initial WEB posting 
and Phase I RFP document, NHHEAF did not meet the Go/No-Go Factor 
eligibility requirement criteria for participation in Phase II of the 
solicitation process listed below:
            2.1 Go/No-Go Factor
    (1) Demonstrate experience in processing a minimum of 500,000 
student loan sales conversions annually and servicing at least 
2,000,000 student loans. Federal Student Aid reserves the right to 
utilize resources available to the Government to validate an offeror's 
proposed experience, as appropriate.
    GSM&R currently services 422,000 loans. Additionally, annual new 
loan volume serviced by GSM&R is listed below:

                            FY '08       70,000
                            FY '07      166,000
                            FY '06       99,000

    If you should need additional information or clarification please 
feel free to contact me.
    Sincerely,
                           Rene A. Drouin, President & CEO,
                                  The NHHEAF Network Organizations.
                                 ______
                                 
                                           [Via Facsimile],
                                                      May 28, 2009.
Hon. Robert Shireman, Deputy Under Secretary,
U.S. Department of Education, 400 Maryland Avenue, SW, Washington, DC
    Dear Deputy Secretary Shireman: Thank you for testifying at the May 
21, 2009 hearing of the Committee on Education and Labor on 
``Increasing Student Aid through Loan Reform.''
    Representative Carolyn McCarthy (D-NY), Chairwoman of the Healthy 
Families and Communities Subcommittee, and member of the Health, 
Employment, Labor, and Pensions Subcommittee has asked that you respond 
in writing to the following questions:
    1. Financial literacy is a big concern of mine. Especially in the 
current economic climate, consumers need to be more aware and informed 
of how their finances work and how to avoid some common financial 
pitfalls. Does the Administration plan to continue to support important 
borrower services like financial literacy and default prevention that 
have traditionally been an integral part of FFEL? As these services are 
not now generally part of the Direct Loan program are you willing to 
maintain the current (FFEL) investment and extend it to all federal 
loan borrowers?
    2. Currently parents and Graduate students who have PLUS loans have 
an interest rate of over 8 percent. Given the current interest rate 
environment of almost the lowest rates ever, why shouldn't we return to 
the pre July 1 2006 rate formula which if applied would provide for 
less than 2 percent interest rates?
    Representative Robert C. ``Bobby'' Scott (D-VA), member of the 
Early Childhood, Elementary and Secondary Education Subcommittee and 
member of the Healthy Families and Communities Subcommittee, has asked 
that you respond in writing to the following questions:
    1. When considering the elimination of the FFEL program, what 
conclusions did you draw as to the impact that this decision would have 
on Historically Black Colleges and Universities?
    2. Describe the trends of student loans (including the number of 
loans and the loan volume of the FFEL and the Direct Loan Program) that 
have been distributed since 1978.
    Representative Jason Altmire (D-PA), member of the Healthy Families 
and Communities Subcommittee and member of the Workforce Protections 
Subcommittee, has asked that you respond in writing to the following 
questions:
    1. Considering the uniqueness and complexity with the various 
Financial Aid Management Systems and School Information Systems, 
combined with the human, financial, technology and capacity resources 
necessary to modify systems and train staff, how does the Department of 
Education plan to support and transition 4,000+ schools of various 
types, sizes and locations into Direct Loans by July 1, 2010?
    2. If the administration's proposal is enacted, what is the 
Department's contingency plan to cover the risk that may surface if 
they are not able to support and transition all 4000+ FFELP schools 
into Direct Loans by July 1, 2010?
    3. Can you please provide insight to what the Department has done 
to reach out to schools to better understand their concerns about 
transitioning to DL?
    4. FFEL loan providers have suggested that more than 30,000 jobs 
will be lost if the FFEL program is ended as proposed by the 
administration. These jobs include front end functions such as sales 
and marketing, as well as operations including origination, servicing, 
default prevention and collections. Are these claims claim valid?
    5. Current employees of FFEL loan providers have substantial 
expertise in working with borrowers to help them with their loan 
obligations. Will this expertise be lost as the employers of these loan 
providers cease operations?
    6. Concerns have been raised that the elimination of guaranty 
agencies and other loan providers will result in a lower quality of 
service to students. Is this a legitimate claim? What evidence against 
this claim can those that suggest the fear is unfounded offer?
    7. The administration's proposal assumes that the elimination of 
FFEL guaranty agencies will not result in an increase in student loan 
delinquencies or defaults. On what basis has the administration reached 
its conclusion?
    8. How does the Department plan to contract for additional Direct 
Loan servicing capacity? Will it rely on the RFP process currently 
underway for servicing on loans put to the Department or will it hold a 
new competition? How will the Department determine the service provider 
for each school?
    9. The schools, students, and families of Pennsylvania depend on 
our current guaranty agency, PHEAA to provide essential services. These 
services include early college awareness and financial literacy 
programs as well as technical assistance and training for schools. They 
also provide crucial and successful default reduction and delinquency 
prevention services. Does the Department have a realistic proposal for 
maintaining and funding these services that will ensure that PHEAA and 
its sister agencies around the country have the resources they need to 
continue to carry out their public mission?
    Representative Carol Shea-Porter (D-NH), member of the Healthy 
Families and Communities Subcommittee and member of the Workforce 
Protections Subcommittee, has asked that you respond in writing to the 
following questions:
    1. The Department made the determination that it was necessary to 
provide an opportunity for servicers to compete for participation in 
the servicing of the ECASLA loans based on fact that the servicing of 
the ECASLA loans constituted a change to the existing servicing 
contract. Base on this past determination, it would seem that a similar 
determination should be made given that the additional private 
servicing as part of the President's budget proposal constitutes a 
significant change, requiring an additional opportunity for 
competition, just as the servicing of the ECASLA loans required an 
opportunity for competition. Will there be another RFP for the 
servicing of loans under the restructuring plans?
