THE HEALTH EDUCATION ASSISTANCE

LOAN PROGRAM

December 1985

Control  III-
# OAI-85- 047

Region III
Office of Analysis and
PhiladelDhia  Pennsylvania  Inspections 
Office of Inspector General

Department of P.ealth and

Human Services
 .,..
MAJOR FINDINGS

in 
participation 
Reasons for bank HEAL vary  from
guaranteed profit
to expanding customer base, to  com
munity service. 
The number of current participating lenders is sufficient 
to meet the borrowing needs of HEAL students. 
Neither schools nor lenders favor risk sharing.

At  risk sharing, 
maj1o0r%i tyl eondfe rm ajor banks andst atthee a gSetnucdieesn t  the
Loan 
Marketing Association say they would continue par
ticipation. 
The discontinued participation of three 
major banks , however , would reduce available 
HEAL 
loan funds by nearly 30% , as compared with the FY
level.

At  sharing,  of the 
20% risk  over half  current

participa ting banks , major as well as local , say
participation. 
they would probaibnly  adits continue  This 
least 
would result 
36% reduction 
available HEAL loan funds , as compared with FY 84. 
Rbiasnk kssh atroin go faft saenty  tlheveeilr  would cause participating
potential liability
tightening  and 
loan criteria  reducing total loan 
in a 
volume , resulting  further decline in available 
HEAL loans. 
that 
Banks feel  HEAL defaults could be significantly
reduced by denying loans to high-risk borrowers.

Needy students and those in surplus disciplines are
likely to be adversely affected by banks' decisions to
tighten up 
Other loanle sndoiunrgc ecrsi aterreia n ion tr aesvpaoinlsaeb tloe  rtiosk  msheaerti ng.
the 
borrowing needs of these students. 
Schools and banks have  had positive results from coun
seling students on the  long- term debt burden  associa ted 
with HEAL borrowing.  INTRODUCTION

The Hea:1th Edbcation Assistance Loan (HEAL) Program , administered
by the Public Health Service (PHS), insures loans provided by non-
fsecdheoraoll sl.e nders for students attending eligible health professions
Most students may borrow up to $20 000 per year , up to a
maximum of $80 000 for all years. 
IntBerielslt r aotne  HEAL  loans is computed at the prevailing market rate
(T- plus 
school.  3* percent) and accrues while the borrower is
Interest
is compounded , and unpaid interest is added 
the loan principal  ths. 
every six mon 
Borrowers begin repayment nine months after graduation. The maxi
mum repayment period is 25 years. Repayment may be deferred up
for 
four years  internsthhipe  or residency training, and up to three 
years for service in  Armed Forces , the Peace Corps or the 
National Health Service Corps. 
Ithn ec ase of default , death, difsuablil lity or bankruptcy, the holder of
loan is reimbursed the  amount of principal and accrued 
interest from the Student Loan Insurance Fund (SLIF). Deposits to
the 
fund are derived from insurance premiums (currently 2 percent)
deducted from the loan principal at the time of award. 
1978. 
HEAL has grown dramatically since its inception in  As of 
September 30  1984, over $560 million had been loaned to over
000 students 
, and 7, 969 borrowers were  in repayment. An addi
tional 332 borrowers (4% of total) were in default for $5. 2 million 
or 5. 3% of the total $97. 4 million owed. The average HEAL indebt
edness was $13, 
646 per borrower. 
HEAL was intended to operate without a Federal subsidy. To date,
it has not been necessary to appropriate any Federal 
funds to main
tain the SLIF. 
In March 1985, the OIG Office of Audit (OA) issued a report on the
HEAL program , which found that the SLIF was in danger of insolvency
in FY 1985 due to insufficient insurance premiums , unnecessary stu
dent borrowing and ineffective collection efforts. The situation 
if uncorrected , could result in a need for Congress to appropriate
$100 million over the next five years to cover HEAL defaults. 
PHS has takeSn La IsFe.r ies of corrective actions to insure the future 
solvency of  These include policy issuances to lenders and
schools 
, and a comprehensive NPRM now under final development.
addition 
, the Administration has proposed legislation 
ceiling  to remove the
sible foorn  the insurance premium , with the HHS Secretary respon
insurance 
determining the  premium necessary to insure 
sOlvency of the SLIF. 
is still 
Npreovpeortsheedle scso ,r retcheti vOeI Ga ctions  thcoen creirsniendg t hat despite recent and
borrower default rate 
(averaging $750 000 per month since December 1984) may prevent HEAL
from remaining solvent in the long term. 
1 
 LENDER P ARTICIP A TION LIMITED 
Financial institutions  state agencies  pension funds and 
schools are e..ligible to become HEAL lenders. To become a HpEaArL  
ticipating lender , an eligible organization must submit an applica
tion for approval by the Secretary. 
While over 60 institutions are currently approved HEAL lenders 
most loans are being made by a few lenders. In FY 84, ten lenders
disbursed over 90% of the $237 million loaned , while 32 lenders
made ten or fewer loans. 
The Student Loan Marikest ing Association (SLMA), a Federally char
largest single 
tered corporation  the nation'  source of 
loans. 
financing for postsecondary education , including HEAL 
SLMA 
acquires HEAL loans through the secondary purchase of loans origin
by other lenders. 
ally made  Loans are purchased at par at any
point after the loan has been awarded. Currently, SLMA holds over 
90% of all HEAL loans in repayment. 
SLMA also manages the Assured Access Program , financing HEAL loans
and managing them from the time of award. The Assured Access
Program was the largest disburser of HEAL loans ($66. 6 million)
FY 84. 
Other major lenders include 
the Bank of Indiana, Baybank Norfolk 
County Trust Co. (Massachusetts), Chase Manhattan Bank (New York),
Bank One of Columbus (Ohio), and Florida Federal Savings and Loan.
These banks make loans across large geographical areas 
, rather than
confining coverage to their own state or local area. 
Higher educa
tion agencies in two states , Pennsylvania and Wisconsin , are also
among the ten largest HEAL lenders. 
RISK SHARING

