U.S. GOVERNMENT PRINTING OFFICE

63–517 CC WASHINGTON : 2000

DEPARTMENT OF EDUCATION’S STUDENT LOAN

PROGRAMS: ARE TAX DOLLARS AT RISK?

HEARING

BEFORE THE

SUBCOMMITTEE ON CRIMINAL JUSTICE,

DRUG POLICY, AND HUMAN RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JUNE 17, 1999

Serial No. 106–103

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

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON CRIMINAL JUSTICE, DRUG POLICY, AND HUMAN RESOURCES

JOHN L. MICA, Florida, Chairman

BOB BARR, Georgia

BENJAMIN A. GILMAN, New York

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

ASA HUTCHINSON, Arkansas

DOUG OSE, California

PATSY T. MINK, Hawaii

EDOLPHUS TOWNS, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

SHARON PINKERTON, Deputy Staff Director

MASON ALINGER, Professional Staff Member

ANDREW GREELEY, Clerk

CHERRI BRANSON, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on June 17, 1999 ............................................................................... 1

Statement of:

Berthoud, John, president, National Taxpayers Union; Thomas A. Butts,

National Direct Student Loan Coalition; Fred J. Galloway, former director, direct loan program evaluation, Macro International, Inc.; and

Steven A. McNamara, Assistant Inspector General for Audit, Office

of Inspector General, Department of Education ......................................... 12

Smith, Marshall S., Acting Deputy Secretary, Department of Education;

and Greg Woods, Chief Operating Officer, Office of Student Financial

Assistance Programs, Department of Education ........................................ 126

Letters, statements, et cetera, submitted for the record by:

Berthoud, John, president, National Taxpayers Union, prepared statement of ........................................................................................................... 15

Butts, Thomas A., National Direct Student Loan Coalition:

Information concerning loan reconciliations ........................................... 113

Prepared statement of ............................................................................... 23

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

of Maryland, prepared statement of ............................................................ 9

Galloway, Fred J., former director, direct loan program evaluation, Macro

International, Inc., prepared statement of .................................................. 37

Gilman, Hon. Benjamin A., a Representative in Congress from the State

of New York, prepared statement of ........................................................... 47

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio, prepared statement of .................................................................... 161

McNamara, Steven A., Assistant Inspector General for Audit, Office of

Inspector General, Department of Education, prepared statement of ..... 52

Mica, Hon. John L., a Representative in Congress from the State of

Florida:

Prepared statement of ............................................................................... 5

U.S. Department of Education’s Study of Cost Issues ........................... 60

Mink, Hon. Patsy T., a Representative in Congress from the State of

Hawaii, letter dated September 20, 1991 ................................................... 119

Smith, Marshall S., Acting Deputy Secretary, Department of Education,

prepared statement of ................................................................................... 129

Woods, Greg, Chief Operating Officer, Office of Student Financial Assistance Programs, Department of Education, prepared statement of ........... 141

(1)

DEPARTMENT OF EDUCATION’S STUDENT

LOAN PROGRAMS: ARE TAX DOLLARS AT

RISK?

THURSDAY, JUNE 17, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CRIMINAL JUSTICE, DRUG POLICY,

AND HUMAN RESOURCES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

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

2154, Rayburn House Office Building, Hon. John L. Mica (chairman of the subcommittee) presiding.

Present: Representatives Mica, Gilman, Souder, Ose, Mink,

Cummings, Kucinich, and Tierney.

Staff present: Sharon Pinkerton, deputy staff director; Steve

Dilingham, special counsel; Andrew Greeley, clerk; Mason Alinger,

professional staff member; Cherri Branson, minority counsel; and

Jean Gosa, minority staff assistant.

Mr. MICA. I’d like to call this meeting of the Subcommittee on

Criminal Justice, Drug Policy, and Human Resources to order.

We’ll have other Members joining shortly, and with the consent of

the minority, we’re going to proceed because we have several full

panels, and we don’t want to keep our witnesses. We’ll be able, I

think, to proceed in good order as the Members arrive.

I will read my opening statement, and then we’ll submit others

for the record, or, if the Members arrive, we will recognize them.

This morning’s hearing is entitled, The Department of Education’s student loan programs, and it asks a question: Are Tax

Dollars at Risk? Faced with staggering college costs, the American

family is increasingly dependent on student aid to finance higher

education. The cost of a 4-year public education has escalated to almost $12,000 annually, and private schools can cost almost twice

as much, now averaging $21,000 a year. Today, more than ever,

the Federal Government’s role in this process must be examined to

ensure that both the student and the taxpayer are being well

served.

As a subcommittee with oversight jurisdiction of the Department

of Education, we have an important responsibility to see that the

Office of Student Financial Assistance is operating with fiscal and

managerial integrity. For almost 10 successive years, the General

Accounting Office has labeled the Education Department’s student

financial aid programs as, ‘‘a high risk for fraud, waste, abuse, and

mismanagement.’’ The GAO tells us that the Department lacks the

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ability to provide basic information about whether a student is enrolled, even after a student loan is awarded and thousands of dollars in student aid have been given. In other words, many students

who are not eligible could be, and often are, receiving funds.

This kind of poor management not only hurts the taxpayer, but

it ultimately takes away from funding from other eligible students.

In an attempt to remedy some of these problems, the 1998 Higher

Education Act reauthorized a bipartisan agreement that included

some much-needed reforms for managing our student aid programs. Congress created the first Federal sector performance-based

organization [PBO], this was in the 1998 law, to accomplish some

clear goals and try to make the operations of the student loan program more efficient. The goals outlined in that statute are clear,

let me cite some of them: to improve service, reduce costs, integrate

systems, and improve data accuracy and program integrity.

We’re here today to assess the PBO’s progress to date. It’s my

understanding that we have some 1,200 plus people employed, and

we’re not sure how many contractors. We’d like to find out how

many additional folks are involved in that process, in addition to

full-time employees; how many contractors. We created these PBOs

to initiate some of these changes, and today, we’ll hear a little bit

about what’s taken place.

By improving service, we mean we do not want a repeat performance of the 3-month shutdown of the loan consolidation program.

Systems can be integrated and reliably enhanced by consolidating

the existing 12 stovepipe systems into one system with accurate

and immediately retrievable data. What progress has been made on

this issue? I hope we can find answers to that question today.