    2. You have mentioned the bid process and the utilization of 
private servicers. What specific steps are being taken by the 
Department of Education to ensure that the small non-profits have an 
opportunity to compete for these servicing contracts?
    Representative Thomas Petri (R-WI), member of the Early, Elementary 
and Secondary Education Subcommittee has asked that you respond in 
writing to the following questions:
    1. Can you explain the financial incentives to guaranty agencies in 
preventing default on student loans relative to the subsidies they 
receive for collecting on defaulted student loans?
    2. Mr. Shireman, advocates for FFEL highlight the borrower 
services, such as default prevention that lenders and guarantors 
provide students. Besides cohort default rates which we know to be a 
fairly weak accountability measure, is there any oversight or 
accountability measures in FFEL regarding these services? Do we know if 
they are actually working? Or which ones work best?
    3. Although the Administration's budget provides $2.5 billion over 
five years in grants to states to promote college access and student 
retention, many guaranty agencies see this funding stream as being 
insufficient or wanting their own specific funding stream. Can you 
comment on this critique?
    Representative Todd Platts (R-PA), Ranking Member of the Healthy 
Families and Communities Subcommittee, and member of the Health, 
Employment, Labor, and Pensions Subcommittee has asked that you respond 
in writing to the following questions:
    1. The two school systems represented here today, Penn State, and 
the entire California State School system are very large entities. My 
District contains a number of small and mid-sized institutions. If we 
move forward with the Administration's proposal to convert all schools 
to the Direct Lending program, how can the Department of Education 
ensure that smaller schools will get the same loan servicing assistance 
that their larger counterparts will receive?
    2. I have heard from schools that have historically participated in 
the Direct Loan program that they felt they received better service 
through the Direct Loan program before the recent influx of 
participating schools. What specific steps has the Department of 
Education taken to ensure that it will have the capacity to service ALL 
schools in the Direct Loan program by the end of 2010, as the 
Administration proposes?
    Representative Joe Wilson (R-SC), member of the Health, Employment, 
Labor, and Pensions Subcommittee and member of the Workforce 
Protections Subcommittee has asked that you respond in writing to the 
following questions:
    1. You propose to stop new FFEL loan originations as of July 1, 
2010. How many schools will need to transition from FFEL to Direct 
Loans between today and July 1st?
    2. While some schools with tremendous resources have said making 
the transition to Direct Lending is relatively easy, many schools are 
projecting that they will incur additional administrative costs and 
face additional compliance risk as a result of being required to 
convert to the Direct Loan program. Has the Department produced an 
estimate of the costs of transitioning to the Direct Loan program for a 
small to medium size independent college? What are those costs?
    3. Will the administration provide direct financial assistance to 
schools to support their transition into the Direct Loan program? If 
so, what assistance will be provided and when?
    Please send an electronic version of your written response to the 
questions to the Committee by close of business on Wednesday, June 3, 
2009--the date on which the hearing record will close. If you have any 
questions, please do not hesitate to contact the Committee.
            Sincerely,
                                             George Miller,
                                                          Chairman.
                                 ______
                                 

           Responses From Mr. Shireman to Questions Submitted

    Dear Mr. Chairman: Thank you for your committee's follow up 
questions from the May 21, 2009, hearing, ``Increasing Student Aid 
Through Loan Reform.'' Please see the enclosed document for responses 
to the questions that members of the committee submitted.
    If you have any issues or questions about the Department's 
responses, please contact Gabriella Gomez, Assistant Secretary for the 
Office of Legislation and Congressional Affairs at the Department, at 
202-401-0020.
            Sincerely,
                                              Bob Shireman.
Representative Carolyn McCarthy
    Question: Financial literacy is a big concern of mine. Especially 
in the current economic climate, consumers need to be more aware and 
informed of how their finances work and how to avoid some common 
financial pitfalls. Does the Administration plan to continue to support 
important borrower services like financial literacy and default 
prevention that have traditionally been an integral part of FFEL? As 
these services are not now generally part of the Direct Loan program 
are you willing to maintain the current (FFEL) investment and extend it 
to all federal loan borrowers?
    Mr. Shireman: The need for better financial literacy, particularly 
among our young adults, has been placed under a spotlight by recent 
economic issues faced by our nation. Traditionally, lenders and 
guaranty agencies participating in the Federal Family Education Loan 
(FFEL) program have developed entrance and exit counseling tools that 
have been used by schools to assist borrowers in understanding their 
financial obligations. At the same time, the Department has provided, 
and will continue to provide, these tools to schools participating in 
the William D. Ford Direct Loan program. Similarly, the Department 
provides default prevention assistance to borrowers with loans under 
the Direct Loan program just as the lenders and guaranty agencies do in 
the FFEL program. The availability of financial literacy services 
should not turn on whether a lender or guaranty agency has extra 
resources. The administration's proposed College Access and Completion 
Fund program would include funds that would allow states to continue 
college outreach and information activities, including financial 
literacy training that goes beyond student loans.
    Question: Currently parents and graduate students who have PLUS 
loans have an interest rate of over 8 percent. Given the current 
interest rate environment of almost the lowest rates ever, why 
shouldn't we return to the pre-July 1, 2006, rate formula, which, if 
applied, would provide for less than 2 percent interest rates?
    Mr. Shireman: Long-term fixed-rate loans are available at a higher 
interest rate than loans with rates that adjust every few months, such 
as those that are currently at historic lows. Reducing rates on federal 
student loans would place greater risk and cost on taxpayers. Although 
Congress could decide to change the statute, the administration 
believes these funds are better used for Pell Grants and other student 
financial assistance programs serving low-income populations.
Representative Robert C. ``Bobby'' Scott
    Question: When considering the elimination of the FFEL program, 
what conclusions did you draw as to the impact that this decision would 
have on Historically Black Colleges and Universities?