On August 24  1984, the Office of Management and Budget 
(OMB)
issued Revised Circular A-70, "Policies and Guidelines for Federal 
Credit Programs.  The revised circular establishes guidelines for
Federal agencies to follow "in reviewing existing credit program
legislation and proposing  such legislation. 
changes to 
70 requires private  Among
other provisions , A- lenders of Federally
insured loans to bear a " significant" portion (defined as at least
20%) of the risk of loss from borrower default. 
Tinhes uHrEeAdL  lporaongrsa tmo w ahse elpst mableiesth feidn ainn c1i9a7l8  to provide 100% Federally
health professions. The HEAL legislnaeteidosn  oqfu asrtaundteenetss  Fiend etrhael 
payment to the lender of 100% of the unpaid principal and interest
on a defaulted loan. 
In view of this contradictory situation 
, the Department must either
propose legislation to amend the HEAL statute or request an exemp
tion from the policy established by A-70. 
- 2 
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PURPOSE AND APPROACH

The purpose of this inspection is to determine: 1) why so few major

ban k s  par tic i  lenda se rHsE; A L  l end e r s; 2) how to e n c 0 u rag e g rea t e r par 
ticipation by  3) the potential impact of risk sharing on
HEAL; and 4) ways to reduce the borrower default rate to ensure the 
continued solvency of the Student Loan Insurance Fund. 
The inspection is based on personal and telephone interviews with
the ten  lenders 
largest HEAL  (SLMA, two state agencies and seven 
commercial banks), seven participating banks with limited loan 
banks. 
activity, and five major non-participating  Interviews were 
also conducted with ten HEAL schools in six states representing six 
different health disciplines , as well as with private experts and
organizations . 
The inspection builds upon the extensive prior work done by OA and
PHS , and is intended to provide additional information for use by
Department officials in considering future program options. 
MAJOR FINDINGS 
I. BANK MOTIVES FOR HEAL PARTICIPATION DIFFER

Participating banks were asked  they 
what factors  considered in 
lenders. 
deciding whether to become HEAL  The following chart shows
the five responses mentioned most frequently as incentives for HEAL 
participation by major and local participating banks. 
REASONS FOR BANK PARTICIPATION IN HEAL

MAJOR 
REASON  LOCAL  TOTAL
BANKS 
BANKS
i2L___
i.2_____--1il___
Round Out

Portfolio 
100% Federal

Guarantee 
Expand Customer

Base 
Service to School 
or Communi ty 
1 0 
Pro fi t 
- 3 
 -------------------. --------------
~~~ ~~~~
~~~~ --  ~~~.!_
MAJOR PARTICIPATING BANKS

Of the ten largest  HEAL lenders  five are commercial banks 
kin g  large 
mc ai ted tI h0 rne se   amc ar j0o sr  s  reasongse ofgorra pphaicrtailc iapraetaisn.g  Tihne steh leen ders
HEAL 
program: 
!-1 
lQ_  n d  t u !fQll
All banks contacted participate in the Guaranteed Student
Loan 
loans( GaSnL)d  paruogxrialmia,r yan dlo maonsts  tmoak ea lsosainsst  usntduerd PeLnUSt s()p.a rent
programs are guaranteed by the Education DepartmBeontth. 
les 
Par t i cipa t ing bank s  ind i ca t ed tha t HEAL ena b  th em to 
offer a more complete loan service to eligible students. 
d e  a l  ran t  Qff  , the o f i

In a recent position paper  HEAL Subcommittee of the 
Consumer Bankers Association (CBA) estimated that at the 
current interest rate (T-Bill plus 3*%), pretax profit on
HpEapAeLr  loathnse  iasc caeppprtoaxbilmea tperleyt a0x. 9re0t%ur.n A ccording to the CBA 
on assets for most 
lending institutions is approximately 1. 5%. 
In our survey, three major banks estimated net (after tax)
HEAL profit to be approximately 0. 33% , compared with about
0% for consumer loans. They stated they are willing 
accept a lower return because the 100% Federal guarantee
eliminates any risk of loss. 
e in 
citree cd e n tth  ear  tic 1  the  W 1!  gJ9- bus in e s S  se c t ion
average return on all assets for commercial 
banks at about 0. 67%. A representative of Moody'  , an
independent financial rating firm , confirmed that a lower
profit 
, e.g., 0. 33% , might be acceptable to banks because 
of the Federal guarantee. 
12- .2__S.l  2.!  i2.  ?!L-1
Banks see HEAL borrowers as a pool of potentially valuable

customers with high future earnings. Their objective is
to use HEAL to initiate a banking relationship which will

the 
continue after  borrower completes his education and
opens a practice  part of 
, even if he lives in another  the
country. 
LOCAL PARTICIPATING BANKS