Now, I understand that the National Student Loan Data System

[NSLDS], was created to improve the quality of student financial

aid data and minimize fraud and abuse in these programs. However, according to a September 1998 GAO report, almost half of the

schools are not using NSLDS’s on-line functions. Is this data base

working effectively? We also hope to find answers to that question.

We’ll hear today from the Inspector General’s office that the administrative costs in the Department of Education’s direct loan program are 31 percent higher than private sector costs. This is bad

news for the taxpayers. I’m very concerned that spending for student loan administration has jumped from $137 million a year to

$401 million a year from 1992 to 2000. This is a 193 percent increase despite the fact that the Department’s award workload has

only increased some 28 percent. This is even more bad news for the

taxpayer.

Qualified personnel should be in place to ensure that the programs are not subject to waste, fraud, and abuse. Since the Department has been repeatedly criticized for a lack of systems integration, are competent people in place to fix this problem? That’s another question we hope to find an answer to today.

In addition to examining the Student Financial Assistance Office’s progress in achieving those goals, I have some other very specific concerns. It’s absolutely astounding to me that over $109 million in Pell grant over-awards were made in 1996 to students who

fraudulently stated their income in order to be eligible for loans.

The Higher Education Act of 1998 was supposed to fix this problem

3

by authorizing the Department of Education to verify a student’s

income with the IRS. What has the Department done to implement

this solution? Another question we hope to find an answer to today.

As we delve into a recently released audit by the Inspector General’s Office, even the most blase supporter of government bureaucracy has to be shocked by the fact that the Department has forgiven millions of dollars in loans to students on the basis of death

or disability despite the fact that these students were neither dead

nor disabled. In fact, in just one program that was examined, students went on to earn significant salaries after over $73 million in

loans were forgiven for their supposed total and permanent disability. Some of the students, after having their loans forgiven, simply

returned to school and received additional loans and grants.

Perhaps the most astounding thing about this report is that over

$3.8 million in loans was forgiven for students who claimed to be

dead but were alive and well. In fact, some forgiven disabled and

so-called deceased borrowers were discovered to be doing quite well

and enjoying salaries of over $50,000 a year. But what’s so unbelievable is that the Department does not even require presentation

of a certified copy of a death certificate before a loan is forgiven,

just a simple act like that.

Once again, the taxpayer is fleeced by a loan program out of control. It really shocks, I think should shock, the conscience of every

Member of Congress when we see this type of abuse within a system, particularly when there’s so many of our students who are in

need of financial assistance, and we have so many demands on

education today.

I’m also concerned about reports that there are a rapidly growing

number of loans going to students who attend foreign universities

and misuse the loan money. In 1998, $200 million in loans were

awarded for tuition at foreign schools, and the Inspector General

has been after the Department for several years to do something

about these students who get their checks but never show up for

school.

I have a quote here from a former Assistant Inspector General

in which she asserts that the Department had not moved aggressively to combat this fraud and that, in her opinion, ‘‘the Department could do more to deal with this problem if they just made it

a priority,’’ and that’s taken from the Chronicle of Higher Education, January 15 of this year.

In addition, while I understand that the default rate has come

down slightly in recent years, I’m frankly troubled that there are

still about $20 billion of loans that are in default. I’m also concerned that the default rate terminology and calculation can, in

fact, be very misleading. It is defined generally by the Department

to refer to the repayment of loans for a 2-year period, not whether

the loan goes into actual default at a later date.

Congress, for the first time in history, provided a performancebased organization. It now has some 1,200 employees and contract

personnel. We provided the PBO with personnel and also gave

them contracting flexibility to facilitate operation of the PBO’s

hoped-for achievement of important educational financing goals.

Today, we’ll ask many questions. We’ll ask in particular how the

Department has used those tools to do more, and efficiently, an efVerDate 11-MAY-2000 08:43 Aug 04, 2000 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\63517.TXT HGOVREF1 PsN: HGOVREF1
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fective management of our student loan programs. In a time when

Congress is struggling to provide funds for students who are very

much alive and classrooms and teachers who don’t have adequate

resources, it’s absolutely outrageous that our Federal education bureaucracy would waste such an incredible amount of money.

[The prepared statement of Hon. John L. Mica follows:]

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Mr. MICA. That concludes my opening statement. I’m pleased

that we’ve been joined by our ranking member, the distinguished

lady from Hawaii, Mrs. Mink, who is indeed one of the Congress’s

champions in education. I recognize her at this time.

Mrs. MINK. Thank you, Mr. Chairman. I apologize for being late

and missing part of your opening statement.

Mr. MICA. That’s OK. I’ll give you a copy right here.

Mrs. MINK. Thank you.

Creating opportunities for young people to go on to college is an

enormous responsibility, not only of the Federal Government, but

of the State and local agencies. It’s been one of the very, very significant efforts on the part of the Federal Government to open up

opportunities for higher education through loan programs which

have enabled many, many students, not only the low-income students, to go on to college. It has afforded relief to many middle-income families as well, as the Congress moved to recognize that the

Nation as a whole was dependent upon its ability to offer higher

educational opportunities and that financial barriers should never

be the reason for persons not being able to go on to higher education.

I recognize the fact, Mr. Chairman, that there are always difficulties in the administration of any program and that there will

be people who will attempt to sneak out the back door or indulge

in fraud or misinformation. It is the responsibility of this subcommittee, I recognize, to investigate these matters, and for that

reason I commend you for opening this hearing today. Perhaps it

will lead us to ways in which we might tighten up the program,

insist upon greater scrutiny and greater safeguards that the Federal funds invested in these programs are not wasted.

I look forward to the testimony of all the witnesses that have

been called for this subcommittee hearing and must apologize, Mr.

Chairman, if I have to leave in midperiod of the hearing as we are

in the juvenile justice floor debate, and the chairman of my Education and the Workforce Committee has a major amendment

which is coming up shortly and I need to be on the floor. But I will

come back as soon as I’ve had my 2 minutes on the floor. Thank

you very much.

Mr. MICA. Thank you so much, Mrs. Mink.

I recognize now the gentleman from Maryland Mr. Cummings.

Mr. CUMMINGS. Thank you very much, Mr. Chairman. I want to

thank you, too, for holding this hearing. As one who has a daughter

just about to enter college, I, too, am concerned about these loan

programs as I am for the students at Johns Hopkins University in

my district and many other colleges and, of course, the students in

my district and students throughout the country.

