<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:21709.wais]
FEDERAL STUDENT LOAN PROGRAMS: ARE THEY MEETING THE NEEDS OF STUDENTS
AND SCHOOLS?
=======================================================================
HEARING
before the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MAY 26, 2005
__________
Serial No. 109-31
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada BRIAN HIGGINS, New York
KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of
LYNN A. WESTMORELAND, Georgia Columbia
PATRICK T. McHENRY, North Carolina ------
CHARLES W. DENT, Pennsylvania BERNARD SANDERS, Vermont
VIRGINIA FOXX, North Carolina (Independent)
------ ------
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
C O N T E N T S
----------
Page
Hearing held on May 26, 2005..................................... 1
Statement of:
Merten, Alan, president, George Mason University; Sarah
Bauder, director of student financial aid, University of
Maryland; Nancy Coolidge, coordinator, Federal student
financial support, Office of the President, University of
California; Natala Hart, director of student financial aid,
Ohio State University; and Cynthia Thornton, Director of
Student Financial Aid, Dillard University.................. 64
Bauder, Sarah............................................ 74
Coolidge, Nancy.......................................... 78
Hart, Natala............................................. 95
Merten, Alan............................................. 64
Thornton, Cynthia........................................ 102
Shaw, Theresa S., Chief Operating Officer, Federal Student
Aid Office, U.S. Department of Education; and John P.
Higgins, Jr., Inspector General, U.S. Department of
Education.................................................. 27
Higgins, John P., Jr..................................... 40
Shaw, Theresa S.......................................... 27
Letters, statements, etc., submitted for the record by:
Bauder, Sarah, director of student financial aid, University
of Maryland, prepared statement of......................... 76
Burton, Hon. Dan, a Representative in Congress from the State
of Indiana, prepared statement of.......................... 127
Coolidge, Nancy, coordinator, Federal student financial
support, Office of the President, University of California,
prepared statement of...................................... 80
Cummings, Hon. Elijah E., a Representative in Congress from
the State of Maryland, prepared statement of............... 16
Davis, Chairman Tom, a Representative in Congress from the
State of Virginia, prepared statement of................... 4
Hart, Natala, director of student financial aid, Ohio State
University, prepared statement of.......................... 97
Higgins, John P., Jr., Inspector General, U.S. Department of
Education, prepared statement of........................... 42
Merten, Alan, president, George Mason University, prepared
statement of............................................... 67
Porter, Hon. Jon C., a Representative in Congress from the
State of Nevada, prepared statement of..................... 129
Ruppersberger, Hon. C.A. Dutch, a Representative in Congress
from the State of Maryland, prepared statement of.......... 24
Shaw, Theresa S., Chief Operating Officer, Federal Student
Aid Office, U.S. Department of Education, prepared
statement of............................................... 30
Thornton, Cynthia, Director of Student Financial Aid, Dillard
University, prepared statement of.......................... 104
Waxman, Hon. Henry A., a Representative in Congress from the
State of California, prepared statement of................. 9
FEDERAL STUDENT LOAN PROGRAMS: ARE THEY MEETING THE NEEDS OF STUDENTS
AND SCHOOLS?
----------
THURSDAY, MAY 26, 2005
House of Representatives,
Committee on Government Reform,
Washington, DC.
The committee met, pursuant to notice, at 10:25 a.m., in
room 2154, Rayburn House Office Building, Hon. Tom Davis
(chairman of the committee) presiding.
Present: Davis of Virginia, Shays, Souder, Platts, Duncan,
Brown-Waite, Porter, Marchant, McHenry, Dent, Fox, Waxman,
Kanjorski, Sanders, Maloney, Cummings, Kucinich, Clay, Watson,
Lynch, Van Hollen, Sanchez, Ruppersberger, Higgins, and Norton.
Staff present: Jennifer Safavian, chief counsel for
oversight and investigations; Robert Borden, counsel/
parliamentarian; Rob White, press secretary; Drew Crockett,
deputy director of communications; Grace Washbourne,
professional staff member; Teresa Austin, chief clerk; Sarah
D'Orsie, deputy clerk; Corinne Zaccagnini, chief information
officer; Phil Barnett, minority staff director/chief counsel;
Kristin Amerling, minority deputy chief counsel; Karen
Lightfoot, minority communications director/senior policy
advisor; Brian Cohen, minority senior investigator and policy
advisor; Earley Green, minority chief clerk; Jean Gosa,
minority assistant clerk; Cecelia Morton, minority office
manager; and Christopher Davis, minority investigator.
Chairman Tom Davis. A quorum being present, the Committee
on Government Reform will come to order. I would like to
welcome everybody to today's oversight hearing examining
Federal Student Loan Programs.
The purpose of this hearing is to discuss the management
and performance of the Federal Family Education Loan Program
and the William D. Ford Federal Direct Loan Program.
Specifically, the committee will focus on the Department of
Education initiatives to enhance management and delivery of
services to students and schools, as well as highlight the
important role of choice in the creation of increased services
and streamline delivery in both programs.
Discussions about Federal Student Loan Programs often
digress into battles over which program is better, and evolve
into debates centering on complex cost estimates. Along with
Chairman Boehner on the Education and Workforce Committee,
Chairman Nussle of the Budget Committee, and other House and
Senate colleagues, we have asked the Government Accountability
Office to examine the accuracy of cost estimates so that we
will have accurate and reliable data.
With conflicting studies and reports on costs, it is
imperative that Congress have a thorough and independent
examination of these factors, and I will await the release of
the GAO findings in September and the committees of
jurisdiction with the consideration of reauthorization of the
Higher Education Act.
In the meantime, today's hearing will focus on the
management and performance of both loan programs. We have asked
our witnesses the fundamental oversight questions. Are schools
and students well served by the current choice of loan
programs? Is the Department effectively managing these
programs?
Student loan programs must do more than issue loans to
students. They have to educate parents and students about their
options, when it comes to paying the high costs for higher
education. They have to help schools and students comply with
the complex procedures to apply for and receive student loans.
We need to know, are these programs doing all that they have to
do, to make higher education accessible and affordable for all?
I welcome Ms. Theresa Shaw, Chief Operating Officer of the
Office of Financial Student Aid, Department of Education; and
the Honorable John Higgins, Inspector General of the Department
of Education to discuss their successes and the continuing
challenges they face in managing Federal Student Loan Programs.
The Department of Education's Student Loan Programs were
removed from the GAO's high risk series this past January, and
I look forward to hearing about the management improvements
that made this possible.
We are also honored to have with us a wide range of student
financial experts from schools whose students rely on Federal
Student Loans. Each of them has been asked to talk about their
institution's history with the Federal Student Loan Program,
and to discuss their working relationship with the Department
of Education. We also hope they will suggest service
improvements and reforms to the Student Loan Program.
During the committee's investigation of Student Loan
Programs, we found that 75 percent of our Nation's students
choose the FFELP Program over the Direct Loan Program.
Why is that? The answer is, the private sector plays a
pivotal role in making higher education affordable and
accessible. Lenders, loan guarantors, and other non-profits
provide many services that not only help students afford higher
education, but also help students who mistakenly believe higher
education is otherwise out of their reach.
They also customize their programs for the specific needs
of diverse schools and student bodies, and provide financial
and life skills training.
For example, the committee has had the opportunity to hear
from the State of Virginia's guaranty agency, ECMC, whose
foundation created the Realizing the College Dream Program.
This program supports teachers, counselors, and community-based
organizations in their efforts to help low income and first
generation college students and their families realize that
higher education is within their reach.
Through this program, the ECMC Scholars Program, the ECMC
Foundation provides millions of dollars in financial aid every
year to students in Virginia.
The constant refrain that has emerged from the committee's
findings is that schools want a choice in Student Loan
Programs, and that the competition between the two main Student
Loan Programs has resulted in better benefits and services for
their students.
Today, we will hear that choice in the Student Loan Program
has resulted in a healthy, competitive marketplace on student
financial aid. Choice in Federal student loans has led to major
investments in technologies by companies and by the Federal
Government, and that choice gives schools the power to demand
loan services that best address the financial needs of the
students that attend their schools. Along with my colleagues, I
welcome you all here today and look forward to today's
discussion.
I would just add that I served in Fairfax County Government
for 15 years, prior to coming to Congress. We established there
a county trash pick-up to compete with the privates, and we
allowed neighborhoods to choose. We found out, when the county
got in the action, the privates lowered their price and it kept
everybody more competitive, giving people a wider choice.
I think, to a great extent, my observations going into this
is that this competition has been healthy for students and
consumers. Mr. Waxman.
[The prepared statement of Chairman Tom Davis follows:]
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Mr. Waxman. Thank you, Mr. Chairman, and I would like to
thank you for calling today's hearing on Federal Student Loan
Programs. The committee does not hold hearings on the
Department of Education, but the Government's education
programs are an important area for oversight.
The Federal Student Loan Program has been a vital resource
over the last five decades, providing opportunities for higher
education to millions of Americans. Before they finish school,
6 out of 10 post-secondary students have borrowed money through
a Government program to help pay for their education. With
tuition rates rising much faster than inflation, this Federal
assistance is becoming an increasingly vital resource.
The economic return from the student loan investment is
easy to see. A more educated society has helped propel the
Nation's productivity over the last half century. The Federal
Government has two programs to finance student loans: the
Direct Loan Program, which is run by the Federal Government,
and the Guaranteed Loan Program, which is run by private
lenders.
It is clear that the Direct Loan Program has been a huge
success. Before its inception, the student loan business was
characterized by chaos. Students had to wait in long lines to
get their loan checks, and schools had to deal with different
forms and procedures for each lender.
By offering schools a more accessible alternative, the
Direct Loan Program has sparked reform in the private lending
community. In its first 3 years, the Direct Loan Program
enticed a third of the participating schools to switch from
private lenders. The rapid migration caused private lenders to
make rapid upgrades in their services that included
streamlining loan administration and offering beneficial
financial incentives to borrowers.
The Direct Lending Program has offered an additional
benefit to the taxpayer. It is more efficient than its private
sector counterpart.
The President's budget shows that when the Government lends
the money itself, it cost 14 times less in 2004 than when the
Government guarantees loans through private lenders. Since its
inception, the program has saved the taxpayer more than $10
billion in lower subsidy costs.
I am not opposed to the Guaranteed Loan Program run by
private lenders. Its existence provides competition to the
Direct Loan Program, and this competition improves both
programs.
But one of the questions we need to resolve is how to
protect the taxpayers' interest. It does not make sense that
the Guaranteed Loan Program should cost the taxpayers so much
more than the Government Loan Program. If the Federal
Government is overly subsidizing banks and big lenders to offer
these loans, we should reassess these payments.
We also need to examine the financial management of the
Federal Student Aid Program. For 15 years, this program has
been on GAO's list of programs at high risk of waste, fraud,
and abuse. This January, GAO took the Student Aid Program off
the watch list. This positive step was a response to a
concerted effort at the Department of Education to better track
outstanding loans and more thoroughly investigate cases of
fraud.
The Department should be congratulated for its progress and
encouraged to ensure that it persists. I am glad that we have
the Department of Education Inspector General here to tell us
about their continued efforts to improve financial management.
I am also pleased that we will hear from a panel
representing the Nation's colleges. I would particularly like
to welcome Nancy Coolidge, who will be representing the
University of California. The U.C. schools have over 80,000
students receiving loans through Federal programs. Because the
U.C. schools participate in both the Direct Loan and Guaranteed
Loan Programs, she will be able to offer us a valuable and
balanced perspective.
Mr. Chairman, the Federal Student Loan Program is a great
example of how the Federal Government can provide a boost to
low and middle-income families. I thank you for holding these
hearings today, and I look forward to learning what we can
about how we can make these programs even more effective.
[The prepared statement of Hon. Henry A. Waxman follows:]
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Chairman Tom Davis. Well, thank you very much. Since you
referred to the second panel, I just would note that we have
Dr. Alan Merten, who is a visionary leader at George Mason
University, who will be on that second panel, as well, and we
look forward to hearing from him.
Mr. Waxman. Mr. Chairman, you are probably going to mention
it, but there are people from Ohio State University.
Chairman Tom Davis. And Maryland, and Dillard University, I
was going to get that on the second introduction, but as long
as we are home-towning it. [Laughter.]
Mr. Waxman. We are looking forward to even hearing from
them, even though they do not come from our jurisdiction.
Chairman Tom Davis. Well, we are looking forward to hearing
from all of them. But you have to recognize that Dr. Merten
votes in my district, as well, and I did not want to get
upstaged.
Mr. Waxman. I give up. [Laughter.]
Chairman Tom Davis. Are there any other opening statements?
I know Mr. Souder has an opening statement.