    Mr. Shireman: The delivery mechanism for the William D. Ford Direct 
Loan program is built on the Common Origination and Disbursement (COD) 
System used by the Department to deliver Pell Grants, Academic 
Competitiveness Grants, National SMART Grants, and TEACH Grants. HBCUs 
and other institutions of higher education--both large and small--have 
been able to adapt readily. For the relatively small number of 
institutions that do not offer Pell Grants, such as graduate-only Clark 
Atlanta University, a one-time adjustment to their business processes 
will be necessary. This change will result in each institution working 
with a single entity originating loans instead of the multiple lenders 
that they deal with today. We have been reaching out to institutions to 
make sure they have enough time and assistance for a successful 
transition to direct lending.
    Question: Describe the trends of student loans (including the 
number of loans and the loan volume of the FFEL and the Direct Loan 
Program) that have been distributed since 1978.
    Mr. Shireman: The requested information is provided in the attached 
table.

                                                                                       DIRECT LOAN PROGRAM
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                            Consolidation Loans                PLUS Loans             Stafford Subsidized Loans          Unsubsidized Loans              Direct Loan Total
                                      ----------------------------------------------------------------------------------------------------------------------------------------------------------
             Fiscal Year                                    No. of                        No. of                         No. of                         No. of                          No. of
                                           Volume ($)        Loans       Volume ($)        Loans       Volume ($)        Loans        Volume ($)        Loans         Volume ($)        Loans
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1994.................................  .................  ..........        71,135,741      12,335       533,586,511      131,268       213,818,203       55,001        818,540,456      198,604
1995.................................        319,827,446      11,769       392,136,544      68,421     2,888,040,722      775,101     1,335,494,334      365,862      4,935,499,047    1,221,153
1996.................................      1,035,648,522      80,507       774,413,535     139,063     5,070,081,229    1,555,998     2,569,976,666      803,719      9,450,119,952    2,579,287
1997.................................      1,369,159,000      89,930       878,163,068     152,287     5,658,864,589    1,724,892     3,221,673,576      977,995     11,127,860,233    2,945,104
1998.................................      2,427,511,901     106,653     1,020,223,689     169,945     5,640,707,200    1,736,332     3,426,742,721    1,034,583     12,515,185,512    3,047,513
1999.................................      7,973,130,807     410,033     1,020,812,774     167,655     5,290,759,591    1,618,272     3,494,201,083    1,011,096     17,778,904,254    3,207,056
2000.................................      5,418,255,434     270,845     1,224,546,074     189,273     5,457,099,337    1,588,249     3,895,894,617    1,046,641     15,995,795,462    3,095,008
2001.................................      7,772,817,303     369,512     1,270,394,823     184,754     5,174,292,505    1,503,851     3,879,679,931    1,028,478     18,097,184,562    3,086,595
2002.................................      8,902,127,749     365,388     1,426,990,460     193,648     5,450,652,409    1,571,719     4,240,365,153    1,099,884     20,020,135,772    3,230,639
2003.................................      6,679,506,841     298,258     1,690,575,674     220,317     5,644,253,828    1,606,076     4,407,467,375    1,119,575     18,421,803,718    3,244,226
2004.................................      7,713,186,196     330,512     2,054,456,228     245,523     5,781,985,500    1,624,741     4,612,168,789    1,137,098     20,161,796,713    3,337,874
2005.................................     15,765,230,978     645,426     2,188,106,154     247,978     5,650,724,391    1,584,375     4,731,126,241    1,138,602     28,335,187,764    3,616,381
2006.................................     19,385,219,165     755,486     2,205,957,766     235,775     5,383,233,351    1,497,139     4,587,051,900    1,081,044     31,561,462,183    3,569,444
2007.................................      3,507,514,220     150,970     2,255,198,201     233,094     5,542,522,663    1,455,270     4,707,087,502    1,037,339     16,012,322,586    2,876,673
2008.................................      5,839,603,081     207,169     3,204,964,020     297,374     7,380,388,668    1,783,261     7,627,694,455    1,649,244     24,052,650,224    3,937,048
2009.................................     16,431,482,111     470,757     3,775,715,237     455,063     8,463,896,102    2,495,393     9,596,054,954    2,683,306     38,267,148,404    6,104,518
                                      ----------------------------------------------------------------------------------------------------------------------------------------------------------
      Grand Total....................    110,540,220,753   4,563,215    25,453,789,990   3,212,505    85,011,088,598   24,251,937    66,546,497,500   17,269,467    287,551,596,841   45,232,925
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Totals for 2009 reflect estimated activity for the entire year


                                                                                                              FFEL PROGRAM
                                                                                                     [Not Including ECASLA Programs]
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Consolidation Loans              PLUS Loans                   SLS Loans            Stafford Subsidized Loans         Unsubsidized Loans           FFEL/Non-ECASLA Total
                                                       ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                      Fiscal Year                                                                         # of                        # of
                                                           Volume ($)     # of Loans     Volume ($)      Loans       Volume ($)      Loans       Volume ($)      # of Loans     Volume ($)     # of Loans     Volume ($)      # of Loans
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1978..................................................  ................  ..........  ...............  .........  ...............  .........       701,840,203      372,974  ................  ..........       701,840,203      372,974
1979..................................................  ................  ..........  ...............  .........  ...............  .........     2,174,270,000    1,134,360  ................  ..........     2,174,270,000    1,134,360
1980..................................................  ................  ..........  ...............  .........  ...............  .........     3,858,150,000    1,911,760  ................  ..........     3,858,150,000    1,911,760
1981..................................................  ................  ..........       24,640,000      9,790  ...............  .........     6,555,740,000    3,071,880  ................  ..........     6,580,380,000    3,081,670
1982..................................................  ................  ..........       58,960,000     24,030       27,280,000     11,700     5,251,890,000    2,434,320  ................  ..........     5,338,130,000    2,470,050
