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21–709 PDF 2005

FEDERAL STUDENT LOAN PROGRAMS: ARE THEY

MEETING THE NEEDS OF STUDENTS AND

SCHOOLS?

HEARING

BEFORE THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 26, 2005

Serial No. 109–31

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

(III)

C O N T E N T S

Page

Hearing held on May 26, 2005 ............................................................................... 1

Statement of:

Merten, Alan, president, George Mason University; Sarah Bauder, director of student financial aid, University of Maryland; Nancy Coolidge,

coordinator, Federal student financial support, Office of the President,

University of California; Natala Hart, director of student financial aid,

Ohio State University; and Cynthia Thornton, Director of Student Financial Aid, Dillard University .................................................................... 64

Bauder, Sarah ............................................................................................ 74

Coolidge, Nancy ......................................................................................... 78

Hart, Natala .............................................................................................. 95

Merten, Alan .............................................................................................. 64

Thornton, Cynthia ..................................................................................... 102

Shaw, Theresa S., Chief Operating Officer, Federal Student Aid Office,

U.S. Department of Education; and John P. Higgins, Jr., Inspector

General, U.S. Department of Education ..................................................... 27

Higgins, John P., Jr. ................................................................................. 40

Shaw, Theresa S. ....................................................................................... 27

Letters, statements, etc., submitted for the record by:

Bauder, Sarah, director of student financial aid, University of Maryland,

prepared statement of ................................................................................... 76

Burton, Hon. Dan, a Representative in Congress from the State of Indiana, prepared statement of .......................................................................... 127

Coolidge, Nancy, coordinator, Federal student financial support, Office

of the President, University of California, prepared statement of ........... 80

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 16

Davis, Chairman Tom, a Representative in Congress from the State of

Virginia, prepared statement of ................................................................... 4

Hart, Natala, director of student financial aid, Ohio State University,

prepared statement of ................................................................................... 97

Higgins, John P., Jr., Inspector General, U.S. Department of Education,

prepared statement of ................................................................................... 42

Merten, Alan, president, George Mason University, prepared statement

of ..................................................................................................................... 67

Porter, Hon. Jon C., a Representative in Congress from the State of

Nevada, prepared statement of .................................................................... 129

Ruppersberger, Hon. C.A. Dutch, a Representative in Congress from the

State of Maryland, prepared statement of .................................................. 24

Shaw, Theresa S., Chief Operating Officer, Federal Student Aid Office,

U.S. Department of Education, prepared statement of ............................. 30

Thornton, Cynthia, Director of Student Financial Aid, Dillard University,

prepared statement of ................................................................................... 104

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, prepared statement of ........................................................... 9

(1)

FEDERAL STUDENT LOAN PROGRAMS: ARE

THEY MEETING THE NEEDS OF STUDENTS

AND SCHOOLS?

THURSDAY, MAY 26, 2005

HOUSE OF REPRESENTATIVES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10:25 a.m., in room

2154, Rayburn House Office Building, Hon. Tom Davis (chairman

of the committee) presiding.

Present: Davis of Virginia, Shays, Souder, Platts, Duncan,

Brown-Waite, Porter, Marchant, McHenry, Dent, Fox, Waxman,

Kanjorski, Sanders, Maloney, Cummings, Kucinich, Clay, Watson,

Lynch, Van Hollen, Sanchez, Ruppersberger, Higgins, and Norton.

Staff present: Jennifer Safavian, chief counsel for oversight and

investigations; Robert Borden, counsel/parliamentarian; Rob White,

press secretary; Drew Crockett, deputy director of communications;

Grace Washbourne, professional staff member; Teresa Austin, chief

clerk; Sarah D’Orsie, deputy clerk; Corinne Zaccagnini, chief information officer; Phil Barnett, minority staff director/chief counsel;

Kristin Amerling, minority deputy chief counsel; Karen Lightfoot,

minority communications director/senior policy advisor; Brian

Cohen, minority senior investigator and policy advisor; Earley

Green, minority chief clerk; Jean Gosa, minority assistant clerk;

Cecelia Morton, minority office manager; and Christopher Davis,

minority investigator.

Chairman TOM DAVIS. A quorum being present, the Committee

on Government Reform will come to order. I would like to welcome

everybody to today’s oversight hearing examining Federal Student

Loan Programs.

The purpose of this hearing is to discuss the management and

performance of the Federal Family Education Loan Program and

the William D. Ford Federal Direct Loan Program. Specifically, the

committee will focus on the Department of Education initiatives to

enhance management and delivery of services to students and

schools, as well as highlight the important role of choice in the creation of increased services and streamline delivery in both programs.

Discussions about Federal Student Loan Programs often digress

into battles over which program is better, and evolve into debates

centering on complex cost estimates. Along with Chairman Boehner

on the Education and Workforce Committee, Chairman Nussle of

the Budget Committee, and other House and Senate colleagues, we

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have asked the Government Accountability Office to examine the

accuracy of cost estimates so that we will have accurate and reliable data.

With conflicting studies and reports on costs, it is imperative

that Congress have a thorough and independent examination of

these factors, and I will await the release of the GAO findings in

September and the committees of jurisdiction with the consideration of reauthorization of the Higher Education Act.

In the meantime, today’s hearing will focus on the management

and performance of both loan programs. We have asked our witnesses the fundamental oversight questions. Are schools and students well served by the current choice of loan programs? Is the

Department effectively managing these programs?

Student loan programs must do more than issue loans to students. They have to educate parents and students about their options, when it comes to paying the high costs for higher education.

They have to help schools and students comply with the complex

procedures to apply for and receive student loans. We need to

know, are these programs doing all that they have to do, to make

higher education accessible and affordable for all?

I welcome Ms. Theresa Shaw, Chief Operating Officer of the Office of Financial Student Aid, Department of Education; and the

Honorable John Higgins, Inspector General of the Department of

Education to discuss their successes and the continuing challenges

they face in managing Federal Student Loan Programs.

The Department of Education’s Student Loan Programs were removed from the GAO’s high risk series this past January, and I

look forward to hearing about the management improvements that

made this possible.

We are also honored to have with us a wide range of student financial experts from schools whose students rely on Federal Student Loans. Each of them has been asked to talk about their institution’s history with the Federal Student Loan Program, and to

discuss their working relationship with the Department of Education. We also hope they will suggest service improvements and

reforms to the Student Loan Program.

During the committee’s investigation of Student Loan Programs,

we found that 75 percent of our Nation’s students choose the

FFELP Program over the Direct Loan Program.

Why is that? The answer is, the private sector plays a pivotal

role in making higher education affordable and accessible. Lenders,

loan guarantors, and other non-profits provide many services that

not only help students afford higher education, but also help students who mistakenly believe higher education is otherwise out of

their reach.

They also customize their programs for the specific needs of diverse schools and student bodies, and provide financial and life

skills training.

For example, the committee has had the opportunity to hear

from the State of Virginia’s guaranty agency, ECMC, whose foundation created the Realizing the College Dream Program. This program supports teachers, counselors, and community-based organizations in their efforts to help low income and first generation colVerDate 11-MAY-2000 13:37 Jul 20, 2005 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 D:\DOCS\21709.TXT HGOVREF1 PsN: HGOVREF1
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lege students and their families realize that higher education is

within their reach.

Through this program, the ECMC Scholars Program, the ECMC

Foundation provides millions of dollars in financial aid every year

to students in Virginia.

The constant refrain that has emerged from the committee’s findings is that schools want a choice in Student Loan Programs, and

that the competition between the two main Student Loan Programs

has resulted in better benefits and services for their students.

Today, we will hear that choice in the Student Loan Program has

resulted in a healthy, competitive marketplace on student financial

aid. Choice in Federal student loans has led to major investments

in technologies by companies and by the Federal Government, and

that choice gives schools the power to demand loan services that

best address the financial needs of the students that attend their

schools. Along with my colleagues, I welcome you all here today

and look forward to today’s discussion.

I would just add that I served in Fairfax County Government for

15 years, prior to coming to Congress. We established there a county trash pick-up to compete with the privates, and we allowed

neighborhoods to choose. We found out, when the county got in the

action, the privates lowered their price and it kept everybody more

competitive, giving people a wider choice.

I think, to a great extent, my observations going into this is that

this competition has been healthy for students and consumers. Mr.

Waxman.

[The prepared statement of Chairman Tom Davis follows:]

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Mr. WAXMAN. Thank you, Mr. Chairman, and I would like to

thank you for calling today’s hearing on Federal Student Loan Programs. The committee does not hold hearings on the Department

of Education, but the Government’s education programs are an important area for oversight.

The Federal Student Loan Program has been a vital resource

over the last five decades, providing opportunities for higher education to millions of Americans. Before they finish school, 6 out of

10 post-secondary students have borrowed money through a Government program to help pay for their education. With tuition

rates rising much faster than inflation, this Federal assistance is

becoming an increasingly vital resource.

The economic return from the student loan investment is easy to

see. A more educated society has helped propel the Nation’s productivity over the last half century. The Federal Government has

two programs to finance student loans: the Direct Loan Program,

which is run by the Federal Government, and the Guaranteed Loan

Program, which is run by private lenders.

It is clear that the Direct Loan Program has been a huge success.

Before its inception, the student loan business was characterized

by chaos. Students had to wait in long lines to get their loan

checks, and schools had to deal with different forms and procedures

for each lender.

By offering schools a more accessible alternative, the Direct Loan

Program has sparked reform in the private lending community. In

its first 3 years, the Direct Loan Program enticed a third of the

participating schools to switch from private lenders. The rapid migration caused private lenders to make rapid upgrades in their

services that included streamlining loan administration and offering beneficial financial incentives to borrowers.

The Direct Lending Program has offered an additional benefit to

the taxpayer. It is more efficient than its private sector counterpart.

The President’s budget shows that when the Government lends

the money itself, it cost 14 times less in 2004 than when the Government guarantees loans through private lenders. Since its inception, the program has saved the taxpayer more than $10 billion in

lower subsidy costs.

I am not opposed to the Guaranteed Loan Program run by private lenders. Its existence provides competition to the Direct Loan

Program, and this competition improves both programs.

But one of the questions we need to resolve is how to protect the

taxpayers’ interest. It does not make sense that the Guaranteed

Loan Program should cost the taxpayers so much more than the

Government Loan Program. If the Federal Government is overly

subsidizing banks and big lenders to offer these loans, we should

reassess these payments.

We also need to examine the financial management of the Federal Student Aid Program. For 15 years, this program has been on

GAO’s list of programs at high risk of waste, fraud, and abuse.

This January, GAO took the Student Aid Program off the watch

list. This positive step was a response to a concerted effort at the

Department of Education to better track outstanding loans and

more thoroughly investigate cases of fraud.

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The Department should be congratulated for its progress and encouraged to ensure that it persists. I am glad that we have the Department of Education Inspector General here to tell us about their

continued efforts to improve financial management.

I am also pleased that we will hear from a panel representing

the Nation’s colleges. I would particularly like to welcome Nancy

Coolidge, who will be representing the University of California. The

U.C. schools have over 80,000 students receiving loans through

Federal programs. Because the U.C. schools participate in both the

Direct Loan and Guaranteed Loan Programs, she will be able to

offer us a valuable and balanced perspective.

Mr. Chairman, the Federal Student Loan Program is a great example of how the Federal Government can provide a boost to low

and middle-income families. I thank you for holding these hearings

today, and I look forward to learning what we can about how we

can make these programs even more effective.

[The prepared statement of Hon. Henry A. Waxman follows:]

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Chairman TOM DAVIS. Well, thank you very much. Since you referred to the second panel, I just would note that we have Dr. Alan

Merten, who is a visionary leader at George Mason University, who

will be on that second panel, as well, and we look forward to hearing from him.

Mr. WAXMAN. Mr. Chairman, you are probably going to mention

it, but there are people from Ohio State University.

Chairman TOM DAVIS. And Maryland, and Dillard University, I

was going to get that on the second introduction, but as long as we

are home-towning it. [Laughter.]

Mr. WAXMAN. We are looking forward to even hearing from them,

even though they do not come from our jurisdiction.

Chairman TOM DAVIS. Well, we are looking forward to hearing

from all of them. But you have to recognize that Dr. Merten votes

in my district, as well, and I did not want to get upstaged.

Mr. WAXMAN. I give up. [Laughter.]

Chairman TOM DAVIS. Are there any other opening statements?

I know Mr. Souder has an opening statement.

Mr. SOUDER. Yes, I appreciate the chairman for yielding me a

few minutes. As a senior member of the Education Committee, and

as chairman of the oversight committee that has jurisdiction over

the subcommittee on this committee on education, I wanted to

make it absolutely clear that I believe it is important to have private sector alternatives.