As one who came from a mother and father who never passed the

first grade, but were able to send all of their children to college,

their seven children, trying to find ways to make sure that students are able to have the opportunity to go to college is something

that is very near and dear to my heart. I would associate my words

with that of our ranking member, I think we have to look at these

things very carefully.

One of the things they taught us in criminal law my first year

of law school, was that if there is a way to break the law, people

8

will find it, and I think that you are always going to have some

problems. The question is whether you deal with those problems effectively so that the program continues on to do the good that it

does. I think that it is our responsibility to look very carefully at

the program to make sure they are functioning properly. In the

process of doing that, I think we must be careful to keep in mind

that these programs are making it possible for people to have opportunity.

The great educational scholar James Comber says that people

can have will, they can have ability, but if they don’t have opportunity, they’re going nowhere fast. And so I hope that we’ll look

carefully at what we’re doing here, that we will take appropriate

actions where we deem them necessary, and we will strengthen the

things that need to be strengthened and made better.

And so I want to thank the witnesses too, for being here today,

and as I have said to witnesses many times, it is your testimony

that makes it possible for us to do what we do. You are the ones

who are on the front line. You are the ones who are dealing with

the issues. You’re the ones who have to go under the scrutiny, and

sometimes, I must tell you, after sitting on this committee for over

3 years, sometimes the scrutiny is one-sided, and so it is good to

have you here so that you can give us both sides. I’ve sat in this

committee where you would have thought somebody had committed

an offense that was worth 10 death penalties, and by the time we’d

finished, there was nothing there, and I’ve seen that many, many,

many times. So I sit here with open ears and open heart. Thank

you very much.

Mr. MICA. I thank the gentleman.

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

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Mr. MICA. No further opening statements at this time.

We’ll turn to our first panel. Our first panel consists of Dr. John

Berthoud, president of the National Taxpayers Union; Mr. Thomas

A. Butts, the National Direct Student Loan Coalition; Dr. Fred J.

Galloway, former director of the direct loan program evaluation,

currently with Macro International, Inc.; and Mr. Steven A. McNamara, Assistant Inspector General for Audit, Office of Inspector

General, Department of Education.

I think you’re mostly new witnesses. This is an investigations

oversight panel of Congress. We do swear in our witnesses, so if

you’d please stand and raise your right hands.

[Witnesses sworn.]

Mr. MICA. The witnesses answered in the affirmative, and I’m

pleased to welcome them.

Let me just tell you the ground rules first. If you have a lengthy

statement, we’re going to run the little clock here. We will be glad

to submit this statement or additional information or reports for

the record. It will be made a part of the record upon request. We

ask that you summarize your remarks in about 5 minutes here,

and we will begin.

I first recognize Dr. John Berthoud, president of the National

Taxpayers Union. Welcome, and you’re recognized, sir.

STATEMENTS OF JOHN BERTHOUD, PRESIDENT, NATIONAL

TAXPAYERS UNION; THOMAS A. BUTTS, NATIONAL DIRECT

STUDENT LOAN COALITION; FRED J. GALLOWAY, FORMER

DIRECTOR, DIRECT LOAN PROGRAM EVALUATION, MACRO

INTERNATIONAL, INC.; AND STEVEN A. McNAMARA, ASSISTANT INSPECTOR GENERAL FOR AUDIT, OFFICE OF INSPECTOR GENERAL, DEPARTMENT OF EDUCATION

Mr. BERTHOUD. Mr. Chairman, distinguished members of the

committee, thank you very much. It’s an honor to appear before

you. As you said, Mr. Chairman, I’m John Berthoud, president of

the National Taxpayers Union. We are a nationwide grassroots lobbying organization of taxpayers with 300,000 members.

I come before you today to state our views, and I will summarize

my remarks as you requested, Mr. Chairman.

To state our views on the Federal direct loan program, we believe

that the evidence shows that this program has been plagued by intractable administrative problems and inefficiencies. These inefficiencies in turn cost taxpayers directly today, and in the future

could lead to greater losses if there are significant defaults on the

program’s loans. The Federal direct loan program has been the

fastest-growing Federal loan program, yet until recently there has

been little attention to this program or the Department of Education’s management practices. We are very grateful at the National Taxpayers Union that you are holding this hearing today to

shed some light on some of the difficulties.

One of the greatest problems for this program has been slipshod

administration by the Department of Education. Mr. Chairman,

you touched on some of the problems. I’ll repeat a few others.

In a March 1999 study, the Inspector General of the Department

of Education found inefficiencies in both the FDLP and the Federal

family education loan program. Regarding the FDLP, the Inspector

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General wrote, ‘‘To approximate the effect of these inefficiencies,

we compared our estimates to the Department’s cost to manage the

FDLP, $17 per loan, to the average cost that we estimated, based

on U.S. Treasury research, the large private lenders would have incurred to manage the FDLP, $13 per loan. A significant portion of

the $4 difference may be due to inefficiencies; however, some of the

difference may be due to other factors.’’ As you said, I believe, Mr.

Chairman, this is indeed bad news for taxpayers.

Beyond what the Inspector General found, there have been other

troubling indications of waste. Since 1992, while student aid

awards were up 28 percent, administrative spending is up about

200 percent, as your chart over here demonstrates. Two years ago,

taxpayers were forced to pay $40 million in penalties because of the

Department of Education’s actions related to the FDLP. I think, as

you indicated, the Department had to shut down the loan consolidation program from August 1997 to December 1997 because it

couldn’t keep up with the backlog of applications.

However, these were not the first warning signs for this program. An earlier report by the Inspector General of the Department of Education found other problems. They found problems and

weaknesses in other areas, including student status reporting, electronic data processing controls, loan record accuracy, timeliness of

reporting, cash management reconciliation, written policies and

procedures, and quality assurance systems. The record of the Department of Education in running this program is clearly not one

in which the administrators or taxpayers can take pride.

The question arises as to why we have these problems, and I

know on the second panel you will hear from the Department of

Education. They may assure you that if there have been problems,

they will get better. We are not so confident of that. I think the

problems, from a structural point of view, come from the fact that

we are asking a bureaucracy to be something it is not, which is a

bank. NTU believes that where the private sector can better fulfill

a mission desired by the Congress and the President, it should be

allowed to do so.