Mr. Souder. Yes, I appreciate the chairman for yielding me
a few minutes. As a senior member of the Education Committee,
and as chairman of the oversight committee that has
jurisdiction over the subcommittee on this committee on
education, I wanted to make it absolutely clear that I believe
it is important to have private sector alternatives.
We, on the Education Committee, and I was Higher Education
Subcommittee for 6 years, have declared a truce, Chairman
Boehner and Chairman McKeon, between those of us who believe
that direct lending ought to be eliminated, and those who
believe that the private sector ought to be eliminated. We have
had a working truce to make sure there is a level playing
field.
The statistics show that, in fact, private sector lending
has been much more effective. I believe that previously, the
Federal Government gave us misleading, deceitful statistics
about how mixed and fixed costs were allocated, which made
direct lending seem cheaper.
It also shows that when you keep a level playing field, for
example in my district, 10 of the 12 institutions of higher
learning are not direct lending. They have moved to the private
sector and, in fact, have moved to the private sector at an
increasing rate.
It is important, as we debate this, that we understand that
much like when we deal with questions in Postal reform and
others, when the Federal Government tries to bury their fixed
and mixed cost, and then claim they are beating the private
sector, I would hope Members of Congress have enough economic
sense to understand that difference.
I yield back.
Chairman Tom Davis. I thank you very much. Are there any
other Members? The gentleman from Baltimore.
Mr. Cummings. Thank you very much, Mr. Chairman, and I
thank you for holding this very important hearing.
As Congress considers the reauthorization of the Higher
Education Act, we must embrace our moral obligation to ensure
that those who wish to better themselves through a post-
secondary education are able to achieve that goal unobstructed
by the barrier of financial disadvantage. Federal Student Aid
Programs reflect our commitment to that obligation by helping
needy students and families afford a higher education, who
would otherwise be unable to do so.
In today's world of global competition, transformation, and
increased expectations of employee qualifications, there can be
no doubt of the importance of a post-secondary education. In
fact, the Bureau of Labor Statistics recently reported that a
post-secondary education would be essential for 42 percent of
the jobs created in this decade.
The U.S. Census Bureau reaffirmed the value of a post-
secondary education, reporting that those with a Bachelor's
Degree earned, on an average, $1 million more over their
lifetime than those with only a high school diploma.
With record budget deficits, dramatic tuition increases,
and the growing necessity of post-secondary education, the need
to ensure that our Federal student loan programs are effective
and efficient has never been greater. The two major student
loan programs operated by the Federal Government include the
Federal Family Education Loan Program and the Ford Federal
Direct Loan Program.
Under the FFELP or Guaranteed Loan Program, private lenders
supply the loan capital and the Federal Government assumes the
risk by guaranteeing the loan against the borrower's default.
Under the FDLP or Direct Loan Program, loans are financed
directly to the students, using the U.S. Treasury funds.
In fiscal year 2004, approximately $52 billion was
distributed to 12\1/2\ million college students and their
families through Federal Student Loan Programs. Moreover, 25
percent of these loans were made through the Direct Loan
Program, with the larger 75 percent share made through the
Guaranteed Loan Program.
It is unfortunate, however, that more institutions did not
utilize the Direct Loan Program as it is over 10 times less
costly to the taxpayer than the Guaranteed Loan Program.
While improvements in the Guaranteed Loan Program such as
the implementation of standard forms and procedures should be
recognized, I am deeply troubled that these reforms had little
impact on the overall cost to the taxpayer.
The Washington Post reported that the President's own
budget for fiscal year 2006 shows that ``for every $100 spent
on student loans, the U.S. Government pays $12.09 of subsidy on
Government-guaranteed loans, and only 84 cents for direct
loans.'' In contrast, from 1992 to 2004, the Direct Loan
Program saved taxpayers approximately $10 billion in subsidy
costs.
I believe we have a common goal in following common sense.
For this reason, I have co-sponsored the Student Reward Aid
Act, introduced by Representative Petri and Representative
Miller.
This legislation would encourage institutions of higher
education to participate in the Student Loan Program that is
most cost-effective for taxpayers. If more institutions
utilized the Direct Loan Program, we would achieve substantial
cost savings and direct those savings to grant aid such as Pell
Grants.
Finally, Mr. Chairman, in the wake of an announcement that
the University System of Maryland's in-State undergraduate
tuition would rise in the fall by 5.8 percent, a Towson
University student in Maryland was quoted in the Washington
Post as saying, ``You are not offering a higher education to
everyone. You are only offering it to people who can afford
it.''
In clear and plain terms, there is something wrong in
America when capable and driven students are denied access to a
higher education for financial reasons.
By improving Federal Student Aid Programs, we open the door
of opportunity to more students. Mr. Chairman, by providing
students in our Nation with access to an affordable, high-
quality, post-secondary education, we help save our children
and generations yet unborn from the clutches of poverty, crime,
drugs, and hopelessness. What can be more necessary? What can
be more important?
I look forward to the testimony of all of today's
witnesses, and especially recognize Ms. Sarah Bauder of the
University of Maryland, my alma mater. I yield back the balance
of my time.
[The prepared statement of Hon. Elijah E. Cummings
follows:]
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Chairman Tom Davis. Thank you very much.
Yes, Mr. Duncan.
Mr. Duncan. Mr. Chairman, thank you for once again calling
a hearing on a very important topic. Several columnists and
education experts have pointed out that since the start of the
Federal Student Loan Program in 1965, college and university
tuition and fees have gone up at about three or four times the
rate of inflation.
For many years, there was little opposition to increases,
because students were told not to worry, they could just get a
low interest Government loan.
Now many young people are getting out of school with huge
student loan debts, especially if they have gone to a private
school. The average student loan debt is now $18,900. But it is
not uncommon for those who have gone to private universities or
colleges to get out with $50,000 debts, or if they go to
graduate school, too, even $75,000 or $100,000 debts.
According to College Board and the Bureau of Labor
Statistics, tuition and fees have increased almost 300 percent
in the last 20 years. While inflation over that same period has
been 84.7 percent. If the figures since 1965 are included, the
increase over the rate of inflation is even greater.
There is now so much concern, that legislative remedies are
being considered. In the March 8th U.S. News and World Report
of last year, Editor in Chief Mortimer Zackman wrote an
editorial about this problem.
He noted there was a 14 percent increase in tuition last
year alone at public 4-year colleges and universities. He said,
``Only the well off can now afford a college education these
days.'' Nothing will happen this year. But if these whopping
increases continue, the Congress will be forced to take action.
In a new book, called ``Going Broke by Degrees: Why College
Costs Too Much,'' Richard Vetter wrote this. He said, in 1958,
the annual tuition at Northwestern University was $795. In the
fall of 2003, the tuition for new students was $28,404. An
estimate of the 2003 median family income indicates that
Northwestern's tuition would be over 53 percent of an average
family's incomes.
If the ratio of Northwestern's tuition to median family
incomes rises by the same rate over the next 45 years, as it
did over the previous 45 years, the tuition then would
represent almost 2 years of a median family's incomes. That
will just be impossible to bear for mini-families.
I can tell you a very common thing for me, for parents and
grandparents to bring me their college graduate young people.
These are good looking young people with good grades, and they
are unable to find jobs.
So what is happening, because we have sent so many millions
of good jobs to other countries for so many years now, many
students cannot find the good jobs that they used to be able to
find with just Bachelors Degrees, when I was in college.
So all the young people are working as waiters and
waitresses in restaurants, and they are going on to Graduate
School. But then, sadly, they are finding out that they cannot
find good jobs, even sometimes with Graduate Degrees and huge
student loan debts. This is a very serious problem that is
growing very fast. If colleges and universities do not start
doing more to hold down these whopping increases, Congress is
going to have to take action. Thank you, Mr. Chairman.
Chairman Tom Davis. Thank you very much.
Does anyone else wish to make a statement? Ms. Norton.
Ms. Norton. Mr. Chairman, this hearing on the management of
Education Loan Program could not be more timely. Inflation in
tuition is outflanked only by inflation in health care in our
country. We have gotten to the point, of course, where parents
do not so much pay for college tuition as students do, with the
effect that millions of young people are not going to college
at all with the rise in the inflation tuition.
Those who do go and take these loans find that they are
retarded in their start in life. Many of them have to take job
only based on whether the jobs pay enough money to allow them
to pay their student loans and to make a living. They are
moving in with their parents. We have to do something about
this effect on young people.
The Direct Loan Program has had the desired effect, it
seems to me, because it has encouraged changes in the
Guaranteed Loan Fund, and it has encouraged lenders to do what
the private sector is most capable of doing, and that is to
engage in innovations that attract even more students and
parents to their program.
But the difference in the costs of these two programs, Mr.
Chairman, is simply indefensible. We have to come to grips with
that difference. You can explain away this or that part of it.
But the fact is that these are huge differences, and these
subsidies do not go to the student. They do not go to
education. These subsidies go to the private sector.
We have to demand far greater efficiencies from them than
they have been able to produce, since the Direct Loan Program
demonstrated that you can indeed provide this service at a much
reduced amount than had been done previously.
Mr. Chairman, I am particularly grateful for the work you
have done on the D.C. College Access Act. That has caused me to
follow these costs in a way that I did not before. You and I
know that despite the fact that Congress has been generous in
trying to keep up with the costs of this act, that it has
become almost impossible to do.
Indeed, tuition in the United States is going up at an
average rate of 14 percent annually. This is not sustainable.
Anything we can do to cause a U-turn on these costs, not just
gradually reduce these costs over the next generation. But a U-
turn on these costs is going to be necessary if, in fact, we
intend to encourage young people to go to college at the rate
they will need to go in order to keep our country competitive.
I am very interested in this hearing, and I am grateful
that you called it today, Mr. Chairman.
Chairman Tom Davis. Thank you. Let me just say that we are
not trying to engage here in a cost issue. But there are some
issues on costs that we do not have all the facts. That is why
we have asked GAO to come back and look at this.
In past reports, GAO has hinted at problems in revenue
data. The Department of Education data shows that direct
lending subsidy costs have been underestimated by billions of
dollars. But we don't really know, and we are going to wait for
that GAO report to come back in.
What we are looking at today is not the cost debate, but it
is an oversight hearing on the management and performance of
the two largest student programs. I would like to keep the
emphasis there, because from my perspective, we could throw out
all the numbers we want, but until we get that GAO report, at
this point we really don't know what we are talking about.
Mr. Ruppersberger.
Mr. Ruppersberger. Very quickly, Mr. Chairman, a lot has
been said. I think we all agree that students who are
deserving, regardless of their ability to pay, we need to get
them educated. The economic viability and long-term success of
the Nation is dependent upon its ability to enroll, educate and
graduate students. The Federal loan program is the single
largest source of student financial aid.
Unfortunately, with the increase of college tuition, many
students who enroll in college will not be able to afford to
stay until graduation. The efforts of the Department of
Education to bring accountability to its programs are
essential. If we ensure accountability among the borrowers and
the programs that are responsible for day to day operations, it
will send a clear message that these funds should be used for
educational purposes only.
The U.S. Department of Education should further its
programs to teach borrowers about the official use of the money
and require students to prepare budget plans for any additional
use. Thank you.
[The prepared statement of Hon. C.A. Dutch Ruppersberger
follows:]
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Chairman Tom Davis. Do any other members wish to make
opening statements?
If not, we will move to our first panel. We are expecting
votes shortly, so I would like to get your testimony in. We may
have to take about a 15 minute recess, then we will come back
and finish.
We have Ms. Theresa Shaw, who is the Chief Operating
Officer of the Office of Federal Student Aid at the U.S.
Department of Education, and the Honorable John P. Higgins,
Inspector General of the U.S. Department of Education. Thank
you both for being with us.
It is our policy to swear witnesses in before you testify,
so if you will raise your right hands.
[Witnesses sworn.]
Chairman Tom Davis. Thank you so much.
Ms. Shaw, we will start with you.
STATEMENTS OF THERESA S. SHAW, CHIEF OPERATING OFFICER, FEDERAL
STUDENT AID OFFICE, U.S. DEPARTMENT OF EDUCATION; AND JOHN P.
HIGGINS, JR., INSPECTOR GENERAL, U.S. DEPARTMENT OF EDUCATION
STATEMENT OF THERESA S. SHAW
Ms. Shaw. Good morning, Chairman Davis, Ranking Member
Waxman, and members of the committee. Thank you for inviting me
to testify today.
I am Terri Shaw, the Department of Education's Chief
Operating Officer for Federal Student Aid. I am pleased to be
here representing Secretary Spellings, the Department, and the
very talented and dedicated Federal Student Aid staff.
The Department of Education's grant, loan, and work
programs represent the largest source of student aid for post-
secondary education in the United States. In 2004, these
programs provided approximately $69 billion to more than 10
million students and their families.