We, on the Education Committee, and I was Higher Education

Subcommittee for 6 years, have declared a truce, Chairman

Boehner and Chairman McKeon, between those of us who believe

that direct lending ought to be eliminated, and those who believe

that the private sector ought to be eliminated. We have had a

working truce to make sure there is a level playing field.

The statistics show that, in fact, private sector lending has been

much more effective. I believe that previously, the Federal Government gave us misleading, deceitful statistics about how mixed and

fixed costs were allocated, which made direct lending seem cheaper.

It also shows that when you keep a level playing field, for example in my district, 10 of the 12 institutions of higher learning are

not direct lending. They have moved to the private sector and, in

fact, have moved to the private sector at an increasing rate.

It is important, as we debate this, that we understand that much

like when we deal with questions in Postal reform and others,

when the Federal Government tries to bury their fixed and mixed

cost, and then claim they are beating the private sector, I would

hope Members of Congress have enough economic sense to understand that difference.

I yield back.

Chairman TOM DAVIS. I thank you very much. Are there any

other Members? The gentleman from Baltimore.

Mr. CUMMINGS. Thank you very much, Mr. Chairman, and I

thank you for holding this very important hearing.

As Congress considers the reauthorization of the Higher Education Act, we must embrace our moral obligation to ensure that

those who wish to better themselves through a post-secondary education are able to achieve that goal unobstructed by the barrier of

financial disadvantage. Federal Student Aid Programs reflect our

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commitment to that obligation by helping needy students and families afford a higher education, who would otherwise be unable to

do so.

In today’s world of global competition, transformation, and increased expectations of employee qualifications, there can be no

doubt of the importance of a post-secondary education. In fact, the

Bureau of Labor Statistics recently reported that a post-secondary

education would be essential for 42 percent of the jobs created in

this decade.

The U.S. Census Bureau reaffirmed the value of a post-secondary

education, reporting that those with a Bachelor’s Degree earned, on

an average, $1 million more over their lifetime than those with

only a high school diploma.

With record budget deficits, dramatic tuition increases, and the

growing necessity of post-secondary education, the need to ensure

that our Federal student loan programs are effective and efficient

has never been greater. The two major student loan programs operated by the Federal Government include the Federal Family Education Loan Program and the Ford Federal Direct Loan Program.

Under the FFELP or Guaranteed Loan Program, private lenders

supply the loan capital and the Federal Government assumes the

risk by guaranteeing the loan against the borrower’s default. Under

the FDLP or Direct Loan Program, loans are financed directly to

the students, using the U.S. Treasury funds. In fiscal year 2004, approximately $52 billion was distributed to

121⁄2 million college students and their families through Federal

Student Loan Programs. Moreover, 25 percent of these loans were

made through the Direct Loan Program, with the larger 75 percent

share made through the Guaranteed Loan Program.

It is unfortunate, however, that more institutions did not utilize

the Direct Loan Program as it is over 10 times less costly to the

taxpayer than the Guaranteed Loan Program.

While improvements in the Guaranteed Loan Program such as

the implementation of standard forms and procedures should be

recognized, I am deeply troubled that these reforms had little impact on the overall cost to the taxpayer.

The Washington Post reported that the President’s own budget

for fiscal year 2006 shows that ‘‘for every $100 spent on student

loans, the U.S. Government pays $12.09 of subsidy on Governmentguaranteed loans, and only 84 cents for direct loans.’’ In contrast,

from 1992 to 2004, the Direct Loan Program saved taxpayers approximately $10 billion in subsidy costs.

I believe we have a common goal in following common sense. For

this reason, I have co-sponsored the Student Reward Aid Act, introduced by Representative Petri and Representative Miller.

This legislation would encourage institutions of higher education

to participate in the Student Loan Program that is most cost-effective for taxpayers. If more institutions utilized the Direct Loan Program, we would achieve substantial cost savings and direct those

savings to grant aid such as Pell Grants.

Finally, Mr. Chairman, in the wake of an announcement that the

University System of Maryland’s in-State undergraduate tuition

would rise in the fall by 5.8 percent, a Towson University student

in Maryland was quoted in the Washington Post as saying, ‘‘You

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are not offering a higher education to everyone. You are only offering it to people who can afford it.’’

In clear and plain terms, there is something wrong in America

when capable and driven students are denied access to a higher

education for financial reasons.

By improving Federal Student Aid Programs, we open the door

of opportunity to more students. Mr. Chairman, by providing students in our Nation with access to an affordable, high-quality, postsecondary education, we help save our children and generations yet

unborn from the clutches of poverty, crime, drugs, and hopelessness. What can be more necessary? What can be more important?

I look forward to the testimony of all of today’s witnesses, and

especially recognize Ms. Sarah Bauder of the University of Maryland, my alma mater. I yield back the balance of my time.

[The prepared statement of Hon. Elijah E. Cummings follows:]

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Chairman TOM DAVIS. Thank you very much.

Yes, Mr. Duncan.

Mr. DUNCAN. Mr. Chairman, thank you for once again calling a

hearing on a very important topic. Several columnists and education experts have pointed out that since the start of the Federal

Student Loan Program in 1965, college and university tuition and

fees have gone up at about three or four times the rate of inflation.

For many years, there was little opposition to increases, because

students were told not to worry, they could just get a low interest

Government loan.

Now many young people are getting out of school with huge student loan debts, especially if they have gone to a private school.

The average student loan debt is now $18,900. But it is not uncommon for those who have gone to private universities or colleges to

get out with $50,000 debts, or if they go to graduate school, too,

even $75,000 or $100,000 debts.

According to College Board and the Bureau of Labor Statistics,

tuition and fees have increased almost 300 percent in the last 20

years. While inflation over that same period has been 84.7 percent.

If the figures since 1965 are included, the increase over the rate

of inflation is even greater.

There is now so much concern, that legislative remedies are

being considered. In the March 8th U.S. News and World Report

of last year, Editor in Chief Mortimer Zackman wrote an editorial

about this problem.

He noted there was a 14 percent increase in tuition last year

alone at public 4-year colleges and universities. He said, ‘‘Only the

well off can now afford a college education these days.’’ Nothing

will happen this year. But if these whopping increases continue,

the Congress will be forced to take action.

In a new book, called ‘‘Going Broke by Degrees: Why College

Costs Too Much,’’ Richard Vetter wrote this. He said, in 1958, the

annual tuition at Northwestern University was $795. In the fall of

2003, the tuition for new students was $28,404. An estimate of the

2003 median family income indicates that Northwestern’s tuition

would be over 53 percent of an average family’s incomes.

If the ratio of Northwestern’s tuition to median family incomes

rises by the same rate over the next 45 years, as it did over the

previous 45 years, the tuition then would represent almost 2 years

of a median family’s incomes. That will just be impossible to bear

for mini-families.

I can tell you a very common thing for me, for parents and

grandparents to bring me their college graduate young people.

These are good looking young people with good grades, and they

are unable to find jobs.

So what is happening, because we have sent so many millions of

good jobs to other countries for so many years now, many students

cannot find the good jobs that they used to be able to find with just

Bachelors Degrees, when I was in college.

So all the young people are working as waiters and waitresses

in restaurants, and they are going on to Graduate School. But

then, sadly, they are finding out that they cannot find good jobs,

even sometimes with Graduate Degrees and huge student loan

debts. This is a very serious problem that is growing very fast. If

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colleges and universities do not start doing more to hold down

these whopping increases, Congress is going to have to take action.

Thank you, Mr. Chairman.

Chairman TOM DAVIS. Thank you very much.

Does anyone else wish to make a statement? Ms. Norton.

Ms. NORTON. Mr. Chairman, this hearing on the management of

Education Loan Program could not be more timely. Inflation in tuition is outflanked only by inflation in health care in our country.

We have gotten to the point, of course, where parents do not so

much pay for college tuition as students do, with the effect that

millions of young people are not going to college at all with the rise

in the inflation tuition.

Those who do go and take these loans find that they are retarded

in their start in life. Many of them have to take job only based on

whether the jobs pay enough money to allow them to pay their student loans and to make a living. They are moving in with their

parents. We have to do something about this effect on young people.

The Direct Loan Program has had the desired effect, it seems to

me, because it has encouraged changes in the Guaranteed Loan

Fund, and it has encouraged lenders to do what the private sector

is most capable of doing, and that is to engage in innovations that

attract even more students and parents to their program.

But the difference in the costs of these two programs, Mr. Chairman, is simply indefensible. We have to come to grips with that difference. You can explain away this or that part of it. But the fact

is that these are huge differences, and these subsidies do not go to

the student. They do not go to education. These subsidies go to the

private sector.

We have to demand far greater efficiencies from them than they

have been able to produce, since the Direct Loan Program demonstrated that you can indeed provide this service at a much reduced amount than had been done previously.

Mr. Chairman, I am particularly grateful for the work you have

done on the D.C. College Access Act. That has caused me to follow

these costs in a way that I did not before. You and I know that despite the fact that Congress has been generous in trying to keep

up with the costs of this act, that it has become almost impossible

to do.

Indeed, tuition in the United States is going up at an average

rate of 14 percent annually. This is not sustainable. Anything we

can do to cause a U-turn on these costs, not just gradually reduce

these costs over the next generation. But a U-turn on these costs

is going to be necessary if, in fact, we intend to encourage young

people to go to college at the rate they will need to go in order to

keep our country competitive.

I am very interested in this hearing, and I am grateful that you

called it today, Mr. Chairman.

Chairman TOM DAVIS. Thank you. Let me just say that we are

not trying to engage here in a cost issue. But there are some issues

on costs that we do not have all the facts. That is why we have

asked GAO to come back and look at this.

In past reports, GAO has hinted at problems in revenue data.

The Department of Education data shows that direct lending subVerDate 11-MAY-2000 13:37 Jul 20, 2005 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 D:\DOCS\21709.TXT HGOVREF1 PsN: HGOVREF1
23

sidy costs have been underestimated by billions of dollars. But we

don’t really know, and we are going to wait for that GAO report

to come back in.

What we are looking at today is not the cost debate, but it is an

oversight hearing on the management and performance of the two

largest student programs. I would like to keep the emphasis there,

because from my perspective, we could throw out all the numbers

we want, but until we get that GAO report, at this point we really

don’t know what we are talking about.

Mr. Ruppersberger.

Mr. RUPPERSBERGER. Very quickly, Mr. Chairman, a lot has been

said. I think we all agree that students who are deserving, regardless of their ability to pay, we need to get them educated. The economic viability and long-term success of the Nation is dependent

upon its ability to enroll, educate and graduate students. The Federal loan program is the single largest source of student financial

aid.

Unfortunately, with the increase of college tuition, many students who enroll in college will not be able to afford to stay until

graduation. The efforts of the Department of Education to bring accountability to its programs are essential. If we ensure accountability among the borrowers and the programs that are responsible for

day to day operations, it will send a clear message that these funds

should be used for educational purposes only.

The U.S. Department of Education should further its programs

to teach borrowers about the official use of the money and require

students to prepare budget plans for any additional use. Thank

you.

[The prepared statement of Hon. C.A. Dutch Ruppersberger follows:]

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Chairman TOM DAVIS. Do any other members wish to make

opening statements?

If not, we will move to our first panel. We are expecting votes

shortly, so I would like to get your testimony in. We may have to

take about a 15 minute recess, then we will come back and finish.

We have Ms. Theresa Shaw, who is the Chief Operating Officer

of the Office of Federal Student Aid at the U.S. Department of

Education, and the Honorable John P. Higgins, Inspector General

of the U.S. Department of Education. Thank you both for being

with us.

It is our policy to swear witnesses in before you testify, so if you

will raise your right hands.

[Witnesses sworn.]

Chairman TOM DAVIS. Thank you so much.

Ms. Shaw, we will start with you.

STATEMENTS OF THERESA S. SHAW, CHIEF OPERATING OFFICER, FEDERAL STUDENT AID OFFICE, U.S. DEPARTMENT OF

EDUCATION; AND JOHN P. HIGGINS, JR., INSPECTOR GENERAL, U.S. DEPARTMENT OF EDUCATION

STATEMENT OF THERESA S. SHAW

Ms. SHAW. Good morning, Chairman Davis, Ranking Member

Waxman, and members of the committee. Thank you for inviting

me to testify today.

I am Terri Shaw, the Department of Education’s Chief Operating

Officer for Federal Student Aid. I am pleased to be here representing Secretary Spellings, the Department, and the very talented and

dedicated Federal Student Aid staff.

The Department of Education’s grant, loan, and work programs

represent the largest source of student aid for post-secondary education in the United States. In 2004, these programs provided approximately $69 billion to more than 10 million students and their

families.

Federal Student Aid, under the direction of the Secretary, is

charged with operational responsibility for oversight and administration of all the Department’s Federal student financial assistance

programs and as one of the Government’s few performance-based

organizations, upholds high standards of operational efficiency, innovation, and customer care.