Rliemasiotn s for participation were discussed with ninae rbeaankss.  which
loans to particular schools or geographic  These 
included seven local banks and two large lenders. Two primary
reasons were cited: 
l!I'
i c  !Q_l2.  hQ21 
All nine banks mentioned service to a local school or COff
munity as a primary reason for making HEAL loans. 
- 4 
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~!_  ~!_!~_

the student 
According to  loan officer at one midwestern 
the local university. 
bfaenekl ,in "gW ea rodou ntdh eh ebraen kiisn gt fhoart  if the university wereTnh'te
here  the town would die. 
G ua  r o f  profit as a 
Sloixa bnasn.k s cited  these  major reathsoeni rf or making HEAL
Three of  banks sell  loans to 
just prior to  repayment. SLMA 
annually or  the start of  They
receive 
interes1t0.0  percent of the loan balance plus all accrued
profit as 
One small bank sees HEAL  favorable 
ethnoiusg h to expand its loan program. The loan officer for
makebra. nk stated  "We see HEAL as  guaranteed money
and planW et oh ave the lleisttt eorf  tHoE AL schools in the midwest
send a  each one soliciting their 
HEAL business.

NON-PARTICIPATING BANKS 
All of the major HEAL lenders are located in the eastern part
of the U. S. Some time ago, PHS approached major banks in the 
western states to discuss the HEAL program and encourage par
ticipation. 
declined to participate.
At that time , the banks 
We contacted five of these 
banks to learn their reasons for 
participation. 
deciding against HEAL  Several factors were men
tioned: 
nade 
Two banks stated that at the time HEAL was discussed 
, they
were unable to handle any additional student loan acti
vi ty,  their 
because of  manual processing systems 
and 
these 
limited staff. One of  banks has since adopted an
automated system and is now interested in becoming a HEAL
lender. 
~f_ B a !i!  ~Sl
Two banks ciQ.tY~~e  d competing demands for limited funds , low

profit associated with student loans , and corporate deci
sions to limit existing student loan programs as factors
contributing 
to non-participation in HEAL. 
Excessive Future Debt 
Burden for HEAL Borrowers
One  the 
bank stated that  high interest rates , deferred
payment and long  create an 
repayment period  excessive
future debt 
burden for HEAL borrowers which many will
unable to meet.