Federal Student Aid, under the direction of the Secretary,
is charged with operational responsibility for oversight and
administration of all the Department's Federal student
financial assistance programs and as one of the Government's
few performance-based organizations, upholds high standards of
operational efficiency, innovation, and customer care.
To carry out these purposes, Federal Student Aid is focused
on delivering world-class customer service, developing award-
winning products and services, effectively managing the
programs to ensure fair and effective oversight, and providing
service delivery at the lowest cost without sacrificing
quality.
I would like to share some statistics that illustrate the
size and scope of our enterprise. We receive and process over
14 million FAFSA aid applications each year. We have
dramatically transformed the FAFSA process from a 100 percent
paper to nearly 90 percent Web-based.
We are the single largest lender of student loans, annually
originating nearly $13 billion in new loans. We service the $87
billion outstanding portfolio of Direct Loans. The Department,
through Federal Student Aid, provides over $12 billion in
Federal Pell Grants to more than 5 million undergraduate
students each year. We are responsible for collection on the
$17 billion defaulted student loan portfolio, and we manage and
monitor $500 million in contracts under which our major
business processing functions are performed.
We are particularly proud of the Department's and Federal
Student Aid's recent achievement of a major President's
management agenda, Government Accountability Office and
departmental objective by reducing the vulnerability of the
Federal Student Aid programs to risk. In January 2005, GAO
removed the Federal Student Aid programs from its high risk
list. Additionally, in March 2005, we achieved all green status
on the scorecard used by the Office of Management and Budget
for monitoring our progress and status.
You asked me to highlight some of the initiatives that
resulted in these achievements. Simply stated, the Department
made reducing vulnerabilities in the programs and the removal
of the Student Aid Programs from the High Risk List a top
priority. We institutionalized sound financial management and
received clean audit opinions for the past three fiscal years.
Working with all participants across the program, the cohort
default rate was reduced from an all-time high of 22.4 percent
to an all-time low of 5.2 percent.
We implemented ongoing processes to identify risk and have
several initiatives underway, including a joint task force with
the Department's Office of Inspector General to identify real
or potential risks. We developed a multi-year sequencing plan
for system and business process integration. Our two principal
initiatives re-engineer our front end and back end systems and
business functions, and together will save taxpayers an
estimated $1\1/2\ billion.
Our independent customer satisfaction scores for our
electronic FAFSA are comparable to UPS, Mercedes Benz, and
Amazon.com; for our direct loan servicing, better than Wachovia
Bank and similar financial services institutions. And for our
Pell Grant and Direct Loan origination, better than e-Trade.
The Department is committed to ensuring the integrity and
viability of both the Federal Family Education Loan and Direct
Loan program. The availability of choice has made both programs
stronger through competition, has been the catalyst for
innovation, has forced standardization of data exchange
methods, and most importantly, has appropriately directed the
focus on service to students and parents and to the higher
education institutions who are on the front lines serving them.
Your invitation asked me to suggest recommendations for
legislative changes needed to improve the management of the
Federal Student Aid program. Changes may be necessary in the
Performance-Based Organization authorizing legislation. The
Department is in the process of developing its legislative
recommendations for the upcoming reauthorization of the Higher
Education Act. Any changes related to human capital management
will complement the administration's Government-wide Civil
Service reform, announced in the fiscal year 2006 President's
budget.
I believe that in order for Federal Student Aid to be made
most effective, it must be able to operate more like a private
sector business than a traditional Government agency. I am
fully aware of however, of our special responsibilities to
taxpayers, employees and our business partners.
I would also like to highlight a legislative proposal that
the administration has supported for several years: an
amendment to Section 6103 of the Internal Revenue Code that
would allow for the matching of student aid applicant data with
IRS tax information. We believe that if this change is enacted,
we could eliminate many burdensome processes that are currently
used to verify student aid applicant data and further simplify
the process for applicants, their families and schools.
Additionally, we could significantly reduce improper
payments due to inaccurate income reported by applicants. For
example, reducing these improper payments could lead to
significant cost savings of approximately $300 million annually
in the Pell Grant program.
In closing, I am honored to be part of Secretary Spellings'
team and the Department of Education, an organization that
plays such a central and essential role in our Nation. We
ensure that all eligible Americans can benefit from federally
funded financial assistance for education beyond high school,
and we consistently champion the promise of post-secondary
education for all Americans and its value to our society.
On behalf of the Secretary, the Department, and the Federal
Student aid staff, thank you all for the opportunity to share
with you our performance and accomplishments. I would be
pleased to answer any questions the committee may have.
[The prepared statement of Ms. Shaw follows:]
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Chairman Tom Davis. Thank you very much.
Mr. Higgins.
STATEMENT OF JOHN P. HIGGINS, JR.
Mr. Higgins. Mr. Chairman and members of the committee,
thank you for the opportunity to appear before you today to
discuss the management and the performance of the Federal and
Direct Loan Programs.
As you know, these loan programs are large and complex and
through the Department disperses or guarantees tens of billions
of dollars every year. Like these and other student aid
programs that were recently removed from the GAO high-risk
list, an accomplishment for which Ms. Shaw and her staff should
be commended, nevertheless, they continue to present
significant management and oversight challenges.
Last December, Terri and I initiated a joint effort to
identify patterns of fraud and abuse in the Student Aid
programs and to recommend improvements. We called this the OIG-
FSA Joint Fraud Initiative. Working in collaboration, our staff
has identified 11 risk categories that represent areas in the
life cycles of the programs that are vulnerable to fraud and
abuse. We have established work groups to focus on the three
categories that begin the student aid process and that have
been the subject of frequent audits and investigations. I will
focus on these three risk areas today.
The first risk area is the falsification on the pre-
application for Federal student aid. Information contained in
this application determines an individual's initial
eligibility. False information on the application, particularly
under-reporting of income, often results in an applicant
receiving student aid to which he or she is not entitled.
The Department has not estimated the effect of mis-
reporting of income on the student loan programs. However, it
has estimated that $365 million in Pell Grants were over-
awarded in fiscal year 2003, because applicants understated
their income. This problem has grown since my office first
identified this in 1997 an estimated amount to be $177 million
of over-awards in fiscal year 1996.
The second risk area category is identity theft. Identity
theft typically occurs when a person intentionally uses someone
else's name, Social Security Number and date of birth to
fraudulently obtain student aid. People who obtain loans
through identity theft almost always default on these loans.
Our investigations continue to aggressively pursue
individuals who steal by mis-using the identities of others.
For example, we found an individual in Arizona who used more
than 50 identities, typically those of inmates serving long
prison terms, to obtain over $316,000 in loans and grants. This
scheme was unraveled when a sharp financial aid administrator
at a local community college recognized the thief as the person
who had previously picked up another loan check belonging to
another identity.
As a part of his plea agreement, the individual described
his scheme in an interview with us. We have included his
interview in this educational DVD intended to increase
awareness of i.d. theft. We have provided copies of this DVD to
Department officials, campus police, Members of Congress and
your committee staff. I would be happy to supply more if you
would like.
The third risk area is school fraud and abuse. Over 6,000
schools participate in the student aid programs and the
Department relies upon these schools to properly account for
and administer the funds. Fraud and abuse by school owners and
officials has been a longstanding problem for the Department.
While fraud and abuse does occur at non-profit and public
sector schools, historically the majority of my resources has
been devoted to fraud and abuse involving proprietary schools.
In fact, over the last 6 years, 74 percent of the schools
involved were proprietary schools.
In my written testimony I provided you with information on
the other risk areas of the fraud initiative. I also discussed
my work plans for the following year and recommended
legislative changes. This concludes my statement. I would be
happy to answer any questions.
[The prepared statement of Mr. Higgins follows:]
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Chairman Tom Davis. Thank you both very much.
Let me start, Ms. Shaw, with you. Paraphrasing your written
statement, the availability of choice has made both loan
programs stronger through competition. It has been the catalyst
for innovation, has forced standardization of data exchange and
directed focus on service to students, parents and schools.
Can you give us more specifics on the enhanced services to
students, parents and schools that you are talking about?
Ms. Shaw. Yes. I mentioned, for example, the fact that we
have converted what was a paper process, the Federal
application, pre-application for Federal Student Aid, which was
100 percent paper-bound. We have now migrated that to nearly 90
percent electronic via our Web services. Practically every
provider out there has Web-based services now under both
programs, either the Pell or the Direct Loan. It all begins
with the FAFSA form and application process and goes all the
way through the back end on the servicing side where you can do
online payments, you can do electronic debiting, and basically
self-service to borrowers on the back end.
So all throughout the entire life cycle of the borrower's
experience with student aid, everything has been migrating
toward Web-based services and streamlined processes for
everybody.
Chairman Tom Davis. I was looking at how much money was
being spent on the administration of these student aid
programs. These numbers I have gotten from the Department of
Education show that prior to the beginning of direct lending,
the Department was spending about $120 million on administering
student aid programs. Last year it was $720 million, a sixfold
increase.
Why has the spending gone up so much? Is it the amount of
loans going out? Do you know the reason?
Ms. Shaw. The way, what we do in Federal Student Aid, I try
to look at our budget numbers from three aspects. One, our
staffing expense; two, what I call our baseline operation, or
operating expenses, everything from travel to our equipment, to
our contracts for IT and services, and down to other
administrative expenses, that being the account maintenance
fees, subsidies and contract collection costs.
Yes, things are driven by volume. We have had roughly since
2000 I believe around a 60 percent increase in loans coming
into the system that go all the way through the application
process, through the various delivery models and mechanisms,
either through the Direct Loan process or through the Pell
process.
So yes, some of it is volume-based, for sure. We in Federal
Student Aid, in particular in the past several years, have been
making investments of dollars to modernize our systems, to
integrate our different processes and systems together. For
example, I mentioned in both my written and verbal testimony,
we have two major initiatives underway right now to basically
overhaul all our back-end processes, direct loan servicing,
direct loan consolidation, our collection processes, into a
single solution.
We just launched a new project to do the very same thing on
the front end part of our business processes to bring together
everything from aid awareness to application processing to Pell
Grant delivery, origination and disbursement of those funds
under direct loans as well. Those things require money to make
investments, but they also deliver savings over time.
Those two initiatives alone will save taxpayers over a
billion and a half dollars over the 10-year terms of those
contracts, over what would have been spent, had we not
undertaken those initiatives. So some of it is investment. Some
of it is driven by volume growth. Some of it is down to us
being, staff costs growth, for example, our staff has been
reduced over 19 percent, but the costs are higher, even though
our staffing is lower. So it is a combination of factors, Mr.
Chairman.
Chairman Tom Davis. Are there problems with schools
reconciling accounts under the Direct Loan Program?
Ms. Shaw. No, in fact, we substantiate disbursement of
dollars through our common origination and disbursement system,
within 30 days of those funds being delivered at close to 100
percent level.
With that said, when the common original and disbursement
system was first rolled out in 2002, there were some typical
system roll-out issues that have been worked through. For the
most part, I believe that schools are able to use that system
to appropriately reconcile their funds. We have put into place
systems and processes and internal controls so that, in fact,
we do substantiate those funds at nearly 100 percent each
month.
Chairman Tom Davis. I have been told that several hundred
schools have left the Direct Loan Program, since they joined
it. Do you know why schools have left it? Is it based on size,
location, or type of school, or are there any regulatory
barriers. Is this going to cause a problem in sustaining the
Direct Loan Program?
Ms. Shaw. The outflow of schools stayed fairly steady
around 25 percent. We have around 1,100 schools participating
in the program right. Our volume is actually up this year, even
though the net school in and out remained relatively constant
over the past few years.
Now we deliver $13 billion of loans annually. That was our
2003 delivery. It will be similar this year and maybe slightly
higher. I do not see that the number of schools, per say, as it
stands right now, is a threat to the viability of the program.
Chairman Tom Davis. Has there been a decrease in the number
of schools?
Ms. Shaw. Oh, from the inception, yes. We are about 1,100
now. I believe at its peak, it was slightly over 1,300. I
believe it was 1,365 in the first and second year of the
program.
Chairman Tom Davis. OK, thank you.
Mr. Sanders.
Mr. Sanders. Thank you very much, Mr. Chairman, and thank
you very much for holding a hearing on an issue that I think
concerns middle class families from one end of this country to
the other.
But before we turn to the loan programs that are the
subject of this hearing, let me, if I might, speak a little bit
outside of the box. That is, to make the point that I think
everybody in this room knows, that over the last many years,
there has been a significant shift in terms of Federal programs
from Direct Grant Programs, such as the Pell Grant, to loan
programs.
Mr. Chairman, before we get too much into the nitty-gritty
of this or that loan program, I think somebody up here should
say that there is something wrong when the United States of
America is the only major industrialized country on Earth,
which forces its students and its families to pay so much to go
to college, and leaves so many people deeply in debt.