To carry out these purposes, Federal Student Aid is focused on

delivering world-class customer service, developing award-winning

products and services, effectively managing the programs to ensure

fair and effective oversight, and providing service delivery at the

lowest cost without sacrificing quality.

I would like to share some statistics that illustrate the size and

scope of our enterprise. We receive and process over 14 million

FAFSA aid applications each year. We have dramatically transformed the FAFSA process from a 100 percent paper to nearly 90

percent Web-based.

We are the single largest lender of student loans, annually originating nearly $13 billion in new loans. We service the $87 billion

outstanding portfolio of Direct Loans. The Department, through

Federal Student Aid, provides over $12 billion in Federal Pell

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Grants to more than 5 million undergraduate students each year.

We are responsible for collection on the $17 billion defaulted student loan portfolio, and we manage and monitor $500 million in

contracts under which our major business processing functions are

performed.

We are particularly proud of the Department’s and Federal Student Aid’s recent achievement of a major President’s management

agenda, Government Accountability Office and departmental objective by reducing the vulnerability of the Federal Student Aid programs to risk. In January 2005, GAO removed the Federal Student

Aid programs from its high risk list. Additionally, in March 2005,

we achieved all green status on the scorecard used by the Office

of Management and Budget for monitoring our progress and status.

You asked me to highlight some of the initiatives that resulted

in these achievements. Simply stated, the Department made reducing vulnerabilities in the programs and the removal of the Student

Aid Programs from the High Risk List a top priority. We institutionalized sound financial management and received clean audit

opinions for the past three fiscal years. Working with all participants across the program, the cohort default rate was reduced from

an all-time high of 22.4 percent to an all-time low of 5.2 percent.

We implemented ongoing processes to identify risk and have several initiatives underway, including a joint task force with the Department’s Office of Inspector General to identify real or potential

risks. We developed a multi-year sequencing plan for system and

business process integration. Our two principal initiatives re-engineer our front end and back end systems and business functions,

and together will save taxpayers an estimated $11⁄2 billion.

Our independent customer satisfaction scores for our electronic

FAFSA are comparable to UPS, Mercedes Benz, and Amazon.com;

for our direct loan servicing, better than Wachovia Bank and similar financial services institutions. And for our Pell Grant and Direct Loan origination, better than e-Trade. The Department is committed to ensuring the integrity and viability of both the Federal

Family Education Loan and Direct Loan program. The availability

of choice has made both programs stronger through competition,

has been the catalyst for innovation, has forced standardization of

data exchange methods, and most importantly, has appropriately

directed the focus on service to students and parents and to the

higher education institutions who are on the front lines serving

them.

Your invitation asked me to suggest recommendations for legislative changes needed to improve the management of the Federal

Student Aid program. Changes may be necessary in the Performance-Based Organization authorizing legislation. The Department

is in the process of developing its legislative recommendations for

the upcoming reauthorization of the Higher Education Act. Any

changes related to human capital management will complement

the administration’s Government-wide Civil Service reform, announced in the fiscal year 2006 President’s budget.

I believe that in order for Federal Student Aid to be made most

effective, it must be able to operate more like a private sector business than a traditional Government agency. I am fully aware of

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however, of our special responsibilities to taxpayers, employees and

our business partners.

I would also like to highlight a legislative proposal that the administration has supported for several years: an amendment to

Section 6103 of the Internal Revenue Code that would allow for the

matching of student aid applicant data with IRS tax information.

We believe that if this change is enacted, we could eliminate many

burdensome processes that are currently used to verify student aid

applicant data and further simplify the process for applicants, their

families and schools.

Additionally, we could significantly reduce improper payments

due to inaccurate income reported by applicants. For example, reducing these improper payments could lead to significant cost savings of approximately $300 million annually in the Pell Grant program.

In closing, I am honored to be part of Secretary Spellings’ team

and the Department of Education, an organization that plays such

a central and essential role in our Nation. We ensure that all eligible Americans can benefit from federally funded financial assistance for education beyond high school, and we consistently champion the promise of post-secondary education for all Americans and

its value to our society.

On behalf of the Secretary, the Department, and the Federal Student aid staff, thank you all for the opportunity to share with you

our performance and accomplishments. I would be pleased to answer any questions the committee may have.

[The prepared statement of Ms. Shaw follows:]

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Chairman TOM DAVIS. Thank you very much.

Mr. Higgins.

STATEMENT OF JOHN P. HIGGINS, JR.

Mr. HIGGINS. Mr. Chairman and members of the committee,

thank you for the opportunity to appear before you today to discuss

the management and the performance of the Federal and Direct

Loan Programs.

As you know, these loan programs are large and complex and

through the Department disperses or guarantees tens of billions of

dollars every year. Like these and other student aid programs that

were recently removed from the GAO high-risk list, an accomplishment for which Ms. Shaw and her staff should be commended, nevertheless, they continue to present significant management and

oversight challenges.

Last December, Terri and I initiated a joint effort to identify patterns of fraud and abuse in the Student Aid programs and to recommend improvements. We called this the OIG-FSA Joint Fraud

Initiative. Working in collaboration, our staff has identified 11 risk

categories that represent areas in the life cycles of the programs

that are vulnerable to fraud and abuse. We have established work

groups to focus on the three categories that begin the student aid

process and that have been the subject of frequent audits and investigations. I will focus on these three risk areas today.

The first risk area is the falsification on the pre-application for

Federal student aid. Information contained in this application determines an individual’s initial eligibility. False information on the

application, particularly under-reporting of income, often results in

an applicant receiving student aid to which he or she is not entitled.

The Department has not estimated the effect of mis-reporting of

income on the student loan programs. However, it has estimated

that $365 million in Pell Grants were over-awarded in fiscal year

2003, because applicants understated their income. This problem

has grown since my office first identified this in 1997 an estimated

amount to be $177 million of over-awards in fiscal year 1996.

The second risk area category is identity theft. Identity theft

typically occurs when a person intentionally uses someone else’s

name, Social Security Number and date of birth to fraudulently obtain student aid. People who obtain loans through identity theft almost always default on these loans.

Our investigations continue to aggressively pursue individuals

who steal by mis-using the identities of others. For example, we

found an individual in Arizona who used more than 50 identities,

typically those of inmates serving long prison terms, to obtain over

$316,000 in loans and grants. This scheme was unraveled when a

sharp financial aid administrator at a local community college recognized the thief as the person who had previously picked up another loan check belonging to another identity.

As a part of his plea agreement, the individual described his

scheme in an interview with us. We have included his interview in

this educational DVD intended to increase awareness of i.d. theft.

We have provided copies of this DVD to Department officials, camVerDate 11-MAY-2000 13:37 Jul 20, 2005 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 D:\DOCS\21709.TXT HGOVREF1 PsN: HGOVREF1
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pus police, Members of Congress and your committee staff. I would

be happy to supply more if you would like.

The third risk area is school fraud and abuse. Over 6,000 schools

participate in the student aid programs and the Department relies

upon these schools to properly account for and administer the

funds. Fraud and abuse by school owners and officials has been a

longstanding problem for the Department. While fraud and abuse

does occur at non-profit and public sector schools, historically the

majority of my resources has been devoted to fraud and abuse involving proprietary schools. In fact, over the last 6 years, 74 percent of the schools involved were proprietary schools.

In my written testimony I provided you with information on the

other risk areas of the fraud initiative. I also discussed my work

plans for the following year and recommended legislative changes.

This concludes my statement. I would be happy to answer any

questions.

[The prepared statement of Mr. Higgins follows:]

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Chairman TOM DAVIS. Thank you both very much.

Let me start, Ms. Shaw, with you. Paraphrasing your written

statement, the availability of choice has made both loan programs

stronger through competition. It has been the catalyst for innovation, has forced standardization of data exchange and directed

focus on service to students, parents and schools.

Can you give us more specifics on the enhanced services to students, parents and schools that you are talking about?

Ms. SHAW. Yes. I mentioned, for example, the fact that we have

converted what was a paper process, the Federal application, preapplication for Federal Student Aid, which was 100 percent paperbound. We have now migrated that to nearly 90 percent electronic

via our Web services. Practically every provider out there has Webbased services now under both programs, either the Pell or the Direct Loan. It all begins with the FAFSA form and application process and goes all the way through the back end on the servicing side

where you can do online payments, you can do electronic debiting,

and basically self-service to borrowers on the back end.

So all throughout the entire life cycle of the borrower’s experience with student aid, everything has been migrating toward Webbased services and streamlined processes for everybody.

Chairman TOM DAVIS. I was looking at how much money was

being spent on the administration of these student aid programs.

These numbers I have gotten from the Department of Education

show that prior to the beginning of direct lending, the Department

was spending about $120 million on administering student aid programs. Last year it was $720 million, a sixfold increase.

Why has the spending gone up so much? Is it the amount of

loans going out? Do you know the reason?

Ms. SHAW. The way, what we do in Federal Student Aid, I try

to look at our budget numbers from three aspects. One, our staffing

expense; two, what I call our baseline operation, or operating expenses, everything from travel to our equipment, to our contracts

for IT and services, and down to other administrative expenses,

that being the account maintenance fees, subsidies and contract

collection costs.

Yes, things are driven by volume. We have had roughly since

2000 I believe around a 60 percent increase in loans coming into

the system that go all the way through the application process,

through the various delivery models and mechanisms, either

through the Direct Loan process or through the Pell process.

So yes, some of it is volume-based, for sure. We in Federal Student Aid, in particular in the past several years, have been making

investments of dollars to modernize our systems, to integrate our

different processes and systems together. For example, I mentioned

in both my written and verbal testimony, we have two major initiatives underway right now to basically overhaul all our back-end

processes, direct loan servicing, direct loan consolidation, our collection processes, into a single solution.

We just launched a new project to do the very same thing on the

front end part of our business processes to bring together everything from aid awareness to application processing to Pell Grant

delivery, origination and disbursement of those funds under direct

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loans as well. Those things require money to make investments,

but they also deliver savings over time.

Those two initiatives alone will save taxpayers over a billion and

a half dollars over the 10-year terms of those contracts, over what

would have been spent, had we not undertaken those initiatives. So

some of it is investment. Some of it is driven by volume growth.

Some of it is down to us being, staff costs growth, for example, our

staff has been reduced over 19 percent, but the costs are higher,

even though our staffing is lower. So it is a combination of factors,

Mr. Chairman.

Chairman TOM DAVIS. Are there problems with schools reconciling accounts under the Direct Loan Program?

Ms. SHAW. No, in fact, we substantiate disbursement of dollars

through our common origination and disbursement system, within

30 days of those funds being delivered at close to 100 percent level.

With that said, when the common original and disbursement system was first rolled out in 2002, there were some typical system

roll-out issues that have been worked through. For the most part,

I believe that schools are able to use that system to appropriately

reconcile their funds. We have put into place systems and processes

and internal controls so that, in fact, we do substantiate those

funds at nearly 100 percent each month.

Chairman TOM DAVIS. I have been told that several hundred

schools have left the Direct Loan Program, since they joined it. Do

you know why schools have left it? Is it based on size, location, or

type of school, or are there any regulatory barriers. Is this going

to cause a problem in sustaining the Direct Loan Program?

Ms. SHAW. The outflow of schools stayed fairly steady around 25

percent. We have around 1,100 schools participating in the program right. Our volume is actually up this year, even though the

net school in and out remained relatively constant over the past

few years.

Now we deliver $13 billion of loans annually. That was our 2003

delivery. It will be similar this year and maybe slightly higher. I

do not see that the number of schools, per say, as it stands right

now, is a threat to the viability of the program.

Chairman TOM DAVIS. Has there been a decrease in the number

of schools?

Ms. SHAW. Oh, from the inception, yes. We are about 1,100 now.

I believe at its peak, it was slightly over 1,300. I believe it was

1,365 in the first and second year of the program.

Chairman TOM DAVIS. OK, thank you.

Mr. Sanders.

Mr. SANDERS. Thank you very much, Mr. Chairman, and thank

you very much for holding a hearing on an issue that I think concerns middle class families from one end of this country to the

other.

But before we turn to the loan programs that are the subject of

this hearing, let me, if I might, speak a little bit outside of the box.

That is, to make the point that I think everybody in this room

knows, that over the last many years, there has been a significant

shift in terms of Federal programs from Direct Grant Programs,

such as the Pell Grant, to loan programs.

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Mr. Chairman, before we get too much into the nitty-gritty of

this or that loan program, I think somebody up here should say

that there is something wrong when the United States of America

is the only major industrialized country on Earth, which forces its

students and its families to pay so much to go to college, and leaves

so many people deeply in debt.

In my office right now, there is a young lady who has incurred a $100,000 debt for college. We have several who have gone to law

school. It is the same thing.