In my written testimony is discussion of the benefits of using the

private sector in all facets of public policy. I will note that strong

use of the private sector is a central component of the reinventing

government concept that Vice President Al Gore often touts. Here,

I will only note that beyond greater efficiencies through heavy use

of the private sector, there are lower risks to taxpayers. There’s

also greater satisfaction among end users of the customers of government, as was demonstrated in the Macro International study.

Inefficiencies in the FDLP program lead to taxpayer costs and

risks. The size of the program puts the extent of this risk in perspective. The FDLP is more than five times as large as the next

biggest Federal direct loan program. Through last year it had

issued more than $30 billion in loans, which is about one-third of

all outstanding Federal loans. By 2004, just 5 years from now, it’s

projected the program will have issued more than $100 billion in

student loans. Even if this program were small, there is no excuse

for inefficiency, but the enormous size of the program magnifies the

cost.

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In conclusion, Mr. Chairman, it is not surprising that the Department of Education has not done well with this program. NTU

believes education policy is best set by those closest to students and

most concerned with results. To maximize efficiency and service delivery, program implementation should be turned over to the private sector wherever feasible.

While many are clamoring for yet more education spending on

the K through 12 levels and higher, we see, as representatives of

taxpayers, a huge run-up in education costs in recent years. In my

testimony, you will see both numbers looking at K through 12

spending and overall Federal education spending. I think our message to you today, which is why these hearings are so important,

is despite a lot of calls out there for yet more dollars to go to our

education systems, the facts are clear that we have invested heavily in recent years in education. The time has come to not spend

more, but to spend wiser. In light of this huge run-up, the National

Taxpayers Union adamantly rejects the need for more dollars for

education. Again, what we need is wiser spending. One small step

in that direction would be rolling back the Department of Education’s role in direct loans. As is often the case, much of what the

government is doing currently could be handled more efficiently

and effectively through the private sector. Thank you.

Mr. MICA. Thank you for your testimony. We’ll withhold questions until we finish the panel.

[The prepared statement of Mr. Berthoud follows:]

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Mr. MICA. Our next witness is Mr. Thomas A. Butts, with the

National Direct Student Loan Coalition. Welcome, and you’re recognized.

Mr. BUTTS. Thank you, Mr. Chairman. I am Thomas A. Butts,

associate vice president for government relations at the University

of Michigan. I was, at one time, the director of student financial

aid at Michigan and have served as the Deputy Assistant Secretary

in the U.S. Department of Education. I am pleased today to have

the opportunity to appear before you on behalf of the National Direct Student Loan Coalition.

The Coalition is composed of institutions participating in the

Federal direct student loan program. Its purpose is to assure the

direct loan program accomplishes its goals and mission of providing

outstanding service and accountability to students, institutions,

and taxpayers. The chair of the Coalition executive committee is

Marian Smithson, director of financial aid at Southern Illinois University.

The direct loan program was first authorized as a demonstration

program as part of the 1992 reauthorization of the Higher Education Act and signed into law by President Bush. Recognizing the

lower cost to the taxpayers and potential improved service to students and institutions, the direct loan program was expanded in

1993. Today, institutions have the choice of participating in either

the government-guaranteed Federal family education loan or direct

loan programs. Presently, more than 1,200 institutions participate

in the direct loan program and originate about $11 billion per year

in new loans to about 1.9 million students.

The University of Michigan was among the first 105 institutions

to participate in direct lending. We originate about $130 million in

direct loans each year and have had a very successful experience

with the program. It has helped us streamline our student aid operations and deliver loans to our students in a timely, cost-effective

manner. Like other direct loan institutions, we have been able to

fully integrate the loan process with all of our financial aid and

business processes. While there have been bumps along the way,

as anyone experienced in large system change projects would expect, the Department of Education has really done a wonderful job

in meeting its responsibilities to us and to our students. I believe

the Michigan experience is typical, as demonstrated by the loyalty

direct loan schools have shown to the program and its mission.

Direct loan institutions are also pleased by the fact that the competition that we introduced to the FFEL program has resulted in

improved service to our colleagues who have chosen to say in

FFEL. Although most dissatisfied institutions left FFEL for direct

lending, it is good to see that satisfaction of those who remained

has improved.

One of the reasons those involved in direct lending thought the

program would be a success is that it permitted government to leverage the best of private market principles. Capital for the program is obtained essentially through the auction of government securities in the private capital markets, and the program is administered through competitive contracts with the private sector. This

stands in stark contrast with FFEL, which essentially is a corporate welfare program masquerading as free enterprise. I had to

22

add that in light of the previous testimony. I’m sure the Department will be providing us with cost comparisons, which, when considering both administrative and subsidy costs, will show that direct lending is a good deal for taxpayers.

While the direct loan program is only completing the 5th year of

operation, it captured one-third of the student loan market in its

first 3 years. Some express concern that it seems to be on hold at

that level. However, any private company that introduced a new

product and went from zero to one-third of market share in 3 years

would be the darling of Wall Street. The last couple of years have

given the Department and the institutions the opportunity to adjust to rapid expansion. Under the new performance-based organization, we are expecting substantial improvements in all aspects of

program operations, including cost.

We believe that the PBO authorized by the Department and

being implemented will do much to improve service to direct loan

institutions and students. Indeed, it should better the operation of

all of the student financial aid programs. In my testimony, I further talk about some of the implementing activities of the performance-based organization. I think it is well on its way, as we’ll hear,

I presume, from the Department shortly, about what it is about.

We are also concerned that students receive equal access to benefits provided by the taxpayers and that all students in both programs be given similar terms and conditions on their loans. That

is, their interest rates, fees, and so forth should be the same. To

the extent that the Congress has chosen, through a system of mandatory payments to the lenders in the FFEL program, to evidently

give more than is necessary to provide a reasonable profit and

cover operating expenses in order for them to determine who

should get taxpayer benefits, we believe the same should obtain in

the direct loan program. The direct loan program for every $100

lent is $7 cheaper than FFEL when considering all of the subsidy

costs and the administrative costs of both programs.

Mr. Chairman, thank you. I’d be happy to answer any questions.

Mr. MICA. Thank you. We will withhold questions until we’ve

heard from everyone.

[The prepared statement of Mr. Butts follows:]

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Mr. MICA. We will now hear from Dr. Fred J. Galloway, former

director of the direct loan program evaluation, with Macro International. You’re recognized, sir. Welcome.

