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Hearing of the House Education and Labor Committee - "Increasing Student Aid Through Loan Reform"

Chaired By: Rep. George Miller

Witnesses: Christopher Chapman, President and CEO, Access Group; Rene Drouin, President and CEO, New Hampshire Higher Education Assistance Foundation; Anna Griswold, Assistant Vice President, Undergraduate Education And Executive Director, Student Aid, Pennsylvania State University; Charles Reed, Chancellor, California State University; John Remondi, Vice Chairman and CFO, Sallie Mae; Deputy Undersecretary of Energy Robert Shireman; Richard Vedder, Professor of Economics, Ohio University

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REP. MILLER: Everyone being present, the committee will come to order.

I want to welcome everybody to the committee this morning. The meltdown in our economy as a result of the financial scandals has made the growing college affordability crisis worse for many American families. Escalating tuition prices and college loan payments have become even more burdensome in the face of lost jobs, income and benefits.

Students are graduating with too much debt. We as a Congress need to refocus our efforts back on grant aid rather than loans. Twenty years ago, the maximum Pell Grant award covered about half of the in-state tuition. Today it covers about 30 percent. Over the last three years we've worked hard to reverse this trend by increasing the maximum Pell Grant award by $1,500, but work still needs to be done.

Today, our committee will examine how we can continue to make college more affordable by significantly increasing grant aid for students. We can do this at no cost to the taxpayers by transforming the way our student loan programs operate.

First, it's important to take stock of how we intertwine credit markets. Credit and economic crises have altered the student loan landscape. For years, the Department of Education has operated two programs that provide borrowers with the same federal college loans, at the same interest rates, terms and conditions.

One was the federally guaranteed student loan program or the FFEL program as it's known, under which private companies make loans to students and receive federal subsidies. These loans are virtually risk-free for lenders because they get reimbursed by the taxpayers when borrowers default on their loans. The other is the Direct Loan Program under which the federal government offers loans directly to students using Treasury capital. It's subsidy free and cheaper for taxpayers. Last year, as the credit markets froze, many FFEL lenders had trouble financing their lending activity.

Some chose to discontinue making loans, while others became highly selective about whom they would lend to. With many students and families deeply worried about their student loan availability, Congress stepped in to perform emergency triage. Our goal was to make sure that families saw no interruption in the access to loans.

We enacted a temporary program that to date has been successful. It allows the Secretary of Education to finance and purchase loans from lenders using Treasury funds, but this was never intended to be and isn't a permanent solution.

Meanwhile, seeing that the Direct Loan Program remain insulated from the turmoil in the economy, hundreds of colleges and universities switched to the Direct Loans for the first time.

Two undeniable lessons have emerged from the past year. First, the economic crisis has exposed serious vulnerabilities to the current FFEL structure and students shouldn't have to worry about whether the roller-coaster fluctuations of the financial markets will hurt their college opportunities.

Second, FFEL currently is on life support. In fact, the federal government through both the Direct Loan Program and its emergency program are now funding $6 out of every $10 in federal student loans made this year. In short, the status quo has become impossible to defend.

Students and families are not being served well as they could be and taxpayers are spending billions of dollars annually to finance a broken system. The momentum is building for reforms that will deliver aid to families in a more sustainable way, shielded from many ups and downs in the markets.

There is already several proposals on the table and we will take a close look at today. In his 2010 budget, President Obama proposed increasing Pell Grant Scholarships by ending lender subsidies and instead using the federal funds to originate new federal student loans beginning in 2010.

The Congressional Budget Office estimates that this would save about $94 billion over ten years, all of which is to be redirected back to the students. I think this proposal sets the bar high. It yields an astonishing savings that will help students and make the most sense to the taxpayers and harness the private sector innovation for the public good.

We also will hear about other proposals to reform our nation's student lending. While the means and reforms may be different, any workable plan must meet two basic benchmarks. It must increase the efficiency of the loan programs so that we have more to invest for our students and it must increase reliability so the students and families are never again left wondering whether or not -- where to turn in a difficult economy.

We will hear about the experience of one school that entered the Direct Loan Program last year and what other schools might expect under the president's proposal. We'll learn more about students' financial needs and how we can best reform these programs to work on their campuses.

Now there are some who like things the way that they are. They've already begun to fight this change, but I think the students who have framed the issue candidly. We either can continue sending billions of dollars to the lenders to act as intermediaries or we can start sending that same money to the students and their families who are trying to pay for college costs, the costs that continue to go up, costs that continue to go up faster than inflation and that more and more families find themselves struggling with.

And I think that's the question that's before us today is how do we go about providing the best deal for the taxpayers, the students, to their families and the institutions? And I look forward to today's testimony and I welcome all of the individuals who will be testifying and lending us their expertise and their experience in this field.

And now, I would like to recognize Congressman McKeon, the senior Republican on our committee for the purpose of his opening statement.

REPRESENTATIVE BUCK MCKEON (R-CA): Thank you, Chairman Miller and good morning. Education, especially a college education, is an engine that drives the American dream. I would like to see this committee do what it can to help those American dreams come true and student loans are one tool that allow students and families to pursue that dream.

Today we're going to hear about different student loan plans. We will discuss whether it's better to have loans come directly from the government or through other sources such as private lenders and nonprofits. I believe the American people have already made that choice.

In the Federal Family Education Loan program, which features a public-private partnership, there are more than 4,000 participating institutions. Students attending these institutions have received approximately $66 billion this year.

In the Direct Loan Program, where the loans come directly from the government, there are roughly 1,700 institutions. Students attending these institutions have received approximately $22 billion this year.

This is clearly a case of schools voting with their feet. Much like the secretary told us, families that do when it comes to picking an affordable college, institutions have selected their loan program of choice. They have moved to a program that provides the choice, flexibility and options to make college affordable thanks to that public-private partnership.

The administration has argued that the FFEL program is on life support and does not provide a stable source of capital. With all due respect, this is like arguing that the federal government should directly manufacture and sell cars because the administration is now assisting Chrysler and GM.

Some in the administration may want to take -- to fully take over the automotive industry, but I don't think the American people would agree. Let's just consider the facts. Our nation is in the midst of a global economic meltdown. Our credit markets became paralyzed and no one, not mortgage lenders, not small business lenders, not consumer lenders and not student lenders was able to secure credit to keep capital flowing.

The federal government stepped in with a temporary measure to restore liquidity, just like it did for the entire banking and financial system, but you don't hear calls for the federal government to make all mortgages or all small business loans, at least I hope not, or all car loans.

No, it's only in the student loan market where political forces are taking advantage of economic peril to create a federal monopoly. So to those who claim the FFEL program does not work, I would only ask you to look back on the 40 plus years before the credit crisis that crippled our entire financial system.

The private sector is a stable source of capital. It's one that has served millions of students and families for decades. Instead of trying to keep private capital and innovation out of the student lending permanently, perhaps we should be looking for ways to bring it back. We've also heard a lot about lender subsidies and so-called waste in this program.

So let me just take a moment to set the record straight. This year, the federal government is expected to make a profit on the FFEL program. The only subsidies being paid are interest benefits so that low income students do not accrue interest costs while they're in school. But on the whole, the FFEL program is actually returning money to the U.S. Treasury this year.

In a way, that means lenders are subsidizing the federal government and the administration's own budget clearly expects the programs included in the Ensuring Continued Access to Student Loans Act to continue to return money to the government. It seems to me that we should consider these programs -- those programs as a viable alternative to a complete conversion to the Direct Loan Program.

Finally, what about the 4,000 plus institutions across the country who have decided that the FFEL program works well for their students? Don't they get a say in all of this? In 1993 when the Direct Loan Program was created, it came about mainly because some institutions were not happy with the FFEL program and wanted another option.

If the more 4,000 institutions currently in the FFEL program are happy with the program and wish to keep it, I think we should listen to their wishes just like we did in 1993 to the institutions who wished for change. In that vein, I have several letters from financial aid officers from all around the country who want to keep the options available to them today through the FFEL program.

But this is one of the things that people really don't like when the federal government or any government, local or state, wants to take choice away from them. Why would we want to do that? I would like to see these submitted into the record today.

Mr. Chairman, what's best for schools and the students they serve seems to be lost in this debate and I'm not the only one who thinks so. This morning, "Inside Higher Ed" published an op-ed written by the director of financial aid at Tallahassee Community College.

The article is called "Why I'm sticking with FFEL," and he begins by saying quote, "But for all the talk about budget numbers and politics, the views of college financial aid administrators have been largely lost in the shuffle."

I would also like to insert this article into the hearing record. I hope we'll think about people like this financial aid director as the debate unfolds. With that, I would like to thank our witnesses for appearing today and look forward to learning more from them.

Thank you, Mr. Chairman. I yield back.

REP. MILLER: Thank you. And I would like now to introduce our panel of witnesses. Robert Shireman is the deputy undersecretary at the U.S. Department of Education, a leading expert on college access and financial aid.

Mr. Shireman has previously served as congressional appointee to the Federal Advisory Committee on Student Financial Assistance and as advisor to Senator Paul Simon and part of President Clinton's White House National Economic Council. Mr. Shireman is the founder of the Institute of College Access and Success and the Project on Student Debt.

Dr. Charles Reed has served as chancellor of the California State University System since 1998. He provides leadership to 46,000 faculty and staff and to 450,000 students on 23 campuses and seven off-campus centers.

Prior to serving as chancellor of the California State system, Dr. Reed was chancellor of the State University System of Florida from 1985 to 1998. Dr. Reed has served on a number of organizations, including the board of the Urban Serving Institutions, the President's Roundtable for the National Board of Professional Teaching Standards and on the board of the California Chamber of Commerce.

Mr. John F. Remondi is the vice chairman and chief financial officer of Sallie Mae. Prior to joining Sallie Mae, Mr. Remondi worked as a portfolio manager for PAR Capital Management, a Boston- based private investment management firm. Mr. Remondi will address Sallie Mae's alternative proposal to reform the student lending program, which would allow the private companies to remain in the program while using federal capital to finance student loans.

Ms. Anna Griswold is the assistant vice president of Undergraduate Education, executive director of student aid at Pennsylvania State University, which has one of the highest loan volumes of any institution in the country.

Prior to working at Penn State, Ms. Griswold was the director of student aid at Washington State University and prior to that she was the director of student aid, Northern Virginia Community College at the Alexandria campus. Ms. Griswold has served in student aid administration for 39 years.

This comes from Ms. Shea-Porter; I think is going to make the next introduction. Carol?

REPRESENTATIVE CAROL SHEA-PORTER (D-NH): Thank you, Mr. Chairman. It's my privilege to introduce Rene Drouin to the committee this morning.

Rene is the president and chief executive officer of the New Hampshire Higher Education Assistance Foundation or NHHEAF as we call it. Mr. Drouin began his student loan career in 1978 as manager of the claims and recoveries division of New Hampshire Higher Education Assistance Foundation.

He has served as president and CEO of both NHHEAF and the president of the Network Organization. During his over 30 years at NHHEAF, he has overseen a number of enhancements to the organizations' infrastructure, including the establishment of a NHHEAF network education foundation with half a million dollar endowment in 2004.

