Copyright 1999 Federal News Service, Inc.
Federal News Service
FEBRUARY 11, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
4986 words
HEADLINE: PREPARED STATEMENT BY
WILLIAM
D. HANSEN
BEFORE THE SENATE HEALTH, EDUCATION, LABOR AND
PENSIONS COMMITTEE
SUBJECT - DEPARTMENT OF EDUCATION FY 2000 BUDGET REQUEST
FEBRUARY 11, 1999
BODY:
Mr. Chairman and Members of
the Committee:
Thank you for the opportunity to appear before you today to
testily on the Department of Education's FY 2000 budget as it relates to higher
education and Departmental management. Mr. Chairman, you asked that I testify
today from two perspectives - - as the Department's former Assistant Secretary
for Management and Budget/CFO and in my current capacity as the Executive
Director of the Education Finance Council. Therefore, my statement today
reflects both my experiences during the Bush Administration as well as my
observations related to the direction that I believe federal higher education
policy should be headed from the perspective of the Education Finance Council.
Profile of the Education Finance Council and Its Members
The Education
Finance Council (EFC) represents state-based student loan secondary market
organizations throughout the country. These public purpose organizations were
created by the states under the authority of legislation originally written over
20 years ago by former Sen. Lloyd Bentsen, who recognized the need for
organizations across the country dedicated to the single purpose of making sure
students can get the money they need to go to college. These organizations are
always there for students, in good financial time, and had, in large communities
and small, in every size and type of school. They expand access to higher
education in two ways: by ensuring the availability of funding for student loans
and by making it easier and less expensive to pay for college.
EFC member
organizations raise capital by selling both taxable and tax-exempt bonds to
investors, then using that capital to acquire student loans from commercial
banks, savings and loans and credit unions. The capital formation in the bond
market allows these financial institutions to make more student loans. In
acquiring loans from the originating lenders, or in some cases making the loans
themselves, secondary markets assume long-term servicing and collection
responsibilities and share the risk of defaults.The public- private partnership
of secondary markets, guaranty agencies and financial institutions is an example
of how the federal government can efficiently and effectively leverage billions
of dollars in private capital to meet a compelling public need.
Student loan
authorities operate in every state and territory. Their only purpose is to serve
students, families, and schools by making sure money is available for student
loans. EFC members serve millions of students and parents each year, accounting
for approximately 30 percent of the FFELP loans currently outstanding. EFC
members offer some of the lowest-cost loans available, saving students and
families from all backgrounds millions of dollars in interest and fee payments
each year. in addition, the diversity, and localization of state-based
authorities allows them to tailor programs, technology, and innovations to meet
the needs of each area of the country.
EFC members understand that programs
which increase access to higher education by lowering the cost or college are
only part of the solution. Consumers also need information, guidance and
encouragement. To provide these services, EFC members deliver extensive outreach
and counseling programs that bring professional counselors, materials, and
support services right to area schools, community centers and the workplace. EFC
members also assist colleges with borrower entrance and exit interviews that
explain borrowers' rights and responsibilities under the federal loan programs.
These interviews play a critical role in preventing defaults.
Many EFC
members offer their own scholarship and grant programs or operate state grant
and scholarship programs, including sonic or fire pre-paid tuition plans and
tuition savings plans that most states have started. The specialized knowledge
and experience of the slate secondary market organizations makes them a logical
choice for these programs.
Where once grants, scholarships and family
savings paid most of the hills, student loans are now the largest source of
student financial aid. In fact, the number of loans has skyrocketed in recent
years. In FY 1998, student loans accounted for over 75 percent of all Federal
postsecondary student financial assistance. EFC members are committed to meeting
the financial and oilier needs of students and their families by ensuring that
student aid programs remain strong and meet the challenges of the future.
Making College More Affordable
The state-based, non-profit secondary
markets provide some of the least expensive student loans available - - as much
as 3 percent below the standard government interest rate. Secondary markets,
working closely with their local communities, have tailored their programs to
serve their residents. I would like to highlight only three examples for the
committee at this time but just about anywhere else you go, similar student
benefits arc offered by secondary markets and many lenders.