1983..................................................  ................  ..........      129,360,000     51,620       96,800,000     37,800     5,817,930,000    2,654,200  ................  ..........     6,044,090,000    2,743,620
1984..................................................  ................  ..........      170,720,000     65,860      154,000,000     60,300     6,680,340,000    2,986,320  ................  ..........     7,005,060,000    3,112,480
1985..................................................  ................  ..........      222,640,000     84,550      228,800,000     87,300     7,476,890,000    3,349,720  ................  ..........     7,928,330,000    3,521,570
1986..................................................  ................  ..........      212,080,000     81,880      245,520,000     95,400     7,164,500,000    3,139,960  ................  ..........     7,622,100,000    3,317,240
1987..................................................       262,615,879      17,762      284,240,000     97,010      726,880,000    257,400     7,642,430,000    3,203,440  ................  ..........     8,916,165,879    3,575,612
1988..................................................       641,051,919      45,398      476,080,000    158,420    1,775,840,000    644,400     8,238,730,000    3,329,480  ................  ..........    11,131,701,919    4,177,698
1989..................................................       683,396,589      49,354      658,240,000    212,710    1,870,000,000    713,700     8,537,770,000    3,387,440  ................  ..........    11,749,406,589    4,363,204
1990..................................................       816,797,019      55,907      771,760,000    242,970    1,497,094,403    551,093     8,658,866,077    3,304,996  ................  ..........    11,744,517,500    4,154,966
1991..................................................     1,115,705,613      71,906      943,360,000    292,810    1,647,267,518    584,622     9,385,562,726    3,512,852  ................  ..........    13,091,895,857    4,462,190
1992..................................................     1,358,610,961      83,136    1,138,005,492    349,984    1,952,933,657    676,236    10,046,650,502    3,674,417  ................  ..........    14,496,200,612    4,783,772
1993..................................................     1,484,159,987      83,619    1,155,574,259    304,387    2,726,513,080    739,746    11,202,850,857    3,766,255       901,542,727     380,097    17,470,640,910    5,274,103
1994..................................................     1,992,532,245     110,165    1,483,565,386    309,291    1,654,123,210    503,663    13,276,449,718    4,203,650     4,219,498,456   1,211,892    22,626,169,015    6,338,661
1995..................................................     3,227,303,674     206,884    1,455,648,219    270,551  ...............  .........    11,492,996,046    3,528,214     5,789,106,418   1,701,142    21,965,054,357    5,706,791
1996..................................................     4,074,655,077     261,335    1,473,583,387    255,160  ...............  .........    10,433,243,733    3,096,960     5,871,037,779   1,644,279    21,852,519,976    5,257,734
1997..................................................     3,998,401,328     203,534    1,737,686,709    282,058  ...............  .........    10,727,129,433    3,178,247     6,760,361,632   1,814,795    23,223,579,101    5,478,634
1998..................................................     3,353,209,551     162,942    1,908,313,559    301,581  ...............  .........    10,764,806,761    3,183,913     7,283,686,207   1,905,777    23,310,016,077    5,554,213
1999..................................................     4,917,972,742     205,684    2,074,486,590    311,983  ...............  .........    10,566,374,757    3,104,338     7,919,742,290   1,988,008    25,478,576,379    5,610,013
2000..................................................     6,588,622,659     243,125    2,405,432,780    340,716  ...............  .........    11,160,709,135    3,270,690     9,108,932,546   2,240,906    29,263,697,120    6,095,437
2001..................................................     9,411,520,436     319,355    2,726,888,248    366,704  ...............  .........    11,909,461,955    3,508,999    10,179,708,670   2,493,719    34,227,579,308    6,688,777
2002..................................................    22,907,047,646     731,960    3,200,803,176    403,393  ...............  .........    13,430,701,706    3,965,045    11,967,510,188   2,908,346    51,506,062,716    8,008,744
2003..................................................    35,223,215,400   1,256,173    4,064,536,508    476,225  ...............  .........    15,587,370,202    4,558,823    14,178,557,986   3,388,178    69,053,680,096    9,679,399
2004..................................................    36,082,038,079   1,241,235    4,111,628,579    452,583  ...............  .........    13,033,511,202    3,784,853    12,337,987,509   2,906,898    65,565,165,368    8,385,568
2005..................................................    54,589,284,588   1,989,579    5,077,757,232    529,840  ...............  .........    15,553,731,527    4,492,551    15,344,090,363   3,551,802    90,564,863,710   10,563,772
2006..................................................    72,541,481,669   2,633,118    6,669,423,005    622,284  ...............  .........    17,395,566,988    5,012,020    17,444,512,100   4,001,108   114,050,983,762   12,268,531
2007..................................................    47,268,022,607   1,675,491    6,667,933,350    603,288  ...............  .........    16,496,978,117    4,594,767    17,300,310,703   3,817,123    87,733,244,777   10,690,669
2008..................................................     9,270,170,988     287,691    3,101,126,165    270,858  ...............  .........     9,765,470,949    2,603,723    11,219,697,386   2,514,211    33,356,465,488    5,676,483
2009..................................................     1,006,964,596      10,542    1,551,825,080    155,520  ...............  .........     4,225,903,846    1,198,780     5,394,207,087   1,327,115    12,178,900,608    2,691,956
  Total...............................................   322,814,781,253  11,945,895   55,956,297,722  7,928,054   14,603,051,868  4,963,360   305,214,816,438  102,519,946   163,220,490,045  39,795,396   861,809,437,326  167,152,652
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                                                                                               FFEL VOLUME FUNDED THROUGH ECASLA PROGRAMS
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       Consolidation          PLUS Loans             SLS Loans     Stafford Subsidized Loans        Unsubsidized Loans          FFEL/Non-ECASLA Total               Total Loans
                                                           Loans     -------------------------------------------------------------------------------------------------------------------------------------------------------------------
                     Fiscal Year                     ----------------
                                                      Volume   # of      Volume ($)       # of    Volume   # of      Volume ($)    # of Loans     Volume ($)    # of Loans     Volume ($)     # of Loans      Volume ($)      # of Loans
                                                        ($)    Loans                     Loans      ($)    Loans
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1978................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........        701,840,203      372,974
1979................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........      2,174,270,000    1,134,360
