[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

Available on the Internet:
http://www.gpoaccess.gov/congress/house/education/index.html

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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 hwadsworth@wpllc.net 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.]