The charitable mission of the organization has been fulfilled by Mr. Drouin's support for expansion of the Center for College Planning, which annually serves over 30,000 individuals statewide with free college planning programs and services. Mr. Drouin also served as chairman of the board at the National Council of Higher Education Loan programs from 1999 to 2000.

In October of 2003, Mr. Drouin received a congressional appointment to U.S. Department of Education's Advisory Committee on student financial assistance for a three-year term and he was reappointed for an additional term in July, 2006. He knows the key to prosperity in this country for America's youth and for America's business is education and he has devoted his life to providing access.

I'm delighted that you are here today. Thank you, very much.

REP. MILLER: Congressman Castle.

REPRESENTATIVE MIKE CASTLE (R-DE): Thank you, Mr. Chairman. I would like to welcome Chris Chapman to today's hearing. Mr. Chapman is the president and chief executive officer of Access Group, a national nonprofit lender and servicer based in my hometown of Wilmington, Delaware. Although Mr. Chapman joined Access Group last year, Mr. Chapman's been involved in the education financing field since 1994. Immediately prior to his current position, Mr. Chapman served for almost seven years as president and CEO of All Student Loan, a Los Angeles-based nonprofit lender and secondary market.

He's also served as vice president of Student Loan Funding Resources, Inc. and a director of his joint venture servicing company, Intuition Holdings, Inc. Mr. Chapman has also maintained a private legal practice, primarily focused on the representation of a variety of FFEL participants in public finance and general corporate matters.

Mr. Chapman's early career was spent working for two members of the U.S. House of Representatives and the mayor and city council of Cincinnati. Mr. Chapman earned his Bachelor of Arts degree from Xavier University in Ohio and his Juris Doctorate degree from the University of Cincinnati College of Law. We welcome you here, Mr. Chapman.

REP. MILLER: Thank you and welcome to the committee. Our final witness on this panel will be Dr. Richard Vedder who is a professor of economics at Ohio University. He is the author of a number of books, including "Going Broke by Degree, Why Colleges Cost Too Much."

Welcome to all of you. We look forward to your testimony. Some of you have testified before, in front of Congress, but we do have a lighting system. When you begin to testify, in the small boxes in front of you a green light will go on. We allow you five minutes. We hope that you can convey your thoughts in that period of time. I know it's always difficult.

An orange light will go on, when you have one minute remaining and you should think about wrapping up your testimony, and then at the end of five minutes, a red light will go on and we want you to finish in a coherent fashion, but we want you to be mindful there will be a lot of questions then.

And unfortunately, I am told that we can expect votes on the floor at around 11 o'clock, so we'll begin. Mr. Shireman, welcome to the committee.

MR. SHIREMAN: Thank you. Chairman Miller, Mr. McKeon, thank you very much for the opportunity to testify today.

In his speech to the joint session of Congress in February, President Obama established a bold goal for America and that is to restore our place as the country with the most -- the largest proportion of our adult population with college degrees and that was partly about education and the importance of education, but it is also critical to restoring our economy and our place in the world economy.

To achieve that goal, we need our graduating high school seniors to continue on to college. We need our adults, who are either working or perhaps unemployed right now, to return to college. We need both those populations to thrive in the programs and colleges that they attend, be able to focus on their studies and we need them to complete their degrees and that is how we can reach that goal for America.

President Obama proposed a number of tools to get there. First, the $2,500 American opportunity tax credit which was adopted for two years in the Recovery Act and which his fiscal year '10 budget would make permanent.

Second, a strong, secure Pell Grant entitlement. This is the core program for low and modest income families and we need to make sure that that money will be there, not just for the folks who are entering college in six months, but we need to be able to tell students in middle schools that this is a program that will be there and will be strong, secure and will have enough for them to help them pay for college.

So we've proposed increasing that Pell Grant instead of having -- we've had a number of years where we've had just a flat Pell Grant. We want to be able to increase that by the Consumer Price Index plus one percentage point into the future.

Third, we need a reliable federal student loan program. We really dodged a bullet last year with -- almost had a situation where schools had real trouble getting loans and, in effect, what the Department of Education was able to do with the swift action of Congress was, in effect, to make direct loans to lenders so that they could make FFEL loans to students.

What President Obama is proposing to do is to cut out the middleman, make those direct loans to students and schools. Schools already have a very efficient system of drawing down Pell Grant dollars for their campuses and it is that same system that is used for drawing down and reconciling Pell Grant dollars. So the switch over, from the perspective of a school, is not a -- not all of it is new. It is an add-on to an existing system that works very well for colleges.

We want to tap the expertise of the private sector entities that are currently involved in the FFEL program to do the very important work of servicing student loans. We want to have a performance-based contract with these servicers that focuses on preventing defaults and delinquencies and making sure that we have high levels of satisfaction of the borrowers whose questions need to be answered, as well as the schools that are involved in the program.

By doing this we save billions of dollars and that money can be poured into the Pell Grant Program. We also will be able to maintain a viable and growing student loan program. And I think there's a chart that will show the growth that we expect.

While the current FFEL portfolio will decline slowly over time -- and there's been a lot of talk about jobs -- the FFEL loans will decline slowly over time. There will be a lot more loans overall. So overall, there will be more people employed in servicing in the United States than ever before.

Another important element of the president's proposal is to reduce the amount of private student loans that students are having to take out. This is where students really get in trouble.

Non-federal student loans, no cap on the interest rate and our Perkins Loan Proposal is designed to give college financial aid administrators the flexible loan funds they need to apply to those situations where students need more than what is available in the Stafford Loan Program. We also want to distribute that money in a way that encourages colleges to keep college affordable.

Finally, we have proposed and access and completion innovation fund and there really are two important goals of this program. One is to allow state agencies and nonprofit organizations that have been doing important work with the funds that they've earned in the FFEL Program, getting out to high schools, providing information.

We want them to be able to -- allow them to continue those activities. We also want to encourage innovation at colleges and universities and in states on persistence and completion. We have to do a lot better job of helping students to complete those degrees.

Thank you very much.

REP. MILLER: Thank you. Chancellor Reed, welcome to the committee and thank you for your service to the students in our state. Appreciate it.

MR. REED: Thank you Chairman Miller and Ranking Member McKeon and members of the committee, thank you for the opportunity to discuss the California State University's experience with federal loan programs and with federal need-based aid programs.

As the chairman said, the CSU is the largest and most diverse four-year university system in the country. We have more than 450,000 students. Fifty-five percent of our students are students of color, mostly from the underserved communities of California. And our mission is to provide high quality, affordable education to meet our state's ever-changing economic needs.

During the 1990s, the direct lending program was created. Ten CSU campuses joined that program then. This year five more campuses have joined the direct lending program and the remaining eight campuses will join next year.

Why this shift? Events of the past few years have contributed significantly. First, changes to federal law through the budget reconciliation process that reduced FFEL lender margins have led to a decline in FFEL lender service and reliability and to a reduction in borrower benefits.

Second, our nation's financial crisis has raised significant concerns about the long-term viability of participating in FFEL. Third, previous concerns about the future viability of direct lending programs have been eliminated. Stability and reliability in a campus's student loan programs are tremendously important to our students and to our institutions.

When it comes to student aid, the Pell Grant Program, with its focus on student need is essential to the California State University to closing the gap in college enrollment and completion that exists between low income students and their more affluent peers. This is true even at low cost institutions like the CSU.

In 2009, '10, next year, our average campus tuition plus fees will be $4,155 which is the lowest among any of our comparison institutions and among the lowest in the nation. Even so, many CSU students continue to have financial need.

However, thanks in part to programs supported by Chairman Miller and Mr. McKeon, most CSU students with family incomes of $75,000 or less pay no student tuition or fees at the CSU. Both of you have always focused on our most needy students, so thank you. Pell is a huge part of this equation in California. This fall we estimate that more than 128,000 of our neediest students will receive Pell Grants for a total of more than $445 million. Your support for Pell has also helped us maintain the CSU's long-standing policy.

This is our policy, increases in federal and state grant programs should reduce our students' loan indebtedness dollar-for-dollar. Over 57 percent of our CSU graduate recipients graduate without debt compared to the national average of 33 percent and the average debt in California of our students is a little less than $14,000 a year, well below the national average of $20,000.

More than 35,000 Pell recipients received CSU Bachelor's degrees in 2008. The CSU endorses continued efforts to increase this vital aid for students.

This new administration's proposed new $500 million per year post-secondary access and completion fund, which would provide grants to states and nonprofit organizations, to help the underserved population pursue and complete a post-secondary education is very important.

The CSU is very supportive of this concept and would like to offer its experience in developing this new program, should Congress decide to authorize it. The CSU would also support including an incentive for maintaining state funding of higher education in this program, similar to the non-supplanting provision found in Title I of ESEA.

I commend both Chairman Miller and Ranking Member McKeon for utilizing such maintenance of effort language. It is very helpful for public institutions.

As this committee explores ways to improve educational attainment for lower income and under-represented students, I urge you to consider what I call a big and bold idea and we sure don't need any more little ideas, and that is to resurrect a concept that was authorized in 1972, which was the original Pell.

It envisioned direct institutional grants to colleges and universities to support the educational services necessary for these students to succeed. The concept was known as the cost of education allowances and was similar to the concept contained in the Elementary and Secondary Education Act of 1965. A Title I for higher education would provide a flat capitation grant per lower income student for every institution that meets an enrollment threshold of at least 20 percent of these students. The program could require that funds be used to support academic and student service programs designed to assist Pell eligible students.

It would create incentives for public and private institutions to not only enroll but to retain and graduate low or lower middle class income students. Here, too, the amount of the grant award could be moderately increased or decreased based on the maintenance of effort for higher education.

If we're going to improve our nation's achievements in higher education and reach the president's goal, we have got to reach out to the underserved communities of this country.

Thank you again for this opportunity and I'll be happy to answer your questions.

REP. MILLER: Mr. Remondi.

MR. REMONDI: Good morning, Chairman Miller, Ranking Member McKeon and members of the committee. My name is Jack Remondi and I am the vice chairman and chief financial officer of Sallie Mae.

On behalf of Sallie Mae's 8,000 employees and the more than 20 million college savings and student loan customers, I thank you for the opportunity to testify on federal student loan reform and the opportunity to provide for increasing student aid.

The administration has made an important proposal to reform the federal student loan programs. At the outset, I want to underscore the significant agreement between Sallie Mae and the administration's objectives of reforming the federal student loan program and increased funding for Pell Grants.

Sallie Mae proposes to build on this model, with modifications that would preserve beneficial competition in the delivery of loans, create incentives to materially reduce defaults and eliminate the risk of requiring more than 4,000 schools to convert to a new loan delivery process within the next nine months.

We believe our suggestions would preserve the value added by loan originators, including state and nonprofit providers, help all students better manage their debt burden, and increase the savings available for the Pell Grant Program.

The president's proposal builds a solid foundation for a new federal student loan program by utilizing federal funding, establishing common loan terms and replacing the subsidy model with a fee for service model. We believe, however, that it could be made better.

Specifically, we recommend the following six enhancements.