1980................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........      3,858,150,000    1,911,760
1981................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........      6,580,380,000    3,081,670
1982................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........      5,338,130,000    2,470,050
1983................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........      6,044,090,000    2,743,620
1984................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........      7,005,060,000    3,112,480
1985................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........      7,928,330,000    3,521,570
1986................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........      7,622,100,000    3,317,240
1987................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........      8,916,165,879    3,575,612
1988................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     11,131,701,919    4,177,698
1989................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     11,749,406,589    4,363,204
1990................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     11,744,517,500    4,154,966
1991................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     13,091,895,857    4,462,190
1992................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     14,496,200,612    4,783,772
1993................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     17,470,640,910    5,274,103
1994................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     23,444,709,471    6,537,265
1995................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     26,900,553,404    6,927,944
1996................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     31,302,639,928    7,837,021
1997................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     34,351,439,335    8,423,738
1998................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     35,825,201,589    8,601,726
1999................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     43,257,480,633    8,817,069
2000................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     45,259,492,582    9,190,445
2001................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     52,324,763,870    9,775,372
2002................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     71,526,198,488   11,239,383
2003................................................  ......  ......  ...............  .........  ......  ......  ...............  ..........  ...............  ..........  ................  ..........     87,475,483,814   12,923,625
2004................................................  ......  ......    1,039,478,094    114,419  ......  ......    4,517,691,893   1,311,910    4,170,098,812     982,498     9,727,268,800   2,408,828     95,454,230,881   14,132,270
2005................................................  ......  ......      955,526,953     99,705  ......  ......    3,211,985,271     927,752    3,119,962,479     722,199     7,287,474,703   1,749,656    126,187,526,177   15,929,809
2006................................................  ......  ......      725,947,454     67,734  ......  ......    2,201,807,099     634,386    2,245,837,610     515,110     5,173,592,163   1,217,229    150,786,038,108   17,055,204
2007................................................  ......  ......    1,798,801,575    162,748  ......  ......    5,335,460,031   1,486,042    4,198,810,890     926,421    11,333,072,496   2,575,211    115,078,639,859   16,142,553
2008................................................  ......  ......    5,105,998,916    445,967  ......  ......   13,289,069,579   3,543,204   14,814,607,390   3,319,791    33,209,675,886   7,308,962     90,618,791,598   16,922,493
2009................................................  ......  ......    7,150,602,922    716,615  ......  ......   19,659,492,970   5,576,889   25,997,629,761   6,396,092    52,807,725,654  12,689,596    103,253,774,667   21,486,071
                                                     -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total...............................................  ......  ......   16,776,355,915  1,607,188  ......  ......   48,215,506,844  13,480,184   54,546,946,943  12,862,111   119,538,809,702  27,949,483  1,268,899,843,869  244,399,258
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Representative Jason Altmire
    Question: Considering the uniqueness and complexity with the 
various Financial Aid Management Systems and School Information 
Systems, combined with the human, financial, technology and capacity 
resources necessary to modify systems and train staff, how does the 
Department of Education plan to support and transition 4,000+ schools 
of various types, sizes and locations into Direct Loans by July 1, 
2010?
    Mr. Shireman: The Federal Student Aid (FSA) system that originates 
Direct Loans is called the Common Origination and Disbursement (COD) 
system. COD is the same system that institutions of higher education 
use to originate Title IV grants (Pell, ACG, National SMART, and 
TEACH). Therefore, most institutions (and their computer systems) 
already interact with COD. The Department has ramped up, and is 
continuing to ramp up, its COD capacity to support 100 percent Direct 
Lending.
    The institutions that have recently transitioned to Direct Lending 
have done so with little or no problem. However, to ensure that all 
institutions are prepared, we have shifted human and capital resources 
to enable FSA to properly manage and support 100 percent school 
participation in the Direct Lending program. In addition, we have 
created a specially trained team whose task is to assist institutions 
that may have unique situations or need additional support. FSA is 
hosting monthly webinars for schools, attending and presenting at 
conferences, and offering targeted training. FSA also is in the process 
of reviewing and updating all of its Direct Lending publications.
    Question: If the administration's proposal is enacted, what is the 
Department's contingency plan to cover the risk that may surface if 
they are not able to support and transition all 4000+ FFELP schools 
into Direct Loans by July 1, 2010?
    Mr. Shireman: Because Direct Loans is part of the COD system run by 
Accenture, the switch is relatively simple when it comes to delivering 
funds to institutions. The key to a smooth transition is to ensure that 
schools do not wait until the last minute to adjust their systems. 
Accenture has increased its call center capacity, and we are reaching 
out to FFEL institutions to encourage them to get ready early so there 
is not a last-minute rush that could result in longer wait times for 
technical assistance.
    Question: Can you please provide insight to what the Department has 
done to reach out to schools to better understand their concerns about 
transitioning to DL?
    Mr. Shireman: Our Direct Loan Transition Team has identified types 
of institutions that might need additional support and information to 
smoothly transition to Direct Lending. Team members are reaching out to 
those institutions to answer questions and to offer assistance. We've 
also reached out to HBCUs, Hispanic-Serving Institutions, and Tribally 
Controlled Colleges and Universities. We have conducted, in association 
with their national organizations, a Direct Loan webinar for community 
colleges and one for independent private colleges. We have also met 
with the Council of Independent Colleges and the National Association 
of Independent Colleges and Universities to discuss issues and 
activities targeted to smaller independent colleges. Finally, we are 
developing plans for transitioning foreign schools into the Direct Loan 
program.