Mr. GALLOWAY. Thank you, Mr. Chairman. My name is Fred

Galloway, and I appreciate the opportunity to appear before you

today to share with you the results of the 5-year evaluation of the

Federal direct loan program that I directed while at Macro International.

In my remarks today, I’ll be touching on three topics of interest

to the subcommittee: The structure of our evaluation, the research

questions that drove the evaluation, and some of the results from

the evaluation. I’ll begin with the structure of the evaluation and

try and limit my rather lengthy remarks between to 5 and 6 minutes.

The evaluation itself was a 5-year, $6.7 million project funded by

the Department of Education. Its stated purpose was to evaluate

the implementation and effectiveness of the direct loan program.

The project began on October 1, 1993, and was scheduled to end

on September 30, 1998, although final revisions to reports continue

through the end of this year.

In the almost 3 years I spent running the evaluation, I can assure you that all of our work was done in a completely unbiased

manner, and in no way did the Department of Education ever force

us to change or manipulate any of our findings. However, as you

will see in a moment, they did cancel part of our contract during

the 4th year of the evaluation.

Now, we had four research questions that drove the evaluation:

What do institutions think about direct lending; what do borrowers

think about direct lending; how well has the Department of Education managed and administered the direct loan program; and

what are the Federal costs of the direct loan program? I would like

to spend approximately 1 minute on our answers to each of those

questions to provide some context for you to help understand the

program’s successes and failures.

We asked what institutions think about direct lending. We conducted four annual surveys of over 3,000 direct loan and FFEL institutions. We started in academic year 1994–1995 and went

through 1995–1996, 1996–1997, and concluded with academic year

1997–1998. We used a mail survey methodology with the option of

completing the survey over the Internet, and our response rates

ranged from 75 percent in 1995–1996 to 86 percent in 1997–1998,

most importantly with no evidence of nonresponse bias.

We had two major findings from our four institutional surveys.

First, we found that all schools, direct loan and FFEL schools, were

increasingly satisfied with their respective loan programs. In fact,

81 percent in our last survey expressed their satisfaction. This is

up from 68 percent in academic year 1994–1995, suggesting that,

something I believe Mr. Butts said before, the competition between

the two programs has seemed to improve both programs.

Our second finding over the last 4 years, institutional satisfaction with the direct loan program had fallen for 3 years before rebounding last year in academic year 1997–1998. Satisfaction with

the FFEL program rose through all 4 years. In fact, during the

first 2 years of our surveys, we found direct loan schools were sigVerDate 11-MAY-2000 08:43 Aug 04, 2000 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\DOCS\63517.TXT HGOVREF1 PsN: HGOVREF1
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nificantly more satisfied than were FFEL schools. In the last 2

years of our surveys, we found just the opposite, that FFEL schools

were more satisfied than direct loan schools.

Now, we also had two minor findings from our institutional survey I’d like to briefly share with you. In terms of institutional satisfaction with the Department of Education and other service providers, in all four of our surveys, we found that direct loan schools

were more satisfied with the services provided by the Department

than were FFEL schools. Not surprisingly, FFEL schools were significantly more satisfied with the materials and training provided

by lenders and guarantors than that provided by the Department

of Education.

Our last finding, which is quite interesting among institutions

actually participating in both programs, we found those institutions

trying to do both were less satisfied with the direct loan program

than all the institutions participating fully in the direct loan program, and they were less satisfied with the FFEL program than institutions participating fully in the FFEL program. For those

schools trying to do both, it was a rough road to hoe.

Now, our second research question, what do borrowers think

about direct lending? In this case, we conducted three borrower

surveys, between 2,500 and 5,000 direct loan and FFEL borrowers.

These were telephone surveys using computer-assisted telephone

interviewing techniques. Our response rates ranged between 64

percent for our survey of borrowers in repayment to 77 percent for

our last, our 1996–1997 survey. Again, there was no evidence of

nonresponse bias.

Two major findings: Borrowers were extremely satisfied with

their respective loan programs; 94 percent of students and 91 percent of parents expressed satisfaction during our last survey, suggesting that borrowers in both programs seemed quite satisfied

with the loan programs.

We also found in all of our surveys that when we asked students

and parents about specific aspects of the loan programs, they were

also very satisfied. We found no significant differences, however,

between direct loan and FFEL borrowers. Taken together, these

findings also suggest the competition between the loan programs

has improved both programs.

We also found two other things of interest. When we talked to

borrowers in repayment, over 90 percent of them were satisfied

with their contacts with the Department of Education and other

service providers, so it seems things are working quite well here.

Finally, and perhaps most interestingly, we found borrowers indicated a relatively low awareness of the terms and conditions of

their loans. For example, only 15 percent of students and 19 percent of parents were able to recall or estimate the amount of their

recent loan within 1 percent. Almost 6 out of every 10 students and

almost half of all parent borrowers did not even know their loan

amount within 50 percent of the actual amount. It’s quite shocking.

It turns out, what’s even worse is borrowers have become less

knowledgeable between 1994–1995 and 1996–1997. Fortunately,

borrowers in repayment do seem to know a little bit more about

this.

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I would like to turn to our third research question, which is how

well has the Department of Education administered and managed

the program? To answer this question, we used our survey results

together with between 40 and 50 interviews a year with individuals

involved in the management, administration and oversight of the

direct loan program to help shape our reports. Although we produced several reports, I’d like to concentrate on the structure content of our last and most retrospective report, direct loan program

administration 1993 to 1998. However, rather than discuss the successes and failures that occurred, as documented in our report, I’d

like to focus on the structure of the report, which the subcommittee

may find useful helping to understand the context surrounding the

Department’s management and administration of the program.

We prepared this report in the spring of 1998. It was written

largely for the new Chief Operating Officer, Greg Woods, although

we didn’t know who it was going to be at the time coming in to

run the congressionally mandated performance-based organization.

Our goal in producing the report was to provide a contextual understanding for some of the major events that occurred during the

history of the program so the new chief operating officer could hit

the ground running.

Specifically, we developed a framework that looked at three

things. We looked at the effect of external or exogenous factors on

departmental decisionmaking. We looked at operating constraints

common to all Federal agencies, and finally, we looked at problem

areas unique to the Department.