Now if we are going to be competitive with the rest of the world,

if we are going to utilize the intellectual expertise with the capabilities of our young people we want to encourage people to go to

college. With an economy in which the middle class is shrinking,

people are having a hard time surviving. What we are seeing is a

lot of low income and middle income kids saying, gee, I do not want

to go to college. I am not going to be able to go to college.

So Mr. Chairman, let me be on the record right now in making

a very simple statement. I think the United States of America and

this Government have to guarantee the right of every young person

in America who has the ability, and not everybody does, who wants

to go to college, to be able to go to college, regardless of their income. That is what we should be doing.

We should be moving away from loans and moving back into

grants. A government which can provide hundreds of billions of dollars in tax breaks to the wealthiest 2 percent of our population can

surely guarantee that every family in America is able to send their

kids to college, without going deeply into debt.

Mr. Chairman, my understanding is that of the two main student

loan programs that provide essentially the same loans and interest

rates to students, one costs American taxpayers billions more every

year than the other. The Federal Direct Loan Program is, by any

measure, a huge success. It secures loan capital at a lower rate. It

eliminates the middlemen, and cuts out billions of unnecessary

subsidies to banks.

The other, the Federal Family Education Loan Program, has taxpayers underwrite and subsidize loans issued by private lenders

and banks. These loans bear virtually no risk for private banks, yet

have an assured rate of return and are guaranteed by the Government.

According to President Bush’s 2006 education budget, for every

$100 spent on student loans, the U.S. Government pays $12.09 of

subsidy on Government-guaranteed private loans. That is over 12

percent of subsidy, and only 84 cents for Direct Loans. I think that

is the issue that we are going to have to address today.

Chairman TOM DAVIS. Is that a question to the panel?

Mr. SANDERS. Yes, my question is, what is the debate about

when one program costs over $12 to maintain in administrative

costs, and one costs 84 cents?

Chairman TOM DAVIS. Does the IG want to hit that today? I

know we have a GAO study, looking at those numbers to see if

they are accurate.

Mr. SANDERS. This is what the President of the U.S.’ people have

said.

Mr. HIGGINS. I do not know where those figures came from.

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Chairman TOM DAVIS. We will ask IG what he thinks.

Mr. SANDERS. They came from OMB. That is my understanding.

Mr. HIGGINS. OK, I only can tell you that my office, in 1997,

tried to make a comparison of the administrative costs between the

two programs. Because the Department does not have a cost accounting system, it was very difficult to do that.

We did come up with the conclusion though that the Direct Stu- dent Loans administrative cost, back in 1997, was about $17 per

loan, while there was a Treasury study that said that with a large

bank, it cost $13 a loan to administer. We have done no other work

since then on this.

Mr. SANDERS. But do you disagree with the President, in his own

education budget, which gives the facts that I have given you?

Mr. HIGGINS. I do not disagree or agree, because I do not know

what is behind it.

Mr. SANDERS. I understand that the CBO has come up with a

similar conclusion.

Chairman TOM DAVIS. Ms. Shaw, do you have any information

on this?

Mr. SANDERS. Ms. Shaw.

Ms. SHAW. No, I agree with the Inspector General. I have not

studied the numbers in the President’s budget. In fact, what Federal Student Aid does, we operationally administer the programs.

My job, in running Federal Student Aid, is to ensure that it operates efficiency for all of the programs we administer, and to reduce

costs and manage costs wherever we can, be it the Direct Loan Program, the Pell Grant Program, the FELL Program, Work Study

Programs.

So my job is to operationally make Federal Student Aid as efficient as possible. Granted, numbers come from our operation that

feed into everybody’s studies.

Mr. SANDERS. Mr. Chairman, sorry, I would just conclude by saying that the numbers that I have given come from the President

of the United States’ 2006 education budget. That is all that I

would say.

Chairman TOM DAVIS. Let me say, we have asked GAO to look

at this. GAO has hinted in the past that there are some problems

and that the numbers were based on assumptions. Nobody has ever

checked the assumptions over several years. Now being in operation, we will have a better handle on it when, I think, the report

comes back in September, at that point.

Basically, we are trying to look at the efficiencies today. We will

just know more about the costs. Maybe, Mr. Sanders, it will be

borne out and maybe there will be different numbers when we

come back in September. I think our panelists here who work with

these really are not prepared to say, either way, because you do not

know how to measure that. Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman. Mr. Chairman, thank you

for having this hearing, and thank you to both our first panel and

our second panel. I always appreciate the work of Government officials who are serving our country, and thank you.

I just want to say, I have less trouble with students having debt

for graduate school than I do for under-graduate school. I just hired

a young man, an under-graduate, who has $90,000 worth of debt.

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I would be less concerned about his debt if it were for law school

or for medical school and so on.

I also will just say that when I was on the Budget Committee

for 10 years, one of the most interesting facts was, as we increased

grants to schools, the students did not get them. The schools either

raised their tuition, or gave less of a discount to the students. So

if they were giving a $3,000 discount or $4,000, they gave $2,000.

They said the student had more money and qualified.

So the unintended consequence, frankly, was we were seeing college costs go up significantly, without the students’ benefit. I realize that is not really the subject of the hearing. But I just want to

put it on the table.

I want to know how the Department of Education recognizes or

certifies foreign schools. Is there a list of foreign schools that are

pre-qualified? How do you know that they are for real?

I would also say, I have that same issue on online education. I

want to know how we know this online education is for real, and

whether this is not somewhat of a sham that students get caught

up in. I will start with you, Ms. Shaw.

Ms. SHAW. On the foreign school topic, actually working with the

Inspector General, they issued a report to us. We bolstered our

processes and procedures around that.

We try to do onsite visits, you know, eye ball sites, to see if there

is really an institute there, bricks and mortar, if you will. For foreign institutions, we do a variety of other reviews and checkpoints

with other Government agencies.

Mr. SHAYS. Does that result in your decertifying a school?

Ms. SHAW. I am sorry, I did not hear the first part.

Chairman TOM DAVIS. Just 1 second.

Mr. SHAYS. Does that result in the decertifying of a school? Has

it? I mean, are there cases that you decertified schools?

Ms. SHAW. I do not have that information at my disposal today.

I can check on that and get back to you on that in a written format.

If we find out that, for example, when a school is in the application phase, that there is nothing there, and they do not meet the

criteria, they are not going to get certified to participate in the programs. If, in a regular review of a school that has been approved

to participate in a program, we find that there are issues substantial enough to limit their participation, then we will do that, as

well. I can check on the numbers for you, though.

Mr. SHAYS. Yes, if you would provide it to the committee.

Ms. SHAW. Sure.

Ms. SHAYS. You have many applications, so you do a preliminary.

But once a school has been approved, do you ever de-certify?

Ms. SHAW. Have we ever decertified schools?

Ms. SHAYS. Yes.

Ms. SHAW. Yes, as a general statement, we do decertify schools.

With respect to foreign schools, I do not recall off the top of my

head if we have decertified any during my tenure there, but I could

double check.

Mr. SHAYS. The question would be, and I do not need an answer

now if you do not know, once you have certified a school overseas,

do you periodically go back and check?

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Ms. SHAW. Oh, yes, we do program reviews and other checks,

yes.

Mr. SHAYS. Site visits?

Ms. SHAW. Where appropriate, we do site visits, yes.

Ms. SHAYS. Mr. Higgins, can you respond to these questions?

Mr. HIGGINS. Yes, my office has done a lot of work in the foreign

school area. We have done a lot of work in that area, and as a result, we have made some recommendations to Terri’s office, which

she has implemented. We recommended that the guaranty agencies, before they make a disbursement, they ensure themselves that

the student has matriculated at the school.

I also have two recommendations in my testimony to strength

that also, where the second disbursement is not until there they

know that this student is actually going to school. That is also a

recommendation. We also have a recommendation that payment

does not go to the student until after the matriculation is confirmed.

Mr. SHAYS. Let me just conclude by saying, I appreciate the Department of Education working with our Inspector General. I think

that there is much to be learned from our Inspector Generals in the

GAO reports. When we do that, we provide better programs. So

thank you for doing that.

Chairman TOM DAVIS. Thank you.

Mr. Van Hollen.

Mr. VAN HOLLEN. Thank you, Mr. Chairman, and I thank you for

holding this hearing. I also serve on the Education Work Force

Committee, so I am pleased that Government Reform is also looking into this issue.

I think we would all agree that we want to make sure that Federal taxpayers’ dollars go as far as possible in providing our students with help in the form of grants and loans in their education.

In that connection, I would like just to talk about the 91⁄2 percent

loans. You are familiar with that issue, I assume. Is that right?

Ms. SHAW. Yes.

Mr. VAN HOLLEN. For the benefit of the committee, these are

loans that are essentially guaranteed return for the lender at 91⁄2

percent. There are a number of lenders that are still taking advantage of this program. Last year, the Congress passed an amendment. It was a 1-year legislation that addressed a part of the issue.

But it did not deal with the whole issue. We still allow recycling

of these 91⁄2 percent loans.

The Congressional Budget Office has made it clear that if we

close this loophole, we would save the taxpayer over $1 billion over

5 years. Mr. Chairman, you referenced GAO reports. The GAO

looked at this and made it clear that we could have substantial

savings to the Education program if we closed this loophole. My

question is very simple. Does the Department of Education support

closing the 91⁄2 percent loan loophole?

Ms. SHAW. I believe the Department of Education does.

Mr. VAN HOLLEN. In its entirety?

Ms. SHAW. To the best of my knowledge. The question might be

better answered by the Office of Post-Secondary Education. The

Department supported the recent amendment, the Cunningham

amendment, that closed it. I know there is more work to be done.

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I have read all the materials, and to the best of my knowledge, yes.

We monitor the billings on a quarterly basis by all lenders in the

program. We are watching it very closely.

Mr. VAN HOLLEN. All right, well, Mr. Chairman, I would hope

that we could take a position as a committee on a bi-partisan basis,

that we should shut down this subsidy. There is no point in continuing the recycling of these funds.

Let me ask you a question with respect to the other loan programs. I agree with the chairman, that it is important to have a

healthy competition between the FFELP Program and the Direct

Loan Program. However, there is a provision in law that essentially prohibits the FFELP Program participants from offering inducements to colleges and universities to switch. In other words,

using special incentives and, for example, promises to pay private

loans to students who otherwise would not qualify. Are you familiar with those provisions?

In fact, I believe it was in 2003 the Inspector General’s Office did

a study of this issue. We have a memo here, Mr. Chairman, that

I would like to submit for the record on that issue, where you

looked into that question, and made a recommendation that the

Department clarify its guidelines on that issue.

You specifically looked at a situation where Sallie Mae had negotiated a deal with Pace University. You looked into the different

facts and concluded that this was an area that needed further clarification and made a recommendation to that effect. Do you know

whether the Department followed the recommendations of the IG

in that regard?

Mr. HIGGINS. No, I do not know whether they did or not.

Mr. VAN HOLLEN. Were you at the Department at the time?

Mr. HIGGINS. Yes, I was.

Mr. VAN HOLLEN. Is there any mechanism for followup here? I

mean, there have been a number of serious issues in connection

with this. I am just wondering whether the Department took any

action following your recommendations?

Mr. HIGGINS. I do not know. I can check on it and get back to

you for the record, if you want me to.

Mr. VAN HOLLEN. If you could, I mean, you would agree, would

you not, that the law prohibits this kind of inducement to switch

programs?

Mr. HIGGINS. On the part of—yes. What we also found was that

colleges and universities were out there soliciting incentives. So we

found the opposite of what the law was prohibiting. The players

switched places.

Mr. VAN HOLLEN. All right. I just would ask, in your capacity as

Inspector General, that you let Members of Congress know if the

Department is now following through on your recommendations. I

appreciate getting some feedback on that. I would hope that the

Department, if it has not taken action, would do so quickly.

Thank you, Mr. Chairman.

Chairman TOM DAVIS. OK, thank you, I think what we will do

at this point is recess and be back in about 15 minutes, if you can

hang around for some additional questions, thank you.

[Recess.]

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Chairman TOM DAVIS. Ms. Shaw, I’ll just start while waiting for

other Members to come back. My understanding is that most of the

money for administering student aid programs is money that is

provided in an entitlement account.

Ms. SHAW. I am sorry, I could not hear you.

Chairman TOM DAVIS. Most of the money is from entitlement accounts that administer student aid programs. Is that right?

Ms. SHAW. From the 458 account, if that is what you are referring to?

Chairman TOM DAVIS. Yes.

Ms. SHAW. Yes.

Chairman TOM DAVIS. So the salaries and expenses are considered entitlement spending. In other words, whatever it is, it is, and

it is paid for, and if the President’s budget makes a change in that,

to move it to appropriated funds. In other words, you have a ceiling

under appropriated funds, entitlement funds. The cost is what it is,

and it is paid for out of the program. Is that correct?