One, we would allow schools to choose the loan originator that works best for them and the students that they serve. We would introduce risk sharing so that all servicers have skin in the game and loan defaults are minimized.

We would allow originating lenders to retain servicing regardless of their size; and permit schools to choose their loan servicer. We would require the Department of Education to set origination fees via market mechanisms, to preserve a broad participation of originators, including state and nonprofit service providers.

And finally, we would require the Department of Education to fund default prevention initiatives, such as financial literacy programs and student counseling.

The benefits of these programs and these modifications are significant. Using the existing loan delivery infrastructure eliminates the risks and costs associated with the conversion of more than 4,000 schools to a loan origination platform that they did not choose.

After 16 years of FFEL and direct lending competing side-by-side, it's fair to say that schools have chosen the loan delivery system or process that works best for them and their students.

Great products and services result from consistent competition. Competition through the choice of loan providers and servicers will drive innovation and improvement in these programs. Mandating that all schools use a single loan originator will eliminate this competition and any incentives in innovation for improvement.

Today, loan originators add significant value beyond the delivery of funds. The new Income-Based Repayment program or IBR is a great example of how competition adds value. IBR will help lower-income borrowers shrink their payments to a manageable portion of their income.

For students to benefit from this new tool, however, they need to know -- they need to be aware of it and know how to use it. To make sure this is the case; Sallie Mae has held school-based workshops on IBR since January, six months before the launch and has been asked by several direct lending schools to provide these same workshops for their students.

These efforts are an example of how competition creates enhanced services, because we compete, lenders, secondary markets and guarantee agencies are all incented to create value-added programs and services.

These initiatives are particularly valuable to schools and families with limited resources and some of the examples include financial literacy programs and tools like paying for college calculators and seminars, customized technology interfaces for schools and outreach programs that help families understand, plan, and pay for college including customized programs for Hispanic, Latino and African American students and families.

A specific example is Sallie Mae's Education Investment Planner, a free tool that helps students and families save, plan and pay for college. I would also like to highlight the cost-saving aspects of our suggestions, some of which may not be captured by CBO models but are real nonetheless.

Our risk sharing proposal would generate substantial savings. A modest ten percent reduction in default rates, only one-third of the 30 percent that Sallie Mae has actually achieved, would prevent more than $1 billion in loans from defaulting, sparing several hundred thousand students from the negative consequences of default.

A delay in the conversion of the more than 4,000 schools into the Department of Education's loan origination system would materially reduce the savings and could potentially disrupt student's access to loans. By allowing schools to use the origination platforms that work best for them, implementation is guaranteed and the savings would be realized.

Finally, using a market-based process for setting fees will insure the lowest cost to the taxpayer year-after-year. I hope I've been clear. Sallie Mae supports the administration's objectives in reforming the federal student loan programs in increased funding for Pell Grants.

We are not trying to preserve lender subsidies. We are offering recommendations that build on the foundation of the president's proposal, particularly the use of low-cost Treasury funding for all loans and with such changes, we and our competitors can guarantee the seamless delivery of student loans and meet the financial objectives of the administration, this committee and America's students and families.

Thank you and I'd be pleased to answer any questions you may have.

REP. MILLER: Thank you.

Ms. Griswold?

MS. GRISWOLD: Good morning, Mr. Chairman and Ranking Member McKeon and members of the committee.

My name is Anna Griswold and I'm the assistant vice president and executive director for student aid at Penn State University. Thank you for the opportunity to be here today to talk about Penn State's experience converting to the Direct Loan Program this past year.

Penn State University is a large, public, multi-campus research university enrolling just over 90,000 undergraduate, graduate, medical and law students at 23 campuses. Seventy-three percent of our students receive some form of financial aid. Twenty-three percent of our undergraduates receive Pell Grants. About one-third of our undergraduates are first generation college students for their families.

The federal student loans represent over 50 percent of our student aid funding. Last year, more than 46,000 Penn State students borrowed $466 million in federal loans to help pay their education costs. Last year's turmoil in the financial markets threatened to destabilize both the federal student loans and our efforts to maintain an efficient and student-friendly loan delivery model in the FFEL program.

As lenders across the country began to terminate or suspend their participation, this quickly became cause for alarm among our students and parents that relied heavily on Stafford Loans. To allay their concerns, we needed to act quickly and decisively to assure students that they would be able to get their loans.

In our case, some 38,000 current student borrowers were with a single lender that announced it would have to suspend making loans last year. Given the uncertainty about future lender participation and the new restrictions that limit schools' use of preferred lenders, we knew this would be a challenge for our students.

So Direct Loans was really the logical solution for us. In March 2008, Penn State began implementing the Direct Loan Program. A core team of 10 to 12 existing staff from several Penn State offices started the conversion, linking our system to the department's common origination and disbursement system, one already familiar to us for processing Pell Grants.

We also developed a communication plan to inform students and parents of the change in how they would secure their loans and the steps that they would need to take. Students readily accepted this change.

Our existing staff did all the work. We did not hire additional staff to convert to direct lending and the cost to convert was within normal budgetary costs required for any new student aid program implantation that comes along.

Our circumstances were quite unique last year. First, as I mentioned, the need to move quickly when we learned in February that our primary lender would no longer be serving our students for the coming year. So we needed to move quickly and to convert to direct lending by July.

We have one of the largest student loan volumes in the country and we have a homegrown computing environment, our own programmers to run our student aid system. We do not use vendor-supported software.

Most schools will not face these same circumstances and would not require the same resources that we used. Smaller schools with fewer resources will likely be able to convert to Direct Loans without too much trouble, especially if they have vendor-supported student aid systems or if they use the department's EDExpress software.

Ample lead time may be necessary for most and is always something welcomed by aid administrators.

It is testimony though to the streamlined nature of the Direct Loan process, the single point of contact model it represents, that we were able to convert fairly quickly. It helps that Direct Loans uses the same COD system that schools use for Pell. We had excellent technical support from the Department of Education's Direct Loan and COD staff. Our first Direct Loan disbursements went very smoothly. Our bursar's office reports great satisfaction with the disbursement and reconciliation functions, having reconciled summer 2008 loans in four months ahead of the required deadline.

The cash draw down system, already familiar to us as well with other student aid programs, has greatly improved cash flow at Penn State. Our frontline staff reports that this program is very simple to explain to students.

Staff feel more in control of advising them about the status of their loans and my written statement contains a number of comments from staff about their experience with Direct Loans.

In summary, we believe that by entering the Direct Loan Program, we have shielded our students from uncertainty and the financial markets and we have gained greater efficiency in processing student loans.

The state of the economy makes adequate student aid funding an even more important consideration for students and their families in deciding if college enrollment is possible. We encourage Congress to take whatever measures possible to increase appropriations in the Pell Grant Program as we all work toward insuring college access and affordability for students from low and moderate income families.

I'd be happy to answer any questions.

REP. MILLER: Thank you.

Mr. Drouin.

MR. DROUIN: Chairman Miller, Mr. McKeon, and members of the committee, thank you for inviting me here today to testify. I also want to personally and professionally thank Congresswoman Shea-Porter for her dedication to higher education. For the record, I am Rene Drouin, and I'm president and CEO of the nonprofit New Hampshire Higher Education Assistance Foundation NHHEAF network organizations.

It is an honor to participate in these discussions on behalf of the students and parents that we serve and on behalf of the organization's dedicated and talented over 200 New Hampshire residents.

I've been asked to describe ideas for loan reform which increase student aid through cost-saving, make federal loan funding more reliable, and preserve the best aspects of the existing FFEL program and DL programs.

I have dedicated 30 years of my life to making higher education more accessible through my work with the FFEL program. Still, I see clearly that the student aid program is in need of transformation. However, to suggest that the federal government or its big contractor located outside the state of New Hampshire could do a better job of supporting New Hampshire college students, their schools and their communities, is unimaginable.

Under NHHEAF's proposal, a student completes the master promissory note from the designated local provider. That would be NHHEAF in the state of New Hampshire. All post-secondary schools would utilize the department's current systems to administer all federal aid, common origination disbursement system, COGS and G5 web site.

Once the loan is approved through COGS, NHHEAF would disburse the funds to the school. Both technologies were built with taxpayers dollars and should be used to administer this new loan program.

Biggest advantage for schools should be, with the system, includes managing payments and data across multiple programs. From the loan perspective, it would provide a uniform way for agencies and schools to share information for more efficient processing and, more importantly, default diversion practices.

The credit crisis has made it clear that the federal student loan program would benefit from changes which ensure the availability of funding from the Treasury. NHHEAF would then participate each loan 15 days after the initial disbursement and then put the loan or sell the loan to the department after 120 days of final disbursement.

The key is that NHHEAF continues to support schools and students with entrance and exit counseling, financial literacy programs and local compliance expertise. This leaves one loan program with standard terms, conditions and administration.

It simplifies the process for students and schools while ensuring funding for program and guaranteeing excellence in borrower education in compliance while the student is in school.

Loans imperative grace and repayment are then serviced by the originating private lender in line with the department's servicing and pricing standards. This creates life of loan servicing which we credit in New Hampshire to our achievement of continuously low default rate. This drives service excellence with pay-for-performance pricing which will result in savings to the department and innovation in servicing.

Moreover, it utilizes existing infrastructure and knowledge at the state and nonprofit agencies and supports borrowers from application through final payment. This is critical to successful default prevention. The most recent draft cohort default rate for NHHEAF is only 3.1 percent while the national default rate is 6.9 percent.

It has been said that going to 100 percent DL puts the taxpayer's interest first. But the reality is that in every category of loan FFEL default rates are lower than DL's. We need a plan that allows students to enjoy higher level of service and effective default programs offered by FFEL agencies.

Our reputation has been built on personalized service for students and our greatest strength is by far the dedicated New Hampshire-based employees who provide borrowers in repayment with expertise throughout the life of their loan.

There already exists this infrastructure to provide the K through 12 outreach entrance and exit counseling, compliance for schools and community outreach programs. Under the new budget proposal, no small nonprofit agency will qualify to service the Direct Loans, only the big players.

I wholeheartedly believe that smaller, well-managed agencies can be most-effective because they are nimble and can respond to rapidly changing national priorities but local realities.

Finally, this model allows agencies like ours to continue the commitment to creating a college going culture locally. President Obama has passionately expressed that expanding college access and success is a national priority. New Hampshire is well prepared to actualize this vision.

In fact, increasing college aspirations has been NHHEAF's highest goal. We provide programs throughout the educational continuum for all populations of students, foster youth, adult learner, dislocated worker, rural student, grad students.

So the report that going 100 percent DL would help students, not lenders, simply does not apply to nonprofit loan providers. In New Hampshire, we serve 30,000 individuals each year with direct, personal service.

This plan incorporates the best aspects of DL Web-based administrative tools and reliable funding. This plan also incorporates the best aspects of FFEL, expert default prevention practices, personalized and local service and commitment to creating a college going culture locally.

The FFEL program has provided education funding to millions of Americans since its inception. I ask you to carefully consider the significance of eliminating FFEL nonprofit organizations like NHHEAF and instead choose to imagine a loan program that upholds the best aspects of the public, non-for-profit, private partnerships which in so many ways has worked so very well for so very long. Thank you.