    Question: FFEL loan providers have suggested that more than 30,000 
jobs will be lost if the FFEL program is ended as proposed by the 
administration. These jobs include front-end functions such as sales 
and marketing, as well as operations including origination, servicing, 
default prevention and collections. Are these claims valid?
    Mr. Shireman: The volume of FFEL loans will decline slowly over 
many years. At the same time, Direct Loan volume will increase, 
resulting in more domestic jobs servicing federal loans. Some of the 
current FFEL servicers have won contracts with the Department to 
service Direct Loans, and others may end up as subcontractors. One area 
that will be affected by a shift to Direct Loans will be the 
intermediaries who simply market Federal loans to schools without 
providing benefits to students and who have, in the past, been accused 
of improper behavior.
    Question: Current employees of FFEL loan providers have substantial 
expertise in working with borrowers to help them with their loan 
obligations. Will this expertise be lost as the employers of these loan 
providers cease operations?
    Mr. Shireman: The volume of FFEL loans will decline slowly over 
many years. At the same time, Direct Loan volume will increase, 
resulting in more domestic jobs servicing federal loans. Some of the 
current servicers have won contracts with the Department to service 
Direct Loans, and others may end up as subcontractors or work with the 
Department in other ways that are still being developed.
    Question: Concerns have been raised that the elimination of 
guaranty agencies and other loan providers will result in a lower 
quality of service to students. Is this a legitimate claim? What 
evidence against this claim can those that suggest the fear is 
unfounded offer?
    Mr. Shireman: For nearly 15 years, the current Direct Loan program 
has operated with the same level of student support, performance, and 
satisfaction as the FFEL program, and the default and repayment rates 
are similar in both programs. The Department has experience in running 
a successful loan program without guaranty agencies. That said, as 
Direct Loan expands to 100 percent of volume, we hope to find ways to 
take advantage of the skills and resources developed in state and 
nonprofit agencies.
    Question: The administration's proposal assumes that the 
elimination of FFEL guaranty agencies will not result in an increase in 
student loan delinquencies or defaults. On what basis has the 
administration reached its conclusion?
    Mr. Shireman: Cohort default rates, by sector, are the same or 
lower in the Direct Loan program for similar loans. In addition, the 
Higher Education Act provides a set of statutory payments to guaranty 
agencies that will continue as the outstanding FFEL portfolio is 
repaid. Some agencies have experience in providing valuable student 
support services, especially in promoting college access. The 
Department looks forward to working with agencies to refocus their 
activities on broadening student access to higher education.
    Question: How does the Department plan to contract for additional 
Direct Loan servicing capacity? Will it rely on the RFP process 
currently underway for servicing on loans put to the Department, or 
will it hold a new competition? How will the Department determine the 
service provider for each school?
    Mr. Shireman: We have not made a decision regarding another 
servicing procurement. However, the procurement that was just completed 
does include the requirement that the selected vendors be able to 
service all Title IV federally held loans, including Direct Loans. 
Allocations of types and volume to any one vendor will be determined 
based upon servicer capabilities and performance.
    Question: The schools, students, and families of Pennsylvania 
depend on our current guaranty agency, PHEAA, to provide essential 
services. These services include early college awareness and financial 
literacy programs as well as technical assistance and training for 
schools. They also provide crucial and successful default reduction and 
delinquency prevention services. Does the Department have a realistic 
proposal for maintaining and funding these services that will ensure 
that PHEAA and its sister agencies around the country have the 
resources they need to continue to carry out their public mission?
    Mr. Shireman: The administration's fiscal year 2010 budget request 
includes funds for states to use to continue the college outreach and 
information activities now provided by some guaranty agencies through 
FFEL subsidies.
Representative Carol Shea-Porter
    Question: The Department made the determination that it was 
necessary to provide an opportunity for servicers to compete for 
participation in the servicing of the ECASLA loans based on fact that 
the servicing of the ECASLA loans constituted a change to the existing 
servicing contract. Based on this past determination, it would seem 
that a similar determination should be made given that the additional 
private servicing as part of the President's budget proposal 
constitutes a significant change, requiring an additional opportunity 
for competition, just as the servicing of the ECASLA loans required an 
opportunity for competition. Will there be another RFP for the 
servicing of loans under the restructuring plans?
    Mr. Shireman: We have not made a decision regarding another 
servicing procurement. However, the procurement that was just completed 
does include the requirement that the selected vendors be able to 
service all Title IV Federally held loans, including Direct Loans. 
Allocations of types and volume to any one vendor will be determined 
based upon servicer capabilities and performance. The current 
contractors have committed to sufficient capacity for the expansion of 
direct lending.
    Question: You have mentioned the bid process and the utilization of 
private servicers. What specific steps are being taken by the 
Department of Education to ensure that the small nonprofits have an 
opportunity to compete for these servicing contracts?
    Mr. Shireman: The contractors that were just selected have 
committed sufficient capacity for the expansion of Direct Lending. The 
work we have ahead of us over the next 18 months is substantial: first 
allocating ECASLA loan volume this fall to the new servicers and making 
sure that those systems are working properly, and then launching a 
multiple-servicer approach in the Direct Loan program. Once that 
implementation is complete next year, we will consider initiating 
another procurement that could focus on nonprofit servicers.
Representative Thomas Petri
    Question: Can you explain the financial incentives to guaranty 
agencies in preventing defaults on student loans relative to the 
subsidies they receive for collecting on defaulted student loans?
    Mr. Shireman: In the existing FFEL program, guaranty agencies 
receive annual Account Maintenance Fee (AMF) payments on non-defaulted 
loans averaging approximately $200 million. They also receive 
approximately $160 million annually from default aversion fees (DAFs) 
on delinquent loans that are brought current. Agencies retain a portion 
of collections on defaulted loans but must also pay their servicing and 
collection costs. In the past, collection revenues far exceeded 
collection costs, reducing the incentive for effective default 
aversion. Statutory decreases in retention rates have reduced the 
margin available to guaranty agencies through collections to address 
this problem.
