[Congressional Record Volume 140, Number 123 (Wednesday, August 24, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: August 24, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                         SIMPLER STUDENT LOANS

 Mr. SIMON. Mr. President, any new program is likely to 
encounter some glitches. This is just as true in the Education 
Department as in the Commerce Department, and it is true in the private 
sector as well as the public sector. But problems can be minimized 
through good planning, and by working closely with clients. I am 
pleased that the Education Department, in putting together the new 
Direct Student Loan Program at 104 schools this year, has worked with 
financial aid administrators so that the initial phases of the program 
have been impressive by anyone's standards.
  An inquiry of the participating Illinois schools by Chicago Tribune 
reporter Frank James found that ``the initial results are 
encouraging.'' Other reports I have heard have been equally positive.
  President Clinton should be commended for his perseverance in seeking 
these reforms in last year's budget bill, and he should be proud of the 
student aid team that Education Secretary Richard Riley has put 
together at the Department. Students, taxpayers, and schools all are 
benefiting from the changes.
  Mr. President, I ask that the Tribune article from July 31, 1994, and 
an interview with David Longanecker from the Rolling Stone magazine of 
August 25, 1994, appear in the Record following my remarks.
  The material follows:

     Student Loans Get Simpler--New System Reduces Paper, Middlemen

                            (By Frank James)

       Student loans rank right up there with term papers and 
     final exams on the list of college ordeals and anxieties.
       There's the application process that seems to generate as 
     much paperwork as a short hospital stay. Then the sometimes 
     excruciating wait for the check.
       Finally, there's the stress over whether the education that 
     the loan is buying will bring a job that can repay the debt.
       But a reform of federal student loan procedures is underway 
     that would change all of this. Four Illinois schools are 
     among 104 nationally helping to introduce the new direct 
     student loan program this summer.
       The streamlined approach involves applications made 
     directly to the federal government, which disburses the money 
     directly to students. If the program works, the U.S. 
     Department of Education, which is overseeing the changes, 
     hopes all eligible schools will adopt the new system within 
     five years.
       Winners in the process would be students, who receive loans 
     quicker without the bewildering array of forms, and 
     taxpayers, according to direct-lending advocates, including 
     Sen. Paul Simon (D-Ill.), the program's main congressional 
     sponsor.
       Losers will be the middlemen--the banks and loan-guarantee 
     agencies--that required all the paperwork and, through their 
     service fees, kept costs of the traditional student loan 
     program unnecessarily high. Understandably, banks and loan-
     guarantee agencies have emerged as the major opponents of 
     direct lending.
       The University of Illinois at Champaign-Urbana, Bradley 
     University in Peoria, Fox College in southwest suburban Oak 
     Lawn and DeVry Institute of Technology in west suburban 
     Addison were the Illinois schools chosen to be in the first 
     wave of this student-loan reform. The initial results are 
     encouraging.
       David Pardieck, financial aid director at Bradley, says 
     he's two months ahead of schedule in parceling out federal 
     loan money to students.
       Likewise, Craig Munier, a financial assistance official at 
     the U. of I., says his office will disburse federal loan 