REP. MILLER: Thank you.

Mr. Chapman.

MR. CHAPMAN: Thank you, Mr. Chairman, Ranking Member McKeon, and members of the committee. My name is Chris Chapman and I'm the president and chief executive officer of Access Group, Inc., a national, nonprofit, student loan provider and loan servicer.

Access Group was formed in 1983 and we currently originate more than $1 billion of FFELP loans annually and hold more than $6 billion of FFELP loans in our portfolio, making us one of the top ten lenders nationwide.

Access Group is mission-based. As I said, we're a not-for-profit entity and mission-based, you know, implies more than making loans with low rates and good terms and excellent service.

As you've heard today from some of the other members of the panel, there's much more that goes along with making loans that -- relating to outreach services, education services for schools, students, parents. These are done all in support of our programs and as a nonprofit who does student loans, nothing else, it is all that we do.

Again, as I said this isn't unique to Access Group, certainly within the nonprofit arena. The more than three dozen nonprofit entities that currently operate across, all across the country and in many, many states perform these services and they, as Mr. Drouin mentioned they're adapted to local realities.

In my career as I have had the opportunity to work in a number of entities in different geographic locations, the role we played has been very localized and very adaptive to the circumstances and the problems not only of the geography but of the time.

I would also like to thank this committee and Congress for moving swiftly on ECASLA last year. The crisis that hit the financial world did not spare anyone including student lenders and due to that quick action and the quick implementation by the Department of Education and lenders getting together, no student was left without a loan or no student was materially disrupted in the timing of that loan last year.

We also thank you for the extension into '09, '10 and we think this year will be even smoother.

What I am here -- what I would like to focus my testimony on primarily is what's kind of called phase two of the ECASLA, which is the asset-backed commercial paper conduit that has just been implemented and gone into effect within the past few weeks.

As you may know the conduit is utilizing the federal liquidity out of the federal financing bank coupled with a put program from the Department of Education to finance loans made under the Federal Family Education Loan program.

It's structured -- the whole idea of the conduit is it's structured to utilize private capital in the program and not have to have federal government borrow $1 or utilize one Treasury dollar in order to fund the program.

Though it's only been up a few weeks it's this is an extremely positive path. Within -- by June 4th about $10 billion will be funded in the program. The program is executed at levels -- pricing levels well within expectations and at levels which are very similar to those prior to the credit crisis.

What this proves is it proves that student loans can be financed in the private markets. Even in today's environment. Given the right circumstances, which in this case includes potentially a federal back top, ensuring investors that if they need to get out of their investment they can which is in a credit crunch, in a credit crisis, is the crux of the problem. We're here to encourage continuation of the ECASLA principles as a means of going forward and funding the student loan programs under FFELP. The reason we say that is because we believe keeping private capital in the program ensures continuing a diversity of providers and a diversity of origination systems, a diversity of servicers which will retain choice, competition and the superior service that FFELP has provided for 40 years.

Now I'm, you know, I admit that as -- the conduit as it sits today is not nirvana for everyone. There are some issues that need to be worked with the conduit to ensure broader participation but they're certainly workable within -- the change is necessary -- workable within the current structure and at no cost to the government.

I want to conclude by just emphasizing that there aren't just two choices here. There's not a choice of 100 percent direct lending or the status quo. You've heard a number of options that have come along the table as we've moved on here.

And I encourage the committee to look at them closely and I encourage you to retain the option that ensures the choice, competition, flexibility and superior service remain in the FFELP program for years to come. Thank you.

REP. MILLER: Thank you.

Mr. Vedder?

MR. VEDDER: Thank you, Chairman Miller. Belated happy birthday by the way and --

REP. MILLER: Thank you.

MR. VEDDER: -- Mr. McKeon you'll be joining the Medicare generation in another year and be part of the --

REP. MILLER: Thank you for your opening remarks. (Laughter.)

MR. VEDDER: I have three points I want to make today. First, the law of unintended consequences has led to outcomes far different than intended as Federal Student Assistance has expanded over time.

Proposed additional expansions will likely not have the intended effects on student participation, access and equality of educational opportunities. Second, the proposal to end the FFEL program and replace it with direct federal student lending will have negative consequences on students, is fiscal madness and the alleged financial benefits to the federal government are likely illusionary.

Third, the proposal to sharply expand the Pell Grant Program and make it an entitlement is likewise fiscally irresponsible and potentially might add to already inflated college costs.

Turning to the first point, the rate of increase in educational attainment in the United States slowed significantly beginning in the mid '70s. From the mid '50s to the mid '70s before Pell Grants and large federal student loans programs, higher education enrollments almost quadrupled.

The era of exploding federal financial assistance has paralleled a significant slowdown in enrollment growth. The notion that federal financial aid has promoted college access to the United States is a myth not a reality.

Expanding these programs will not promote higher access. Moreover the era of greater federal aid is a period of declining equality of educational opportunities. When Chairman Miller completed his higher education in 1972, I've been reading up on you, before the Pell Grant Program, persons from the top quartile in the income distribution had about six times as likely a probability of earning a bachelor's degree by age 24 as by persons in the bottom quartile.

Today the upper income student has eight times the probability of getting the degree. Regarding the second point it is highly debatable whether an expanded direct student loan program will reduce federal budgeted outlays. CBO scoring appears to have ignored Direct Loan administrative costs and not scored the corporate income tax revenue loss in student loan firms.

Moreover people prefer choices to monopoly. FedEx, UPS, and e- mail are booming while the federal postal monopoly wanes. Colleges have largely shunned the direct lending program because of the additional choices in services offered by private providers. As a financial aid person put it in an e-mail to me yesterday, "the direct lending program is more like an ATM machine, with very limited much needed personal contact with students.


Private providers are not earning monopoly profits from federal subsidies as recent exits from the industry and falling stock prices that loan providers indicate. Moreover federal financing of student loans increases federal government borrowing precisely when we're recklessly expanding public debt and expansion is foisting a large burden on future generations of Americans.

This is not only fiscally irresponsible but immoral since the powerful are foisting burdens on young persons who are weak all in the name of frankly political expediency. Regarding the last point, as previously indicated empirical evidence quests whether the Pell Grant Program effectively promotes equal educational opportunities.

Moreover the present value of the funded, unfunded liabilities of federal entitlement programs now exceed $50 trillion or the entire value of the physical capital stock of this nation. It is the height of irresponsibility to add to that liability; rather you should be working to reduce it.

Finally, expanded -- significantly expanding total federal student aid as proposed almost certainly will contribute to the tuition price bubble that is one factor in the slowdown in the growth in college participation. When someone else pays the bills, costs rise, and statutory moves to stop this will simply lead to denied student access, reductions in academic quality, and/or more bloated university bureaucracies.

Thank you very much, Mr. Chairman.

REP. MILLER: Thank you. Mr. Shireman, as you've outlined in your testimony, the -- what the administration is trying to do here is trying to get additional resources into the Pell Grant. I don't know if we have the chart but it's up, but here you can sort of see where we've been with the Pell Grant.

The green is where the administration under its proposal -- it's a lot -- I can't read all -- any of that from here but -- see I am waiting for Medicare to get my glasses.

(Cross talk.)

REP. MILLER: Not going to get covered. Damn. (Laughter.)

All right, let's get back to the subject here. It's not about me. So what they would like to do is to provide direction it would take us back to where we were for something for low income students a greater portion of their opportunity at college would be covered by a grant, the grant program that's made available in the Pell Grant Program is that correct?

MR. SHIREMAN: Absolutely. We want to make sure that the Pell Grant Program grows at a little bit more than inflation, not college inflation because we need to bring that down but we need to provide not just those graduating high school seniors but students in middle school with the assurance that Pell Grant Program will be there and that it will be significant enough to really help them pay for college.

REP. MILLER: And Ms. Griswold, your testimony is that as you switched over in your institution I don't want to paraphrase as you described it, but it appeared in your testimony that this was relatively easy to do for you because of the common platforms between the Pell program and the requirements of the Direct Loan Program?

MS. GRISWOLD: That's correct. It was an undertaking in that we had a pretty short time frame to be up and running. We needed within six weeks of realizing we had some significant changes coming in how our students would need to get their loans, we had a very short period of time to be talking both to our incoming class and as well as our returning students about how they would receive their student loans.

We were getting ready to award financial aid that included their loans and with that comes imparting information about how that program works and what students need to do.

But the mechanics of getting it done were relatively straightforward. With the departments help and the technical manuals that are available and there are a number of schools out there in direct lending that we turned to. To get some questions answered, the promptness of the department was exceptional in responding to us, so for us the experience went very well.

REP. MILLER: Thank you. Chancellor Reed, two things. You have institutions that have done it both ways and you are planning as I understand it as a system to convert to direct loan programs in its entirety over the next year is it?

MR. REED: Next year.

REP. MILLER: Yes, next year. Okay. And that -- so again I don't want to -- but your written testimony suggests that it's worked for the institution. It's made a decision. It seems to have worked fine?

MR. REED: Yes, has and as my colleague said it has gone very smoothly. What we have found is it is not brought an additional burden or cost to our institutions, especially our institutions that are mid-sized, 16,000 to 20,000 students.

We've found that the institution of 40,000 plus students have added one employee at about $40,000 to $50,000 salary including their benefits. So that's been our experience in the conversion.

REP. MILLER: Your -- I mean your testimony you spoke to it but you obviously believe that this trade off if we could increase Pell as the administration is suggesting you think will in fact help those students?

MR. REED: Absolutely. We have an outreach program that goes out into the middle schools and the high schools. We have Super Saturdays, Super Sundays, in the African American churches where we really carry the message about Pell especially and the availability of Pell.

In the CSU we have a $2 billion student aid program, about $1 billion in loans and $1 billion in grants and we try to get that information out as early as we can in the middle schools.

REP. MILLER: Thank you, Mr. Shireman, question of default rates has come up and the suggestion was made I think by Mr. Chapman that in any category at any time the default rates are worse in the DL program than they are in the FFEL program. Is that accurate?

MR. SHIREMAN: No it's not, it's really the opposite. If you look at by type of school defaults rates in the Direct Loan Program by type of school are either comparable or lower than in the FFEL program.

REP. MILLER: Do we not inherit some defaults from the FFEL program?

MR. SHIREMAN: Some of the numbers that you can look at are looking at the whole Direct Loan Program and the Direct Loan Program does take in defaulted loans from the FFEL program. Those are more likely to default again so some of the numbers can look like -- can appear as if there is a lower -- a higher default rate in the Direct Loan Program for that reason.

REP. MILLER: Chancellor Reed?

MR. REED: Mr. Chairman, just to report in 2006 we had 13 of our institutions in FFEL and they're average default rate was 2.56 percent. Our ten direct lending institutions average default rate was 2.4, so that was you know a difference there.

REP. MILLER: Mr. McKeon? Thank you.

REP. MCKEON: Thank you, Mr. Chairman. Dr. Vedder, we've long valued your opinion on the college cost crisis with a lot of talk here, but no talk that I have heard is really talking about lowering the costs of education.