Some of the best
programs, like the one offered by the Vermont Student Assistance Corporation
(VSAC), lower interest rates across the board. The Vermont Value rebate program
provides an automatic interest rebate equivalent to I percent of the outstanding
principal balance for the life of the loan. In addition, Unsubsidized Stafford
and PLUS loans are interest-free the first academic year of the loan. Typically,
a family borrowing $15,000 can save between $1,850 and $3,300 through Vermont
Value. Since July 1, 1994, Stafford, PLUS, and Consolidation loans from VSAC
automatically receive an annual interest rebate equivalent to 1 percent of the
principal balance on loans in repayment. Borrowers can reduce their loan costs
an additional 1/4 percent by making their loan payments electronically. The
program rebated $7 million in FY98, bringing to $15.6 million the total amount
rebated since the program started in 1994.
Programs often include incentives
that reward borrowers who make their loan payments on time - - showing that
responsible behavior does pay. For example, the Maine Education Services' (MES)
SuperLoan is available to all Maine students or parents, with or without
financial need, who pursue higher education at in-state or out-of-state schools.
It is also available to out-of-state students who enroll in Maine schools. Since
its introduction in 1994, SuperLoan has saved Maine families more than $20
million in future interest payments. Nearly three out of four Maine student loan
borrowers choose a MES discounted loan. MES reduces the borrower's interest rate
by 3 percent after 36 months for making on-time payments. ES also reduces the
interest rate by 1/4 percent For borrowers who sign up for automatic electronic
payments. Finally, MES reduces the borrower's principal for origination fees
paid over $250 after 24 months for making on-time payments. The typical borrower
with $10,000 in student loans saves $1,389.
The extensive outreach
services provided by EFC members have a widespread impel on the lives of those
families who don't have access to the necessary information or the the necessary
support to work through the complicated maze of applying for college and
securing financial aid. Some secondary markets have mobile units that are manned
by professional counselors and equipped with computer networks that travel to
rural counties and inner city areas providing prospective students with the
college and career information they need. In addition to paying the 1 percent
guarantee fee for its borrowers and discounting interest rates by 2.25 percent
after 48 timely payments, the Rhode Island Student Loan Authority serves its
community through the recently launched College Planning Center of Rhode Island.
Located on 400 Bald Hill Road in Warwick, Rhode Island, the center provides
academic, admission, financial aid, career counseling, and awareness programs
designed to encourage enrollment in higher education. These services are
available to the general public at no cost. The Center provides professional
advice on ways to save for college, how to take advantage of education tax
incentives, understanding the college admissions process, maximizing scholarship
opportunities, and provides step-by-step assistance in completing admission and
financial aid applications.
In summary, EFC member organizations offer a
wide variety of vital products and services. These products save federal dollars
by reducing defaults. A sample of these services include:
- Early awareness
programs - High school financial aid nights - Elementary school mentoring
programs - Comprehensive student financial aid publications - Lifelong learning
and career planning - 24 hour toll-free financial aid hotlines - Interactive web
sites Scholarship funding - Educational grants - Volunteer community services -
Charitable contributions - Alternative/Supplemental loans - College campus
visits
ED Budget Cuts Millions from Students The FY 2000 budget submitted by
the Administration would abolish most or these student benefits and services. It
would take us in the wrong direction, making it more difficult to serve the
needs of students around the country. We support the Administration's general
goals of in--sing access to higher education and making college more affordable.
Those are central the mission or EFC members. But we believe some of the
specific priorities are off base and that some of the methods For reaching those
priorities will take us farther from those central goals.