     money next month to students in record time--72 hours after 
     receiving their signed promissory notes.
       ``I've been in financial aid for 20 years, and in that time 
     I've become pretty cynical about the Department of Education 
     and government in general.'' Pardieck said. ``But this time 
     they've pulled it off--at least the first year.''
       Simon said the new program ``benefits everyone except for 
     bankers, the guarantee agencies and the secondary market like 
     Sallie Mae.'' Sallie Mae is the nickname of the Student Loan 
     Marketing Association, which acquires and resells student 
     loans.
       The new program is designed to take advantage of modern 
     efficiencies brought about by computer modems.
       In applying for a loan, a student fills out a standardized 
     form and presents it to the college loan office. The office 
     then electronically transmits the form to a private 
     processing company working for the government.
       Usually within a few days, the school is electronically 
     notified about whether the loan has been authorized. If so, 
     the school sends a promissory note to the student. The 
     student's loan account, kept by the college, then is credited 
     once the signed note is returned.
       By contrast, the current byzantine process requires the 
     student to contact a bank or other financial institution and 
     complete financial-aid forms. Once the loan is approved, it 
     goes to a guarantee agency, which essentially ensures that 
     the bank will get all its money back if the student defaults.
       The bank and the guarantor charge fees. They also often 
     spend hours on the phone or days in correspondence with each 
     other or college financial-aid offices to clear up confusion 
     caused by the involvement of so many participants.
       Finally, a check appears that the student must then sign 
     over to the school.
       So much paper is generated that many critics compare the 
     current system to the health-care industry.
       ``It's a wonder we have any trees left in the country with 
     all the paperwork,'' said Sarah Myers, of suburban Baltimore, 
     whose son William attends Bradley in Peoria.
       Myers and her husband already have put a daughter through 
     college. They said the old system required them to set aside 
     an entire day during Christmas vacation to fill out the 
     numerous forms. Completing the single new form for a loan for 
     their son took less than an hour.
       Bradley is a private university with 6,000 students, 60 
     percent of whom received federal loans, Pardieck said. he has 
     converted 3,500 of those students to the new program.
       Only one family has phoned the school to express concern 
     about the change, Pardieck said. And that was because the 
     student's father missed the convenience of having the monthly 
     payments deducted from his paycheck by his credit union.
       The lack of complaints ``really says something,'' Pardieck 
     said.
       Besides accelerating the loan process, the new program also 
     addresses repayment with an eye toward cutting the 17 percent 
     default rate.
       With direct loans, repayment is pegged to income as well as 
     whether a student's education has paid off.
       If a graduate has a low income, then payments can be 
     reduced. And if, after 25 years, there's no indication that 
     the person benefited from his or her schooling,then the 
     government forgives the loan.
       ``Education is a good investment, and for almost everybody 
     it pays off,'' said David Longanecker, assistant secretary 
     for post-secondary education at the Department of Education. 
     ``But [when] it doesn't, this is the ultimate guarantee. We 
     used to guarantee loans to banks. Now we're guaranteeing them 
     to students.''