Ms. SHAW. Mr. Chairman, I am not the budget expert in all of

the funding and the movement of funds behind the scenes. I can

find out the answers.

Chairman TOM DAVIS. Here is my understanding. It is mandatory. Do you know the answer to that, Mr. Higgins?

Mr. HIGGINS. I think you are right.

Chairman TOM DAVIS. OK, and my understanding is that mandatory administrative money is like a slush fund. I mean, if you do

not spend it in 1 year, you roll it over and you can spend it in the

next. Is there oversight on these expenditures, do you know, Ms.

Shaw and Mr. Higgins?

Ms. SHAW. Oversight on the expenditures and money that is used

1 year?

Chairman TOM DAVIS. No, in the entitlement fund.

Ms. SHAW. Mr. Chairman, I am not the budget expert.

Chairman TOM DAVIS. OK.

Ms. SHAW. We certainly manage the money that we use in Federal student aid to deliver aid to students. We run our operation

more like a business that you would find in the private sector. I

look at the operating expense, much like a business would. The

budget services group within the Department of Education does all

the budget wizardry behind the scenes.

But with that said, we clearly monitor and oversee all spending

from the Federal Student Aid Office. In fact, we talk about it regularly. We have a regular budget meeting in my office to examine

every spend out of our office.

Chairman TOM DAVIS. From your testimony, I understand that

FSA contracts with an estimated 6,000 contract staff. Is that about

right?

Ms. SHAW. Yes, we have about a half a billion dollars in

outsourced agreements with the various providers that do our business functions under our monitoring.

Chairman TOM DAVIS. In Inspector General Higgins’ written testimony, he referred to two audits that found FSA lacked oversight

of contract deliverables, and did not ensure a continuation of service and adequate audit access to the systems.

Ms. SHAW. Yes, he did.

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Chairman TOM DAVIS. The interface problems between systems

has caused some problems. Can you comment on what you are

doing to correct this?

Ms. SHAW. What we have done, the specific audit you are referring to, our contracts, one of them was our common origination and

disbursement system. That particular contract, which is nearing

completion at the end of 2006 was a share and savings contract.

That contract was atypical in that regard.

What we have done with all of our contracts is, we have bolstered our contracts and acquisitions management team, including

pricing experts and the Federal acquisition regulation experts. We

do regular contract reviews. We work very closely with the Office

of the Chief Financial Officer in the department and the Chief Acquisition Officer within the department, to make sure that we are

totally in compliance with all rules and regulations.

With that said, we also, within Federal Student Aid, have Federal staff closely monitoring all agreements at this point. I think

the Inspector General, in some of his prior year findings, was probably accurate that we could be better in that regard, and I believe

we put in new process and procedure and focus on that. I believe

that we are better.

Chairman TOM DAVIS. Mr. Higgins, let me ask you, how much

money does the Student Loan Program lose to waste, fraud, and

abuse annually, and what is the main cause?

Mr. HIGGINS. We do not have that figure. We do know that the

department reported in the PELL grant program improper payments of $365 million in 2003. Then there was $131 million of

audit and program liabilities that they also reported. But we do not

know what that figure is.

Chairman TOM DAVIS. What is the collection ratio on loans from

the Direct Lending Program, have there been any problems with

that?

Ms. SHAW. I am sorry?

Chairman TOM DAVIS. The collection, in terms of being able to

collect on the loans under the direct lending program.

Ms. SHAW. No, actually, under the Direct Loan Program, we are

in possession of all of the data with respect to each loan. Actually,

it is a little easier for us, because we have all of that data. When

loans are subrogated to us for collection from the Pell Program, we

do not necessarily have the depth and breath of data that we have

on the Direct Loan Program, because have originated a direct loan.

Chairman TOM DAVIS. But my question is, how are you collecting

it? Are there any problems?

Ms. SHAW. No.

Chairman TOM DAVIS. You are doing just great.

Ms. SHAW. Well, we certainly are doing better than we ever have.

We contract out our services to around 13, I believe, private collection agencies. They compete with each other, with respect to collections.

Chairman TOM DAVIS. Is that a share and savings contract, or

is that on an hourly basis?

Ms. SHAW. No, it is not a share and savings contract. They earn

based on their performance, which is different than a share and

savings contract. So those collection agencies are doing quite well,

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and that incentivized process that we have and the contracts that

we have in place have bolstered our collections across the direct

loan portfolio.

Chairman TOM DAVIS. How much money do you lose annually,

in direct lending, on loans that are uncollected?

Ms. SHAW. I do not know the answer to that question. I will have

to get back to you on that.

Chairman TOM DAVIS. Obviously, you lose whatever you pay out

to the private sector to collect. That is a loss, right?

Ms. SHAW. Right, but for every dollar we spend in collections, I

believe we recover another $7 or $8.

Chairman TOM DAVIS. Right, so my question is, what does it cost

you annually, as you outsource this to other areas in the amounts

uncollected, do you know?

Ms. SHAW. We spend, I believe, in the area of $200 million to

$250 million a year in private collection costs. I believe it was last

year that we recovered, on our portfolio, meaning the $17 billion

portfolio, about $11⁄2 billion.

Chairman TOM DAVIS. You do not know how much just never

gets collected, even after you outsource the collections, right?

Ms. SHAW. No, I could get that figure for you. I do not have it.

Chairman TOM DAVIS. It may not be important, but it is at least

a quarter of a million you are paying to collect it, and then on top

of that. I do not know if the GAO has that. I think if you are really

comparing the two, you need to understand, on one side, you are

eating up the cost of collecting the loans. On the other side, the

taxpayers are paying that. That has to be part of the equation.

Because we get a lot of numbers thrown around here, in terms

of this being more efficient than the others, the estimates, and nobody really knows what the numbers are. Even if you give me that,

that gives me a piece of the pie. But I think that would be interesting.

Ms. SHAW. I can get that for you.

Chairman TOM DAVIS. Mr. Higgins, first, I want to commend you

on your efforts to analyze patterns of fraud and abuse in the Student Financial Assistance Programs, and you are reaching out to

the FSA staff to coordinate those efforts.

One of the areas you mentioned in your written testimony involves FAFSA, the Free Application for Federal Student Aid. You

estimate that under-reporting of income on these applications resulted in $365 million over-awards in Pell Grants in 2003, which

was up from previous years, and state that the Department has not

estimated the effect of mis-reporting of income on Student Loan

Programs.

How might they better contain this? I mean, I have filled out a

FAFSA loan, too. I am like many parents, suffering from ‘‘mal-tuition.’’ [Laughter.]

You know, you kind of take their word for it when they fill out

the loan.

Mr. HIGGINS. Well, there are not a lot of matches made around

eligibility. But we think the most effective match would be the IRS

match. The authority for that was given to the Department of Education. But Treasury has not been given the authority to perform

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this match with us. All we are looking to do is confirm the income

that is reported to us.

Chairman TOM DAVIS. That makes sense. That is not your fault.

That is Treasury’s fault for not giving you the numbers so you can

cross-reference everything. Is that correct?

Ms. SHAW. Right, we cannot do a match with them right now, as

we would like to do.

Chairman TOM DAVIS. That is probably the easiest way to find

out if these numbers are accurate. That is something that the committee can look at, since we have a piece of jurisdiction on that.

That is all for right now. I am going to ask Mr. Clay if he has any

questions.

Mr. CLAY. Thank you, Mr. Chairman.

Let me start with Mr. Higgins. Your office has looked into waste

and abuse in federally funded loan guaranty agencies, such as USA

Funds and PHEAA. One concern that the IG has expressed is the

existence of conflicts of interest on the part of guaranty agencies.

In 1993, the IG found that many of the guaranty agencies that

they investigated were affiliated with loan service providers that

they are required to monitor. The IG concluded that billions of dollars of the Nation’s guaranty loan portfolio are at risk because

many guaranty agencies have a clear conflict of interest.

I am curious about the current status of these conflicts of interest. Has your office continued to monitor guaranty agencies for the

existence of conflicts of interest, or are there still problems in this

area?

Mr. HIGGINS. That audit, initially, the Department sustained our

finding in that audit, and it was overturned in appeal. The Department thought that because the sub that we were talking about had

its own tax identification number, there was enough separation

and it was not a conflict of interest. I think that is the report you

are speaking to.

Mr. CLAY. Yes, I still encourage you to vigilantly monitor the

issue. Conflicts of interest are a problem that could potentially cost

the taxpayers millions of dollars.

In 2003, you audited 9 of the 35 guaranty agencies and identified $164 million in waste and abuse. For instance, at one agency alone,

you received over $100 million in excess Federal funds that the Department of Education did not even know it had overpaid. Your

findings regarding the nine agencies audited suggest that a comprehensive audit of the guaranty agency might find significant additional waste and abuse. Since 2003, have you audited additional

guaranty agencies?

Mr. HIGGINS. No, we have not looked at more than the original

nine. But we did recommend to the Department that they look at

the additional guaranty agencies.

Mr. CLAY. Have you conducted followup audits of those original

nine?

Mr. HIGGINS. We are monitoring the status of the resolution of

the nine audits. All those nine have not been resolved. To my

knowledge, they have not done the followup audits as far as the

split on the Federal expense account.

Mr. CLAY. Are they part of your work plan for this year?

Mr. HIGGINS. Part of Ms. Shaw’s work plan or my work plan?

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Mr. CLAY. Ms. Shaw’s.

Ms. SHAW. We have a work plan to do program reviews and audits of schools, lenders, and guaranty agencies, the servicers that

participate in the programs. Yes, we are focusing in on the guaranty agencies, and our oversight of them, and doing onsite reviews.

I do not recall off the top of my head the specific nine that you

are referencing. But yes, we do have plans for not only this year,

but in 2006 to do onsite reviews at guaranty agencies, as well as

other participants in the program.

Mr. CLAY. Well, I would hope so. Because the fact that you uncovered $164 million in abuse in an audit of only a quarter of the

guaranty agencies suggests to me that it would be worthwhile to

take a deeper look.

Ms. SHAW. Certainly.

Mr. CLAY. Mr. Chairman, that is all that I have for now.

Chairman TOM DAVIS. Well, thank you very much. I know Mr.

Kucinich wanted to ask questions, but he is not here. So we will

move on to the next panel. I want to thank you both. Particularly

after the GAO audit is out, we may want to get you back here. But

we will coordinate that with the Education and Workforce Committee on that. Thank you very much.

Ms. SHAW. Thank you.

Chairman TOM DAVIS. We will take a 2-minute recess before we

call our next panel.

[Recess.]

Chairman TOM DAVIS. This is a distinguished panel, and I want

to thank them all for coming to Washington today and sharing

their wealth of experience. We have Dr. Allen Merten, who is the

president of George Mason University. We have Ms. Sarah Bauder,

who is the director of student financial aid at the University of

Maryland.

We have Nancy Coolidge, the coordinator of Federal student financial support, Office of the President, University of California,

who was already introduced by Mr. Waxman. We have Natala

Hart, who will be back in a minute, and Cynthia Thornton, the director of student financial aid at Dillard University.

Let me just say, we are happy to have all of you here, and Dr.

Merten, particularly, I am happy to have you here. We are just

proud of the job you are doing at George Mason. I am really

pleased that you are in my district.

I am very proud of the fact that George Mason has two Nobel

Prize winners now. I will just let everybody know that. It heads up

a lot of the very basic research in a number of areas, from computer science to brain surgery. We are just very happy to have you

here.

It is our policy that we swear everyone before you testify. So let

me start with you, and I will get Ms. Hart when she comes in. If

you will just raise your right hands.

[Witnesses sworn.]

Chairman TOM DAVIS. Dr. Merten, we will start with you. Thank

you for your patience, and just again, we are very happy to have

you here today.

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STATEMENTS OF ALAN MERTEN, PRESIDENT, GEORGE MASON

UNIVERSITY; SARAH BAUDER, DIRECTOR OF STUDENT FINANCIAL AID, UNIVERSITY OF MARYLAND; NANCY COOLIDGE, COORDINATOR, FEDERAL STUDENT FINANCIAL SUPPORT, OFFICE OF THE PRESIDENT, UNIVERSITY OF CALIFORNIA; NATALA HART, DIRECTOR OF STUDENT FINANCIAL

AID, OHIO STATE UNIVERSITY; AND CYNTHIA THORNTON,

DIRECTOR OF STUDENT FINANCIAL AID, DILLARD UNIVERSITY

STATEMENT OF ALAN MERTEN

Mr. MERTEN. Thank you, Mr. Chairman.

With approximately 29,000 students, George Mason is the largest

university in Virginia. As a State university, our mission is to provide excellent educational opportunities to our students, while

maintaining high quality and affordable access. Twenty-five percent of our freshman are first in their families to attend college.