The budget does
propose to increase the maximum Poll Grant award, and it does not offset that
increase by reducing eligibility. However, the budget actually pulls money out
of the Pell Grant account, failing to move even within hailing distance or the
maximum Pell Grant authorized by this committee. Low-income students ought to be
eligible for $4,800 during the 2000-2001 academic year. The budget proposes only
$3,250 for Pell Grants, a 4.2 percent increase. The Department's budget request
for the other student aid programs also shortchanges students in a big way:
CHART NOT TRANSMITTABLE
We also must take issue with the revenue offsets
proposed in this budget, offsets that are required to pay for a plethora of new
programs by attacking one of the most successful programs in history. Just four
months after Congress unanimously passed the reauthorization of the Higher
Education Act, the Administration essentially wants to toss that careful
bi-partisan agreement into the trash. Rather than allowing one financial aid
award cycle to pass before re-starting the reauthorization debate, the
Administration has launched another attack on the Federal Family Education Loan
Program, the program that provides two-thirds of student loan volume and serves
over three- fourths of the nation's campuses.
Congress spent two years
holding hearings and debates on the Higher Education Act. All the arguments were
made. The result was a unanimous agreement -- unanimous, how often does that
happen on major legislation? A central tenet of the reauthorization was the
agreement to support two strong loan programs, FFELP and Direct Leading. This
budget proposal crushes that idea, relaunching the attempt to force direct
lending down the throats of America's schools and students. The trouble is,
schools have voted with their feet -- 77 percent of schools have chosen FFELP.
Direct Loan volume is less than half what was expected when the program was
created in 1093.
The Non-profit Tax is Nonsense
The Administration
budget has singled out not-for-profit organizations -- those represented by EFC
-- for what amounts to a special tax. That tax in the form of a cut of 30 basis
points (.3 percent) in what these organizations can make on student loans made
with tax exempt funds. It would come on top of a cut of the same amount imposed
by the Higher Education Act reauthorization just 4 months ago. It mystifies me
as to why the Administration would want to target the earnings of not-for-profit
organizations in this maimer while claiming to be trying to help students. There
is only one way these organizations can use the net revenue they make on loans
made with tax-exempt funds They can cut costs and provide services for students
and schools, making higher education more affordable. Any extra revenue that is
"materially higher" than costs must be rebated to the U.S. Treasury via
arbitrage rebate.
Periodically, our member organizations must calculate
their net income, including federal special allowance payments, on any tax-
exempt debt they hold. Anything more than 2 percent must be rebated to the U.S.
Treasury. Section 150(d)(2) of the Internal Revenue Code makes it clear, saying
organizations that issue tax-exempt student loan bonds must "devote any income
(after payment of expenses, debt service, and the creation of reserves for the
same) to the purchase of additional student loan notes or to pay over any income
to the United States."
Actually, my members would rather not rebate funds to
the Treasury. They would rather spend it on students by providing borrower
benefits programs or by going out into their communities telling kids about
college and showing them that they can go to college, that the money is there.
They have to keep their balance sheet in the black, however, so money is rebated
hack to the government. As an example, one medium sized secondary market this
month paid the IRS $ 150,000 in arbitrage rebate. Instead of that money going to
the Treasury, the Administration's budget proposal would apparently have it go
the Education Department, simply taking it from one federal pocket and putting
it in another.
In addition to the IRS's arbitrage rebate regulations, the
tax law drastically limits the amount of tax-exempt student loan bonds that can
be issued. 'Each slate is only allowed to issue a limited amount of tax-exempt
bonds known as private activity bonds each year. The limit is set at $50 per
person per year, with a minimum of $150 million. Those private activity bonds
are divided among mortgage revenue bonds used to help low- and moderate-income
Americans purchase their first home, small-scale industrial development
projects, student loans, and a few other uses. Student loans are allocated only
5 to 10 percent of the private activity cap each year. Of the total amount of
student loans made by the private sector this year, less than 5 percent will be
made with tax-exempt funds. Recognizing this drastic shortage of cap authority,
Congress last year passed a slowly phased in increase in the size of the private
activity cap. I do mean slow. In 2007, this cap will reach the level, not
adjusted for inflation, that it stood at in 1986. States decide if and how much
private. activity bond cap to allocate to student loans, and that state decision
is based on a desire to help students at the local level. Piece do not take away
that state and local control.