For example , a $10  000 loan borrowed at 12% interest capi
otafl idzeefde srmemie-natn.n ually amounts to $25, 000 after eight years
Over 
15 years of repayment , the borrower
would pay over $300 per month for  total of nearly
000. 
$55, Mostf oHuErA Ly esatrusd einnt ss cbhororoowl .f ar more than $10 000 
during their  Actual repayment can 
extend up to 25 years. One bank officer stated , "I would 
- 5 
 ~~~
not encourage a student to get a HEAL loan because the way

it is set up predisposes the student to default later on.

erm and Size of Loan 
as both an incentive and a disin
One bank mentioned this 
participation.  side, 
centive for  On the positive  banks 
find larger loans attractive because the origination costs

aarne  no higher than for smaller lfooanrs  (like GSL which has

annual limit of $5, 000  graduate students).
size increases  that it 
However , the large loan  the risk 
repaid. 
will not be 
A second bank stated that eight years is too long to hold

a loan without receiving any payments to interest or prin

cipal. 
l~!~  n t e  fQll  i 0 
On most consumer loans , interest is collected every month. 
interest  capitalization is
HEAL's semi-annual  payment or 
not attractive  lender. 
to one  For this bank , even the 
quarterly interest payments required under GSL are con
sidered too infrequent. 
II. CURRENT LENDERS ARE MEETING ALL HEAL BORROWING NEEDS

Two types of participation agreements , standard and comprehensive,
are available  lenders. 
to HEAL  to Under the standard agreement , the
bank sends each application 
PHS for confirmation of Federal 
the loan. 
guarantee authority prior to disbursing  The comprehen
sive agreement allows the lender to make loans without receiving
authority. 
prior guarantee  The major HEAL lenders have comprehen
sive agreements.

Earlier this year , PHS notified standard lenders that the Federal 
guarantee authority for FY 85 had been exhausted. These banks have
been unable to make HEAL loans since that time. However , HEAL 
borrowers have still been able to get loans from comprehensive len
ders. 
All participating banks and  our  that 
schools in  sample felt  the
current 
lenders are sufficient to meet the borrowing needs of HEAL
students. 
Most schools saw no reason to solicit participation from 
bank. 
a local  The financial aid officer at a southern school said 
"We wouldn't be interested in using our local bank for HEAL loans. 
Only 5% of our students are from this state , so there would be very
the bank. 
little secondary business for  We prefer dealing with a
few major banks. They have systems set up and we know what kind of 
service to expect. 
Even when a school experiences problems with one lender , there
place. 
no difficulty finding another to take its  A school finan
cial aid officer stated , "Loan processing delays at one major bank 
- 6 
 year. 
caused us to change to another lender last  Now our loans are 
processed within 10 days , and any questions are answered promptly. 
One student a1  officer indicated that while a local bank might be
process loans faster 
able to  , she was satisfied with their current
lender. 
are  to 
While there  enough lenders  meet current HEAL borrowing
that 
needs , it appears  for small banks , the relationship with 
PHS 
may affect their decision to participate in HEAL. 
effect of  One example of the
dropped outth ios fr etlhaeti opnroshgirpa mi se aa rmliiedwre sthteirsn  ybeanakr  wdhuiec ht ore pexocretessdiv iet
delays in receiving PHS guarantee authority for individual loans.
This bank had been 
schools. Another bamnakk ing loans top rsotcuedsesnintgs  daet latywos  local HEAL
noted that  experienced
with PHS were a problem but not serious enough for them to discon
tinue participation. 
Some banks expressed confusion about the PHS notice that FY
Federal guarantee authority for HEAL loans had been exhausted. 
few thought that HEAL had gone out of existence completely. Others
were 
futurceon.c erned about what they perceived as an uncertain program
Standard lenders were awaiting word of renewed guarantee
authority, so 
that new HEAL loans could be awarded. 
III. LENDER REACTIONS TO RISK SHARING VARY

In May of this year , PHS hosted a meeting of major HEAL lenders and 
HbEiAlLi tysc hools to discuss the issue of risk sharing and its applica
risk shtao riHnEAgL..  At that meetingth baott h lenders and schools opposed
profits  Lenders stated  the anticipated reduction in
associated with risk sharing could cause them to stop
making HEAL loans entirely. 
Lender reactions to risk sharing varied based on four factors: 
Lender status as a commercial  bank  state  agency,  private
non-profit corporation;

2 .	 The size of the bank and volume of HEAL loans made; 
The percentage of risk sharing proposed 
3 .	 coupled with bank lati
tude for tightening lending criteria; and 
4 .	 Whether the  lender  sells  loans  SLMA  keeps  th em 
repaymen t. 
Two levels of lender risk sharing, 
10% and 20% , were discussed with
16 current participating lenders , five non-participating banks 
one bank  , and
which recently discontinued participation. Individual 
C. 
bank responses are presented in Appendices A through  A summary 
- 7 
 -----------
----,  -----
!!!-
.!  ... .!!!~- 
of reactions from  the  participating  lenders  shown  the
following chart. 
REACTIONS OF 16 PARTICIPATING LENDERS TO RISK SHARING

Definite 
% of Risk  Lender Possible  Total 
h a  i n5___-- r 0	 Drop Out 
Q. u t s 
10%  5 (31%)	 3 ma j 0 r 5 01%)
2 local 
20%  7 (44%)	 3 ma j 0 r 2 major  9 (56%)
4 local  or 7 
(44%) 
Athlla tb anks who found risk sharing acceptable at any level indicated
theirt rhiesyk w ould continue participation only if they could offset
borrowers.b y using strict loan criteria to screen out high-risk
Current HEAL regulations do not allow the use of such 
loan criteria by banks. 
At 10% risk sharing, five lenders 
out of the program. Two additi(o3n1a%l)  lsetnadteedr st h(abto tthh esym waoulll db adnrkosp)
indicated they would drop out at 20%. Two major lenders who would 
If 
conttihnuee  at the 10% risk levela, rweo uld consider dropping out at 20%.
inspection results  indicative of lender reactions
nationwide 
, implementation of 20% lender risk sharing could mean a 
loss of more than half of the current participating lenders. 
0 S  M A  Q!-1!!Q~  .hL~ 	 T A Y	 P RQQ.!!  A M  (S e e A p pen d  x A)
SLMA voiced a conptairntuiicnug lcaorm.m itment to student loans in general
and to HEAL in  Student 
SLMA'  s business.
loans  is 
The Assured Access Program would continue to be a major lending

source, and SLMA would continue to buy HEAL loans through the 
secondary market. SLMA is the largest HEAL lender , disbursing
over $66 million through the Assured Access Program in FY 84. 
Three major 
banks stated that risk sharing would cause them to 
stop making HEAL loans entirely. Together , these banks awarded

over  loans 
$70 million in HEAL  (nearly one-third of all 
HEAL 
ftoun ds disbursed) in FY 84. These banks do not sell their loans
SLMA.  actively 
One bank is  involved in buying HEAL loans 
from other banks through the secondary market. 
Friosukr  lsahrager inbagn.k s would cotnhteisneu e to make HEAL loans under 10%
Three of  banks sell most loans to 
prior  SLMA
to rterpaanymsefnetr s,  so are noatt  concerned abouts arilsek.  sharing, as
the risk  to SLMA  the point of  These four 
banks loaned over $52 million in FY 84 (24% of the total amount

loaned). 
- 8 
 -------------------------- ----
--------------------------
State higher 
education agencies in Pennsylvania and Wisconsin
use tax-exempt 
state residenbtson. d funds to make low interest HEAL loans to
These state agencies will continue making 