We're talking about putting more money in and giving more money to students and you've written about that. You understand the problem, how that's facing the country, "The Chronicle of Higher Education" recently published an article arguing that the higher education sector would be the next bubble to burst.

How should the higher education community reform itself to avoid a crash like we've seen in other industries?

MR. VEDDER: Well, thank you for that shrewd observation, which of course is mine. (Laughter.)

The cost of college has been rising three times the rate of inflation, two times, three times the rate of inflation for 30, 40 years. That's precisely the period, by the way, since loan programs and the Pell Grant Program began back in the early '70s late '60s we started into this.

The demand for education has been rising faster than the supply. Now, part of the problem is that colleges, and I'm not talking about Charlie's colleges so much as other colleges, the elite universities, he wanted me to say that by the way, the elite universities put limits on.

So you drop more money over at Harvard University or over to the University of Michigan, or the University of California at Berkeley. You give more money to kids it allows them to raise tuition more.

Tuitions have gone up because they can. And you had been part -- you, generically, collectively, have been part of the problem. Now you're trying to solve the problem. You need to look at it from a different way.

How can we change the incentives, the behavior, of college administrators to get them to think small, to think them to cut costs and so forth? You need to look at a different paradigm.

REP. MCKEON: Thank you. Mr. Chapman, the conduit saves the federal government money and it keeps private capital in the program, which means it went for students, schools and employees who are hoping to keep their jobs past July 1st, 2010. As a member of the initial conduit advisory board and one of the members of the advisory board overseeing the implementation of the facility, could you comment on whether you've been approached by Secretary Duncan or other high level officials at the Department of Education, who've been interested in talking to you about the availability of the conduit as a more permanent financing structure?

MR. CHAPMAN: To date I have not been, and to my knowledge no one on the committee has been as well.

REP. MCKEON: If Congress implemented some version of the conduit, what changes in loan delivery, availability of service or services with institutions and students see on their end, as compared to the changes they would experience if we went to 100 percent direct lending?

MR. CHAPMAN: Well, I'm not sure I can speak exactly to what changes it would experience if they went to direct lending, but what I can tell you is with respect to maintaining private sector financing and the diversity of lenders, originators and servicers that exist today and existed over the last 40 years, schools would see the continued great service, the continued value-added services that have been provided over all these years.

From a funding standpoint, it would be seamless and blind. Schools today -- the lenders today in the program finance loans in many different ways in the background and that's all for school perspective, for student perspective, for a parent perspective, it's seamless, so they would see no change.

And in fact, you know, not only not a deterioration but a -- probably an improvement by where if there was a consistent and reliable source of funding that we could see out into the future.

REP. MCKEON: Remember the meeting that we had with Mr. Shireman and the secretary and the lady that was a financial aid administrator at the University of Maryland, her comment how she's helping China now, where they have a one kind of -- one system where the government provides everything.

And they want to reach out to bring competition into their lending market at the same time as we're talking about moving it all to the government. Do you have any comments on that?

MR. CHAPMAN: I will just note that she said those comments with a lot of irony in her voice, but --

(Cross talk.)

MR. CHAPMAN: I think, you know, I think those comments get to, again, choice, and I think, you know, what's critical to this discussion, what's critical to these direct lending vs. FFELP debate, you know, we can talk about savings and dollars and numbers and whether they're real or not.

But what's critical, and what when I think about what the best deal for the taxpayers is, is it's not all about dollars and cents. It's about what the full package is, you know. It's best, not cheapest and sometimes the best isn't the cheapest.

And I think that financial aid officers point and I think, you know, the overarching point of the comments about keeping private capital in the program and keeping the diversity of lenders in the program is that in some, taxpayers, students, schools are better served by maintaining that competition, by maintaining that choice because it leads to better outcomes over the long term.

REP. MCKEON: I think the competition's been good. I fought direct lending when they first brought it in, but over 16 years now we've seen where the competition, I think, has made both programs better. And we have -- one side has 4,000 institutions, one has 1,700.

I think the people have accepted and understood, and I think competition is better and I'm really sorry to see the government moving in so many areas, but especially in this one to take over the whole program.

REP. MILLER: Mr. Andrews?

REPRESENTATIVE ROB ANDREWS (D-NJ): Thank you, Mr. Chairman. I'm glad to hear that my friend from California, Mr. McKeon believes that competition between public and private is a good thing. I'm sure he'll reflect that view in the health care debate when the public option.

REP. MCKEON: Oh, exactly.

(Cross talk.)

REP. ANDREWS: I'm sure he will.

(Cross talk.)

REP. ANDREWS: The word irony was used a few minutes ago, there is an irony overarching our discussion this morning. I think it was brought out in Mr. Shireman's testimony.

Mr. Shireman, I think I heard you say that 60 percent of the capital in the private bank program is coming from the taxpayers at this point, is that right?

MR. SHIREMAN: Yes, it's money we're providing through the participation --

REP. ANDREWS: So, the way this is working now that an institution gets taxpayer money, lends it out, and then we pay them a premium on top of what the student would otherwise pay to reward them for taking a risk with our money? Is that essentially right?

MR. SHIREMAN: Effectively if they -- especially if they keep it they have the option, they can buy it from us ultimately or give it back to us and we pay them a fee for their work. But in the meantime, we could have just made the loans directly and that's really the point.

REP. ANDREWS: But either way the taxpayers are absorbing the risk of that capital not the person in the private sector.

MR. SHIREMAN: Yes, any way we do this it is a government program run by private sector participation.

REP. ANDREWS: So we are -- with respect to 60 percent of what's being called private loans here this morning, with respect to 60 percent of those loans the taxpayer's, in fact, absorbing the risk and we're paying someone a premium to take a risk with our money.

Is that right?

MR. SHIREMAN: Exactly. When they say they're leveraging our liquidity strength that means they're using our borrowing ability.

REP. ANDREWS: Yes. The ranking member also in his opening statement talked about -- he made an analogy to the auto industry. And it seems to me the analogy falls apart in that although we did advance a substantial amount of money to some auto industries, we did not supplement the price of the car, did we? If somebody buys a $20,000 car we don't pay the automaker $24,000?

MR. SHIREMAN: That's exactly right. We have a whole federal financial aid system for Pell Grants and student loans where the decisions about who can borrow, what institution they can borrow at, how much they can borrow and what the interest rate is, are all a part of the federal financial aid system and we don't have that in auto loans, home loans, so the analogy does not really work.

REP. ANDREWS: Ms. Griswold, we're hearing all the horror stories of these additional administrative costs that will be visited upon institutions that make the switch, what was Penn State's experience in a vast system, making the switch from the FFEL program to direct loans, in terms of your internal administrative costs.

MS. GRISWOLD: Right. It was a matter of shifting priorities and some pretty intense work for about a four-month period to get up and running. The -- we did not hire additional staff --

REP. ANDREWS: You didn't hire -- you didn't have to hire anybody else?

MS. GRISWOLD: No, we did not. We did not need $400,000, a figure that grew to $1 million the second time I heard it on the streets, to pay the -- any cost associated with this. Any time we implement a new program or a new system at the university, a new financial aid process or a change in regulation, there's always cost associated in terms of staff priorities.

You shift staff where they need to be. This happens all the time; it's the way student aid offices work. And so the notion that we had to go find $100,000, $200,000, $300,000 to be able to bring direct lending up couldn't be further from the truth. I'm not sure where that came from.

REP. ANDREWS: Mr. Shireman testified that essentially the only different between processing the Pell Grant and the direct loan is the student signs a note for the direct loan and not the Pell Grant, is that essentially right?

MS. GRISWOLD: Yes, it is.

REP. ANDREWS: So that's the only one administrative step that's really added.

Dr. Vedder, I want to ask you one thing. You testified that the CBO score for the savings on direct loans did not take into account additional administrative costs or foregone corporate tax revenues. What's the source of your testimony for that statement?

MR. VEDDER: I received that information from members of the minority.

REP. ANDREWS: But do you know, independently know it's true?

MR. VEDDER: I have not first-handed, scored it, and in my full testimony I made it very clear that I understand --

REP. ANDREWS: Have you read the CBO documents that underscored this?

MR. VEDDER: I have looked at them; I have not read them carefully.

REP. ANDREWS: So are you sure that what you said is right?

MR. VEDDER: I'm not sure I'm sounding right, but neither are you.

REP. ANDREWS: I'm not -- that's why I'm asking, I said -- you made the statement that they did not take into account administrative costs or foregone tax?

MR. VEDDER: The scoring on things like -- I'm an economist, Representative Andrews, and I understand that the people at CBO are honest people. I'm not saying that --

REP. ANDREWS: They sure are.

MR. VEDDER: And they're good people. They're professional people. I used to work with them. But economists make mistakes and if you look at, for example, default rates, can you predict default rates?

REP. ANDREWS: My time's up, but I just want to be clear that you don't know whether that's true or not, right?

MR. VEDDER: I don't know that it's true.

REP. ANDREWS: Thank you very much.

REP. MILLER: Mr. Petri?

REPRESENTATIVE TOM PETRI (R-WI): Thank you very much, Mr. Chairman. Thank you all for your testimony. This has been fascinating for me because I can remember when I just was a new member of this committee, the head of the Wisconsin Higher Education Agency coming to my office and in a response to a question saying that in his experience thought the guarantee program was wildly costly to the government, and suggesting a direct-type loan program, which he thought would be much more efficient both for students and for the taxpayers.

We did try it out despite a lot of doubts on a three school basis including Marquette in my own state, and now it's been expanded and we've seen competition between the two and now we're finding that the direct program is being scored, I can't believe it.

I think it's excessive, a $94 billion saving over ten years, $9 billion a year couldn't possibly -- I mean, obviously, with that much money you can provide a few perks and little extra tweaks and bells. But I'm not sure it's worth it to the taxpayer when the terms of the loans are the same to the students and the schools.

So I just would like to ask Mr. Shireman if you could tell us how you're doing to lay the groundwork for expanding the Direct Loan Program? I mean you're going to try to switch by July 1st, 2010. Could you tell me how many schools do not have their participation agreements set so that they can move to the Direct Loan Program if they choose to do that?

MR. SHIREMAN: I don't have a precise answer to that question, but we are conducting outreach right now on contacting schools that are not yet making direct loans, or have not conducted the initial -- those initial steps.

And we have also invited the Higher Education Association, as well as members of Congress, to let us know about the schools they're most worried about, the schools where there's, you know, maybe one staff person who's handling federal aid and it's important to get them in early, talk to them about what the steps are so that they can take those steps.

Because it's a relatively minor addition to the existing efficient Pell Grant process that's run by Accenture, that front-end origination side is not the biggest concern. The biggest concern is we have to ramp up the servicing capability to collect on those loans and we have -- the previous administration actually started that process with an RFP that we're in the process of completing.

REP. PETRI: And now other countries have gone to a Direct Loan Program, I think Great Britain and Australia and New Zealand.

They have an additional feature which gives borrowers the option of repaying their loans through the Internal -- Inland Revenue Service or their equivalent of the IRS.