We Promote Access and Create New Loan Capital
When many people think of the FFEL Program, they think of Sallie Mac and of the
big banks, like Citibank, Norwest/Wells Fargo Bank, or Chase Manhattan. But
there are more than 3,000 lenders in the program, ensuring that every student
and every school, no matter how small or how remote their community, can get a
college loan. Most of the small and community banks lack the ability or desire
to cope with all the complexities and regulation of the student loan system on
their own, so they sell their loans to the specialized secondary market
organizations. Some of the large organizations prefer to work with other large
organizations. Some of the large organizations do not find it cost effective to
service the Bank of Smallville.
That's where the state-based secondary
market organizations step in. As student loan yields have fallen over the past
five years (3 separate steep cuts), thousands of lenders have left the student
Ivan programs. Recently, two important participants, Wachovia Rank and Household
Finance Corporation left the program because of the most recent 30 basis point
cut. The full impact of reauthorization and its dramatic cuts in special
allowance will not be fully felt for a few years. Liquidity, capital formation,
and access will be extremely important for students in the next several years.
We are, designed to fill those needs.
Some in the Department of Education
have long resented the fact that the Direct Loan Program can't always offer the
interest rate breaks that some of my members can offer. Over the years, they
have proposed outlawing FFELP borrower benefit programs, prohibiting interest
rate discounts for students who make on-time payments, for example. Congress
wisely has newer agreed to such anti-student proposals. This is simply another
backdoor way to try and put a stop to these programs so that Direct Lending can
gain a competitive advantage. Every dollar that secondary markets lose because
of the .3 percent cut will come out of the pockets of students.
ED:
Bureaucracy First, Students and Innovation Last
At the same time, the budget
proposes a 26 percent increase in the Direct Loan Administrative spending - - a
$115 million increase. That is backwards. Who would want to make college more
expensive for students in order to fatten the Direct Loan bureaucracy? The
Department of Education, that's who.
!n addition to singling out non-profit
secondary markets for attack, the budget attempts to revive the Administration's
scheme to destroy the state-based guaranty agency system and transfer those
functions to the Washington-based Education Department bureaucracy. The
Administration makes a nearly identical proposal in every budget, and Congress
in turn rejects it. I believe Congress should do the right thing and reject
these proposals once again.
In fact, the reauthorization bill that passed
four months ago required u major restructuring of the finances of the
state-based guaranty agencies. They are in the midst of putting those changes
into effect. Proposing, once again, the same rejected scheme shows a lack of
respect for the tough compromise, which passed unanimously, and a refusal to
work constructively towards putting the new law into effect.
Another
misguided proposal in the Administration budget would discourage delinquent
borrowers from bringing themselves current. Those who pay their loans on time
would not have this advantage. To be specific, the budget says that lenders
should not be able to collect interest on loans that are more than 180 days
delinquent until the time they go into default. That means that once a loan
becomes delinquent, a borrower would have no incentive to bring it current for
another three months. In fact, there would be a strong incentive not to do
anything, since no interest would accrue. This provision is lacing billed as a
default reducer, when in fact, it would have the opposite effect. Lenders lost
money when borrowers default, so they work extremely hard to prevent them. The
longer a loan is delinquent, the harder it is to get it back to current. It
makes no sense to encourage delinquency.We testified last year that FFELP loan
providers have been constantly improving service delivery, and technology to
financial aid offices and to students, and reducing costs to borrowers.
A
technological revolution is occurring in this country, no place more
dramatically than in the financial services industry. The providers of FFELP
loans have invested and are continuing to invest in the latest technology to
speed service, improve efficiency, and eliminate errors. If allowed to do so,
competition in the private sector will continue to spur innovation. Those
companies that are unable to keep up will be replaced by organizations that are
forward-thinking, flexible, and concentrate on serving their customers -
students and schools.