HE A L loa n &. un d er  r i s k s h a r in g . Pen n s y I van i a p Ir aenp sa ty 0m seenltl.  HE A L 
loans to SLMA , while Wisconsin keeps them in 
(OMB
Circular A-70 " prohibit(s) Federal guarantees of loans funded
by tax-exempt obliga tions. 
" However  some sta tes now using
these bonds to fund HEAL loans are currently permitted to con
tinue the practice. 
hQf!.h_  ~Q!S GA VE MIX  RESfQ!SES  (See Appendix 
Seven banks with limited HEAL loan activity were interviewed. 
Of five significant responses received , one bank would continue
sharing. 
to make loans under 20% risk  Two others would drop
out at 20% but cwroiutledr icaon. tinue to participate at 10% , using
tighter lending  Two banks stated they would discon
tinue participation entirely if any risk sharing were adopted. 
ONE NON-PARTICIPATING BANK NOW INTERESTED (See Appendix 
Onfi tfei vien nteonr-epsatr tiinci pating banks contacted , one expressed defi
becoming a HEAL lender  even under risk
sharing, so long as tighter loan criteria could be applied.
This rapidly growing bank wants to expand its customer base at
the professional level 
so.  , and feels that HEAL is a good vehicle 
Tighter 
for doing is  control over who would qualify for a 
HEAL loan  expected to reduce the probability of borrower
default. 
RISK SHARING ON HEAL

IV.  OF 
Current HEAL regulations do not allow lenders to review credit 
histories or apply lending criteria normally used when evaluating
applications. 
consumer loan  The proposed regulations  fina
lized  will require  other ,a iwdhe n 
schools to include all  sources 
(family contributions , borrower and spousal income) in calculating
the amount of HEAL funds a student can borrow. Lenders will 
required to review credit histories and financial aid transcripts
and to exercise " 
sound business judgment" in making HEAL loans. 
While these  likely  result 
measures are  in smaller loans or 
HEAL loans at all for some student  borrowers , they are considered 
necessary to ensure the continued  solvency of the Student Loan
Insurance Fund (SLIF). 
Lenders in our survey indicated that  risk sharing would have
major impact on the future of the HEAL  program. Four anticipated
results were mentioned:

FEWER HEAL LOANS AVAILABLE

Five banks have indicated that  any risk sharing would cause 
them to stop making HEAL loans.  Other banks would reduce the 
number and size of loans awarded  using strict lending criteria 
- 9 
 ----------------"-"------------------------------------.-.--.---------------------------------------.------.-------
--  .. 
borrowers. 
to eliminate high-risk  Banks mentioned co-signers 
cliotlyla teral, and a detailed risk analysis of the borrower' s abi
to repay based upon future projected earnings by disci
pline  easures they would likely adopt under risk sharing. 
, as 
SLMA's Assured Access Program would continue as a major source 
criteria. 
of HEAL loans , possibly with tighter loan  Assuming
Wconistcionnuesidn  aavnadil aPbeinlnistyyl voafn itaa xc-oexuelmd pcto bnotnindu fuen tdos  ,r escteudivenet s
low-
interest HEAL loans through state higher education agencies. 
it 
is 
Overall  anticipated that fewer HEAL loans would 
to 
available in most states due  1) the application of strict 
lending cri teria by banks and 2) fewer banks making HEAL loans. 
The following chart shows the anticipated reduction in 
HEAL 
loan availability based on lender reactions to risk sharing. 
PROBABLE REDUCTION IN HEAL LOANS UNDER RISK SHARING

R% i0s kf  
DPro br ao b Ipe  outs Number %F  Y 8o4 fLe n Ddin ogllars 
% of 
h a r  ( M  !s~l__-- n s 
2K-.h2~ 
10%  764  28.  $70. 0 m.  29 . 
20%  1 1 , 712  34.  $85. 7 m.  36. 
In 
FY 84, some 34, 000 students borrowed over $237 million in 
funds. 
HsEhAaLr ilnoagn   Based on the survey results , 10% lender risk
could 
be expected to result in a reduction of nearly 
30% in HEAL loan funds from FY 84 levels. At 20% lender risk
sharing, loan 
funds would be reduced by 
36%. 
Tbhyes pe afritgicuripesa tdino gn obta nrkesf lrecets utlhtei nagn tfircoimpat tehd ed eucsreea soef  inti glhoatensr

lending criteria. Therefore , the actual reduction in HEAL loan

likely to be much higher than 
funds under risk sharing  is  36%. 
RESPONDENTS FEEL OTHER LOAN SOURCES WOULD NOT REPLACE HEAL

Lenders and HEAL schools were asked what other sources could 
tapped if HEAL loan funds were reduced or eliminated. 
QBe~hc_a~u!2s e of its higi hr  unsubsidized interest rate, HEAL
cIonn sidered the loan of last resort by lenders and schools.
packaging student aid , school financial officers rely
first on GSL , PLUS , institutional or state aid , and other
resources 
, recommending a HEAL loan only after all other 
exhausted. 
sources are  HEAL funds make up the difference
between the. standard student budget and the total of all 
other available resources. 
10  -------------------------------
School funds limited or none 
HEAL school responses varied by professional specialty and 
the school. 
overall wealth of  Medical schools appear most
likely 
to have some limited reserves which could be used 
ffor undst  ut oden  st ulobas ni sd ize A ifnetwe rmee sdt i  cp aa Iy sm c eh n0 t0s I so  nh a  Hv Ee Aset Las  loanidse.
Dental , chiropractic and podiatry schools have virtually
no reserves to devote  aid. 
to student 
SG Lr aM dA Ed r ePcroe ntly estEa!~blmiesnh te sd  HiEt As L own private loan program
GradED , as a supplement to HEAL. Health, engineering, law
and business administration graduate 
up  500 per year not to  students 0m0ay0  tboortraolw. 
to $7,  exceed $15, 
to HEAL. 
Interest rates are comparable  Interest must be 
paid while in school and the entire loan must be repaid
within  co-signer. 
15 years. GradED requires a  Currently
available in only 13 states , SLMA anticipates expansion 
future. 
other states in the near 
SLMA emphasized that GradED was established to complement 
place. If 
HEAL , not to take its  changes in HEAL were 
leave a major gap in loan availability, SLMA would likely
modify the GradED program to help fill the gap. 
f.!!Y~l~_ 
E'!Qg our  in 
While all banks in  survey participate  GSL, none
have  student loan programs. 
established private  Three
major  they  the 
banks indicated that  are in  preliminary
gstoa gienst oof  ecfofnescitd eirfin gH EpArLi vwaeter el odains cproongrtianmsu ,e dw.h iWchh icloeuld
details 
are yet 
available, it is clear that strict loan 
be an integral 
criteria would  part of any private sector 
student loan program. 
Rfiecsipeonndt etnots  mfeelet t tshtautd eotnhte br oerrxoi!s'.tiinngg  nseoeudrsce isf w oHuElAdL  nfoutn dbse  wsuefre
reduced or eliminated. 
GREATEST IMPACT ON NEEDY STUDENTS

focus or intent 
While not its specific  , the effect of HEAL has 
been to enable many students from lOH-income backgrounds to
pursue graduate degrees in the health professions.

Schools and lenders stated unanimously that while students from 
middle- income families would probably be able to continue their
education by being more frugal  getting part-time jobs
tapping 
family resources  many low-income students
school would be forced to drop out. With lower earning abil
ity, these non-graduates would be required to begin repayment
immediately. 
Many would be in danger of default. 
Also , because tighter lending criteria would screen out indivi
duals considered by banks to be poor credit risks 
many 
pro s p e c t i v e  st u d -e n t s fro m low - i n com e b a c k g r 0 un d s w 0 u 1 d not b e 
at all. 
able to begin their graduate education 
1 1 
 ~~~~.!_ 
and  risk 
Schoo Is  bank s exp r es s ed concern tha  shar ing wou ld 
aulst iwmateellly a dsep trhivoes ede fsreorvmin mg elodwi-cailnlcyo muen danedrs emirvnoerdi atyre astsu dents