In developing this context, the two factors that the Department

must take as given to their daily operations is the amount of

money they have to operate the program and the level of political

scrutiny that the program receives. Although to some extent, all

Federal programs operated under these constraints, time and time

again we were told by individuals in the Department that not having as much money as they needed to run the program, coupled

with the increased level of political scrutiny that resulted from the

1994 congressional elections, forced many direct loan decisionmakers into adopting a risk-adverse posture when making key decisions.

Now, in addition to these outside factors, we looked at two factors prominent in most Federal agencies that the Department also

has to grapple with: contracting issues and personnel issues. It’s

discussed in a number of the reports by the Inspector General and

the General Accounting Office. Contractual oversight issues coupled with structural weaknesses in the technical skills of many employees make running a technologically sophisticated program like

direct lending a tremendously challenging task.

Finally, we looked at several problem areas unique to the Department. These included such issues as organizational structure,

systems problems and accountability, all of which affect the context

that surrounds the management and administration of the program.

In our report, we used this contextual framework to help explain

some of the major events in the history of the direct loan program,

like the transition of loan origination from Utica to the Montgomery, the decision to move to multiple services that was subseVerDate 11-MAY-2000 08:43 Aug 04, 2000 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 C:\DOCS\63517.TXT HGOVREF1 PsN: HGOVREF1
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quently reversed, and the difficulties associated with the consolidation process that occurred in the latter part of 1997.

We also looked at a host of smaller issues, and in our report we

provide the historical perspective and discuss how the departmental decisionmaking was influenced by the context that the program operates within. If our report could be summed up in only

one phrase, it might be that of a long-time observer of the Department who commented that the program was run better than we

had thought, but not as well as was needed.

Now, our last research question, which will take less than a

minute to discuss, because we didn’t complete it, was what were

the Federal costs of the direct loan program? In this we enlisted

the help of Coopers & Lybrand to help us with some of the accounting information we obtained from the Department, and Economic

Systems, Inc., to build a microsimulation model for us. Together

our firms were engaged in the tasks of calculating the actual cost

to the Federal Government of running the two loan programs,

which involved gathering such information as the administrative

costs from the general ledger accounts of the Department’s primary

accounting system. We also looked at invoices and analysis of the

major Office of SFA program systems contracts and loan data from

the National Student Loan Data System.

During the summer of 1997, we were hard at work estimating

the Federal cost of the loan programs when our work was stopped

by the Department of Education. We were told to turn over all our

work documents and provide a summary of our work to date, which

we did on August 15, 1997. The modification to our contract became official on September 19, 1997, and the Department reduced

our contract amount by slightly more than 300,000 as a result of

their cancellation of the cost component.

Within less than a month, we had signed a $20,000 contract with

the Office of Inspector General to provide both materials and training necessary for OIG staff to prepare our report comparing the

cost of the direct loan and FFEL programs. We completed our approximately 160 hours of training by the end of January 1998 and

closed the books on our contract with the OIG at that time. I’d be

happy to answer questions after the final statement.

Mr. MICA. We’ll take the questions not in fast forward when we

get back to you.

[The prepared statement of Mr. Galloway follows:]

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Mr. MICA. I’m going to interrupt before we get to you, Mr. McNamara, because Mr. Gilman has joined us and may have to leave for

another hearing.

Mr. Gilman, I’d like to recognize you for your statement.

Mr. GILMAN. Thank you, Mr. Chairman. I’ll be very brief. I want

to commend you, Chairman Mica, for conducting this hearing, and

when we see a deficit of $11 billion at the end of this year, and

possibly by the year 2004 going to $100 billion, it certainly warrants a very thorough review of this whole process and possibly

moving it to the private sector. I want to commend the panelists

for being here to give us the benefit of their thinking, and I want

you to know that many of us are very much concerned about this

kind of a deficit at a time of our budgetary constraints.

So I would like to ask that my opening remarks be made part

of the record. I thank you for allowing me to.

Mr. MICA. Without objection, so ordered.

[The prepared statement of Hon. Benjamin A. Gilman follows:]

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Mr. MICA. I appreciate your patience, Mr. McNamara, you are

our last witness in this panel. Steven A. McNamara, who is the Assistant Inspector General for Audit, Office of Inspector General, the

Department of Education. Welcome, sir. You’re recognized.

Mr. MCNAMARA. Good morning, Mr. Chairman and members of

the subcommittee. Thank you for the opportunity to discuss issues

and costs affecting the Federal loan programs. My name is Steven

McNamara, and I am the Assistant Inspector General for Audit at

the Department of Education, Office of Inspector General. Today,

I am representing the Office of Inspector General because our new

Inspector General, Lorraine Lewis, was just sworn in on Monday

of this week. She regrets not being here today to provide our testimony, but she has not yet had sufficient time to become familiar

with the details of our report entitled, Study of Cost Issues, Federal family education loan program and Federal direct loan program, which is the focus of my testimony today.

Mr. Chairman, with your permission, I would like to provide a

brief oral summary of my statement and submit my complete statement for the record.

Mr. MICA. Without objection, the entire statement will be made

part of the record.

Mr. MCNAMARA. Thank you, Mr. Chairman.

Before discussing what the study did say, let me put to rest some

misconceptions about what we didn’t say. We did not conclude that

one program is inherently cheaper than the other. We did not conclude that eliminating the direct loan program would save the government money. We did not state that the inefficiencies affect only

one of the programs. And finally, we did not state that private

lenders making student loans are more efficient than the government contractors serving the direct loan program.

Let me say just a little bit about how we did our study, which

was not an audit of either program. We obtained cost information

for both programs as reported in the Department’s published financial statements for fiscal years 1996 and 1997. Consistent with the

Credit Reform Act, we segregated costs into two primary categories, subsidy costs and administrative costs, and we addressed

them separately in our study. Subsidy costs include interest expense, loan origination fees, default costs, and other fees, and they

constitute by far the majority of the direct loan and FFELP costs.

The Department has limited control over subsidy costs because the

economy and Congress exert the greatest influence on these costs.

Administrative costs are those that the Department incurs in

managing both the FFELP and the direct loan program, and they

include such costs as contracting, personnel, travel, and others. The

Department can largely control these administrative costs through

effective management. Because the Department lacks a cost accounting system, it does not allocate administrative costs to the

various financial aid programs. Consequently, we allocated administrative costs to the particular loan program in light of the activities and services actually performed.