In my office right now, there is a young lady who has
incurred a $100,000 debt for college. We have several who have
gone to law school. It is the same thing.
Now if we are going to be competitive with the rest of the
world, if we are going to utilize the intellectual expertise
with the capabilities of our young people we want to encourage
people to go to college. With an economy in which the middle
class is shrinking, people are having a hard time surviving.
What we are seeing is a lot of low income and middle income
kids saying, gee, I do not want to go to college. I am not
going to be able to go to college.
So Mr. Chairman, let me be on the record right now in
making a very simple statement. I think the United States of
America and this Government have to guarantee the right of
every young person in America who has the ability, and not
everybody does, who wants to go to college, to be able to go to
college, regardless of their income. That is what we should be
doing.
We should be moving away from loans and moving back into
grants. A government which can provide hundreds of billions of
dollars in tax breaks to the wealthiest 2 percent of our
population can surely guarantee that every family in America is
able to send their kids to college, without going deeply into
debt.
Mr. Chairman, my understanding is that of the two main
student loan programs that provide essentially the same loans
and interest rates to students, one costs American taxpayers
billions more every year than the other. The Federal Direct
Loan Program is, by any measure, a huge success. It secures
loan capital at a lower rate. It eliminates the middlemen, and
cuts out billions of unnecessary subsidies to banks.
The other, the Federal Family Education Loan Program, has
taxpayers underwrite and subsidize loans issued by private
lenders and banks. These loans bear virtually no risk for
private banks, yet have an assured rate of return and are
guaranteed by the Government.
According to President Bush's 2006 education budget, for
every $100 spent on student loans, the U.S. Government pays
$12.09 of subsidy on Government-guaranteed private loans. That
is over 12 percent of subsidy, and only 84 cents for Direct
Loans. I think that is the issue that we are going to have to
address today.
Chairman Tom Davis. Is that a question to the panel?
Mr. Sanders. Yes, my question is, what is the debate about
when one program costs over $12 to maintain in administrative
costs, and one costs 84 cents?
Chairman Tom Davis. Does the IG want to hit that today? I
know we have a GAO study, looking at those numbers to see if
they are accurate.
Mr. Sanders. This is what the President of the U.S.' people
have said.
Mr. Higgins. I do not know where those figures came from.
Chairman Tom Davis. We will ask IG what he thinks.
Mr. Sanders. They came from OMB. That is my understanding.
Mr. Higgins. OK, I only can tell you that my office, in
1997, tried to make a comparison of the administrative costs
between the two programs. Because the Department does not have
a cost accounting system, it was very difficult to do that.
We did come up with the conclusion though that the Direct
Student Loans administrative cost, back in 1997, was about $17
per loan, while there was a Treasury study that said that with
a large bank, it cost $13 a loan to administer. We have done no
other work since then on this.
Mr. Sanders. But do you disagree with the President, in his
own education budget, which gives the facts that I have given
you?
Mr. Higgins. I do not disagree or agree, because I do not
know what is behind it.
Mr. Sanders. I understand that the CBO has come up with a
similar conclusion.
Chairman Tom Davis. Ms. Shaw, do you have any information
on this?
Mr. Sanders. Ms. Shaw.
Ms. Shaw. No, I agree with the Inspector General. I have
not studied the numbers in the President's budget. In fact,
what Federal Student Aid does, we operationally administer the
programs. My job, in running Federal Student Aid, is to ensure
that it operates efficiency for all of the programs we
administer, and to reduce costs and manage costs wherever we
can, be it the Direct Loan Program, the Pell Grant Program, the
FELL Program, Work Study Programs.
So my job is to operationally make Federal Student Aid as
efficient as possible. Granted, numbers come from our operation
that feed into everybody's studies.
Mr. Sanders. Mr. Chairman, sorry, I would just conclude by
saying that the numbers that I have given come from the
President of the United States' 2006 education budget. That is
all that I would say.
Chairman Tom Davis. Let me say, we have asked GAO to look
at this. GAO has hinted in the past that there are some
problems and that the numbers were based on assumptions. Nobody
has ever checked the assumptions over several years. Now being
in operation, we will have a better handle on it when, I think,
the report comes back in September, at that point.
Basically, we are trying to look at the efficiencies today.
We will just know more about the costs. Maybe, Mr. Sanders, it
will be borne out and maybe there will be different numbers
when we come back in September. I think our panelists here who
work with these really are not prepared to say, either way,
because you do not know how to measure that. Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman. Mr. Chairman, thank you
for having this hearing, and thank you to both our first panel
and our second panel. I always appreciate the work of
Government officials who are serving our country, and thank
you.
I just want to say, I have less trouble with students
having debt for graduate school than I do for under-graduate
school. I just hired a young man, an under-graduate, who has
$90,000 worth of debt. I would be less concerned about his debt
if it were for law school or for medical school and so on.
I also will just say that when I was on the Budget
Committee for 10 years, one of the most interesting facts was,
as we increased grants to schools, the students did not get
them. The schools either raised their tuition, or gave less of
a discount to the students. So if they were giving a $3,000
discount or $4,000, they gave $2,000. They said the student had
more money and qualified.
So the unintended consequence, frankly, was we were seeing
college costs go up significantly, without the students'
benefit. I realize that is not really the subject of the
hearing. But I just want to put it on the table.
I want to know how the Department of Education recognizes
or certifies foreign schools. Is there a list of foreign
schools that are pre-qualified? How do you know that they are
for real?
I would also say, I have that same issue on online
education. I want to know how we know this online education is
for real, and whether this is not somewhat of a sham that
students get caught up in. I will start with you, Ms. Shaw.
Ms. Shaw. On the foreign school topic, actually working
with the Inspector General, they issued a report to us. We
bolstered our processes and procedures around that.
We try to do onsite visits, you know, eye ball sites, to
see if there is really an institute there, bricks and mortar,
if you will. For foreign institutions, we do a variety of other
reviews and checkpoints with other Government agencies.
Mr. Shays. Does that result in your decertifying a school?
Ms. Shaw. I am sorry, I did not hear the first part.
Chairman Tom Davis. Just 1 second.
Mr. Shays. Does that result in the decertifying of a
school? Has it? I mean, are there cases that you decertified
schools?
Ms. Shaw. I do not have that information at my disposal
today. I can check on that and get back to you on that in a
written format.
If we find out that, for example, when a school is in the
application phase, that there is nothing there, and they do not
meet the criteria, they are not going to get certified to
participate in the programs. If, in a regular review of a
school that has been approved to participate in a program, we
find that there are issues substantial enough to limit their
participation, then we will do that, as well. I can check on
the numbers for you, though.
Mr. Shays. Yes, if you would provide it to the committee.
Ms. Shaw. Sure.
Ms. Shays. You have many applications, so you do a
preliminary. But once a school has been approved, do you ever
de-certify?
Ms. Shaw. Have we ever decertified schools?
Ms. Shays. Yes.
Ms. Shaw. Yes, as a general statement, we do decertify
schools. With respect to foreign schools, I do not recall off
the top of my head if we have decertified any during my tenure
there, but I could double check.
Mr. Shays. The question would be, and I do not need an
answer now if you do not know, once you have certified a school
overseas, do you periodically go back and check?
Ms. Shaw. Oh, yes, we do program reviews and other checks,
yes.
Mr. Shays. Site visits?
Ms. Shaw. Where appropriate, we do site visits, yes.
Ms. Shays. Mr. Higgins, can you respond to these questions?
Mr. Higgins. Yes, my office has done a lot of work in the
foreign school area. We have done a lot of work in that area,
and as a result, we have made some recommendations to Terri's
office, which she has implemented. We recommended that the
guaranty agencies, before they make a disbursement, they ensure
themselves that the student has matriculated at the school.
I also have two recommendations in my testimony to strength
that also, where the second disbursement is not until there
they know that this student is actually going to school. That
is also a recommendation. We also have a recommendation that
payment does not go to the student until after the
matriculation is confirmed.
Mr. Shays. Let me just conclude by saying, I appreciate the
Department of Education working with our Inspector General. I
think that there is much to be learned from our Inspector
Generals in the GAO reports. When we do that, we provide better
programs. So thank you for doing that.
Chairman Tom Davis. Thank you.
Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman, and I thank you
for holding this hearing. I also serve on the Education Work
Force Committee, so I am pleased that Government Reform is also
looking into this issue.
I think we would all agree that we want to make sure that
Federal taxpayers' dollars go as far as possible in providing
our students with help in the form of grants and loans in their
education.
In that connection, I would like just to talk about the
9\1/2\ percent loans. You are familiar with that issue, I
assume. Is that right?
Ms. Shaw. Yes.
Mr. Van Hollen. For the benefit of the committee, these are
loans that are essentially guaranteed return for the lender at
9\1/2\ percent. There are a number of lenders that are still
taking advantage of this program. Last year, the Congress
passed an amendment. It was a 1-year legislation that addressed
a part of the issue. But it did not deal with the whole issue.
We still allow recycling of these 9\1/2\ percent loans.
The Congressional Budget Office has made it clear that if
we close this loophole, we would save the taxpayer over $1
billion over 5 years. Mr. Chairman, you referenced GAO reports.
The GAO looked at this and made it clear that we could have
substantial savings to the Education program if we closed this
loophole. My question is very simple. Does the Department of
Education support closing the 9\1/2\ percent loan loophole?
Ms. Shaw. I believe the Department of Education does.
Mr. Van Hollen. In its entirety?
Ms. Shaw. To the best of my knowledge. The question might
be better answered by the Office of Post-Secondary Education.
The Department supported the recent amendment, the Cunningham
amendment, that closed it. I know there is more work to be
done. I have read all the materials, and to the best of my
knowledge, yes. We monitor the billings on a quarterly basis by
all lenders in the program. We are watching it very closely.
Mr. Van Hollen. All right, well, Mr. Chairman, I would hope
that we could take a position as a committee on a bi-partisan
basis, that we should shut down this subsidy. There is no point
in continuing the recycling of these funds.
Let me ask you a question with respect to the other loan
programs. I agree with the chairman, that it is important to
have a healthy competition between the FFELP Program and the
Direct Loan Program. However, there is a provision in law that
essentially prohibits the FFELP Program participants from
offering inducements to colleges and universities to switch. In
other words, using special incentives and, for example,
promises to pay private loans to students who otherwise would
not qualify. Are you familiar with those provisions?
In fact, I believe it was in 2003 the Inspector General's
Office did a study of this issue. We have a memo here, Mr.
Chairman, that I would like to submit for the record on that
issue, where you looked into that question, and made a
recommendation that the Department clarify its guidelines on
that issue.
You specifically looked at a situation where Sallie Mae had
negotiated a deal with Pace University. You looked into the
different facts and concluded that this was an area that needed
further clarification and made a recommendation to that effect.
Do you know whether the Department followed the recommendations
of the IG in that regard?
Mr. Higgins. No, I do not know whether they did or not.
Mr. Van Hollen. Were you at the Department at the time?
Mr. Higgins. Yes, I was.
Mr. Van Hollen. Is there any mechanism for followup here? I
mean, there have been a number of serious issues in connection
with this. I am just wondering whether the Department took any
action following your recommendations?
Mr. Higgins. I do not know. I can check on it and get back
to you for the record, if you want me to.
Mr. Van Hollen. If you could, I mean, you would agree,
would you not, that the law prohibits this kind of inducement
to switch programs?
Mr. Higgins. On the part of--yes. What we also found was
that colleges and universities were out there soliciting
incentives. So we found the opposite of what the law was
prohibiting. The players switched places.
Mr. Van Hollen. All right. I just would ask, in your
capacity as Inspector General, that you let Members of Congress
know if the Department is now following through on your
recommendations. I appreciate getting some feedback on that. I
would hope that the Department, if it has not taken action,
would do so quickly.
Thank you, Mr. Chairman.
Chairman Tom Davis. OK, thank you, I think what we will do
at this point is recess and be back in about 15 minutes, if you
can hang around for some additional questions, thank you.
[Recess.]
Chairman Tom Davis. Ms. Shaw, I'll just start while waiting
for other Members to come back. My understanding is that most
of the money for administering student aid programs is money
that is provided in an entitlement account.
Ms. Shaw. I am sorry, I could not hear you.
Chairman Tom Davis. Most of the money is from entitlement
accounts that administer student aid programs. Is that right?
Ms. Shaw. From the 458 account, if that is what you are
referring to?
Chairman Tom Davis. Yes.
Ms. Shaw. Yes.
Chairman Tom Davis. So the salaries and expenses are
considered entitlement spending. In other words, whatever it
is, it is, and it is paid for, and if the President's budget
makes a change in that, to move it to appropriated funds. In
other words, you have a ceiling under appropriated funds,
entitlement funds. The cost is what it is, and it is paid for
out of the program. Is that correct?