from
entering t he health professions. 
that the  Some respondetnot s suggested
Department consider alternative ways  solve this 
risk sharing, e.g. 
possible consequence of  , direct assistance
to needy students. 
EALTH  QI~~  ONS GRADUA!  OME DISCIPL 
Several lenders ci ted risk analysis of the borrower'  future
ability 
adopt  to repay as hHEaArLi nloga.n  as one of the measures they would
likelyu nder risk  Lenders stated they would be less
to make loans to students in disciplines considered by
Wtheh iblea nnkso tt o hadvier eac ct uirnretentn to ro fpr rojiseckt esdh saurripnlgu,s  tohfe g rreasduulattiensg.
decrease in graduates in surplus disciplines 
is seen as a posi

tive consequence.

RESPONDENT SUGGESTIONS FOR REDUCING DEFAULT

Sdcehbot oblusr adnedn  leonn dbeorsr r,o woeurts  aonf dc tohncee rfnu tufroer  othf eH EeAfLf e,c tha voef   esuxgcgeesssitvede
consideration. 
measures for HHS  Some of these controls  have been 
adopted by individual HEAL schools or 
local banks.

The following 
suggestions are presented in order of the frequency
mentioned 
and the strength of impact respondents felt they would
have in helping to reduce the HEAL default rate. 
B2o.!~th_  b!a!Ynk~s- ao nu !d2~ ~s1c!!h2 ooo lfs   !2! as an essential step
see this 
rreadtueci.n g the level of borrowing as well as the future default
Individual schools and banks have developed handbooks
charts , and videotapes; schools include the topic in their
debt 
management curriculum; bank loan officers and school 
financial aid staff hold joint orientations for new students. 
Respondents suggested a more active role by PHS 
in developing a

comprehensive counseling package for HEAL borrowers.