Our study reached two principle conclusions: No. 1, in any given

year, either the direct loan program or the FFELP program total

cost may be greater, given the effect of prevailing economic conditions on subsidy cost. Since costs may be higher or lower at any

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one point in time, the total cost figure for any one year does not

definitively answer the question of whether FFELP or direct loans

are more expensive over a longer period of time.

Second, we concluded that inefficiencies likely affect the Department’s administrative costs for both loan programs. We base this

conclusion on cost calculations that we made in this study and reviews that we had done in previous audits. For the direct loan program, we estimated the Department’s cost to administer the loan

portfolio to be $17 per loan. We compared our estimate of the Department’s cost to the benchmark average cost of $13 that we derived based on a Treasury study of servicing costs of large lenders.

We believe that a significant part of the $4 difference may be due

to inefficiencies. These inefficiencies can largely be controlled by

improved access to reliable information, increased technical and

contract management expertise, and compatible automated data

processing systems. We do recognize, however, that some of the differences are due to such uncontrollable factors as Federal procurement policies and personnel rules. We were unable in our study to

estimate what portion of the FFELP administrative costs result

from inefficiencies. This was the case because we didn’t have any

comparable private sector entity to compare the Department’s

FFELP administrative costs to.

I do want to be perfectly clear on one essential point. We are not

taking the position that either program over an extended period of

time is cheaper than the other. The intent of the study was to

serve as a beginning with the expectation that the Department

would refine our cost estimates as it strives to improve the management of both loan programs. We suggested four actions the Department could take to improve the administration of the loan programs: No. 1, institute an activity-based cost accounting system;

two, track employees’ time to the programs that they work on;

three, develop models to predict borrower behavior; and four, take

actions to address possible reasons for cost inefficiencies which we

cited in the report.

We are encouraged that the Department has begun efforts to develop a managerial cost accounting system, and the OIG is working

with them as they go forward. Further, the PBO has initiated several actions to address areas where we have found inefficiencies in

our past audits.

Mr. Chairman, this concludes my statement, and I would be

happy to respond to any questions on this issue or other work products.

Mr. MICA. Thank you, Mr. McNamara.

[The prepared statement of Mr. McNamara follows:]

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Mr. MICA. I’ll start out real quickly. Mr. McNamara, this is the

study that was produced. It says, Study of Cost Issues, Federal

family education loan program.

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Mr. MICA. On page 17 it says, ‘‘the 2-year average of the Department’s FDLP administrative cost is $24 per loan. Of the $24 total,

$7 is used to perform oversight and default functions, while the remaining $17 represents FDLP management costs. To assess the

reasonableness of the FDLP management costs, we compared the

Department’s cost to manage the FDLP, $17 per loan, to the average cost that we estimated the large lenders would have incurred

to manage the FDL program, $13 per loan,’’ and you refer to a

table and an appendix.

The report goes on to say, ‘‘Given the similarities of the two programs and results of the audits we’ve reviewed’’—and another appendix—‘‘we believe a significant portion of the $4 difference may

be due to inefficiencies.’’

Now, I’m not a rocket scientist. I didn’t do extremely well in

math, but the administrative costs appear to be 31 percent higher

for the government program; is that correct?

Mr. MCNAMARA. Yes, Mr. Chairman, the difference between the

$17 and the $13.

Mr. MICA. Now, what’s gotten a lot of publicity isn’t something

that we’ve uncovered here, but rather what we’ve watched on television. Some of it is probably sensational, but some of the reports

are that we have $73 million gone astray for forgiven disability

payments and $3.8 million forgiven payments for students that

really didn’t die. Can you explain what’s going on there?

Mr. MCNAMARA. Yes, Mr. Chairman.

Mr. MICA. Are those inaccurate figures?

Mr. MCNAMARA. Yes, Mr. Chairman.

Mr. MICA. Tell us what the figures are.

Mr. MCNAMARA. The figures are pretty much as you described.

What we found in doing an audit——

Mr. MICA. The figures are as I described: $73 million forgiven for

folks who weren’t disabled, $3.8 million for students that weren’t

dead.

Mr. MCNAMARA. Let me check that very quickly.

Mr. MICA. Am I in the range?

Mr. MCNAMARA. Yes, Mr. Chairman. During the period July

1994 through December 1996, our audit determined that $216 million in student loans were discharged for death; $292 million in

student loans were discharged for total and permanent disability.

Nearly $77 million, or approximately 14 percent, were forgiven for

these individuals who we later found appeared to have earned income.

Mr. MICA. That’s more, $77 million, 14 percent. Again, it’s very

hard for me to understand. I empathize with Mr. Cummings and

the ranking member. Their concern is my concern, that these dollars should be going to students who are in need, that’s the reason

we set this up. But when you tell me in your testimony that we

really don’t have a problem, that there’s not much difference, then

you testify that there’s a 31 percent difference, the 14 percent of

those given to disability are forgiven on a wrong basis, there’s

something dramatically wrong with the program.

Mr. MCNAMARA. Mr. Chairman, I would point out that the numbers I’m quoting are for the FFELP program. We think the underVerDate 11-MAY-2000 08:43 Aug 04, 2000 Jkt 000000 PO 00000 Frm 00115 Fmt 6633 Sfmt 6633 C:\DOCS\63517.TXT HGOVREF1 PsN: HGOVREF1
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lying cause would be the same for both, so it doesn’t relate to the

administrative cost of the direct loan program.

Mr. MICA. I don’t care if it’s for the government or for the private

sector. It’s still just not an acceptable level, and again, I don’t mean

to give you a hard time, but what we’re trying to do is find out—

if the information is correct, and are the reports we’re getting correct. Is this happening?

Mr. MCNAMARA. Yes.

Mr. MICA. Thank you.

Mr. Butts, you’re from the University of Michigan, and you had

some laudatory things to say about the direct program. That’s correct?

Mr. BUTTS. Yes.

Mr. MICA. Is it true that the University of Michigan in 1995 and

1996 could not reconcile its books on this program?

Mr. BUTTS. I’m not sure exactly what you’re referring to, Mr.

Chairman.

Mr. MICA. Isn’t one of the requirements that when you participate in the direct loan program that you reconcile your books?

Mr. BUTTS. It’s my understanding that all of our records are reconciled, and all cash has always been reconciled.

Mr. MICA. Is it not also true that more than $100,000 is given

out in 1 fiscal year that could be collected by your university?