Ms. Shaw. Mr. Chairman, I am not the budget expert in all
of the funding and the movement of funds behind the scenes. I
can find out the answers.
Chairman Tom Davis. Here is my understanding. It is
mandatory. Do you know the answer to that, Mr. Higgins?
Mr. Higgins. I think you are right.
Chairman Tom Davis. OK, and my understanding is that
mandatory administrative money is like a slush fund. I mean, if
you do not spend it in 1 year, you roll it over and you can
spend it in the next. Is there oversight on these expenditures,
do you know, Ms. Shaw and Mr. Higgins?
Ms. Shaw. Oversight on the expenditures and money that is
used 1 year?
Chairman Tom Davis. No, in the entitlement fund.
Ms. Shaw. Mr. Chairman, I am not the budget expert.
Chairman Tom Davis. OK.
Ms. Shaw. We certainly manage the money that we use in
Federal student aid to deliver aid to students. We run our
operation more like a business that you would find in the
private sector. I look at the operating expense, much like a
business would. The budget services group within the Department
of Education does all the budget wizardry behind the scenes.
But with that said, we clearly monitor and oversee all
spending from the Federal Student Aid Office. In fact, we talk
about it regularly. We have a regular budget meeting in my
office to examine every spend out of our office.
Chairman Tom Davis. From your testimony, I understand that
FSA contracts with an estimated 6,000 contract staff. Is that
about right?
Ms. Shaw. Yes, we have about a half a billion dollars in
outsourced agreements with the various providers that do our
business functions under our monitoring.
Chairman Tom Davis. In Inspector General Higgins' written
testimony, he referred to two audits that found FSA lacked
oversight of contract deliverables, and did not ensure a
continuation of service and adequate audit access to the
systems.
Ms. Shaw. Yes, he did.
Chairman Tom Davis. The interface problems between systems
has caused some problems. Can you comment on what you are doing
to correct this?
Ms. Shaw. What we have done, the specific audit you are
referring to, our contracts, one of them was our common
origination and disbursement system. That particular contract,
which is nearing completion at the end of 2006 was a share and
savings contract. That contract was atypical in that regard.
What we have done with all of our contracts is, we have
bolstered our contracts and acquisitions management team,
including pricing experts and the Federal acquisition
regulation experts. We do regular contract reviews. We work
very closely with the Office of the Chief Financial Officer in
the department and the Chief Acquisition Officer within the
department, to make sure that we are totally in compliance with
all rules and regulations.
With that said, we also, within Federal Student Aid, have
Federal staff closely monitoring all agreements at this point.
I think the Inspector General, in some of his prior year
findings, was probably accurate that we could be better in that
regard, and I believe we put in new process and procedure and
focus on that. I believe that we are better.
Chairman Tom Davis. Mr. Higgins, let me ask you, how much
money does the Student Loan Program lose to waste, fraud, and
abuse annually, and what is the main cause?
Mr. Higgins. We do not have that figure. We do know that
the department reported in the PELL grant program improper
payments of $365 million in 2003. Then there was $131 million
of audit and program liabilities that they also reported. But
we do not know what that figure is.
Chairman Tom Davis. What is the collection ratio on loans
from the Direct Lending Program, have there been any problems
with that?
Ms. Shaw. I am sorry?
Chairman Tom Davis. The collection, in terms of being able
to collect on the loans under the direct lending program.
Ms. Shaw. No, actually, under the Direct Loan Program, we
are in possession of all of the data with respect to each loan.
Actually, it is a little easier for us, because we have all of
that data. When loans are subrogated to us for collection from
the Pell Program, we do not necessarily have the depth and
breath of data that we have on the Direct Loan Program, because
have originated a direct loan.
Chairman Tom Davis. But my question is, how are you
collecting it? Are there any problems?
Ms. Shaw. No.
Chairman Tom Davis. You are doing just great.
Ms. Shaw. Well, we certainly are doing better than we ever
have. We contract out our services to around 13, I believe,
private collection agencies. They compete with each other, with
respect to collections.
Chairman Tom Davis. Is that a share and savings contract,
or is that on an hourly basis?
Ms. Shaw. No, it is not a share and savings contract. They
earn based on their performance, which is different than a
share and savings contract. So those collection agencies are
doing quite well, and that incentivized process that we have
and the contracts that we have in place have bolstered our
collections across the direct loan portfolio.
Chairman Tom Davis. How much money do you lose annually, in
direct lending, on loans that are uncollected?
Ms. Shaw. I do not know the answer to that question. I will
have to get back to you on that.
Chairman Tom Davis. Obviously, you lose whatever you pay
out to the private sector to collect. That is a loss, right?
Ms. Shaw. Right, but for every dollar we spend in
collections, I believe we recover another $7 or $8.
Chairman Tom Davis. Right, so my question is, what does it
cost you annually, as you outsource this to other areas in the
amounts uncollected, do you know?
Ms. Shaw. We spend, I believe, in the area of $200 million
to $250 million a year in private collection costs. I believe
it was last year that we recovered, on our portfolio, meaning
the $17 billion portfolio, about $1\1/2\ billion.
Chairman Tom Davis. You do not know how much just never
gets collected, even after you outsource the collections,
right?
Ms. Shaw. No, I could get that figure for you. I do not
have it.
Chairman Tom Davis. It may not be important, but it is at
least a quarter of a million you are paying to collect it, and
then on top of that. I do not know if the GAO has that. I think
if you are really comparing the two, you need to understand, on
one side, you are eating up the cost of collecting the loans.
On the other side, the taxpayers are paying that. That has to
be part of the equation.
Because we get a lot of numbers thrown around here, in
terms of this being more efficient than the others, the
estimates, and nobody really knows what the numbers are. Even
if you give me that, that gives me a piece of the pie. But I
think that would be interesting.
Ms. Shaw. I can get that for you.
Chairman Tom Davis. Mr. Higgins, first, I want to commend
you on your efforts to analyze patterns of fraud and abuse in
the Student Financial Assistance Programs, and you are reaching
out to the FSA staff to coordinate those efforts.
One of the areas you mentioned in your written testimony
involves FAFSA, the Free Application for Federal Student Aid.
You estimate that under-reporting of income on these
applications resulted in $365 million over-awards in Pell
Grants in 2003, which was up from previous years, and state
that the Department has not estimated the effect of mis-
reporting of income on Student Loan Programs.
How might they better contain this? I mean, I have filled
out a FAFSA loan, too. I am like many parents, suffering from
``mal-tuition.'' [Laughter.]
You know, you kind of take their word for it when they fill
out the loan.
Mr. Higgins. Well, there are not a lot of matches made
around eligibility. But we think the most effective match would
be the IRS match. The authority for that was given to the
Department of Education. But Treasury has not been given the
authority to perform this match with us. All we are looking to
do is confirm the income that is reported to us.
Chairman Tom Davis. That makes sense. That is not your
fault. That is Treasury's fault for not giving you the numbers
so you can cross-reference everything. Is that correct?
Ms. Shaw. Right, we cannot do a match with them right now,
as we would like to do.
Chairman Tom Davis. That is probably the easiest way to
find out if these numbers are accurate. That is something that
the committee can look at, since we have a piece of
jurisdiction on that. That is all for right now. I am going to
ask Mr. Clay if he has any questions.
Mr. Clay. Thank you, Mr. Chairman.
Let me start with Mr. Higgins. Your office has looked into
waste and abuse in federally funded loan guaranty agencies,
such as USA Funds and PHEAA. One concern that the IG has
expressed is the existence of conflicts of interest on the part
of guaranty agencies.
In 1993, the IG found that many of the guaranty agencies
that they investigated were affiliated with loan service
providers that they are required to monitor. The IG concluded
that billions of dollars of the Nation's guaranty loan
portfolio are at risk because many guaranty agencies have a
clear conflict of interest.
I am curious about the current status of these conflicts of
interest. Has your office continued to monitor guaranty
agencies for the existence of conflicts of interest, or are
there still problems in this area?
Mr. Higgins. That audit, initially, the Department
sustained our finding in that audit, and it was overturned in
appeal. The Department thought that because the sub that we
were talking about had its own tax identification number, there
was enough separation and it was not a conflict of interest. I
think that is the report you are speaking to.
Mr. Clay. Yes, I still encourage you to vigilantly monitor
the issue. Conflicts of interest are a problem that could
potentially cost the taxpayers millions of dollars.
In 2003, you audited 9 of the 35 guaranty agencies and
identified $164 million in waste and abuse. For instance, at
one agency alone, you received over $100 million in excess
Federal funds that the Department of Education did not even
know it had overpaid. Your findings regarding the nine agencies
audited suggest that a comprehensive audit of the guaranty
agency might find significant additional waste and abuse. Since
2003, have you audited additional guaranty agencies?
Mr. Higgins. No, we have not looked at more than the
original nine. But we did recommend to the Department that they
look at the additional guaranty agencies.
Mr. Clay. Have you conducted followup audits of those
original nine?
Mr. Higgins. We are monitoring the status of the resolution
of the nine audits. All those nine have not been resolved. To
my knowledge, they have not done the followup audits as far as
the split on the Federal expense account.
Mr. Clay. Are they part of your work plan for this year?
Mr. Higgins. Part of Ms. Shaw's work plan or my work plan?
Mr. Clay. Ms. Shaw's.
Ms. Shaw. We have a work plan to do program reviews and
audits of schools, lenders, and guaranty agencies, the
servicers that participate in the programs. Yes, we are
focusing in on the guaranty agencies, and our oversight of
them, and doing onsite reviews.
I do not recall off the top of my head the specific nine
that you are referencing. But yes, we do have plans for not
only this year, but in 2006 to do onsite reviews at guaranty
agencies, as well as other participants in the program.
Mr. Clay. Well, I would hope so. Because the fact that you
uncovered $164 million in abuse in an audit of only a quarter
of the guaranty agencies suggests to me that it would be
worthwhile to take a deeper look.
Ms. Shaw. Certainly.
Mr. Clay. Mr. Chairman, that is all that I have for now.
Chairman Tom Davis. Well, thank you very much. I know Mr.
Kucinich wanted to ask questions, but he is not here. So we
will move on to the next panel. I want to thank you both.
Particularly after the GAO audit is out, we may want to get you
back here. But we will coordinate that with the Education and
Workforce Committee on that. Thank you very much.
Ms. Shaw. Thank you.
Chairman Tom Davis. We will take a 2-minute recess before
we call our next panel.
[Recess.]
Chairman Tom Davis. This is a distinguished panel, and I
want to thank them all for coming to Washington today and
sharing their wealth of experience. We have Dr. Allen Merten,
who is the president of George Mason University. We have Ms.
Sarah Bauder, who is the director of student financial aid at
the University of Maryland.
We have Nancy Coolidge, the coordinator of Federal student
financial support, Office of the President, University of
California, who was already introduced by Mr. Waxman. We have
Natala Hart, who will be back in a minute, and Cynthia
Thornton, the director of student financial aid at Dillard
University.
Let me just say, we are happy to have all of you here, and
Dr. Merten, particularly, I am happy to have you here. We are
just proud of the job you are doing at George Mason. I am
really pleased that you are in my district.
I am very proud of the fact that George Mason has two Nobel
Prize winners now. I will just let everybody know that. It
heads up a lot of the very basic research in a number of areas,
from computer science to brain surgery. We are just very happy
to have you here.
It is our policy that we swear everyone before you testify.
So let me start with you, and I will get Ms. Hart when she
comes in. If you will just raise your right hands.
[Witnesses sworn.]
Chairman Tom Davis. Dr. Merten, we will start with you.
Thank you for your patience, and just again, we are very happy
to have you here today.
STATEMENTS OF ALAN MERTEN, PRESIDENT, GEORGE MASON UNIVERSITY;
SARAH BAUDER, DIRECTOR OF STUDENT FINANCIAL AID, UNIVERSITY OF
MARYLAND; NANCY COOLIDGE, COORDINATOR, FEDERAL STUDENT
FINANCIAL SUPPORT, OFFICE OF THE PRESIDENT, UNIVERSITY OF
CALIFORNIA; NATALA HART, DIRECTOR OF STUDENT FINANCIAL AID,
OHIO STATE UNIVERSITY; AND CYNTHIA THORNTON, DIRECTOR OF
STUDENT FINANCIAL AID, DILLARD UNIVERSITY
STATEMENT OF ALAN MERTEN
Mr. Merten. Thank you, Mr. Chairman.
With approximately 29,000 students, George Mason is the
largest university in Virginia. As a State university, our
mission is to provide excellent educational opportunities to
our students, while maintaining high quality and affordable
access. Twenty-five percent of our freshman are first in their
families to attend college.
George Mason has had experience with both the FFELP and the
Federal Direct Loan Program. Therefore, I feel we have a unique
viewpoint to share, since we left FFELP to become a direct
lending school in 1995, and returned to FFELP in 2004.