ents During School and 
2~.!~  Deferm 
HEAL borrowers may pay any part of the interest or principal
while in school or during deferment with no penalty. Only a
small  this 
percentage of borirsow ers take advantage of  option.
Since  capitalized 
unpaid interest  every six months  the
ultimate debt 
originally borbruorwdeend f. oBr amnoksst h baovrer oswuegrgse sftaerd  etxhcaete des vtehne  paamrotuinatl
interest payments could significantly reduce a borrower' 
s ulti

mate burden , reducing the likelihood of default. 
12 
 ~~~ g~-!
~~~ ~~~ ~~~~~~ ~~~
!-  !g 
x i m um  1-~Q  row i  !Q_ 
QQQ
The current limit for most HEAL borrowers is $20 000 per year. 
A m 0 n g ban k s- in t e r vie wed , the a v5 e0ra0 g. e  F Y 8 4 b 0 r row i n g per s t u 
dent ranged from $4 000 to $12  Some banks suggested that
a reduced loan limit would also reduce the long-term debt bur
den being 
assumed by student borrowers , thereby reducing the
probability of default. 
i s b  HE A L  I~g  F 0  o n  I n!~.!Y
The proposed HEAL regulations e!sh-tablish six months 
as the maxi

mum period for which HEAL funds could be disbursed. One bank 
suggested that a four-month maximum would significantly reduce

interest accrual over the life of the loan. 
Some~Q hQsQ1-chooFl us  s~e!Qt _a side-E f~uYn-!d2s! to assist students with 
interest payments. Specific  HEAL
arrangements vary. One school
makes low interest loans to students for this purpose. Others 
the interest for 
pay a portion of  needy students. Many stu
for 
dents who qualify  this assistance then pay the remaining
interest from their own funds. 
Thio sr  tp  rovision  !lQg  1-f  li!n_   e n QZ- 2!2_  r s e  thn its 
took effect  California earlier  year.
Reporting student loans at the time of disbursement will allow 
btharnokusg ht os tcuodnetnrto llo aann sin odriv idual'  overall borriosw ing, whether
consumer loans , and  expected to
serve as a disincentive to borrower default. 
L 0  !Q_  T e  u d
One school' s policy is not to recommend first term students for
HEAL loans. The rationale is that many students are likely
drop out during the first term for other than financial reasons 
and that these students would be prime candidates for default. 
Mtoo!s2Z -tb eTH rE 
lAigLc~ Qeb nosrerodw etros  parrea crKteEiqQcu  ier.e dLll igtcgoe  ntsaikneg  sbtro ar aterd bso raerqdsu iirne  foirndearl

transcripts inn octo nrjeulnecatsieon t rwainths ctrhipet se xfaomr ination. One HEAL
school will  known delinquent
made. 
abofrfreocwte orsn luyn tthilo spea ybmoreronwt aerrrsa wngheom ednetlsa ya rtea king stat(eT hliicse nwosiunlgd
exams until after the end of the nine-month grace period. 
13 
 VI. CONCLUSIONS

The inspection  while 
found that  banks differ somewhat in their 
rea son s for b  c 0 m i n g H E A L sIue fn fd iec ri se,n tt he n u m b e r 0 f par tic i pat in g I en
ders shatuved etnhutss . far been  to meet the borrowing needs of
HEAL  At this point , there does not appear to be a need 
to solicit participation from additional lenders. 
Our survey indicates that most lenders would be willing to continue

HEAL participation with risk sharing at the 10% level , but only if

allowed to adopt loan criteria similar to those applied to consumer

loans , including credit checks , co-signers and/or collatetroa l , and
risk analysis of  potential borrower'  future ability  repay.
The result would be a reduction in available loan funds of nearly 
30% , as compared wi th the FY 84 lending level. 
While some banks , the Student Loan Marketing Association 
, and some
astta te higherr iesdku cation agencies would continue to make HEAL loans
the 20%  sharing level , tihne  discontinued participation by
most major banks could result  reduction of over 36% of
available HEAL loan funds as compared with Fr 84 lending.
If 
risk 
the 
sharing is enacted  and within  constraints of 
Circular A-70 regarding tax-exempt bond funding of FederaOlMlyB 
guaranteed loans 
, PHS may wish to consider soliciting interest from 
higher education agencies in states with substantial HEAL borrowing
gap. 
as one way of filling the anticipated lending  Some additional 
non-participating banks may also be interested in becoming new HEAL
as 
lenders 
, as long  they have clear authority to exercise control 
over who receives a loan and the amounts to be loaned. 
The credit check provision of the proposed HEAL regulations will
result 
in fewer loans available for needy and other high-risk stu
dent borrowers. Risk  likely to 
sharing is  further reduce funds
availability  students 
for needy  and those in surplus disciplines.
Most low-income borrowers will be unable to qualify for loans if
banks  usual 
apply their  lending criteria. Students in surplus
disciplines may be considered poor risks because of limited future
earning potential. 
Lack of knowledge of thteo f uture debt consequences of HEAL borrowing
causes some students  borrow more HEAL funds than absolutely
needed. 
Through active counseling efforts by banks and schools 
sthomee  students are borrowing less and repaying at least a portion of
accrued interest while in school  thereby minimizing their
the risk of default. 
future debt and reducing 
sider  PHS may wish to con
designing  program involving both banks and schools
actively counsel student borrowers on their future debt 
burden 
based on the amounts borrowed , the capitalization of interest and
the long period prior to repayment.