    Question: Mr. Shireman, advocates for FFEL highlight the borrower 
services, such as default prevention, that lenders and guarantors 
provide students. Besides cohort default rates which we know to be a 
fairly weak accountability measure, is there any oversight or 
accountability measures in FFEL regarding these services? Do we know if 
they are actually working? Or which ones work best?
    Mr. Shireman: As you know, cohort default rates are comparable in 
Direct Loans and FFEL. Incentives in the non-ECASLA FFEL program, 
however, do not necessarily aim in the direction of default prevention. 
In our latest procurement for servicers, we have included strong 
financial incentives to promote default prevention: the venders receive 
higher payments for loans in good standing, and the companies with the 
best records will receive more new loan volume.
    Question: Although the Administration's budget provides $2.5 
billion over five years in grants to states to promote college access 
and student retention, many guaranty agencies see this funding stream 
as being insufficient or wanting their own specific funding stream. Can 
you comment on this critique?
    Mr. Shireman: The agencies have not provided us with sufficient 
information about the outreach and information services they provide 
for me to be able to comment.
Representative Todd Platts
    Question: The two school systems represented here today, Penn State 
and the entire California State School system, are very large entities. 
My District contains a number of small and mid-sized institutions. If 
we move forward with the Administration's proposal to convert all 
schools to the Direct Lending program, how can the Department of 
Education ensure that smaller schools will get the same loan servicing 
assistance that their larger counterparts will receive?
    Mr. Shireman: The schools that have recently transitioned to Direct 
Lending have done so with little or no problem. However, to ensure that 
all schools are prepared, we have shifted human and capital resources 
to enable it to properly manage and support 100 percent school 
participation in the Direct Loan program. In addition, we have created 
a specially trained team whose task is to assist schools that may have 
unique situations or need additional support. FSA is hosting monthly 
webinars for schools, attending and presenting at conferences, and 
offering targeted training. FSA also is in the process of reviewing and 
updating all of its Direct Lending publications. Further, all vendors 
selected to service Direct Loans will receive their allocations of new 
loans based on performance. In addition to their performance related to 
borrower services and satisfaction, one very important part of 
measuring performance will be the service they provide to schools. Each 
servicer's performance will be measured by school type, control, and 
size.
    Question: I have heard from schools that have historically 
participated in the Direct Loan program that they felt they received 
better service through the Direct Loan program before the recent influx 
of participating schools. What specific steps has the Department of 
Education taken to ensure that it will have the capacity to service ALL 
schools in the Direct Loan program by the end of 2010, as the 
Administration proposes?
    Mr. Shireman: Starting last year when a number of FFEL schools 
began to transition to Direct Lending, we were aware that some of our 
current Direct Loan schools had concerns that the influx of new schools 
might degrade service levels and suggested that we take efforts to 
avoid that result. We are pleased to say that, even with the 50 percent 
increase in new schools last year, no degradation was experienced and 
we have not heard from either the older participants or the new schools 
that they have experienced any problems. That said, in preparation for 
a larger number of schools coming into Direct Lending, we are in the 
process of implementing a comprehensive plan to ensure that there is 
adequate staff both at the Department and at our contractors to ensure 
that we maintain the current high level of customer service for all 
schools and for all students and borrowers.
Representative Joe Wilson
    Question: You propose to stop new FFEL loan originations as of July 
1, 2010. How many schools will need to transition from FFEL to Direct 
Loans between today and July 1st?
    Mr. Shireman: As of June 1, 2009, there are just over 3,500 schools 
that would need to transition to Direct Lending. For most of these 
schools, the initial administrative steps to begin transition have 
already occurred.
    Question: While some schools with tremendous resources have said 
making the transition to Direct Lending is relatively easy, many 
schools are projecting that they will incur additional administrative 
costs and face additional compliance risk as a result of being required 
to convert to the Direct Loan program. Has the Department produced an 
estimate of the costs of transitioning to the Direct Loan program for a 
small- to medium-size independent college? What are those costs?
    Mr. Shireman: The Department has worked closely with the National 
Direct Loan Coalition to identify potential costs and other resources 
that might be needed for schools joining the Direct Loan program. The 
Coalition, after surveying 35 small schools that recently transitioned 
to Direct Lending, found that those schools did not have any 
significant costs in transitioning to Direct Lending. In terms of 
originating loans, the schools reported that the process is similar to 
transmitting FFEL loan certifications to FFEL lenders and that the use 
of the Department's Common Origination and Disbursement (COD) System, 
that is also used for Title IV grants, also made the transition 
relatively easy and cost efficient. Most, if not all, software vendors 
and third party servicers have software and operations that support 
both the FFEL and Direct Loan programs.
    Schools with technology challenges can use the Department's 
``EDExpress'' software to transmit loan data in batches from their 
systems to our system at no cost. Small schools with low volume can 
also use the Direct Loan Web site to enter loan origination and 
disbursement data instead of using software products.
    Question: Will the administration provide direct financial 
assistance to schools to support their transition into the Direct Loan 
program? If so, what assistance will be provided and when?
    Mr. Shireman: While the Department has provided, and will continue 
to provide, support to schools (training, customer service, school 
visits, etc.), there is no statutory authority to provide direct 
financial support to schools. Furthermore, based on the feedback we 
have heard from schools that have made the transition in the past year, 
there are no net added costs to be covered.
                                 ______
                                 
                                           [Via Facsimile],
                                                      May 28, 2009.
John F. Remondi, Vice Chairman and Chief Financial Officer,
Sallie Mae, 12061 Bluemont Way, Reston, VA.