The Federal loan programs are critical to our ability to
provide affordable access to higher education. Approximately
one-third of our students benefit from the Federal loan
programs. Federal loan programs constitute $60 million of the
overall $99 million in aid awarded to our students last year,
which is consistent with the national average of 59 percent.
George Mason has a $500 million annual budget, of which
$141 million comes from tuition revenue, so Federal loans
account for over 40 percent of our tuition revenue.
Approximately 3,500 of our students receive a Federal Pell
Grant, while over 10,000 receive some type of Federal loan.
George Mason's Federal loan borrowing has increased by over 5
percent in the last 5 years. Sixty percent of our financial aid
applicants are from families with income of less than $50,000.
The university takes pride in the sense of responsibility
that our students have demonstrated. Mason's overall cohort
default rate is very low. It is 2 percent, which is less than
one-half of the national average of 5.2 percent. In addition,
our Office of Student Financial Aid has received a Model of
Quality Award from the Department of Education.
In the 1995 and 1996 academic year, George Mason joined
1,200 other institutions to become a direct lending school. The
major viable that made direct lending the obvious choice for us
was the inefficiency of FFELP at that time.
Under FFELP, our students were borrowing from hundreds of
different lenders and guaranty agencies. Although we had
electronic funds transfer with the Virginia lenders, all of the
other lenders used paper checks. Because of multiple loan
servicers, the efforts and costs investigating loan status or
even determining whether a check had been delivered was very
high. This processing was time consuming and frustrating for
our students.
At that time, direct lending eliminated most of the paper
processing. All direct loan funds were electronically released
to George Mason, and the Aid Office was able to respond quickly
to students' requests. This was a major improvement at that
time over FFELP. However, over the 8 years that we were a
direct lending school, many changes occurred in FFELP.
The FFELP community increased the efficiencies of Federal
loan funds delivery. Schools now can easily work with multiple
lenders and even multiple guaranty agencies, and still deliver
Federal loan funds in a timely manner to our students.
Technological improvements and data systems, spearheaded by
the Department of Education, were paramount in creating a more
streamlined electronic processing of Federal aid funds.
Mason again began a cross-campus review of its
participation in direct lending in 1999/2000. Much of this
review was initiated because many of our students and parents
wanted to borrow from private lenders. There was an increasing
number of complaints about the level of customer service
received from the Direct Program.
Private lending institutions also offered other incentives
and borrower benefits that the direct loan program did not
equal. While direct loans did offer an up-front loan rebate in
anticipation of future timely payments, that single benefit did
not come close to the other borrower benefits.
Students and their parents increasingly could receive
reduced origination fees and reduced interest rates from the
private lenders, after they began their loan repayment.
Effective with the 2004/2205 academic year, we left the
direct program and returned to FFELP. We now have one point of
contact at both the guaranty agency and the servicing center to
address any systems issues.
Our students and parents who are Federal loan borrowers are
happy with the changes and benefits that have become available
because of our return to FFELP. They much appreciate the fact
that they are given a choice in lending institutions. The
benefits to our students and parents were the deciding factor
in choosing to utilize direct lenders.
There continues to be new benefits to our students from
FFELP in addition to the Federal loan repayment/discharge
options. For example, effective next academic year, in
Virginia, the newly established Teach for Virginia and Care for
Virginia loan programs will grant added benefits to teachers
and nurses who stay in Virginia.
The competition among private lenders has provided savings
and other benefits to parents and students that direct lending
cannot match. Improvements in processing loans through the
FFELP system have decreased the administrative burdens that
existed in the 1990's.
Finally, while we are excited about providing options to
our students and parents, the sources of money have become
increasingly limited when it comes to assisting students in
financing their post-secondary education.
We rely heavily on the State and Federal Government
financial aid funds. The reductions in the Federal Campus Based
Programs and the elimination of the Federal Perkins Loan
Program are of great concern to us. Our country's college
student population is going to increase, and so are the overall
costs of education.
We encourage you to do all that you can to provide programs
and funds that encourage our youth to learn through the dream
of higher education, thank you.
[The prepared statement of Mr. Merten follows:]
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Chairman Tom Davis. Thank you very much, Dr. Merten.
Ms. Bauder, thanks for being with us.
STATEMENT OF SARAH BAUDER
Ms. Bauder. Mr. Chairman, I want to thank you for inviting
me to speak here today on why the University of Maryland has
chosen the FFELP program. My name is Sarah Bauder, and I am the
director of financial aid at the University of Maryland.
In the 15 years I have been in higher education, I have
noticed an evolutionary change in the loan industry, most
notably when direct lending was introduced in 1994.
If we step back and look at the Higher Education Act and
its fundamental purposes, we will notice that it is there to
ensure access, affordability, and choice. FFELP and direct
lending both offer access and affordability. FFELP is the only
one that offers choice, and that is why we have chosen it. We
have different lending options.
The University of Maryland is home to 24,000 undergraduate
students and 9,000 graduate students. We process approximately
$90,000 million in Federal student loans for 19,000 students.
We have 28 different staff guidance counselors that can work
with our students. Over the years, we have built great
partnerships with our lending institutions.
Our lenders provide many value-added services to our
students that I do not think can be underscored enough. We
basically can offer a zero fee loan to our students. So a
student who borrows $5,000 actually receives $5,000.
Our lenders provide flexible repayment options on the back
end. They provide delinquent and default initiatives for our
students and financial management awareness. They provide
training and workshops for our staff, so that we have education
all around. We fully understand that the University of Maryland
is not only for educating within the classroom, but we have to
educate outside the classroom, as well.
Our default rate is 1.4 percent, which is significant. The
lenders know that we are a low risk, and so our students are
going to pay back their loans when they lend to our students.
That is because we communicate with them, and they have a
personal relationship with their lender.
Lenders also provide scholarships, and I do not think that
has been mentioned. That helps defer the cost of students
attending college and also from borrowing.
Now the University of Maryland, our culture is really one
of research and development. So over the years, we have been
able to enhance our technologies. We have a fully paperless
loan process. That is significant, because we have been able to
cost save on mailing and on communications to our students.
That cost savings then can be reallocated into other
educational benefit for our students. The only way that we
could have done that is to build partnerships with our lenders.
We do not have the administrative burden of reconciliation.
Our lenders do that on a daily basis. So once again, we have
cost savings on the administrative side.
I think the advent of technology has definitely helped us.
I think that has been brought out today. If we look at the
legislation of the Higher Education Act, it recognizes the need
for Federal support of higher education today, as well as equal
access. That commitment holds true.
What I have seen in higher education is that the attitudes
of families have shifted over the few 15 years that I have been
there. It used to be that higher education was really a
privilege, to get an undergraduate degree. Now it is considered
a right.
So financing in education is extremely important, and
parents and students really do trust the financial aid office
and the information that we give them. We hold that
responsibility sacred. We want to make sure we are giving them
the best financial information that we can give them, and the
best options and the best choices.
I applaud direct lending. I was there when direct lending
was introduced. It really did create a wonderful atmosphere of
competition and effectiveness. It woke up the FFELP industry
and the lenders to say, hey, we have to improve here.
But choice is essential. The Higher Education Act gives
students the option of choosing a lender. If you have only one
program, you eliminate that choice.
There are two things I will say in closing here. One, I
think if you ever get an opportunity to really visit a
university and sit just 1 day in a financial aid office, I
think it is really enlightening. I do think reauthorization
would happen if you could spend time there in a university. I
do think that we need to increase loan limits. We need to
increase Pell appropriations for our needy students.
In closing, students and parents finance a new car, they
finance a home equity loan. They comparison shop for credit
cards. I think they also need the choice when it comes to
student loans, as well, thank you.
[The prepared statement of Ms. Bauder follows:]
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Chairman Tom Davis. Thank you very much.
Ms. Coolidge, your entire statement is in the record.
STATEMENT OF NANCY COOLIDGE
Ms. Coolidge. I can assure you I am not going to read the
whole thing. I think that it is excellent that you are having
this hearing today, and I thank you for doing it.
I represent 200,000 students, almost half of whom get
financial aid from the Federal sources, and quite a number of
those also get Federal student loans. I am also representing 10
campuses, with lots of financial aid administrative
professionals on them, who send their messages through us. We
are a central administrative office.
I want to just say that there are three principles that the
University of California observes. I can stipulate today, we
are not here, and I do not think anybody is here actually, to
argue for one program, that one program should win and the
other program should go away. In fact, the comments we have to
make today have to do with improving the choice between
programs, so that schools have equal level playing fields from
which to choose.
The core mission of this loan program is a social mission.
It is to make it possible for low income students to attend
college. To the extent that we can devote resources to that
activity, we should do so.
What I am going to focus on today is what we consider at
our institutions with six in direct lending, four in the FFELP
Program, to be non-level playing fields for the two kinds of
programs, and why administrators struggle.
It has built into them some differences, some fundamental
differences. At the moment, the playing field is not level. The
schools that are in the FFELP Program have available a feature,
and in my institutions it matters, because we have lots of
graduate and professional students who would quality.
There is a provision called the School as Lender. This is
used, and we are under a fair amount of pressure, to think of
using it. We are not at the moment, but certainly we are being
asked to do feasibility studies and look at it, to bleed out
Federal subsidy out of the FFELP Program for uses by students,
and in this case it could be by low income students certainly,
or to give the borrowers even better loans than they are
getting right now.
So the School as Lender would allow a school to become a
lender and to share the profits of doing so with a recognized
lender/partner.
There is no equivalent to that in the direct loan program.
Frankly, our reading of the Star Act proposal is that they are
capturing that concept. What they are saying is, let us do
something like that in the other program to try to equalize the
playing fields in these two loan options for schools.
It is the case that the students at the other end of this
that would get the subsidies are not being treated fairly if a
school gets a lot more resources to spend, and another kind of
school that chooses a different loan program has fewer
resources to spend.
So only in the FFELP can you become a school lender, and
schools are being asked to look at FFELP, even if they are very
happy with their direct loan participation, because it is a way
of tapping into Federal subsidy.
These kinds of adjustments in the two programs are going to
require ongoing management. It is not something that you can
sit down 1 day and just--it is going to require nuanced
legislation over time to try to keep the two programs more
similar in their benefits to students.
At the moment, you pay an amount to lenders that includes
enough to pay, as you pointed out, the collection costs out of
what they get. Also, obviously, you are going to hear today
about many wonderful services that are offered. That comes out
of the revenue they get by being a lender.
The questions really are that because you have these two
very differently financed programs, are they similar enough to
treat students fairly? My argument today is that they are not
there yet, and they still need adjustment.
But the Direct Loan Program does not have the same level of
resources to spend on student and, in some cases, on other
coordinated benefits that we are going to talk about today.
There will be some testimony about counseling, about resources
for the campus. Those are not possible under direct lending.
The University of California has thoughts about how money
can be saved if we are looking at Government reform issues. One
is, and you mentioned it earlier, to look at the 9\1/2\ minimum
yield on loans that were made with tax-exempt funding. The
President's budget estimated that over a 10 year window, this
could save $5.4 billion.
If that kind of savings is significant, and since you are
under great pressure to produce savings, we are certainly
recommending that you look at that kind of opportunity before
you look at taking it away from students, specifically.
It is always the case that some of this money is shared
with students. These organizations, as was pointed out, give
scholarships and other things. But they are not shared
according to the Federal goals. They are not using the
principles and themes of access, necessarily. They have choices
about how they spend it.
Right now, under the current law, the lenders are allowed
to get a guaranteed return on their capital money that they put
into the program, and they get the difference in what borrowers
pay in interest. So they get what we consider to be a windfall.
Capturing that for student benefit is really something that is
also needed.
Finally, guaranty agencies are being paid right now on a
model that is essentially like an insurance company. We are
going to recommend that you look again at guaranty agency
competition and make them Federal contractors, and pay them for
their services directly. What they do for you, they should be
paid for. But the model now is a different kind of model, and
it is being used for other purposes that are not Federal
principles and purposes.
Thank you for your consideration today.
[The prepared statement of Ms. Coolidge follows:]
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Chairman Tom Davis. Thank you very much.
Ms. Hart, I am going to need to swear you in.
[Witness sworn.]
Chairman Tom Davis. Thank you very much, and thank you for
being with us.
STATEMENT OF NATALA HART
Ms. Hart. Mr. Chairman, members of the committee, and
respected colleagues and guests, my name is Tally Hart. I am
the director of student financial aid at the Ohio State
University. We serve as the Nation's largest direct lending
institution. In the last fully completed year, we offered and
administered $246 million in direct loans to nearly 29,000
students.