Explosion in FD Overhead Spending
Now permit me to
put on my "has-been" hat as the Department's former Assistant Secretary for
Management and Budget/CFO. It's always easy for a former official to try to poke
holes at the subsequent regime. That is not my intention. My intention is to
point out the serious problem of exploding overhead spending. Even if I were not
in the student loan arena, I would be and am a disgusted taxpayer. This
committee should be concerned about the fact that the 1993 Student Loan Reform
Act created an unprecedented $2.5 billion administrative entitlement fund for
the implementation of the direct loan program. Unlike nearly all other
government-administrative funds, those associated with the Department's direct
government loan program are not subject to annual appropriations and review.
Mr. Chairman, we as taxpayers need this committee to ensure some fiscal
integrity at the Department of Education. Departmental spending just for student
loan administration has jumped from $137 million a year to $429 million a year
(from 1992 to 2000). This is a 213% increase during the last seven years. At
rite same time the number of student aid awards that EO processes has increased
from 12 million to 15.3 million, representing a 28% increase in its workload.
Between 1993 and 1999, ED spent $2.02 billion on student aid administration.
Additionally, they spent another $609 million on their new Direct Loan servicing
and origination contracts. Over the next five years, EL) is poised to spend
another $2.18 billion on student aid administration and an additional $1.52
billion on its Direct Loan origination and servicing contracts, even though ED's
own budget says that direct lending will not grow. Just to be clear, that is a
grand total of $6.409 billion in administrative and contract spending between
1993 and 2004. That's billion. The 1992 projections for total student aid
administrative spending for this same time period was only around $2.6 billion.
Therefore, an additional $3.8 billion was and will be spent on overhead, solely
as a result of the creation of the direct Loan program. Even subtracting out the
Direct Loan origination and servicing contracts from this amount, ED will have
spent $1.6 billion more for basic administration - - payroll, travel, rent,
postage, etc. - - than it would have otherwise.
A simple freeze in
administrative costs should be considered immediately. To be clear, freezing the
Department's overhead does not reduce the money available for Direct Loan
origination and servicing. Those funds will grow by almost 60% over the next
live years to meet increasing servicing demands. A freeze would merely reign in
the runaway spending of the Department's bureaucracy. They can keep their
bloated base (triple the spending) which they have accumulated, but Congress
should stop this escalation in bureaucracy, and stop it now.
These
entitlement administrative funds when originally framed, assumed at least 60%
direct lending volume by now. They are at half that. The Department has had a
virtual blank check and has never once offered to spend these administrative
funds on students in the form of borrower benefits to direct loan recipients or
to return excess funds to the Treasury. In fact, they have had a $40 million
contract cancellation and needed a $25 million bailout during the emergency
consolidation loan crisis. They magically found $25 million in the old HEAF
account to cover their mistakes.
There has been no effort to enhance the
efficiency and simplicity of the Department's operations because there has been
no need. The more complicated the systems the more money bureaucracies can
spend. The Department's Office of Postsecondary Education spends $325 million a
year on contracts and $300 million on internal administration to run their 12
stove-pipe computer systems. The Department has not consolidated a single
computer system in the last six years and there is no incentive to do so.
Taxpayers cannot continue to just throw money at more poor management. We
deserve prudent and efficient fiscal controls.
Just look at the facts - the
Department's payroll expenses have gone up by 93% and training costs have gone
up by 1084%. The Department is spending massive amounts of money on promotion
and travel. The Department has added 34% more staff, and rent has increased
415%. The Department's travel has increased dramatically; their travel expenses
are up 133%. Printing of promotional items and applications has increased
1,415%. The Department is printing a similar number of applications as it did in
1992, because, students are starting to apply for financial aid electronically,
and yet, the printing expenses have risen by 14-fold. Despite providing a great
deal or information on the world-wide-web, the Department's postage budget has
increased by 234%.
I urge you to curb the Department's wasteful spending.