    Mr. Remondi: Thank you for testifying at the May 21, 2009 hearing 
of the Committee on Education and Labor on ``Increasing Student Aid 
through Loan Reform.''
    Representative Dina Titus (D-NV), member of the Higher Education, 
Lifelong Learning, and Competitiveness Subcommittee and member of the 
Early Childhood, Elementary and Secondary Education Subcommittee, has 
asked that you respond in writing to the following questions:
    In your testimony you suggest modifying the Administration's 
proposal by ``authorizing lenders to originate loans for the 
government, with government capital, on a fee-for-service basis, thus 
ending lender subsidies altogether.''
    1. What do you anticipate the fee-for-service amount will be? 
Second, who ultimately pays the fee-for-service? Will costs be passed 
on to the student? If so, that seems counterproductive to the needs of 
the average family in finding a way to pay for higher education. Will 
costs be passed on to the institute of higher education? Again, this 
seems counterproductive. Surely it would incentivize schools to go to 
direct lending. Further, how would this help schools keep the rising 
costs of tuition and fees down? Will the federal government pay the 
fee-for-service? If so, that seems counterproductive to the goal of 
reducing subsidies, a goal you state in your testimony that you agree 
with. An added cost of a fee-for-service also seems to inhibit the 
savings of the Administration's plan that can be used to increase Pell 
grants, something you also say you agree with.
    2. I would imagine that for most hard-working Americans trying to 
pay for college, a subsidy to a lender and a fee-for-service appear to 
be quite similar in their effect. Would you please elaborate more on 
your fee-for-service proposal, including the costs to all stakeholders, 
and how exactly a ``fee-for-service'' would work?
    Please send an electronic version of your written response to the 
questions to the Committee by close of business on Wednesday, June 3, 
2009--the date on which the hearing record will close. If you have any 
questions, please do not hesitate to contact the Committee.
            Sincerely,
                                             George Miller,
                                                          Chairman.
                                 ______
                                 

           Responses From Mr. Remondi to Questions Submitted

    Dear Representative Titus: Thank you for the opportunity to clarify 
my recent testimony on suggested reforms of the federal student loan 
programs. Please find my answers to your questions below.
    1. What do you anticipate the fee-for-service amount will be? 
Second, who ultimately pays the fee-for-service? Will costs be passed 
on to the student? If so, that seems counterproductive to the needs of 
the average family in finding a way to pay for higher education. Will 
costs be passed on to the institute of higher education? Again, this 
seems counterproductive. Surely it would incentivize schools to go to 
direct lending. Further, how would this help schools keep the rising 
costs of tuition and fees down? Will the federal government pay the 
fee-for-service? If so, that seems counterproductive to the goal of 
reducing subsidies, a goal you state in your testimony that you agree 
with. An added cost of a fee-for-service also seems to inhibit the 
savings of the Administration's plan that can be used to increase Pell 
grants, something you also say you agree with.
    We propose a market-based fee, to be paid by the federal 
government, for the services attendant to origination of federal 
student loans. To ensure an orderly transition to a new program, we 
propose an initial fee of $75 per loan. This fee is what is already 
being paid by the government to loan originators for loans sold to the 
Department of Education under the authority granted by the Ensuring 
Continued Access to Student Loan Act (ECASLA). Under ECASLA, the $75 
fee was designed under strict ``no net cost to the taxpayer'' 
requirements.
    The fee will not be passed on to students or schools. To the 
contrary, by using the existing loan origination infrastructure and not 
requiring schools to convert to Direct Lending, no school will be faced 
with conversion and administration costs that might otherwise have been 
passed on to students.
    Lender subsidies were historically employed to compensate lenders a 
fair market value for holding assets which, by design, generate 
artificially low returns due to caps on student-paid interest rates. 
Sallie Mae supports an end of lender subsidies and moving to a model of 
federal student loan ownership.
    We believe that a model built on the Administration's proposal that 
includes the benefits of lender-provided origination services, paid for 
on a fee-for-service basis, will drive tens of millions of dollars for 
increased Pell Grant funding, while guaranteeing seamless 
implementation and retaining high-quality services.
    2. I would imagine that for most hard-working Americans trying to 
pay for college, a subsidy to a lender and a fee-for-service appear to 
be quite similar in their effect. Would you please elaborate more on 
your fee-for-service proposal, including the costs to all stakeholders, 
and how exactly a ``fee-for-service'' would work?
    There are costs associated with the origination of federal student 
loans. Moving toward a Direct Lending only model means that those costs 
will be borne by some combination of the government, the institutions 
of higher learning themselves or students if those costs are passed on 
in the form of higher tuition or fees.
    We support modifications to the Administration's proposal that 
would retain the loan origination services that 75 percent of colleges 
and universities prefer, and that would ensure that the costs of loan 
originations would be borne by the government, the ultimate owner of 
the loan assets.
    We propose a market-based fee, to be paid by the federal 
government, for the services attendant to origination of federal 
student loans. To ensure an orderly transition to a new program, we 
propose an initial fee of $75 per loan. This fee is what is already 
being paid by the government to loan originators for loans sold to the 
Department of Education under the authority granted by the Ensuring 
Continued Access to Student Loan Act (ECASLA). Under ECASLA, the $75 
fee was designed under strict ``no net cost to the taxpayer'' 
requirements. The fee will be for the services attendant to the process 
of originating federal student loans for the federal government. The 
fee would compensate loan originators for services that include the 
paperwork associated with loan origination, as well as related services 
that include technical and operational support for schools, financial 
literacy programs and default aversion programs that benefit students.
    We also recommend a requirement that, after the initial transition 
period, the Department establish a process to set origination fees via 
market mechanisms designed to preserve broad participation of loan 
originators, including smaller, regional, state and non-profit 
entities.
    Thank you again for the opportunity to clarify my testimony.
                                 ______
                                 
    [Whereupon, at 1:13 p.m., the committee was adjourned.]

                                 
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