George Mason has had experience with both the FFELP and the

Federal Direct Loan Program. Therefore, I feel we have a unique

viewpoint to share, since we left FFELP to become a direct lending

school in 1995, and returned to FFELP in 2004.

The Federal loan programs are critical to our ability to provide

affordable access to higher education. Approximately one-third of

our students benefit from the Federal loan programs. Federal loan

programs constitute $60 million of the overall $99 million in aid

awarded to our students last year, which is consistent with the national average of 59 percent. George Mason has a $500 million annual budget, of which $141

million comes from tuition revenue, so Federal loans account for

over 40 percent of our tuition revenue.

Approximately 3,500 of our students receive a Federal Pell

Grant, while over 10,000 receive some type of Federal loan. George

Mason’s Federal loan borrowing has increased by over 5 percent in

the last 5 years. Sixty percent of our financial aid applicants are

from families with income of less than $50,000.

The university takes pride in the sense of responsibility that our

students have demonstrated. Mason’s overall cohort default rate is

very low. It is 2 percent, which is less than one-half of the national

average of 5.2 percent. In addition, our Office of Student Financial

Aid has received a Model of Quality Award from the Department

of Education.

In the 1995 and 1996 academic year, George Mason joined 1,200

other institutions to become a direct lending school. The major viable that made direct lending the obvious choice for us was the inefficiency of FFELP at that time.

Under FFELP, our students were borrowing from hundreds of

different lenders and guaranty agencies. Although we had electronic funds transfer with the Virginia lenders, all of the other

lenders used paper checks. Because of multiple loan servicers, the

efforts and costs investigating loan status or even determining

whether a check had been delivered was very high. This processing

was time consuming and frustrating for our students.

At that time, direct lending eliminated most of the paper processing. All direct loan funds were electronically released to George

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Mason, and the Aid Office was able to respond quickly to students’

requests. This was a major improvement at that time over FFELP.

However, over the 8 years that we were a direct lending school,

many changes occurred in FFELP.

The FFELP community increased the efficiencies of Federal loan

funds delivery. Schools now can easily work with multiple lenders

and even multiple guaranty agencies, and still deliver Federal loan

funds in a timely manner to our students.

Technological improvements and data systems, spearheaded by

the Department of Education, were paramount in creating a more

streamlined electronic processing of Federal aid funds.

Mason again began a cross-campus review of its participation in

direct lending in 1999/2000. Much of this review was initiated because many of our students and parents wanted to borrow from

private lenders. There was an increasing number of complaints

about the level of customer service received from the Direct Program.

Private lending institutions also offered other incentives and borrower benefits that the direct loan program did not equal. While

direct loans did offer an up-front loan rebate in anticipation of future timely payments, that single benefit did not come close to the

other borrower benefits.

Students and their parents increasingly could receive reduced

origination fees and reduced interest rates from the private lenders, after they began their loan repayment.

Effective with the 2004/2205 academic year, we left the direct

program and returned to FFELP. We now have one point of contact

at both the guaranty agency and the servicing center to address

any systems issues.

Our students and parents who are Federal loan borrowers are

happy with the changes and benefits that have become available

because of our return to FFELP. They much appreciate the fact

that they are given a choice in lending institutions. The benefits to

our students and parents were the deciding factor in choosing to

utilize direct lenders.

There continues to be new benefits to our students from FFELP

in addition to the Federal loan repayment/discharge options. For

example, effective next academic year, in Virginia, the newly established Teach for Virginia and Care for Virginia loan programs will

grant added benefits to teachers and nurses who stay in Virginia.

The competition among private lenders has provided savings and

other benefits to parents and students that direct lending cannot

match. Improvements in processing loans through the FFELP system have decreased the administrative burdens that existed in the

1990’s.

Finally, while we are excited about providing options to our students and parents, the sources of money have become increasingly

limited when it comes to assisting students in financing their postsecondary education.

We rely heavily on the State and Federal Government financial

aid funds. The reductions in the Federal Campus Based Programs

and the elimination of the Federal Perkins Loan Program are of

great concern to us. Our country’s college student population is

going to increase, and so are the overall costs of education.

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We encourage you to do all that you can to provide programs and

funds that encourage our youth to learn through the dream of higher education, thank you.

[The prepared statement of Mr. Merten follows:]

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Chairman TOM DAVIS. Thank you very much, Dr. Merten.

Ms. Bauder, thanks for being with us.

STATEMENT OF SARAH BAUDER

Ms. BAUDER. Mr. Chairman, I want to thank you for inviting me

to speak here today on why the University of Maryland has chosen

the FFELP program. My name is Sarah Bauder, and I am the director of financial aid at the University of Maryland.

In the 15 years I have been in higher education, I have noticed

an evolutionary change in the loan industry, most notably when direct lending was introduced in 1994.

If we step back and look at the Higher Education Act and its fundamental purposes, we will notice that it is there to ensure access,

affordability, and choice. FFELP and direct lending both offer access and affordability. FFELP is the only one that offers choice,

and that is why we have chosen it. We have different lending options.

The University of Maryland is home to 24,000 undergraduate

students and 9,000 graduate students. We process approximately

$90,000 million in Federal student loans for 19,000 students. We

have 28 different staff guidance counselors that can work with our

students. Over the years, we have built great partnerships with our

lending institutions.

Our lenders provide many value-added services to our students

that I do not think can be underscored enough. We basically can

offer a zero fee loan to our students. So a student who borrows

$5,000 actually receives $5,000.

Our lenders provide flexible repayment options on the back end.

They provide delinquent and default initiatives for our students

and financial management awareness. They provide training and

workshops for our staff, so that we have education all around. We

fully understand that the University of Maryland is not only for

educating within the classroom, but we have to educate outside the

classroom, as well.

Our default rate is 1.4 percent, which is significant. The lenders

know that we are a low risk, and so our students are going to pay

back their loans when they lend to our students. That is because

we communicate with them, and they have a personal relationship

with their lender.

Lenders also provide scholarships, and I do not think that has

been mentioned. That helps defer the cost of students attending

college and also from borrowing.

Now the University of Maryland, our culture is really one of research and development. So over the years, we have been able to

enhance our technologies. We have a fully paperless loan process.

That is significant, because we have been able to cost save on mailing and on communications to our students. That cost savings then

can be reallocated into other educational benefit for our students.

The only way that we could have done that is to build partnerships

with our lenders.

We do not have the administrative burden of reconciliation. Our

lenders do that on a daily basis. So once again, we have cost savings on the administrative side.

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I think the advent of technology has definitely helped us. I think

that has been brought out today. If we look at the legislation of the

Higher Education Act, it recognizes the need for Federal support

of higher education today, as well as equal access. That commitment holds true.

What I have seen in higher education is that the attitudes of

families have shifted over the few 15 years that I have been there.

It used to be that higher education was really a privilege, to get

an undergraduate degree. Now it is considered a right.

So financing in education is extremely important, and parents

and students really do trust the financial aid office and the information that we give them. We hold that responsibility sacred. We

want to make sure we are giving them the best financial information that we can give them, and the best options and the best

choices.

I applaud direct lending. I was there when direct lending was introduced. It really did create a wonderful atmosphere of competition and effectiveness. It woke up the FFELP industry and the

lenders to say, hey, we have to improve here.

But choice is essential. The Higher Education Act gives students

the option of choosing a lender. If you have only one program, you

eliminate that choice.

There are two things I will say in closing here. One, I think if

you ever get an opportunity to really visit a university and sit just

1 day in a financial aid office, I think it is really enlightening. I

do think reauthorization would happen if you could spend time

there in a university. I do think that we need to increase loan limits. We need to increase Pell appropriations for our needy students.

In closing, students and parents finance a new car, they finance

a home equity loan. They comparison shop for credit cards. I think

they also need the choice when it comes to student loans, as well,

thank you.

[The prepared statement of Ms. Bauder follows:]

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Chairman TOM DAVIS. Thank you very much.

Ms. Coolidge, your entire statement is in the record.

STATEMENT OF NANCY COOLIDGE

Ms. COOLIDGE. I can assure you I am not going to read the whole

thing. I think that it is excellent that you are having this hearing

today, and I thank you for doing it.

I represent 200,000 students, almost half of whom get financial

aid from the Federal sources, and quite a number of those also get

Federal student loans. I am also representing 10 campuses, with

lots of financial aid administrative professionals on them, who send

their messages through us. We are a central administrative office.

I want to just say that there are three principles that the University of California observes. I can stipulate today, we are not here,

and I do not think anybody is here actually, to argue for one program, that one program should win and the other program should

go away. In fact, the comments we have to make today have to do

with improving the choice between programs, so that schools have

equal level playing fields from which to choose.

The core mission of this loan program is a social mission. It is

to make it possible for low income students to attend college. To

the extent that we can devote resources to that activity, we should

do so.

What I am going to focus on today is what we consider at our

institutions with six in direct lending, four in the FFELP Program,

to be non-level playing fields for the two kinds of programs, and

why administrators struggle.

It has built into them some differences, some fundamental differences. At the moment, the playing field is not level. The schools

that are in the FFELP Program have available a feature, and in

my institutions it matters, because we have lots of graduate and

professional students who would quality.

There is a provision called the School as Lender. This is used,

and we are under a fair amount of pressure, to think of using it.

We are not at the moment, but certainly we are being asked to do

feasibility studies and look at it, to bleed out Federal subsidy out

of the FFELP Program for uses by students, and in this case it

could be by low income students certainly, or to give the borrowers

even better loans than they are getting right now.

So the School as Lender would allow a school to become a lender

and to share the profits of doing so with a recognized lender/partner.

There is no equivalent to that in the direct loan program. Frankly, our reading of the Star Act proposal is that they are capturing

that concept. What they are saying is, let us do something like that

in the other program to try to equalize the playing fields in these

two loan options for schools.

It is the case that the students at the other end of this that

would get the subsidies are not being treated fairly if a school gets

a lot more resources to spend, and another kind of school that

chooses a different loan program has fewer resources to spend.

So only in the FFELP can you become a school lender, and

schools are being asked to look at FFELP, even if they are very

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happy with their direct loan participation, because it is a way of

tapping into Federal subsidy.

These kinds of adjustments in the two programs are going to require ongoing management. It is not something that you can sit

down 1 day and just—it is going to require nuanced legislation over

time to try to keep the two programs more similar in their benefits

to students.

At the moment, you pay an amount to lenders that includes

enough to pay, as you pointed out, the collection costs out of what

they get. Also, obviously, you are going to hear today about many

wonderful services that are offered. That comes out of the revenue

they get by being a lender.

The questions really are that because you have these two very

differently financed programs, are they similar enough to treat students fairly? My argument today is that they are not there yet, and

they still need adjustment.

But the Direct Loan Program does not have the same level of resources to spend on student and, in some cases, on other coordinated benefits that we are going to talk about today. There will be

some testimony about counseling, about resources for the campus.

Those are not possible under direct lending.

The University of California has thoughts about how money can

be saved if we are looking at Government reform issues. One is,

and you mentioned it earlier, to look at the 91⁄2 minimum yield on

loans that were made with tax-exempt funding. The President’s

budget estimated that over a 10 year window, this could save $5.4

billion.

If that kind of savings is significant, and since you are under

great pressure to produce savings, we are certainly recommending

that you look at that kind of opportunity before you look at taking

it away from students, specifically.

It is always the case that some of this money is shared with students. These organizations, as was pointed out, give scholarships

and other things. But they are not shared according to the Federal

goals. They are not using the principles and themes of access, necessarily. They have choices about how they spend it.

Right now, under the current law, the lenders are allowed to get

a guaranteed return on their capital money that they put into the

program, and they get the difference in what borrowers pay in interest. So they get what we consider to be a windfall. Capturing

that for student benefit is really something that is also needed.

Finally, guaranty agencies are being paid right now on a model

that is essentially like an insurance company. We are going to recommend that you look again at guaranty agency competition and

make them Federal contractors, and pay them for their services directly. What they do for you, they should be paid for. But the model

now is a different kind of model, and it is being used for other purposes that are not Federal principles and purposes.

Thank you for your consideration today.

[The prepared statement of Ms. Coolidge follows:]

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Chairman TOM DAVIS. Thank you very much.

Ms. Hart, I am going to need to swear you in.

[Witness sworn.]

Chairman TOM DAVIS. Thank you very much, and thank you for

being with us.

STATEMENT OF NATALA HART

Ms. HART. Mr. Chairman, members of the committee, and respected colleagues and guests, my name is Tally Hart. I am the director of student financial aid at the Ohio State University. We

serve as the Nation’s largest direct lending institution. In the last

fully completed year, we offered and administered $246 million in

direct loans to nearly 29,000 students.