Prior to 1994, when direct lending was introduced and
available, and I had already by that point worked 20 years in
public financial aid offices, we at Ohio State were essentially
like other institutions of a national scope, taking the same
student loan data, sorting it into 60 different formats,
shipping it and trying to figure out where the student loan
proceeds were in the process.
It took us, on average, 8 weeks into the beginning of the
term, after the full summer's hard work on student loans, to
actually deliver the proceeds to students.
As the result of direct lending, we were able to have loans
follow a single path and to deliver virtually student loans to
our students in time to be matriculated in class, have their
books, and not begin their challenging academic curriculum
worried about, will I have a place to live at the end of this
week, and will I have a meal. Their loan proceeds were in hand.
We did begin the Direct Lending Program in what some would
conclude was a very shaky mode. We did not have much automation
and we literally hung a PC from our mainframe system to deliver
this huge amount of money to our students.
But the risk was worth it, and the Department of Education
has certainly improved the back end processes since that time.
So earlier claims that you might have heard about
reconciliation and other administrative functions, I believe,
operate very smoothly. We do not believe that we spend a great
deal of administrative time or waste in taking care of those
functions.
We, above all, have used the time effectively that the
students used to spend in our office waiting for their loan
funds in very productive ways. There are two major things that
we have done with the freed-up time. First and foremost, we
have become financial literacy educators. This last year, we
delivered more than 3,000 hours of personal financial skills
information to our students. This was everything from how to do
a budget and balance a checkbook. Every class includes
instruction about good and bad uses of credit cards. We teach
identity theft, how to avoid it, of course, and savings and
investing.
Our students have really benefited from this opportunity.
Our staff benefit from the opportunity to be proactive with our
students, rather than to wait until they have difficulties or,
as we found previously, incurred more loans, because they did
not understand how to manage their money correctly.
Direct lending has served us extremely well, and the people
who have benefited most, without question, are the neediest
students. Assuredly, middle income students borrow and need
these funds. But the administrative efficiency gives us time to
focus on students with the highest level of need.
One of the issues that you asked me to comment about is the
continued efficiency of the program. I would encourage, as your
colleagues consider reauthorization of the Higher Education
Act, continuation of the Perkins Loan Program and no cost,
important options, such as the Quality Assurance Program, an
experimental sites program.
These activities, drawn together, enabled Ohio State to do
cutting edge research on our student population. The chart that
you see before you, and it is displayed on the overheads, shows
our success. The bottom blue line shows the rate of
matriculation, through the fall of 2000, of our lowest income
students. Those are students who have ability to pay for
college of about $100 a month. They are, on average, families
with less than $30,000 of income.
Through our research, which started to focus on what
created student loan defaults, we found important findings
about retaining and then attracting, as well, our neediest
students. The results from fall 2001 were considered a success,
and 2002 and beyond--I love to describe as a financial aid
administrator's nirvana--that we have our lowest income
students matriculating at the highest rate of all.
Importantly, if you begin to follow the data 4 years after,
you would see that our retention and graduation rates are now
following a similar plan. So not only are our lowest income
students coming to college at good rates, they are remaining
and graduating.
This has been a direct benefit of the combined effort of
the efficiency of direct lending, the availability of Perkins
loans to mitigate against the low student loan limits in the
freshman and sophomore year under Stafford Programs, and to
have research incentives through quality assurance and
experimental sites to figure out these problems and apply the
outcomes.
I would point out that our results are regularly shared
back to the Department of Education and with colleagues,
whenever asked. So we think this creates best practices and
knowledge that helps benefit not only Ohio State students, but
the Nation's students as a whole.
Thank you again for this opportunity to testify. I want to
especially thank you for all of your efforts on behalf of the
35,000 students who, at Ohio State, benefit from your efforts
to support and invest in them. They will prove the best
investment you can make, thank you.
[The prepared statement of Ms. Hart follows:]
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Chairman Tom Davis. Thank you very much.
Ms. Thornton, thanks for being with us.
STATEMENT OF CYNTHIA THORNTON
Ms. Thornton. Thank you and good afternoon, Chairman Tom
Davis and members of the House Committee on Government Reform.
On behalf of Dillard University, its faculty, staff, and
students, I thank you for the opportunity to testify on Dillard
University's participation in the Federal Family Education Loan
Program and the William D. Ford Federal Direct Loan Program. I
am Cynthia Thornton, director of financial aid.
It is my desire that at the conclusion of this testimony,
you would clearly understand the contributions of private
lenders and continue your support of the Federal Family
Education Loan Program.
Dillard University is a private Historically Black
University located in New Orleans, LA. Last year, more than
2,000 of our 2,200 students utilized private lenders to fund
their education. Our student loan volume is $18 million, or 60
percent of the total $34 million awarded in financial aid.
Dillard University entered the Federal Direct Loan Program
in 1995 after the program was 2 years old. We were relatively
satisfied with the Direct Loan Program, until we experienced
problems that halted the delivery of funds to our students.
At the time, the Department of Education made a transition
to a new Government contractor. This transition was difficult
on behalf of the Department of Education and our school. Our
student loan services were interrupted for an extended period
of time, which created a financial crisis for both the school
and loan recipients awaiting funds to meet their financial
obligations. After evaluating these challenges, Dillard
University made a decision to return to private lending in
1997.
We prefer private lending versus Government lending because
of the value added services and benefits that the students, the
school, and the community receives. These services are offered
at no additional cost to the school. The Government contractors
are for profit and offer no additional services to the higher
education community.
On the other hand, many private lenders return a huge
investment to higher education by providing community outreach
and scholarships. For example, over the past 2 years, seven
Dillard University students have applied for and received
scholarships from the Sallie Mae fund. Dillard University's
preliminary cohort default rate is 4 percent. By utilizing USA
Funds Financial Literacy Program and its default management
software, we except even lower default rates.
Through the assistance of private lenders, Dillard
University has received complimentary printing of pamphlets,
forms, brochures, flyers, and such. In addition, private
lenders offer innovative technology solutions to help us
deliver aid to students in a seamless manner. This is important
to us because budgets are tight and resources are scarce for
many Historically Black colleges and universities.
I urge your support also for increased loan limits. The
current annual Federal loan limits do not cover our tuition
costs of $11,760. Our students, like students nationwide,
supplement Federal loans with private loans offered by private
lenders. The Department of Education does not offer a private
loan program.
Had we continued in the Direct Loan Program, many students
would have had to participate in both Government lending and
private lending to meet their educational cost. This is another
reason why Dillard University chose to return to the Federal
Family Education Loan Program. We needed a streamlined process,
and the FFELP Program does that for us.
I will now just take an opportunity to express my
opposition for House bill 1425, the Student Aid Reward Act, or
the STAR Act, for the following reasons. It promotes inequity
among financial aid recipients. It shifts expenditures to the
Federal Pell Grant Program. There has been recent controversy
surrounding the Federal Pell Grant Program that makes this act
tenuous, at best.
The value of the Federal Pell Grant has not increased in at
least 3 years. Proponents of the STAR Act believe that it will
save the Government billions of dollars. I am no economist, but
I do believe that this may be misleading. If one saves a dollar
in the Federal Direct Loan Program and spends a dollar in the
Federal Pell Grant Program, has the Government really saved?
I have worked in the higher education industry for over 19
years. All of my experiences have been at minority-servicing
institutions that suffer from budget cuts and scarce resources.
It has been beneficial to Dillard University to partner with
private lenders who offer services to bridge the resource gap.
For this reason, I urge your support of private lending.
Dillard University and other institutions that chose to
participate in the Federal Family Education Loan Program prefer
the flexibility and value-added services that this program
offers.
Competition between both private and Government student
loan programs has resulted in lower student loan costs and
specialized loan services that best meet the needs of schools,
students, and parents.
I would also disagree with the notion that the Federal
Family Education Loan Program is costing taxpayers millions of
dollars. I believe that private lenders actually save money for
both the Federal and State Government and taxpayers. As the
cost of education continues to increase, more and more schools
will continue to depend on the assistance of private lenders to
help subsidize the cost associated with higher education.
Please continue to give students, families, and schools a
choice in student lending that offers equity and access. Please
oppose the STAR Act. Thank you on behalf of Dillard University.
[The prepared statement of Ms. Thornton follows:]
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Chairman Tom Davis. Well, I want to first thank all of you.
I think there is always a divide here on the parties in how we
look at this. Our side is traditionally like the private
lending. The other side is traditionally like the Government
lending.
The one thing I hear from this is that private lending has
improved a lot because the Government got into this business.
Now it looks like in many cases, there is a momentum back to
private lending, because of the improvements made in the
competition offer. Is that a fair comment?
Mr. Merten. Yes, I think it is very fair.
Chairman Tom Davis. Ms. Bauder, do you think that is a fair
comment?
Ms. Bauder. Yes.
Chairman Tom Davis. Do you think that is a fair comment,
Ms. Coolidge?
Ms. Coolidge. Well, I think it is fair to say that the
private sector has more money to spend. They are spending it in
ways that maybe people appreciate, and that is good.
Chairman Tom Davis. They would not have done that probably,
if you did not have direct lending. That is my point.
Ms. Coolidge. That is correct.
Chairman Tom Davis. You can always argue about the
Government, that we ought to give Government more money to do
the same kind of things or back and forth.
Ms. Coolidge. One could say that, or one could instead
refocus these resources on the neediest students. That is sort
of the heart of the argument, whether the level of support for
the two programs is reasonable, given these vast needs of poor
students.
Chairman Tom Davis. I will tell you what, I represent the
wealthiest district in the country, and it is hard to find many
families that do not need the aid.
Ms. Coolidge. Yes, that is right.
Chairman Tom Davis. College education is expensive.
Ms. Coolidge. That is right.
Chairman Tom Davis. I wrote out, the year before last,
$72,000 in tuition checks. So even at our salary, that is a
hefty amount. So when it comes to the higher education today,
everybody needs it.
For low income, in particular, as you know, I authored the
D.C. College Access Act that allows District students to go
anywhere in the country and pay in-State tuition.
But when it comes to aid for college, everybody needs it.
There are very few families that this does not impose some kind
of hardship.
Ms. Coolidge. You might want to try a Plus Loan. If you are
writing checks for $17,000, you can get a Plus Loan financed at
4.17 this year. I have four children and I am doing that.
[Laughter.]
Chairman Tom Davis. Well, unfortunately, I got the cash, so
I would just as soon get it out and not owe it. I hear you, but
thank you very much. Maybe I could get one of my kids to go to
George Mason or an in-State school.
Mr. Merten. We will give you a special deal.
Chairman Tom Davis. OK. [Laughter.]
Listen, every student who goes to George Mason gets a
special deal. Is that not right, Dr. Merten?
Mr. Merten. Yes, they do.
[Laughter.]
Chairman Tom Davis. That is just for the record here.
Do I understand that one of the benefits added is that
sometimes under one of the advantages that the private loans
have is that colleges can participate and actually make money
on it? Is that correct?
Ms. Coolidge. Yes, we did a feasibility study at the
University of California, where we have six campuses and direct
loans, and four in FFELP. We could make about $4 million a
year, and most of that would be used to provide very
competitive loan benefits to the borrowers themselves.
But there would be approximately $1 million to $2 million,
depending on how it was spent, of resources that move would
generate for other financial aid at the campuses from Federal
subsidies that we would get, just by partnering with a Federal
lender.
While we have six campuses that definitely do not want to
do it--they are very pleased with the Direct Loan Program and
they do not want to leave it--we are under pressure to say, why
are you not doing that? If that money is out there and
available to schools, why are you passing it up?
Then when we see the STAR Act being proposed, it looks like
that is what they are thinking about. Let us bleed some of this
resource away for students. That is what I think they are
after.
Ms. Hart. Mr. Chairman, if I could also respond.
Chairman Tom Davis. Yes, Ms. Hart.
Mr. Hart. I served as head of a guaranty agency in my
former State of residence. That provision, of school as lender,
I believe, is really antiquated.
It was placed in the law at a time that there were
significant issues of capital formation for student loans. It
was critical at that point that institutions that were having
trouble with capital formation, especially for graduate and
professional students, might want to use the FFELP Loan Program
to provide educational dollars to their students.
That simply is not the status today. That kind of unfair
playing field, we also at Ohio State have had enormous pressure
to move to that option. We have elected not to, for a very
sound set of reasons. But I simply believe that provision is no
longer needed and should be eliminated from the law, in my
opinion.
Chairman Tom Davis. Well, I guess, you know, the unfair
playing field depends on where you sit on this thing. I think
if you are a college administrator, you are just looking for
the best deal for your kids. I am not really trying to take
sides in this debate, one way or the other. We are just trying
to get information here on how efficiently it has been run.
That is our focus.
We are going to get an audit back in September that will, I
think, be more inclusive in terms of what the real costs are.
We have not had a handle on this. Because all we have worked
out are some estimated costs that go back a decade, and nobody
has come back to look at. We will have, I think, a better
handle there, yes?