And if we do have a direct loan program we could save collection costs and default costs and so on by giving people the option of having, say, up to 15 percent of their income withheld from each paycheck, and the loan's automatically rescheduled through the withholding process of the IRS.

Would the administration be at all open to looking and exploring whether us doing here in the United States what's already being done in the United Kingdom and Australia and New Zealand would make sense?

MR. SHIREMAN: In those other countries, which are very interesting programs, all of the participants are paying off their loans as a percentage of their income, and we've made the policy decision here that the majority of borrowers are probably going to be fine paying a flat payment based on the amount that they borrowed, but that there are some that need income-based repayment and that type of help.

So it's more on an exception basis here, so it probably doesn't fit with the system that we have. I'd be glad to go back and take a look at it, but at this point we're focusing on really using the system that we have developed over time here.

REP. PETRI: One other area, several people -- I think someone testified here from Vermont and the guarantee agency in that state. It's my understanding that guarantee agencies in many cases have close relationships with private lenders, and one of their missions is to provide oversight over lenders.

Is that an area where we should be, our self, exercising more oversight to make sure that they haven't gotten in bed with each other rather than supervising?

MR. SHIREMAN: Well, certainly there are some situations where there are close relationships between lenders, our secondary market and guarantee agencies. There has been some increased oversight of that situation over the past couple of years, and it is an area that we'll continue to look at. It is of concern.

REP. MILLER: Mr. Hinojosa?


I enjoyed yesterday's hearing that you brought to us, and this one seems to be just additional information that I am enjoying very much. I want to direct my first question to Chancellor Reed.

I am very happy to hear your statement and how your university system focuses on the most needy students and underserved families helping them access higher education, and you highlighted in your testimony that your system includes many HSIs and involves many first generation college students, those students who need the most support financial, academic and social to successfully complete college.

What do you see as the core services that will help low income first generation minority students successfully manage their student loans and college financing?

MR. REED: Mr. Hinojosa, one of the things that I've found is to reach out to the families and the students together, and in California we have initiated an outreach program into the middle schools, including the distribution of over three million posters that has financial aid information, both grant and loan information.

As you know, the Latino community does not have a history of borrowing money and one of the things that we try to reach into the middle school is to have Super Saturdays where we bring parents and students together to the campuses to share with them the different kinds of financial aid that they will be eligible for and let them know how to apply for it, when to apply for it and give them the assistance that they need.

REP. HINOJOSA: Chancellor Reed, I come from a Mexican American family and that practice is a European practice that you don't borrow money, you save money and you pay for it in cash. So I understand it very well and I'd like to direct my next question to Secretary Shireman.

In your testimony you said that it would be the department's job to build into contracts the proper incentives to get the best service for students and I couldn't agree more. I like those incentives, proper incentives, and that there'll be competition amongst the universities to show that it can be done just as Ms. Griswold shows at Penn State that they didn't need to hire more people to get this Direct Student Loan Program in.

So let me say that in the State of Texas, Secretary Shireman, our state guarantee agency and nonprofit secondary markets have provided valuable financial illiteracy education and outreach programming for students and families and technical support for colleges and universities.

So I'm going to ask you a question. It was interesting to also hear CEO Rene Drouin talk about one of the parts -- I think it was on page two, bullet number three. It says the key is that your organization, your foundation, continues to support schools and students with entrance and exit counseling, financial literacy education programs and local compliance expertise.

So I ask you, Secretary Shireman, will you agree with me that we in Congress make this component of financial literacy education a mandatory as we are trying to finish out our legislation?

MR. SHIREMAN: Certainly as part of our college access and completion innovation fund we want that to include that type of financial literacy education, helping students know about college, how to plan for college, how to pay for college and so that can be a very important part of that program.

REP. HINOJOSA: Excellent. The next question I want to ask the gentleman from that foundation, the experience that you all have had, in terms of minority students going to college, do you find that they are able to repay their loans, or do they have a high percentage that are failing and cannot pay their loans?

MR. DROUIN: Congressman from the State of New Hampshire, our Latino population is one of the fastest growing populations within our state. We have programs that we have designed specifically for our Latino group, and what we find is they again need early awareness and often and we find that with all of our individuals.

REP. HINOJOSA: Okay, thank you. I yield back, Mr. Chairman.

REP. MILLER: Mr. Souder.

REPRESENTATIVE MARK SOUDER (R-IN): Thank you Mr. Chairman. This is a pretty amazing hearing, the party of Andrew Jackson who opposed the national banks not only proposing another national bank and advocating common stock in existing national banks. It is an amazing turn of events that I find this hearing ironic in so many different ways.

As we're debating about Fannie Mae and how Fannie Mae was undergirding much of our financial crisis, by not being careful, we're proposing, in fact, to duplicate Fannie Mae and the problems that occurred in Fannie Mae.

At a time when California is begging on their knees, we're being held up as California as a model of how they did low income and affordability in college. I'm sorry. It's been a great university system. It's not the only problem in California but I wouldn't hold it up as our economic model.

At a time when we're debating health care, my friend from New Jersey said, that there is an option on the table for public and private. If you want to know why Republicans have no trust whatsoever that the purpose of the public part isn't to drive out the part that's private just look at today.

Just look at today. If there's a single Republican who will take the word of the other party that says when there's a public and private offered that the intent isn't to drive out the private, look at this example, 74 percent of colleges chose the private.

That just can't be. We just can't allow that. The public side has to take it over, and I'd like to ask Mr. Chapman why since this is humiliating to have a duplicate public-private and only 26 percent take the private, why would they choose you?

What is it, is there a bias in the system? Is it rigged? Why did they choose the private sector over the public?

MR. CHAPMAN: I would say as a general response to that question is private sector was chosen because of the service that was provided and not only the service in terms of loan delivery, in terms of customer service, but in terms of value-added services that we provided to their students these outreach services, these literacy services.

How do you pay back your loan when you get out? You know, it's a competition and admittedly when I got into this business and when direct lending first came about, the private side of the student lending business was struggling as far as service went.

So, but over time then very quickly common standards, it solved most of the administrative issues that schools were having with the private sector.

I come from Ohio originally and The Ohio State University I believe in 1992 had students from all 50 states. They had approximately 275 lenders I believe who all had different applications.

Those days are long over, and they were long over, you know, probably by 1993 or 1994, and the service improved benefits to students as far as lower prices, quicker turnarounds as far as loan delivery happened and for those schools that have stayed in the private loan program that's what they've -- that's who they've liked.

The schools that were doing direct lending have, you know, they've made their decision and I'm glad they had the ability to make that decision. I'm glad Penn State had the ability to make the decision they made, but cutting off that choice we believe will be very problematic.

REP. SOUDER: In 1997, basically, the direct lending system failed and that led to a lot of trying to make sure there was diversification to be able to handle changing loan amounts and the rigidity of the federal system basically collapsed and the private sector had to bail the federal sector out.

Was that partly when and why a lot of people moved to the private sector? There was an eight month delay that unlike this where the federal government provides a back up in tough times to the private sector to keep it moving smoothly, when the federal government took over the whole thing and then had problems and got eight months behind there was nobody.

They had to go back out to the private sector and it took eight months to fix the problem. That's the risk of just one national system, and I was wondering, were you involved at that particular point in time or familiar with that?

MR. CHAPMAN: Well, as far as that particular time, I'm not sure I can speak to that, but again it gets to for the same reason Penn State and some other schools have been able in times of concern about availability of loan funds or students switched to the Direct Loan Program, but at that time where the situation was reversed the schools had the option to switch back to a more reliable source of funds at that time.

REP. SOUDER: Mr. Chairman, I know my time is up, I'd like to announce consent to insert into the record these are from USA Funds, an Indiana Company, on their default rates which were two percent over six years lower than the direct lending including for Hispanics.

REP. MILLER: Thank you. The gentleman's time has expired. We're going to try one more question here. Mr. Bishop, you'll just have to work out the clock with yourself Mr. Bishop how long you want to keep asking questions but we're in the middle of a vote.

We have a series of votes. I plan to recess the committee here so we can make the vote. We will probably not be back before 12 o'clock so if that creates time problems for some of you, I understand that and feel free to leave.

I would hope that those who can remain would remain because I think this clearly questions that the members of the committee have -- this is an important proposal before the committee.

Mr. Bishop?

REPRESENTATIVE TIM BISHOP (D-NY): Thanks, Mr. Chairman, and I'll try to be quick.

REP. MILLER: It's your voting record, not mine. (Laughter.)

REP. BISHOP: Thank you, Mr. Chairman. I appreciate that reminder. I've listened very carefully to Mr. Souder's questions and just for clarification had we not passed ECASLA, what would have happened to student loan availability in the current academic year, Mr. Shireman?

MR. SHIREMAN: Many, many schools would have shifted to direct lending, and they would have had to do it in a very rushed way, but ultimate -- and we would have seen delays in terms of students getting funding.

REP. BISHOP: And $6 out of every $10 is being made available to students currently enrolled right now in the student loan program is a federal dollar, is that correct?


REP. BISHOP: It may be originated privately but it's supported publicly, correct?

MR. SHIREMAN: Right. And it's important to point out that both of these programs are public programs that involve the private sector doing the work and the difference is really how we pay.

REP. BISHOP: We've heard an awful lot of discussion this morning about choice and that certainly is a sort of a seductive argument. I did student financial aid for seven or eight years back in the dark ages. I was a college administrator for 29 years. Every day practically that I was on my campus I dealt with students in terms of how to pay their bills.

I never once heard a student say, "God, I wish I had a choice." They were grateful to know that there was a source of money available to them. They wanted to know how much, they wanted to know what the terms and conditions of repayment were, and they wanted to know that it was available to them.

Ms. Griswold, is that your experience as well?

MS. GRISWOLD: That's my exact experience, that students are far more concerned about the availability, the efficiency and getting their funds, less concerned about who the provider of those funds are. We had years where students who understand that many banks participate in making the loans.

We regularly got the question, which one should I pick, and the other, you know, the other thought and the notion of competition with these loans has always been my lament and I shared this with my colleagues in the FFELP community, as well as in the Direct Loan community, that lack of standardization is sort of a sad thing.

A student in a rural community, at a small university, hopefully, hopefully, has a school that has worked sufficiently with lenders to negotiate service and availability of loans that are at the best rates. Not all students get the same benefits that come and as the national program it would seem those benefits for students should be equal across all students.

REP. BISHOP: Thank you. I only have time for one more.

Dr. Vedder there are many things that you have said in your testimony. I've heard you testify before. I've read much of what you've written, and I have a lot I could engage you on. I have about 30 seconds.

In 1974 when the Pell Grant began, the maximum award was $1,400. Is it your contention that had that award stayed at $1,400 or some reasonable variant thereof, that tuitions would not have increased?

MR. VEDDER: It's my contention if we had not put in the Pell Grant or the Student Loan Program we would have as many students enrolled in American universities today as in fact --

REP. BISHOP: So if I may interrupt, so if you were constructing a student financial aid portfolio now, federal, state, institutional, what would it look like from your vantage point? Would you have student aid?