Prior to 1994, when direct lending was introduced and available,

and I had already by that point worked 20 years in public financial

aid offices, we at Ohio State were essentially like other institutions

of a national scope, taking the same student loan data, sorting it

into 60 different formats, shipping it and trying to figure out where

the student loan proceeds were in the process.

It took us, on average, 8 weeks into the beginning of the term,

after the full summer’s hard work on student loans, to actually deliver the proceeds to students.

As the result of direct lending, we were able to have loans follow

a single path and to deliver virtually student loans to our students

in time to be matriculated in class, have their books, and not begin

their challenging academic curriculum worried about, will I have a

place to live at the end of this week, and will I have a meal. Their

loan proceeds were in hand.

We did begin the Direct Lending Program in what some would

conclude was a very shaky mode. We did not have much automation and we literally hung a PC from our mainframe system to deliver this huge amount of money to our students.

But the risk was worth it, and the Department of Education has

certainly improved the back end processes since that time. So earlier claims that you might have heard about reconciliation and

other administrative functions, I believe, operate very smoothly.

We do not believe that we spend a great deal of administrative

time or waste in taking care of those functions.

We, above all, have used the time effectively that the students

used to spend in our office waiting for their loan funds in very productive ways. There are two major things that we have done with

the freed-up time. First and foremost, we have become financial literacy educators. This last year, we delivered more than 3,000 hours

of personal financial skills information to our students. This was

everything from how to do a budget and balance a checkbook.

Every class includes instruction about good and bad uses of credit

cards. We teach identity theft, how to avoid it, of course, and savings and investing.

Our students have really benefited from this opportunity. Our

staff benefit from the opportunity to be proactive with our students, rather than to wait until they have difficulties or, as we

found previously, incurred more loans, because they did not understand how to manage their money correctly.

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Direct lending has served us extremely well, and the people who

have benefited most, without question, are the neediest students.

Assuredly, middle income students borrow and need these funds.

But the administrative efficiency gives us time to focus on students

with the highest level of need.

One of the issues that you asked me to comment about is the

continued efficiency of the program. I would encourage, as your colleagues consider reauthorization of the Higher Education Act, continuation of the Perkins Loan Program and no cost, important options, such as the Quality Assurance Program, an experimental

sites program.

These activities, drawn together, enabled Ohio State to do cutting edge research on our student population. The chart that you

see before you, and it is displayed on the overheads, shows our success. The bottom blue line shows the rate of matriculation, through

the fall of 2000, of our lowest income students. Those are students

who have ability to pay for college of about $100 a month. They

are, on average, families with less than $30,000 of income.

Through our research, which started to focus on what created

student loan defaults, we found important findings about retaining

and then attracting, as well, our neediest students. The results

from fall 2001 were considered a success, and 2002 and beyond—

I love to describe as a financial aid administrator’s nirvana—that

we have our lowest income students matriculating at the highest

rate of all.

Importantly, if you begin to follow the data 4 years after, you

would see that our retention and graduation rates are now following a similar plan. So not only are our lowest income students coming to college at good rates, they are remaining and graduating.

This has been a direct benefit of the combined effort of the efficiency of direct lending, the availability of Perkins loans to mitigate

against the low student loan limits in the freshman and sophomore

year under Stafford Programs, and to have research incentives

through quality assurance and experimental sites to figure out

these problems and apply the outcomes.

I would point out that our results are regularly shared back to

the Department of Education and with colleagues, whenever asked.

So we think this creates best practices and knowledge that helps

benefit not only Ohio State students, but the Nation’s students as

a whole.

Thank you again for this opportunity to testify. I want to especially thank you for all of your efforts on behalf of the 35,000 students who, at Ohio State, benefit from your efforts to support and

invest in them. They will prove the best investment you can make,

thank you.

[The prepared statement of Ms. Hart follows:]

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Chairman TOM DAVIS. Thank you very much.

Ms. Thornton, thanks for being with us.

STATEMENT OF CYNTHIA THORNTON

Ms. THORNTON. Thank you and good afternoon, Chairman Tom

Davis and members of the House Committee on Government Reform. On behalf of Dillard University, its faculty, staff, and students, I thank you for the opportunity to testify on Dillard University’s participation in the Federal Family Education Loan Program

and the William D. Ford Federal Direct Loan Program. I am Cynthia Thornton, director of financial aid.

It is my desire that at the conclusion of this testimony, you

would clearly understand the contributions of private lenders and

continue your support of the Federal Family Education Loan Program.

Dillard University is a private Historically Black University located in New Orleans, LA. Last year, more than 2,000 of our 2,200

students utilized private lenders to fund their education. Our student loan volume is $18 million, or 60 percent of the total $34 million awarded in financial aid.

Dillard University entered the Federal Direct Loan Program in

1995 after the program was 2 years old. We were relatively satisfied with the Direct Loan Program, until we experienced problems

that halted the delivery of funds to our students.

At the time, the Department of Education made a transition to

a new Government contractor. This transition was difficult on behalf of the Department of Education and our school. Our student

loan services were interrupted for an extended period of time,

which created a financial crisis for both the school and loan recipients awaiting funds to meet their financial obligations. After evaluating these challenges, Dillard University made a decision to return to private lending in 1997.

We prefer private lending versus Government lending because of

the value added services and benefits that the students, the school,

and the community receives. These services are offered at no additional cost to the school. The Government contractors are for profit

and offer no additional services to the higher education community.

On the other hand, many private lenders return a huge investment to higher education by providing community outreach and

scholarships. For example, over the past 2 years, seven Dillard

University students have applied for and received scholarships

from the Sallie Mae fund. Dillard University’s preliminary cohort

default rate is 4 percent. By utilizing USA Funds Financial Literacy Program and its default management software, we except

even lower default rates.

Through the assistance of private lenders, Dillard University has

received complimentary printing of pamphlets, forms, brochures,

flyers, and such. In addition, private lenders offer innovative technology solutions to help us deliver aid to students in a seamless

manner. This is important to us because budgets are tight and resources are scarce for many Historically Black colleges and universities.

I urge your support also for increased loan limits. The current

annual Federal loan limits do not cover our tuition costs of $11,760.

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Our students, like students nationwide, supplement Federal loans

with private loans offered by private lenders. The Department of

Education does not offer a private loan program.

Had we continued in the Direct Loan Program, many students

would have had to participate in both Government lending and private lending to meet their educational cost. This is another reason

why Dillard University chose to return to the Federal Family Education Loan Program. We needed a streamlined process, and the

FFELP Program does that for us.

I will now just take an opportunity to express my opposition for

House bill 1425, the Student Aid Reward Act, or the STAR Act, for

the following reasons. It promotes inequity among financial aid recipients. It shifts expenditures to the Federal Pell Grant Program.

There has been recent controversy surrounding the Federal Pell

Grant Program that makes this act tenuous, at best.

The value of the Federal Pell Grant has not increased in at least

3 years. Proponents of the STAR Act believe that it will save the

Government billions of dollars. I am no economist, but I do believe

that this may be misleading. If one saves a dollar in the Federal

Direct Loan Program and spends a dollar in the Federal Pell Grant

Program, has the Government really saved?

I have worked in the higher education industry for over 19 years.

All of my experiences have been at minority-servicing institutions

that suffer from budget cuts and scarce resources. It has been beneficial to Dillard University to partner with private lenders who

offer services to bridge the resource gap. For this reason, I urge

your support of private lending.

Dillard University and other institutions that chose to participate in the Federal Family Education Loan Program prefer the

flexibility and value-added services that this program offers.

Competition between both private and Government student loan

programs has resulted in lower student loan costs and specialized

loan services that best meet the needs of schools, students, and

parents.

I would also disagree with the notion that the Federal Family

Education Loan Program is costing taxpayers millions of dollars. I

believe that private lenders actually save money for both the Federal and State Government and taxpayers. As the cost of education

continues to increase, more and more schools will continue to depend on the assistance of private lenders to help subsidize the cost

associated with higher education.

Please continue to give students, families, and schools a choice

in student lending that offers equity and access. Please oppose the

STAR Act. Thank you on behalf of Dillard University.

[The prepared statement of Ms. Thornton follows:]

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Chairman TOM DAVIS. Well, I want to first thank all of you. I

think there is always a divide here on the parties in how we look

at this. Our side is traditionally like the private lending. The other

side is traditionally like the Government lending.

The one thing I hear from this is that private lending has improved a lot because the Government got into this business. Now

it looks like in many cases, there is a momentum back to private

lending, because of the improvements made in the competition

offer. Is that a fair comment?

Mr. MERTEN. Yes, I think it is very fair.

Chairman TOM DAVIS. Ms. Bauder, do you think that is a fair

comment?

Ms. BAUDER. Yes.

Chairman TOM DAVIS. Do you think that is a fair comment, Ms.

Coolidge?

Ms. COOLIDGE. Well, I think it is fair to say that the private sector has more money to spend. They are spending it in ways that

maybe people appreciate, and that is good.

Chairman TOM DAVIS. They would not have done that probably,

if you did not have direct lending. That is my point.

Ms. COOLIDGE. That is correct.

Chairman TOM DAVIS. You can always argue about the Government, that we ought to give Government more money to do the

same kind of things or back and forth.

Ms. COOLIDGE. One could say that, or one could instead refocus

these resources on the neediest students. That is sort of the heart

of the argument, whether the level of support for the two programs

is reasonable, given these vast needs of poor students.

Chairman TOM DAVIS. I will tell you what, I represent the

wealthiest district in the country, and it is hard to find many families that do not need the aid.

Ms. COOLIDGE. Yes, that is right.

Chairman TOM DAVIS. College education is expensive.

Ms. COOLIDGE. That is right.

Chairman TOM DAVIS. I wrote out, the year before last, $72,000

in tuition checks. So even at our salary, that is a hefty amount. So

when it comes to the higher education today, everybody needs it.

For low income, in particular, as you know, I authored the D.C.

College Access Act that allows District students to go anywhere in

the country and pay in-State tuition.

But when it comes to aid for college, everybody needs it. There

are very few families that this does not impose some kind of hardship.

Ms. COOLIDGE. You might want to try a Plus Loan. If you are

writing checks for $17,000, you can get a Plus Loan financed at

4.17 this year. I have four children and I am doing that. [Laughter.]

Chairman TOM DAVIS. Well, unfortunately, I got the cash, so I

would just as soon get it out and not owe it. I hear you, but thank

you very much. Maybe I could get one of my kids to go to George

Mason or an in-State school.

Mr. MERTEN. We will give you a special deal.

Chairman TOM DAVIS. OK. [Laughter.]

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Listen, every student who goes to George Mason gets a special

deal. Is that not right, Dr. Merten?

Mr. MERTEN. Yes, they do.

[Laughter.]

Chairman TOM DAVIS. That is just for the record here.

Do I understand that one of the benefits added is that sometimes

under one of the advantages that the private loans have is that colleges can participate and actually make money on it? Is that correct?

Ms. COOLIDGE. Yes, we did a feasibility study at the University

of California, where we have six campuses and direct loans, and

four in FFELP. We could make about $4 million a year, and most

of that would be used to provide very competitive loan benefits to

the borrowers themselves.

But there would be approximately $1 million to $2 million, depending on how it was spent, of resources that move would generate for other financial aid at the campuses from Federal subsidies that we would get, just by partnering with a Federal lender.

While we have six campuses that definitely do not want to do

it—they are very pleased with the Direct Loan Program and they

do not want to leave it—we are under pressure to say, why are you

not doing that? If that money is out there and available to schools,

why are you passing it up?

Then when we see the STAR Act being proposed, it looks like

that is what they are thinking about. Let us bleed some of this resource away for students. That is what I think they are after.

Ms. HART. Mr. Chairman, if I could also respond.

Chairman TOM DAVIS. Yes, Ms. Hart.

Mr. HART. I served as head of a guaranty agency in my former

State of residence. That provision, of school as lender, I believe, is

really antiquated.

It was placed in the law at a time that there were significant

issues of capital formation for student loans. It was critical at that

point that institutions that were having trouble with capital formation, especially for graduate and professional students, might want

to use the FFELP Loan Program to provide educational dollars to

their students.

That simply is not the status today. That kind of unfair playing

field, we also at Ohio State have had enormous pressure to move

to that option. We have elected not to, for a very sound set of reasons. But I simply believe that provision is no longer needed and

should be eliminated from the law, in my opinion.

Chairman TOM DAVIS. Well, I guess, you know, the unfair playing field depends on where you sit on this thing. I think if you are

a college administrator, you are just looking for the best deal for

your kids. I am not really trying to take sides in this debate, one

way or the other. We are just trying to get information here on how

efficiently it has been run. That is our focus.

We are going to get an audit back in September that will, I

think, be more inclusive in terms of what the real costs are. We

have not had a handle on this. Because all we have worked out are

some estimated costs that go back a decade, and nobody has come

back to look at. We will have, I think, a better handle there, yes?