               Clinton's Credit: The 72-Hour Student Loan

       During the '92 campaign, Bill Clinton vowed to ``scrap the 
     existing student-loan program'' and replace it with one that 
     would allow borrowers to repay loans as a percentage of their 
     income. Of course, he vowed to do a lot of things. But on 
     July 1, the Department of Education begin issuing direct 
     student loans to be repaid on the basis of ``income 
     contingency.''
       In the first year, only 5 percent--about $1 billion--of the 
     total government-backed loan pool will be in direct loans. 
     The remainder will still be handled by banks and other 
     private lenders. But next year the share of direct loans is 
     scheduled to jump to 40 percent and soon after make up the 
     majority of new student lending.
       We talked with David Longanecker, the Department of 
     Education's assistant secretary for post-secondary education, 
     about the changes in financing a college education. For 
     further details, call (880) 433-3243.
       What is a direct student loan?
       A loan that's made directly from the federal government to 
     students through the schools. The capital comes from the 
     federal government. That's quite a bit different from the old 
     loan program, where we essentially paid private banks to 
     provide the capital.
       The reason we changed is real straightforward. The old way 
     cost too much, it was impossible for us to manage, and we had 
     all of the responsibility but virtually none of the 
     authority. The authority was controlled by those banks and by 
     some things we called guarantee agencies, which we also paid. 
     We were paying a lot of middlemen. They were doing a nice--a 
     decent job in some respects, but we were paying an awful lot 
     for that.
       And they didn't want to provide the repayment terms we 
     believed students needed when they came out of school. We 
     wanted a program where students paid back not based on how 
     much they borrowed but on how much their income allowed them 
     to pay back. So we developed what we call an income-
     contingent loan-repayment program.
       If they get out of school and don't get a great job for a 
     while, that's OK; they won't have to pay so much on their 
     loans. If they take a public-service job or for some reason 
     their investment in themselves doesn't pay off substantially, 
     we'll take the hit as the federal government--and 
     intentionally so. If they go into public law instead of 
     corporate law and as a result give us something back in a 
     different way, then they won't have to pay back as much 
     eventually.
       We're also allowing students who took out old student loans 
     who want to convert those into direct loans so that they can 
     participate in income contingency or some of the other 
     features to do that.
       Do banks have any role in direct lending?
       No, unless they compete as a contractor for the service. We 
     don't actually do this job of servicing these loans 
     ourselves. We've contracted for that service. In the past, 
     banks got paid the same amount whether they provided good or 
     poor service. Now our contracts are based on quality of 
     service. Some people have said we moved away from a 
     privatization model. In fact, we think we moved closer to 
     one. We're now contracting for service on the basis of 
     price and quality; that's what the private market is best 
     at.
       If the loan is going directly to the school, does that mean 
     the student doesn't have to mess around getting it before 
     classes begin?
       That's correct. We still recommend they apply for financial 
     aid as early as possible so that they get the full array of 
     potential financial assistance. But a student can go to a 
     school now and apply, and that application will be processed 
     by our central processor, determining eligibility for Pell 
     Grants, for student loans, and that will all essentially be 
     available in their account within 72 hours.
       You can process this in 72 hours?
       Yes. There's a single application form we created so that 
     students can now file for all federal student financial 
     assistance with one form. There used to be an array of forms 
     that a student had to fill out.
       Students fill out that new form. They can do that 
     electronically at their school, they can do it on a 
     computer--it's transmitted electronically to us--or they can 
     do it on paper. Either way we will process it as soon as we 
     receive it. Within 72 hours the school will have the 
     eligibility of that student for the various federal programs.
       The program began July 1. How's it working?
       Everybody is extremely pleased with it at this point. You 
     know, this is a pretty phenomenal feat. This program was 
     passed last August. We selected the institutions for the 
     first phase in November. We selected our contractor in 
     December and since then have been working with institutions 
     to develop the software packages and all. By May 15 we were 
     in a beta testing phase and by June 15 were processing 
     applications.
       Was there any model for this program? Or is this something 
     that was hatched fresh?
       We'd like to claim it as our genius, but the idea of income 
     contingency has been around for about 25 years.
       Does the IRS have a role in collecting?
       It may. At the present time it doesn't, except that they 
     give us income information when a student selects income 
     contingency, so they provide us the most recent information 
     on that person each year so that we know what their income 
     is.
       The IRS provides that to you?
       The IRS provides that. That's their current role. In the 
     future they may actually become a partner in the collection 
     of these loans. If their collection system can provide us 
     with accountability and students with the customer service 
     they deserve, that might be a very viable way for us to go. 
     But we're still investigating.
       If direct loans are such a great idea, what took so long?
       One reason is that there was so much money being made. The 
     banks, the secondary markets and the others, these folks 
     provided service, no doubt, but they did so in an extremely 
     profitable way. This was the second most profitable component 
     of most banks' portfolios.
       They were making risk-free loans, essentially.
       Yeah. Their yield was assured, and it was higher than 
     almost anything else in their portfolio. Because they were 
     making that kind of money and there was such an array of 
     actors out there, it was almost politically impossible to 
     change.
       What happened that make it possible?
       Three things. One is that we had increasing evidence in 
     General Accounting Office reports that the program simply 
     wasn't working, that it was costing too much money and 
     couldn't be managed effectively because of the array of 
     actors. Two, we had the president running on an initiative 
     that couldn't be incorporated effectively into the existing 
     program. Income contingency really required a new design.
       And then--I almost hate to say this--almost by accident 
     this program was incorporated into the Omnibus Budget 
     Reconciliation Act last year. It had fiscal impacts, and it 
     was put into a budget bill as a cost saver, because it was 
     going to save about $4 billion.
       Once it was in that bill, if people wanted to change it, 
     they had to come up with a requisite amount of savings 
     somewhere else. Nobody could do that. We were in a much 
     stronger political position than if we'd had a separate bill. 
     Those forces I'm talking about now had to attack the entire 
     Omnibus Budget Reconciliation Act, and that really created a 
     dilemma for them.--Francis Wilkinson

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