MR. VEDDER: If I were the czar which, thank God I'm not --

REP. BISHOP: I'm sort of thanking God I'm not also, but -- (laughter) --

MR. VEDDER: You should pray every day that I'm not. You should -- I would not -- the federal government would get out of the student loan business completely. The federal government has corrupted higher education with the disincentive effects that it has provided to universities to engage in bloated bureaucracies, arrogance, elitism, and so forth that has caused these problems.

REP. BISHOP: I think my time has expired, Mr. Chairman. Thank you very much. (Laughter.)

REP. MILLER: Recess. I want to thank all of you for your testimony. If you can remain, I would hope that you would and we'll return as quickly as possible.


REP. MILLER: Thank you very much for being willing to remain. My, well, there's no apologies this is just the way it is on The Hill. Most of you are familiar with the Congress, but I wanted to make sure my colleagues, some of them said they will return. If they do they'll have to do it inside my question period, otherwise we're going to let you all be free.

Just a couple of things, Chancellor Reed, the gentleman Mr. Vedder was talking that he thought the federal loan, the federal financial assistance thing should be abolished, or dismantled, you were moving around in your chair a little bit. You want to comment.

MR. REED: Well, America's future workforce is going to come from a majority of the underserved students of color in this nation, and I don't look at either the Pell Grants or the Student Loan Programs as expenditures.

I look at that as investments in America's future, and those are very good economic investments in the future of this country. And providing a college education is something that can be shared by the individual, by the states, and by the federal government.

One of the things that you have tried in the last couple of years is to focus on making states maintain their effort, and I think this is a shared partnership and when one of the questions was why has tuition and fees increased, and I think, my experience has been, because states have withdrawn the kind of support that they need to be as a part of their partnership in this effort.

So I don't look at this as an expenditure and breaking America's back. I look at it as making America stronger.

REP. MILLER: Well, thank you and, you know, I don't think any of us who've sat on this committee -- I mean we've listened to so many people, certainly out of the business world and economists, you know, that this investment we make in education probably returns more than any other investment that we make.

We all know what it leads to in whatever field that it is, and the idea that somehow we would then dismantle the program and that it would return to the days when I was in school.

If you drive by the San Francisco State or if you drive by the University of California at Davis, it's a far different campus with far more of opportunities available to that student body and that student body is far different than when I went there.

Certainly far different -- it's a very different law school today than when I went there and the diversity of people who have the opportunity now to pursue that education. So that the idea that somehow we can return there if we just dismantle the federal student assistance that somehow that's a credible position that the nation would be well served, I just didn't want to leave on the record at that point.

Mr. Remondi, in your testimony, you have essentially said that this program is going to have to change given what has transpired over the last couple of years, and it's a pretty fundamental change that you're talking about.


REP. MILLER: I just wanted to be able to make sure that people on the record understand that -- I mean I've looked at your proposal. We're giving it very serious consideration and discussing it among members and staff, but I think there's sometimes the characterization that you're here saying, "No, we just want to go back to where we were," and I don't think that -- I want to clarify that's not your position.

You recognize that this -- whatever happens is going to be very different than in the past.

MR. REMONDI: That's right. And I think, you know, we -- the federal loan programs kind of mirrored what was going on in the capital markets and as the capital markets continue to ratchet down credit spreads, we were the beneficiaries of that. And the federal loan programs kind of followed and tried to keep step with it. One sometimes often got ahead of the other.

In 2007, that environment changed completely and credit spreads have widened to levels I don't think any of us could have predicted. We used to raise money at about 10 basis points over LIBOR. Now that same bond would cost us about 200 basis points over LIBOR. Obviously, it doesn't work with the economics that are built into the Student Loan Program today.

But we also see that the funding environment is not going to return to those same old levels, and so if there is a predicted and consistently large spread between where the private sector can borrow money and where the federal government can borrow money, it does create an opportunity to utilize that to create savings that can be used to expand the Pell Grant Programs and fully support that.

REP. MILLER: Mr. Guthrie?

REPRESENTATIVE BRETT GUTHRIE (R-KY): Thank you, Mr. Chairman. And it's great to be here. I think the number one issue for all of us regardless of where we stand is how do we make college more affordable? I think that's the biggest concern. I know it's the biggest concern within middle class America right now.

Maybe it's because I have one heading that way and so those are the kind of parents that I talk to every day when I'm home at soccer fields and so forth, but really concerned about the ability to send their children to college. And so that's where we're going. Whatever program we do, I think that's got to be our end result and that's everybody's interest.

The question that I and I kind of caught on it Monday when I was kind of studying for this and if Mr. Shireman, on the score for the CBO, the $90 billion plus score for the CBO, my understanding with that, and please correct me if I'm wrong, is that's not necessarily money that we send to the private lenders or it's not money we send to the private lenders. It's what would be gained by the Direct Loan Program being able to borrow at lower rates and then also charging the same rate that the private industry does to our, I guess middle class students who would be doing these student loans. And then that money is used to subsidize the Pell Grants in the proposal?

MR. SHIREMAN: I think this is the way to think about it. Remember that these are fixed rate loans to students at 6.8 percent, in some cases lower than 6.8 percent. So you've got a 6.8 percent fixed rate loan over the next 10 to 25 years.

Our borrowing, say our cost of funds is here. The amount that we have to pay in the FFEL program to -- so that loans are made in FFEL is here.


MR. SHIREMAN: And there's a gap there and if we make the loans in direct loans, when interest rates are low in the economy, that's an amount that comes to us. When interest rates are high, it's an amount that we actually pay to --


MR. SHIREMAN: -- the FFEL participants. So depending on interest rates over the next 25 years, sometimes there will be -- sometimes we are having more money come in because we do direct loans instead of FFEL and sometimes we have more money going -- less money going out --

REP. GUTHRIE: But the last couple of years --

MR. SHIREMAN: -- with direct loans than FFEL.

REP. GUTHRIE: -- there's been money coming in. Would it be, and I understand the increase in the Pell and I think honest people can disagree on whether there should be an entitlement or the Congress every year decide how much money is going into the Pell program.

I think that's a reasonable area to discuss and debate. But my understanding is though, if 6.8 percent is the fix and we can borrow as the government at a lower rate, why shouldn't -- why is 6.8 the number?

I mean why shouldn't it be 5.5 or when the times are -- when money's coming in and these middle class, typically middle class people who are having -- struggling and then the moderate and lower income or the Pell Grants, why not give a lower interest rate to the people going to college? I can't understand why we wouldn't have that policy and then when it goes up and then 6.8 percent is what we decide as a Congress and as an executive branch is the right level.

MR. SHIREMAN: It is a decision that Congress can make. A few years ago we had a variable rate approach. I mean the tradeoff is usually that a variable rate approach can go to a higher rate, so we had a variable rate with a cap of 8 1/2 percent. When we went to a fixed rate, we went -- Congress decided to go to that 6.8 percent.

So if there was a shift, and obviously, in the private student loan market, non-FFEL, non-guaranteed, they're almost all variable rate loans, with no cap at all.


MR. SHIREMAN: So if we have interest rates at 12, 14, 18, 25 percent, we don't want to have that kind of a variable rate program --

REP. GUTHRIE: And I agree with you on that.

MR. SHIREMAN: -- and so there are tradeoffs there and the tradeoff can involve some federal costs, so that's the kind of decision that Congress needs to make.

I should -- I will say that you cannot get a personal loan at 6.8 percent fixed rate right now, so from the standpoint of whether this is a good deal for students, these are good loans, personal finance experts will say this is the loan to take.

REP. GUTHRIE: I'm not saying they're not good, but it could be better. It could be better if Congress --

MR. SHIREMAN: All the costs to make it better and that's the kind of decisions, you know, those are the kinds of decisions that Congress --

REP. GUTHRIE: But in the score, isn't that 6.8 percent vs. what Congress can borrow for or what the federal government can borrow for? Isn't that the score of the $90 billion?

MR. SHIREMAN: Well, you have to remember that 6.8 is a long-term rate, so we're going to see interest rates, whether it's next winter or next year or five years from now, we're going to see interest rates change a lot over time.

REP. GUTHRIE: Right, so you could be upside down or the federal government could be upside down.

MR. SHIREMAN: Absolutely. There will be times when we're putting money out --

REP. GUTHRIE: But the scoring of CBO assumes that there will be more money coming in than going out, and that money is used -- (Cross talk.)

MR. SHIREMAN: CBO currently uses --

REP. GUTHRIE: -- to create --

MR. SHIREMAN: -- relatively low interest rates into the future. What really doesn't change that much is the fact that there's a gap. So the gap exists whether we're above the fixed rate and paying money out or below the fixed rate and having money coming in.

REP. GUTHRIE: And my time's up, but we could have -- we could loan money to students at the cost of the federal government borrowing, plus servicing or whatever kind of -- and it would be cheaper than 6.8 in today's numbers, right?

MR. SHIREMAN: It would involve work with CBO to figure out what that would cost and compare that to investing in Pell Grants.

REP. GUTHRIE: Instead of the students -- in current times, the students' money would subsidize --

MR. SHIREMAN: Well, students are getting --

REP. GUTHRIE: -- Pell Grants, given the way you're moving on that.

MR. SHIREMAN: Well, students are getting a loan at a rate that they cannot get in the private sector right now, at the rate that is being offered right now, so whether it should be even lower than that, at a cost to the federal government, which would mean we couldn't do as much for Pell Grants, that's not the choice that the administration has made.

We think we have a rate that works for students and we keep that rate and put more funding into Pell Grants.

REP. MILLER: Ms. Shea-Porter.

REP. SHEA-PORTER: Thank you very much. I guess you know who I'm going to be talking to first, right?

Could you please explain to me -- I have some questions about the program there. And in your testimony, you talk about "needs life-of- loan servicing." Could you please explain, in greater detail, what you meant by this and the benefits that you see?

MR. DROUIN: Yes, thank you, Congresswoman. From our standpoint, in the state of New Hampshire, we've never sold a loan outside the state of New Hampshire since the secondary market came into an existence. We've got about $1.5 billion outstanding right now in the student loan program, on that side.

We attribute that to the fact that, as far as not selling a loan, curtails the default rate and delinquency rate on these loans. It also, from the standpoint of -- we are the only constant that that student has throughout the life of this loan. We were there at the early awareness programs and we're there when they make their final payment on their student loan.

It creates, as far as I'm considered, a better, if you will, a better mousetrap, if you will, from the standpoint of looking at the student and making sure that they understand who they can deal with, throughout the life of their loan.

REP. SHEA-PORTER: Okay. So you're minimizing all the additional layers there.

MR. DROUIN: We do. We do, and as I've said before, we've always kind of looked at ourselves as the mini direct loan program in the state of New Hampshire for quite a few years. We were established in 1962, three years prior to the federal government even thinking about student loans.

And so I think we have a lot of history there. And when I say a mini direct loan program, basically, it is from soup to nuts. We do the origination, the upfront work, right through payout.

REP. SHEA-PORTER: Do you think this would work just for New Hampshire or do you think this could help other states as well?

MR. DROUIN: Oh, I think there's -- we're not the ones who solely that invented this. There's quite a few agencies just like us. They call us bundled agencies. And I think it works out well from the standpoint of cost savings and I think it can work across the country.