Mr. Merten. Every time you look at this issue, there are
three players. There are the institutions, and what is in our
best interest, and how we need to operate, and how do we act
and operate in a business-like fashion. Second, it is the
students and their parents. What are the best services that can
be provided to them? Then third, what is the cost to the
Federal Government?
I think when we move forward in this, we have to look at
all three of those. Sometimes you make decisions, and I think
we make decisions, that we have picked an option that might not
have been in our own best interests, but it was in the best
interests of the students and their parents. So we are always
making those kinds of tradeoffs, in all the issues in higher
education, but specifically in this one.
Chairman Tom Davis. I understand, and I think we will have
a better perspective on the costs when we get the GAO back.
Mr. Clay.
Mr. Clay. Thank you, Mr. Chairman, and I also thank you for
holding this hearing. I started at the University of Maryland
as a freshman. When I started, the per-credit hour was $15 per
hour. So I could go throughout my 4 years of college and pay it
out of my pocket. But the costs have really risen.
I have a 4-year old and an 11 year old. So my wife and I
realize we will probably have to give our arms and legs to get
them through college.
But let me ask, and this is for Ms. Coolidge. I will start
with you. We have heard a little bit about how private lenders
market their loan products to schools. My understanding is that
private lenders use a variety of inducements, such as taking
schools administrators out to dinner and on trips and offering
school computer systems and software packages.
U.S. News reported on the lavish benefits that some private
lenders offer to school administrators when they are marketing
their loan program. I am concerned about the potential abuse in
these situations. How can we ensure that marketing approaches
by private lenders do not involve kick-backs? I will start with
you and would like for anyone else on the panel to comment, if
they care to.
Chairman Tom Davis. May I just intervene? I would just ask
this question. There is nothing wrong with taking somebody out
to dinner. Are you talking about direct payments?
Mr. Clay. Those were the examples.
Chairman Tom Davis. Yes, that would be fine.
Mr. Clay. I am not saying there is anything wrong with
going out to dinner.
Chairman Tom Davis. You are worried about the next step.
Mr. Clay. Right.
Chairman Tom Davis. OK.
Ms. Coolidge. I think if you are asking how can we remedy
this kind of thing, that is what I was talking before, about
trying to make a more level playing field between the two
programs.
If the profits are associated, even after all costs which
are obviously reinvested and are considerable with people here
talking about the wonderful services they get--even after
consideration of those great things, the profits that are made
in the FFEL Program are extreme enough so that the school
lenders can make as much as we calculated. By trimming that,
you can reduce that kind of temptation. Because there will be
enough in there to do the proper things for the loan programs
and not enough for really lavish sorts of things that you are
alluding to.
A great number of dollars are spent on things that schools
highly value and appreciate, that do not have that personal
quality of sort of kick-back or payoff or that type of thing.
So I think those are sort of collateral benefits that come from
paying extra for this program. But the question is whether it
is too much, and whether we need to modify the reimbursement
model, so that it is closer to the other model.
Mr. Clay. Thank you for that response.
Mr. Merten. In our case, the purpose of getting something
from the lender is to provide something to the student. That is
what we are there for. I mean, that is the place where we play
the intermediary role. The student needs something. The
student's tuition has gone up, and in many cases has gone up
because of the lack of State support. So we have to do whatever
we can to help that student. If it is to get something extra
from the lender, that is where we go.
Mr. Clay. Thank you for that answer.
Ms. Thornton. I would also agree that if a lender offers a
service that would help us streamline our process for students
then, in the end again, the student benefits from the service
and it is not necessarily an inducement for the school. It is a
service that benefits the student.
At the end of the day, we are all trying to do our jobs
more efficiently and more effective, and deliver the aid to the
student. So sometimes, we need a little help, and private
lenders offer that service to help us deliver the aid to the
student in a timely manner.
Mr. Clay. I appreciate that clarification. Let me ask Ms.
Bauder this. We have heard about how the competition between
the two loan programs has had important benefits for students
and colleges. But we have also heard about how taxpayer dollars
are being wasted because of high subsidies and inefficiencies
in the Guarantee Loan Program.
All of you have significant knowledge of student financial
needs. Can you provide us with some insight into how we can
maintain competition between the two loan programs, while also
ensuring that taxpayers get a good deal? After Ms. Bauder,
anyone on the panel can comment.
Ms. Bauder. I think the point here is that we need to do
what is in the best interests of the students. Who knows better
really than the institution?
I mean, I will look at the University of Maryland. Because
we have partnerships with our private lenders, we are able to
reallocate funding into different educational programs. We know
that financial aid is not a one-size-fits-all program. So we
developed Maryland Pathways. So students who have a zero
expected family contribution, who are an in-State resident, can
come to our institution and not borrow a dime in 4 years.
So I think it is really becoming where we are starting to
profile our students, rather than saying, OK, everybody has to
take on a loan. The word ``loan'' may conjure up images of a
creditor knocking on a door for one student, where it may be
considered a gift for others.
I think the competition between the two programs is
necessary. I think direct lending has done a great benefit for
the FFELP Program and vice versa.
Mr. Merten. If you look at the three different legs, as I
mentioned before, one of the question now in front of you and
in front of all us as taxpayers is, what really is the
difference? The idea of having the GAO study and to make sure
that it is a full costed study--too many times in studies that
we see done by the Federal Government, it is a marginal cost
study. It is not a full cost of the program.
So you need the full cost on both sides. Then it is
something that obviously not only should you be interested, but
we in higher education and as individual taxpayers should be
interested in the full cost.
Mr. Clay. Thank you for that response.
Ms. Thornton. I also think it is important, too, to
remember that some of the subsidies used by the lenders is
returned to the community in the form of scholarships, they are
still helping the students. They are helping the communities. I
think it is important that you guys really consider that
option, as well.
Mr. Clay. Thank you for that.
Ms. Coolidge. There is a bit of cost difference in the
sense of full cost consideration. The Federal program, the
Direct Loan Program, should have in it the borrowers who are
the highest risk and who are the most likely to fail. That is
the social mission of the program.
That is going to be an additional cost. If they are in the
Income Contention Repayment Program and making less than their
interest in forms of payment, that is one of the purposes of
these programs, to make it possible for access to occur. Then
if at the back-end, they are not able to repay, we have a
program that suits them and it is not just considered a
default. It is really a way of dealing with the students who
took the chance we invited them to take and did not succeed.
So in taking into account the costs of the programs, it is
really important to calculate the value associated with placing
really high risk students into a repayment model that does not
cause them to be dropouts from society, that they have a way of
being acceptable, not defaulters. I think that is an extra
cost.
So when you do this comparison, it really needs to be
calculated that we need to have a place, a repository, for the
students who cannot pay. I am not talking about the will-not-
pays. I am talking about the can-not-pays.
Ms. Hart. Mr. Clay, I hope that my summary will be helpful.
But I think that it is consistent with all the other comments.
In trying to avoid some of abuses that you describe, which I
have heard of as well, that if we focus, and we would be glad
to assist you if that would be useful, on the benefits to the
students, and I include Ms. Thornton's definition about
efficiencies. But if that were the distinction, I think there
would be far less concern about the appropriate use of whether
they are profits or dedicated services through direct lending.
That is the distinction, I think, that we could all agree would
be useful.
Those of us who have labored long in these professional
vineyards would love to avoid any onus to our profession of
things that we certainly would never accept, and yet find great
benefits to our students.
For example, Ms. Thornton mentioned the U.S. A Funds
Default Prevention Programs and Financial Literacy programs. We
use those too, even though we are a direct lender. I would
really regret seeing important student benefits, important
educational benefits of that eliminated. But saying that those
are the types of benefits that could accrue from the program, I
think, is very reasonable and it would avoid the concerns which
you have, which I certainly share.
Mr. Clay. I would be very interested in you all sharing
that information with us. I thank you, Mr. Chairman.
Chairman Tom Davis. All right, Ms. Coolidge, let me just go
back you, the ``will not pays'' versus the ``cannot pays,''
when you give a student a loan when they are going to school,
is there not an assumption in every case that they are going to
be able to get an education, improve their income, and pay it
back?
Ms. Coolidge. That is the assumption, and it is certainly
the case that most do. But there are students who have health
problems, who have mental health problems, who have tragedies
in their families who, for various reasons are not able to. It
is usually people who do not finish. People who have taken out
loans.
Chairman Tom Davis. But you do not know that. Do you know
that when you are making the loan?
Ms. Coolidge. No, we cannot know.
Chairman Tom Davis. So those would be handled equally by
the private sector and the public sector, would they not?
Ms. Coolidge. Except that in the case of the income
contingent repayment plan, it is a non-producing asset. It is
something where the Federal Government winds up taking a loss,
basically, on the amount the student cannot repay.
The question is, do you want that loan maintained in a
environment where you are paying basically a premium on the
asset, for someone to take care of and maintain it in the
private program, or do you want it moved to the least costly
repository.
That is why I was speaking of moving those borrowers--
whatever program they borrowed from originally--moving them
into a Federal environment, where the Feds can, first of all,
check their income-contingent repayment against their taxes
each year, to find out if they are legitimately getting this
treatment, if they are earning more. They can check with the
Social Security Administration to see if they are getting more.
So having that kind of borrower's repayment in the
Government program makes a great deal of sense. It is not a
huge number. It is just that I wanted to say that the cost of
this is a legitimate cost, and should be considered when
comparing the two programs.
Mr. Merten. I learned something in the preparation for the
testimony, and that is that our default rate was low. So I
asked the financial aid staff why. The big issue that I got
back was: counseling, counseling, counseling.
That is for the borrower to understand what he or she is
getting into, and to make sure they are borrowing as little as
they need as opposed to as much as they can get. If you have
that kind of a philosophy, then I think we have the opportunity
to make sure people are borrowing close to where they should be
and there will be problems later on. But those problems are
based on a rational loan, as opposed to an irrational loan.
Chairman Tom Davis. Again, a lot of the incentives that the
private sector offers today would not have been there, but for
the Direct Loan Program and so on. As we look at this, we want
to continue to keep that competition.
But my instinct is that Government is never able to keep up
and be competitive with the private markets and their ability
to be flexible, because they are just different motivations.
Private markets, they operate on a very competitive bottom-line
basis. The Government does not. I mean, how many years does it
take us to get an audit to just see what the real costs are.
Ms. Coolidge. But in fact, this is not clearly the private
market versus the Government market. That model is too extreme.
In fact, the Government market, as Ms. Shaw testified, uses
competitive bidding to outsource quite a few of their tasks.
Therefore, they are using the private market as part of their
model.
Chairman Tom Davis. They do for collections, yes.
Ms. Coolidge. It is not just for collections. They do it
for all kinds of processing. They use the private industries.
Chairman Tom Davis. But they do not have the same
competitive arena that they are out there competing in. The
competition level is different in the private sector than it is
in the Government sector.
Ms. Coolidge. Well, let me just speak to that. The private
sector is actually heavily subsidized. This a heavily regulated
and heavily subsidized Federal program. So the thought that is
the free market and this is the Government is actually much
more muted than that. There is not as big a difference.
Chairman Tom Davis. But in private sector companies, the
culture is different than the Government sector.
Ms. Coolidge. Certainly, it is culturally different, and
that is to our benefit. They also, however, to our detriment in
some cases, have stockholders and highly paid executives. So
there is both aspects of the good parts and the bad parts that
go with that. But the fact is, they are making their money on a
Government subsidy, much as some of the agriculture points are.
It is not a clear distinction between liaise a fare and
Government restriction.
Chairman Tom Davis. Well, I think Dr. Merten put it well,
when he said there are three legs to this that you need to
examine. There are the schools' perspective, the students' and
the parents' perspective, and that is where I sit. You know,
what is the best deal? Then finally, there is the taxpayers'
perspective, and we also have to look at all three of these.
I think this discussion has been very, very helpful to this
committee, as we take a look at what is going on. I hope it has
been to Ms. Shaw, for the Department of Education. She has
stayed here for the whole thing.
We have a Direct Lending Program, and we want to make it
work. Because we understand that competition has made the
private sector better. On the other hand, the private sector is
getting more flexible and getting more ingenuity every day as
they get better. I appreciate everybody's comments as we move
forward on this.
So thank you all very much. Is there anything else that
anybody wants to say before we leave, that maybe you did not
get in?
[No response.]
Chairman Tom Davis. Well, thank you very much. This was
well worth it. The hearing is adjourned.
[Whereupon, at 12:49 p.m., the committee was adjourned.]
[Note.--The Department of Education: Federal Student Aid
Packet and additional information is on file with the
committee.]
[The prepared statements of Hon. Dan Burton and Hon. Jon C.
Porter and additional information submitted for the hearing
record follow:]
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