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Mr. MERTEN. Every time you look at this issue, there are three

players. There are the institutions, and what is in our best interest,

and how we need to operate, and how do we act and operate in a

business-like fashion. Second, it is the students and their parents.

What are the best services that can be provided to them? Then

third, what is the cost to the Federal Government?

I think when we move forward in this, we have to look at all

three of those. Sometimes you make decisions, and I think we

make decisions, that we have picked an option that might not have

been in our own best interests, but it was in the best interests of

the students and their parents. So we are always making those

kinds of tradeoffs, in all the issues in higher education, but specifically in this one.

Chairman TOM DAVIS. I understand, and I think we will have a

better perspective on the costs when we get the GAO back.

Mr. Clay.

Mr. CLAY. Thank you, Mr. Chairman, and I also thank you for

holding this hearing. I started at the University of Maryland as a

freshman. When I started, the per-credit hour was $15 per hour.

So I could go throughout my 4 years of college and pay it out of

my pocket. But the costs have really risen.

I have a 4-year old and an 11 year old. So my wife and I realize

we will probably have to give our arms and legs to get them

through college.

But let me ask, and this is for Ms. Coolidge. I will start with you.

We have heard a little bit about how private lenders market their

loan products to schools. My understanding is that private lenders

use a variety of inducements, such as taking schools administrators

out to dinner and on trips and offering school computer systems

and software packages.

U.S. News reported on the lavish benefits that some private lenders offer to school administrators when they are marketing their

loan program. I am concerned about the potential abuse in these

situations. How can we ensure that marketing approaches by private lenders do not involve kick-backs? I will start with you and

would like for anyone else on the panel to comment, if they care

to.

Chairman TOM DAVIS. May I just intervene? I would just ask

this question. There is nothing wrong with taking somebody out to

dinner. Are you talking about direct payments?

Mr. CLAY. Those were the examples.

Chairman TOM DAVIS. Yes, that would be fine.

Mr. CLAY. I am not saying there is anything wrong with going

out to dinner.

Chairman TOM DAVIS. You are worried about the next step.

Mr. CLAY. Right.

Chairman TOM DAVIS. OK.

Ms. COOLIDGE. I think if you are asking how can we remedy this

kind of thing, that is what I was talking before, about trying to

make a more level playing field between the two programs.

If the profits are associated, even after all costs which are obviously reinvested and are considerable with people here talking

about the wonderful services they get—even after consideration of

those great things, the profits that are made in the FFEL Program

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are extreme enough so that the school lenders can make as much

as we calculated. By trimming that, you can reduce that kind of

temptation. Because there will be enough in there to do the proper

things for the loan programs and not enough for really lavish sorts

of things that you are alluding to.

A great number of dollars are spent on things that schools highly

value and appreciate, that do not have that personal quality of sort

of kick-back or payoff or that type of thing. So I think those are

sort of collateral benefits that come from paying extra for this program. But the question is whether it is too much, and whether we

need to modify the reimbursement model, so that it is closer to the

other model.

Mr. CLAY. Thank you for that response.

Mr. MERTEN. In our case, the purpose of getting something from

the lender is to provide something to the student. That is what we

are there for. I mean, that is the place where we play the intermediary role. The student needs something. The student’s tuition

has gone up, and in many cases has gone up because of the lack

of State support. So we have to do whatever we can to help that

student. If it is to get something extra from the lender, that is

where we go.

Mr. CLAY. Thank you for that answer.

Ms. THORNTON. I would also agree that if a lender offers a service that would help us streamline our process for students then, in

the end again, the student benefits from the service and it is not

necessarily an inducement for the school. It is a service that benefits the student.

At the end of the day, we are all trying to do our jobs more efficiently and more effective, and deliver the aid to the student. So

sometimes, we need a little help, and private lenders offer that

service to help us deliver the aid to the student in a timely manner.

Mr. CLAY. I appreciate that clarification. Let me ask Ms. Bauder

this. We have heard about how the competition between the two

loan programs has had important benefits for students and colleges. But we have also heard about how taxpayer dollars are being

wasted because of high subsidies and inefficiencies in the Guarantee Loan Program.

All of you have significant knowledge of student financial needs.

Can you provide us with some insight into how we can maintain

competition between the two loan programs, while also ensuring

that taxpayers get a good deal? After Ms. Bauder, anyone on the

panel can comment.

Ms. BAUDER. I think the point here is that we need to do what

is in the best interests of the students. Who knows better really

than the institution?

I mean, I will look at the University of Maryland. Because we

have partnerships with our private lenders, we are able to reallocate funding into different educational programs. We know that financial aid is not a one-size-fits-all program. So we developed

Maryland Pathways. So students who have a zero expected family

contribution, who are an in-State resident, can come to our institution and not borrow a dime in 4 years.

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So I think it is really becoming where we are starting to profile

our students, rather than saying, OK, everybody has to take on a

loan. The word ‘‘loan’’ may conjure up images of a creditor knocking

on a door for one student, where it may be considered a gift for others.

I think the competition between the two programs is necessary.

I think direct lending has done a great benefit for the FFELP Program and vice versa.

Mr. MERTEN. If you look at the three different legs, as I mentioned before, one of the question now in front of you and in front

of all us as taxpayers is, what really is the difference? The idea of

having the GAO study and to make sure that it is a full costed

study—too many times in studies that we see done by the Federal

Government, it is a marginal cost study. It is not a full cost of the

program.

So you need the full cost on both sides. Then it is something that

obviously not only should you be interested, but we in higher education and as individual taxpayers should be interested in the full

cost.

Mr. CLAY. Thank you for that response.

Ms. THORNTON. I also think it is important, too, to remember

that some of the subsidies used by the lenders is returned to the

community in the form of scholarships, they are still helping the

students. They are helping the communities. I think it is important

that you guys really consider that option, as well.

Mr. CLAY. Thank you for that.

Ms. COOLIDGE. There is a bit of cost difference in the sense of

full cost consideration. The Federal program, the Direct Loan Program, should have in it the borrowers who are the highest risk and

who are the most likely to fail. That is the social mission of the

program.

That is going to be an additional cost. If they are in the Income

Contention Repayment Program and making less than their interest in forms of payment, that is one of the purposes of these programs, to make it possible for access to occur. Then if at the backend, they are not able to repay, we have a program that suits them

and it is not just considered a default. It is really a way of dealing

with the students who took the chance we invited them to take and

did not succeed.

So in taking into account the costs of the programs, it is really

important to calculate the value associated with placing really high

risk students into a repayment model that does not cause them to

be dropouts from society, that they have a way of being acceptable,

not defaulters. I think that is an extra cost.

So when you do this comparison, it really needs to be calculated

that we need to have a place, a repository, for the students who

cannot pay. I am not talking about the will-not-pays. I am talking

about the can-not-pays.

Ms. HART. Mr. Clay, I hope that my summary will be helpful.

But I think that it is consistent with all the other comments. In

trying to avoid some of abuses that you describe, which I have

heard of as well, that if we focus, and we would be glad to assist

you if that would be useful, on the benefits to the students, and I

include Ms. Thornton’s definition about efficiencies. But if that

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were the distinction, I think there would be far less concern about

the appropriate use of whether they are profits or dedicated services through direct lending. That is the distinction, I think, that we

could all agree would be useful.

Those of us who have labored long in these professional vineyards would love to avoid any onus to our profession of things that

we certainly would never accept, and yet find great benefits to our

students.

For example, Ms. Thornton mentioned the U.S. A Funds Default

Prevention Programs and Financial Literacy programs. We use

those too, even though we are a direct lender. I would really regret

seeing important student benefits, important educational benefits

of that eliminated. But saying that those are the types of benefits

that could accrue from the program, I think, is very reasonable and

it would avoid the concerns which you have, which I certainly

share.

Mr. CLAY. I would be very interested in you all sharing that information with us. I thank you, Mr. Chairman.

Chairman TOM DAVIS. All right, Ms. Coolidge, let me just go

back you, the ‘‘will not pays’’ versus the ‘‘cannot pays,’’ when you

give a student a loan when they are going to school, is there not

an assumption in every case that they are going to be able to get

an education, improve their income, and pay it back?

Ms. COOLIDGE. That is the assumption, and it is certainly the

case that most do. But there are students who have health problems, who have mental health problems, who have tragedies in

their families who, for various reasons are not able to. It is usually

people who do not finish. People who have taken out loans.

Chairman TOM DAVIS. But you do not know that. Do you know

that when you are making the loan?

Ms. COOLIDGE. No, we cannot know.

Chairman TOM DAVIS. So those would be handled equally by the

private sector and the public sector, would they not?

Ms. COOLIDGE. Except that in the case of the income contingent

repayment plan, it is a non-producing asset. It is something where

the Federal Government winds up taking a loss, basically, on the

amount the student cannot repay.

The question is, do you want that loan maintained in a environment where you are paying basically a premium on the asset, for

someone to take care of and maintain it in the private program, or

do you want it moved to the least costly repository.

That is why I was speaking of moving those borrowers—whatever program they borrowed from originally—moving them into a

Federal environment, where the Feds can, first of all, check their

income-contingent repayment against their taxes each year, to find

out if they are legitimately getting this treatment, if they are earning more. They can check with the Social Security Administration

to see if they are getting more.

So having that kind of borrower’s repayment in the Government

program makes a great deal of sense. It is not a huge number. It

is just that I wanted to say that the cost of this is a legitimate cost,

and should be considered when comparing the two programs.

Mr. MERTEN. I learned something in the preparation for the testimony, and that is that our default rate was low. So I asked the

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financial aid staff why. The big issue that I got back was: counseling, counseling, counseling.

That is for the borrower to understand what he or she is getting

into, and to make sure they are borrowing as little as they need

as opposed to as much as they can get. If you have that kind of

a philosophy, then I think we have the opportunity to make sure

people are borrowing close to where they should be and there will

be problems later on. But those problems are based on a rational

loan, as opposed to an irrational loan.

Chairman TOM DAVIS. Again, a lot of the incentives that the private sector offers today would not have been there, but for the Direct Loan Program and so on. As we look at this, we want to continue to keep that competition.

But my instinct is that Government is never able to keep up and

be competitive with the private markets and their ability to be

flexible, because they are just different motivations. Private markets, they operate on a very competitive bottom-line basis. The

Government does not. I mean, how many years does it take us to

get an audit to just see what the real costs are.

Ms. COOLIDGE. But in fact, this is not clearly the private market

versus the Government market. That model is too extreme. In fact,

the Government market, as Ms. Shaw testified, uses competitive

bidding to outsource quite a few of their tasks. Therefore, they are

using the private market as part of their model.

Chairman TOM DAVIS. They do for collections, yes.

Ms. COOLIDGE. It is not just for collections. They do it for all

kinds of processing. They use the private industries.

Chairman TOM DAVIS. But they do not have the same competitive arena that they are out there competing in. The competition

level is different in the private sector than it is in the Government

sector.

Ms. COOLIDGE. Well, let me just speak to that. The private sector

is actually heavily subsidized. This a heavily regulated and heavily

subsidized Federal program. So the thought that is the free market

and this is the Government is actually much more muted than

that. There is not as big a difference.

Chairman TOM DAVIS. But in private sector companies, the culture is different than the Government sector.

Ms. COOLIDGE. Certainly, it is culturally different, and that is to

our benefit. They also, however, to our detriment in some cases,

have stockholders and highly paid executives. So there is both aspects of the good parts and the bad parts that go with that. But

the fact is, they are making their money on a Government subsidy,

much as some of the agriculture points are. It is not a clear distinction between liaise a fare and Government restriction.

Chairman TOM DAVIS. Well, I think Dr. Merten put it well, when

he said there are three legs to this that you need to examine. There

are the schools’ perspective, the students’ and the parents’ perspective, and that is where I sit. You know, what is the best deal? Then

finally, there is the taxpayers’ perspective, and we also have to look

at all three of these.

I think this discussion has been very, very helpful to this committee, as we take a look at what is going on. I hope it has been

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to Ms. Shaw, for the Department of Education. She has stayed here

for the whole thing.

We have a Direct Lending Program, and we want to make it

work. Because we understand that competition has made the private sector better. On the other hand, the private sector is getting

more flexible and getting more ingenuity every day as they get better. I appreciate everybody’s comments as we move forward on this.

So thank you all very much. Is there anything else that anybody

wants to say before we leave, that maybe you did not get in?

[No response.]

Chairman TOM DAVIS. Well, thank you very much. This was well

worth it. The hearing is adjourned.

[Whereupon, at 12:49 p.m., the committee was adjourned.]

[NOTE.—The Department of Education: Federal Student Aid

Packet and additional information is on file with the committee.]

[The prepared statements of Hon. Dan Burton and Hon. Jon C.

Porter and additional information submitted for the hearing record

follow:]

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