REP. SHEA-PORTER: Okay, thank you. And, Mr. Shireman, President Obama's budget and your testimony make reference to the department contracting out servicing to private sector student loan services.

We've heard Mr. Drouin's testimony that because of some of the thresholds set in recent opportunities to bid for servicing of the loans that the small, nonprofits, like NHHEAF, were shut out of the process and will be shut out of the process going forward.

Given NHHEAF's exceptionally low default rates and its well- respected and appreciated status in New Hampshire -- and I can attest to that -- doesn't NHHEAF represent exactly the type of services that you would like to retain and what steps are being taken by the department to ensure that services like NHHEAF will have this opportunity going forward?

MR. SHIREMAN: Well, we are in the middle of a procurement. It's currently being negotiated and so the amount that we can talk about some of the servicing issues -- we'll be able to talk more about that in coming months.

But I would say that the -- a lot of -- we have seen a lot of state agencies and state affiliated nonprofit organizations that are doing much -- doing all things for students, in terms of financial literacy, outreach and information, and that is the reason that we created a fund that goes to states that can be used for those kinds of purposes because we see the value in those.

So we may need to have different kinds of funding mechanisms to continue these important works, but they are valuable and something we'd like to continue.

REP. SHEA-PORTER: But in the end are you saying there's life for NHHEAF?

MR. SHIREMAN: Whether it's -- whether it will be exactly the same type of entity, I think there will be change and there already is change because of what we have seen in the market, but having state agencies that are involved in helping students, not just with their student loans, but with understanding college financial aid generally is something we need more of.

REP. SHEA-PORTER: Okay, and will organizations like NHHEAF be at the table, as you work out these details and decide what direction you want to go?

MR. SHIREMAN: Absolutely. We've been meeting with all of the different associations and many of the entities for the past -- during the transition, as well as since we've been in the administration.

REP. SHEA-PORTER: Okay. Thank you, and I yield back.

REP. MILLER: If the gentleman would just yield, just on this point, my understanding is whether it's Sallie Mae or Citicorp or New Hampshire, that you would all continue to service their existing portfolio; is that correct?

MR. SHIREMAN: The current FFEL portfolio would continue --

REP. MILLER: Whatever they have?

MR. SHIREMAN: -- so there would not be some immediate end to the current portfolio of FFEL loans, so there will be a ramp down over time, a lot more loans in the Direct Loan Program, and those would be serviced by private sector entities that we contract with.

REP. MILLER: And that -- okay. I won't complicate it. Okay, thank you.


REP. MILLER: It's complicated, but -- yes.

REP. SHEA-PORTER: Could I ask for one more minute, please, Mr. Chairman?

REP. MILLER: Yes, you still have some time.

REP. SHEA-PORTER: Okay, thank you. I just wanted to make clear that, under the Ensuring Continued Access to Student Loans Act will they be servicing those loans?

MR. SHIREMAN: The loans that are being purchased by the department over the coming months, at least at the start, will need to be serviced by entities that we have contracts with, by the end of this summer and those would be the ones that are in the current procurement that was begun by the prior administration.

The question of whether beyond that there might be more and more opportunity is something that we will entertain, when the current procurement is done, in the next month or so.

REP. SHEA-PORTER: Thank you. I yield back, thank you.

REP. MILLER: Thank you.

Mr. Tierney.

REPRESENTATIVE JOHN TIERNEY (D-MA): Thank you, Mr. Chairman. I'm glad this is all so crystal clear. Earlier we talked and we heard some of our colleagues talk earlier about all the wonders of competition on that. It seems to me that, you know, there really isn't any pure competition in this at all.

We have one pool of money, Mr. Shireman, I guess we have one pool of money, and if it were private companies or non-governmental companies I should say, on the other side, then they wouldn't be getting subsidies and they wouldn't be getting guarantees.

So, if we really want a competition and allow them into the game and not give them subsidies and not give them guarantees, how would that change the competition do you think? Would those people stay in the business or would they get out?

MR. SHIREMAN: Well, I checked last night to find out how much -- what the interest rate would be on a personal, unsecured loan with somebody with good credit, like me, and it was 14 1/2 percent, fixed rate. That was a fixed rate.

It looked maybe there were some where maybe I could get it down to eight or nine, in some special kind of circumstances, but people would be paying much, much higher interest rates, if they could get a loan. And usually, students at 18, 19 years old, don't have much of a credit rating.

REP. TIERNEY: Right. I mean so it looks like we're just finding a way here to funnel money to the FFEL program people as an alternative to a direct loan, where we could just keep it on the direct loan here. The only difference might be some of the services, which you're also providing for in the new proposal, am I right?

MR. SHIREMAN: Absolutely.

We're talking about two different ways of running a government program that uses the private sector and it's not a true government versus private --

(Cross talk.)

REP. TIERNEY: And picks up costs along the way of marketing, of higher salaries, of profits --


REP. TIERNEY: -- of all those things that means that the student gets a worse deal on his loan and the taxpayer gets a worse deal.

MR. SHIREMAN: Yes, there are a lot of added transactions there.

REP. TIERNEY: Right. So just one final thing on that point that my colleague raised a second, we right now are looking at a 6.8 percent rate. Congress could change that rate, which would mean that the borrower student would actually get a benefit and pay less.

When you talk about that being a cost, what you really mean is it'd be less revenue into the government, not that you'd have to put money out-of-pocket, but less revenue.

MR. SHIREMAN: It would be less revenue -- in a low interest rate environment --

REP. TIERNEY: Right, it would be less revenue.


REP. TIERNEY: So it's not a cost, it's just less revenue.

MR. SHIREMAN: In the current environment, yes.

REP. TIERNEY: Right. And then that less revenue would mean less to go into a Pell Grant proposal that you have?


REP. TIERNEY: So Congress could decide to split the baby on that and change the interest rate, put some more into Pell, but also give that student borrower more of an advantage than they currently have.

MR. SHIREMAN: Congress could make that decision, yes, sir.

REP. TIERNEY: Thank you very much.

MR. SHIREMAN: The president would have to sign the bill.

REP. TIERNEY: I've heard about that process. Thank you. I yield back.

REP. MILLER: Mr. Kildee.

REPRESENTATIVE DALE KILDEE (D-MI): Thank you, Mr. Chairman. I apologize for not being here before. We had another hearing. First of all I see in the audience, Tom Butts who worked with Bill Ford to -- you were kind of the obstetrician of the direct loan bill and he was the father of it. Good to see you here, Tom. I know the University of Michigan's used that very much and glad to see you here today.

When I went to college back in 1947, you mentioned that you drive by -- go by San Francisco State University and how huge it is now and, you know, that's true all over the country.

Even small, community colleges, we didn't have many community colleges in those days, but in my city, Mott Community College has grown and that's the entry point for so many students now and there's been a proliferation of that.

So, higher education has really grown throughout the country, with a combination of financial means to get that student into a college. My dad had to -- he couldn't borrow from the bank.

I didn't have any value to the bank or anything that they could get the money back on, so he just put his money together somehow and sent only one of his five children to college. That's all he could afford.

So the loan program has been tremendous and I, myself, have felt that the Direct Loan Program has been a very, very important program in this, in helping students. I know the University of Michigan has used it very, very well in attracting students not only to its campus in Ann Arbor, where I went to school, but also its campus in Flint.

But I do think that we have an enormous responsibility to make sure that the bottom line for this is what loan program or programs will best serve the students and best serve the taxpayers of this country, and I will be reading the testimony to try to learn more about that. I thank you for the hearing this morning.

REP. MILLER: Thank you. Earlier on, I referred to a chart that we had that sort of demonstrates where we've been and what we've tried to do in the last couple of years, and that was really a transfer of money from the FFEL Program to the Pell Program that we did in the last two years, and then you see where the president wants to take us.

I don't think anybody involved in education, and again understanding the opportunity that we're trying to extend in this country to all qualified students to go and pursue a college education, cannot appreciate how serious of a decision this is.

That's a significant amount of resources to be made available to those who struggle most financially, and again, we have a fair amount of evidence, good evidence, that a significant number of those students are deciding not to pursue a college education because they don't believe that they can afford it.

I think I can persuade most of them, certainly in the state of California, that they can knit together the resources to do that and receive a first class education. But as we've talked with various universities and colleges and community colleges around the country, I don't think there's anyone that has suggested that this would not be a major boost to attracting those individuals to college.

So to the question of, you know, we've had a fundamental change in this program because of the credit markets. We didn't create it, you didn't create it. It's part of the tragedy of the financial scandals. They spilled over onto every facet of financial life in this country and we're reeling from those activities that were undertaken.

But the fact of the matter is we now have to decide, since we're the -- essentially the only real player in the game here, with certainty, what we do. And, you know, we're still discussing with CBO what these various programs and changes would mean or not mean and that.

But the idea that we could just leave money on the table here when we know the struggle that these students and families are engaged in to try to pay for an education is not a minor decision.

And the administration has given us a proposal where they want to go. Whether it's an entitlement or not an entitlement, certainly over the next ten years you can see your way clear to a very significant addition of resources.

You know, what we don't want to have happen is where we're back to the left of the chart there, where we were sort of on a flat line, but the cost of college never broke a sweat, you know, in going above that and we saw the ability to afford that get -- continue to be diminished for these individuals or, well, diminished and they ended up taking on much more debt.

And I think there's sort of a consensus in the country that more and more debt is not the answer. Chancellor Reed and a lot of other people at this table agree, something more has to -- Buck McKeon has been a leader on this -- something more has to be done to get support.

We need some partners with these institutions, especially the public institutions where the states, for a whole host of reasons, walked away from maintaining that effort that they had ten years ago and 15 years ago. We somehow have to recreate that partnership.

But I know that, you know, there's been some suggestion that this is all a done deal, that this has all been very cavalier. This is a very big important question. We are moving from a system that, in many ways, worked very well.

I always thought it was too expensive and I was always stunned every year when George Bush's budget said, well, you know, here's the money on the table if you guys want to do something about it, and finally it happened.

I mean I think there's agreement that there's a serious cost to the way that this program has been run. What we do with that is an important question for the members of the committee, and I think you saw that in the attendance of the first part of this hearing. Unfortunately, we were interrupted by a vote.

But what we'd like to do is to stay in touch with you, obviously, as we wind our way through this and consider what options we want to put before the committee and the Congress, but I think it's very important that this committee do address this matter.

And I haven't gotten in the habit of telling President Obama no yet, so we'll proceed here, because it is a very, very important decision in terms of the resources that we can put behind those most financially challenged to educate their children.

It's just not much more complicated than that and we're talking about young people who are fully qualified to take advantage of a college education, and that's what this committee exists for is to try to expand that opportunity.

So, thank you for your time, your expertise and my apologies for the interruption. I know some of my colleagues, because I was talking to them on the floor, they had scheduling conflicts, but I think they may have some questions for you.

I would hope if we submit them to you, you would be able to get them back to us. We'll have them single spaced and typed or double spaced and typed. But I think they do have some questions.

And so no objections, the committee will stand adjourned. Thank you very much.


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