Let's spend this money on students, not bureaucracy.
Recommendations
Rather than cutting the FFEL Program and hurting the millions of students
and thousands of schools who depend on it, like the Administration requested, I
believe Congress should take several bold, positive steps forward for students
and taxpayers.
First, bury the Department's budget proposal. Bury it now.
Bury it deep. Let the market driven student and borrower benefits in the private
sector thrive. Don't open up reauthorization, let's implement it.
Second,
fully thud the Pell Grant maximum authorized amount of $4,800 and increase the
.special education funding under the Individuals with Disabilities
Education Act (IDEA) federal commitment up to 20%. The Senate
Appropriations and Budget Committee Chairmen have both been speaking about
increasing spending on education while not using the budget surplus and offering
a substantial tax cut. They are suggesting rearranging priorities within current
government discretionary spending to add $40 billion to education over the next
5 years. This is an opportunity for an $8 billion increase this year. Congress
should fund programs that work, programs that target special and needy
populations, programs that will affect the lives of millions of Americans.
Congress should not fund dozens of new scattershot programs that are not
targeted and that will only create more bureaucracy. Congress should equally
split such an $8 billion increase between K-12 and higher education ($4 billion
each) - that would be fair and would be effective. Everyone agrees that the Pell
Grant program targets aid to low income students as effectively as any program
in government. A $4 billion increase in Pell Grants would more than fully fund
the $4,800 authorized level for academic year 2000-2001.
Third, rather than
handing out millions more dollars to direct loan administrators at the
Department of Education, we should re-target those resources directly to
students via Perkins Loans and LEAP, two programs that have seen their funding
levels reduced in recent years. With the $115 million increase that the
Administration wants to pour into direct loan administration, Congress could
double the funding for LEAP and nearly double the new capital contribution to
Perkins loans. Both of these programs, like Pell Grants, target low income
students who need money for college the most, when they need it the most (as
students).
Fourth, the massive proposed increase in direct loan
administration should set off alarm bells in this committee. The Administration
budget repeats the tired claim that direct loans arc cheaper than FFELP loans
for the taxpayer. Yet, does anyone know what has happened to the billions of
dollars that have been spent on running the direct loan program since 1994?
Those of us who were skeptical about direct lending from the beginning pointed
out what anyone in student lending knows: it is much easier to give money away
than it is to collect it. I respectfully suggest that this committee, working
with others if appropriate, attempt to ascertain where the billions of dollars
spent on direct loan administration have gone over the past six years and why
the planned future costs in overhead are so outrageous.
Finally, tills
committee has a strong record of ensuring that both programs remain strong and
viable. Last year, Secretary Richard A. Riley testified before this committee,
stating: "strong student loan programs are necessary to ensure access," and he
assured the committee that the Administration will continue a commitment to both
the FFEL, and Direct Loan programs.
Importantly, he also acknowledged that
the Department of Education "can best serve students by maintaining a healthy
and fair competition between the two programs while promoting efficiencies in
the guaranty agency and lender system." I agree. I would add, however, that
promoting efficiencies within the ED bureaucracy is just as important.The
Department's budget request is a disingenuous effort to again cripple the FFEL
program and prop-up file Department's inefficient bureaucracy. Mr. Chairman, I
respectfully request that you carefully monitor ED's implementation of last
year's reauthorization to censure a "healthy and fair competition between the
two programs." This will be critically important in two key areas - negotiated
rulemaking and the alternative index study. The fact that the Department is both
our regulator and our competitor requires honor and diplomacy within the
Department, which continue to be difficult to find.
Conclusion
Americans
strongly support education, and they want leaders at all levels to provide
appropriate support. Support for education is not only measured in how many
dollars you spend, but whether the money is spent wisely and supports
achievement, promotes opportunity, and ensures access and choice for students,
especially those in most need.
Thank you for the opportunity to testify
before the committee. I will be happy to respond to any questions you or the
committee Members may have.
END
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February 24, 1999 