- 14 
 ------------ --_--_-------_-----_-- ----------------------__-_---__--_--_--------~----~----~-----------------------------------_-----_----_---_-----_---__---- ---------------------------------------------_---_-_---_-----_------

APPENDIX A

REACTIONS TO RISK SHARING

MAJOR HEAL LENDERS

LENDER  HEAL LOANS ($  LOANS  REACTIONS TO RISK SHARING

LOCATION  MADE FY 84 TOTAL)  NSOLD ToO
  
SLMA?

New York 2, 669 loans (7. 8%) 
No Any risk sharing would end 
Q!l____--_--_--_pa r t  ion. 
ic  at
Indiana 6, 
346 loans (18. 6%) 
Any risk sharing would end
lE~  1____--_  111  !1--___--__--pa r tic i  at ion. 
Florida  749  loans  (2. 2$)  Any risk sharing would end
( bank)  $ 6 .  (2. 7%)  articipa tion. 
Mass.  564  loans  (10. 5%)  Yes  10$ or 20% risk sharing are
(bank)  $25. 7 m.  (10. 8%)  acceptable because they 
sell loans to SLMA. 
Ohio  1 , 823  loans  (5. 4%)  Yes  Risk sharing would not end
(bank)  $10. 7 m.  (4. 5$)  participation because loans 
are sold to SLMA. They are
considering keeping loans, 
and would restrict loans to 
local customers. 
Missouri  501 loans  (4. 
4%) Yes  Would continue loans at 
10%
(bank)  $10.  (4. 
2 m.  3%)  risk sharing, wi th credi
checks and co-signers. 
At 20% , would consider

t h  E.!2g ram
!25-
Iowa  447 Loans  (1.3%)  10% risk sharing acceptable
( bank)  $5. 5 m.  (2-3%)  with tighter controls. 
A. At 20% , would consider 
a v  !h~--.!2  ~.r 
l~ 
Washington  063 loans(29. 
, 10  6%) N.  Risk sharing would not 
M Al_--!QQ  l1!l__%____--)--- -- f f~~l_E~.!!!Ql  !!2
Pen.h na. 
8%) Yes 
949 loans (2. 
(state $7. 3 m. (3.  Risk sharing would not
affect participation.
~g~!2~Zl______------ 5%) 
9%) No 
Wisconsin 1  669 loans (4. 
(state $17. 8 m. (7.  Risk sharing would not
affect participation.
~Zl______-------- ----
.:_------------
--------------------------------------------_------_--__-----_-__-----__-_----____-_----___- -----------------------------------------_--_---_--_---_--_=-=!!!!__  ~-~--~--------------------_--_--_--_---_~--.:
-.----  p. 
APPENDIX B

PARTICIPATING BANKS WITH LIMITED LOAN ACTIVITY

REACTIONS TO RISK SHARING

BANK  HEAL LOANS  LOANS  REACTIONS TO RISK SHARING 
LOCATION  MADE 0FY 84 0SO0LD TO  
SLMA? 
Ohio  54 loans Not Yet - 10% acceptable with tighter 
$363, loan criteria. 
Arkansas  Yes - w o u l d  2E- o u t .

156 loans  Would drop out with any risk 
Q0QQ0-----0---  -
-.2.2.Q.J Yes -s h  r i n
Missouri  55 loans 
Has dropped out of program.
$579,  However , risk sharing at 10% or 
No -2 0  YLE.  a c c e  a b l 
Nebraska 7 loans 
Would drop out with any risk 
1211. s h ~!:!!2 
QQQ___----------
Minnesota 2 loans 
Not Yet -Risk sharing okay at 10% or 20%. 
111-l No -
Illinois  Q.QQ__------------------
10 loans 
Unsure 
Iowa .!2Q.lQ.QQ_--N-----o---- --------------
4 loans 
10% acceptable. 
l:_ 
J.-l  Q!1._  .!21?_ 
Q.--- -------------
------
-----------------------------------------_--._------------------------.------------------------------------------------
--------------------------------.-.------_--.----------- ----- ------=--.----------'---   ----.-..--------.----------------------
---------- ---- ------------.- 
APPENDIX C

NOlf-- ARTt--IP A TING BANKS PREVIOUSLY CONTACTED BY PHS 
REACTIONS TO RISK SHARING 
BANK
 WHY NOT  INTERESTED
 REACTION TO

LOCATION
 INTERESTED  NOW?  RISK SHARING

ORIGINALLY 
Arizona  Manual system 
YES  10% or 20% okay.

could barely
 Primary motive is

handle existing  expand customer base. 
student loan

workload 
Bank would require 
checks. 
credi t 
California  Manual system
MAYBE  Definitely not

limited staff  interested 
NEXT 
YEAR 
California  Not part of 
Would consider 
MAYBE 
bank strategy.
 IN THE
 participation 
not want to 
Did  FUT URE  but less favorably

expand student 
loan program. 
Limited loan funds 
available. 
Limited ability
service loans. 
Current loan limit 
too high.  Definitely not

California  Future debt burden  interested 
too high. 
Long- term negative 
effect on borrower.

Washington  Profit Margin too
 Definitely not

low.  interested 
Bank decision 

limit student

loans