Mr. BUTTS. I’m not aware of that.

Mr. MICA. I would appreciate it if you go back and check and see

if 1995 and 1996 have even yet been reconciled.

Mr. Galloway, you conducted this extensive—sounds like a consumer survey. How much did that cost? What was the total cost of

finding out whether these folks are satisfied or not?

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Mr. GALLOWAY. Our institutional surveys which we conducted for

them, the cost varied between $215,000 and $300,000 per survey.

Mr. MICA. The total amount contracted over the period of years

for your activities, all of your activities?

Mr. GALLOWAY. Put together were about $6.3 million.

Mr. MICA. You ended by saying that you felt that there were still

problems. In fact, some of the problems you cited you said—and

this is from your testimony ‘‘structural weaknesses in the technological skills of many employees make running a technologically sophisticated program like direct lending a tremendously challenging

task.’’ Were you trying to say it’s hard for a government bureaucracy to be a bank? Is that what you said, Mr. Berthoud?

Mr. BERTHOUD. Yes, it is, Mr. Chairman.

Mr. MICA. Is that basically what it boils down to?

Mr. GALLOWAY. That’s part of it. The other part of it, there’s a

lot of systems requirements in running the direct loan program,

and it seems a lot of people told us they really had trouble getting

people with cutting-edge technical skills.

Mr. MICA. You also said that given the difficulty of firing anyone

in the Department I’m very familiar with that, I chaired the Civil

Service Subcommitee for 4 years. Mr. Cummings was one of my

ranking members. We found it was almost impossible to fire anyone in the Federal work force. Managers are forced to rely constantly on a thin layer of capable people. Now, these aren’t my

words. This is your testimony; is that correct? Is that one of the

problems?

Mr. GALLOWAY. If I could add one word to that, I would be glad

to say it’s correct. Some managers—not every manager has that

problem, but a lot of managers talked to us about having problems

with some people who couldn’t get the job done, and they kind of

shove them off in a corner of the room, and they rely on the people

who could get the job done.

Mr. MICA. Still on the payroll, and then we tax the ones who are

able to—

Mr. GALLOWAY. It’s tough for the people who have the skills because they get called on all the time.

Mr. MICA. Mr. McNamara, one final question. There’s also been

a number of stories and reports about the problem with foreign

schools, people getting loans and not attending school or something

wrong with the school. What’s the problem there in a nutshell?

Mr. MCNAMARA. In a nutshell, Mr. Chairman, foreign schools operate differently than schools in the United States. The check goes

directly to the student, and currently there isn’t any process in

place to verify either before the student gets the loan or while

they’re in school that they actually are attending the school.

Mr. MICA. So there’s still no mechanism in place to check up on

this?

Mr. MCNAMARA. As of this moment, no, but I’m aware the Department is in the process of setting up a website. They could tell

you more about the exact status. There is no mechanism in place

to prevent the student from initially getting the fraudulent loan.

Mr. MICA. Thank you.

I’d like to yield now to the ranking member, Mrs. Mink.

Mrs. MINK. Thank you very much.

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Mr. McNamara, the Chair has raised some disturbing statistics

about discharges from liability to repay loans on the grounds of

total permanent disability or death or other reasons where the government is allowed to discharge the debts rather than by payment.

Are there any safeguards in the law which—upon audits such as

the one that was performed—which disclosed all of these figures allowing the government to go back and reclaim the loan payments

due? Or is the discharge and waiver that’s issued final and permanent even though the circumstances upon which those waivers

were given turn out not to be true?

Mr. MCNAMARA. I believe if we could determine that people that

applied for disability did so based on fraud, we could prosecute

them criminally or civilly and attempt to——

Mrs. MINK. In the absence of fraud, is there any way in which

the law would permit a recovery of the loan payments due?

Mr. MCNAMARA. The regulations would not permit us to go back

and do that right now.

Mrs. MINK. So if, at the date of discharge of the loan liability,

the person was indeed disabled, perhaps, as indicated from these

notes, collecting Social Security disability, and then subsequently

was able to recover, get a job notwithstanding that disability—I

mean, blind people are employed, and they do earn sufficient moneys. Persons that are disabled in many ways can go back to school,

become trained in computer technology or something and become

gainfully employed. Under those circumstances there’s no way that

the government is able to go back then and recover the loan liability if subsequently the person became an earner, and therefore liable for taxes under IRS? Because I assume that the IRS is the one

that disclosed some of these figures.

Mr. MCNAMARA. Actually, we obtained these figures by matching

everyone who had received a discharge with the Social Security

master earnings data base. It certainly could be the case that

someone could be declared permanently disabled and then perhaps

recover. The Department’s regulations right now state that, and I

think they’re on the chart on the wall—on the board over there, basically you have to be so disabled that it’s unlikely you can either

return to work or go to school or that you’re going to die. So it’s

pretty extreme.

Mrs. MINK. So is there any ability, under the loan regulations

that exist, for the government to go back and reclaim the loan liability?

Mr. MCNAMARA. Currently, no.

Mrs. MINK. So would it be your recommendation that we correct

the discrepancy or omission in the law and allow the government

to go back and reopen this liability?

Mr. MCNAMARA. I think if it can be proven that there was fraud,

definitely.

The other question, the previous regulations dealt with that, if

you were going to get a new loan, your previous loan would be reinstated. That regulation changed, I think, in 1995, that’s clearly a

policy question but we would support that.

Mrs. MINK. Now, on the cost basis which your inspector’s report

indicated as a $4 difference in terms of operational costs, to what

do you directly attribute the $4 difference?

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Mr. MCNAMARA. We attributed that to possible inefficiencies surrounding access to the necessary information to run the programs.

The Department didn’t always have necessary management information. As has been mentioned earlier by other members of the

panel, the Department is aware that it needs to make improvements in its technical and contracting expertise. We’ve met with

the new PBO Chief Operating Officer, Greg Woods, on that regard,

and he has brought in people that have this expertise. And finally,

the last inefficiency would be basically the timely information coming in that would allow you to make the management decisions you

needed to make.

Mrs. MINK. How do you determine what the cost of the loan is

if the basis of the determination is lack of information, lack of a

cost accounting system, or lack of relevant data? How do you make

an assessment on what the true cost is for the program?

Mr. MCNAMARA. We use the audited financial statements for fiscal years 1996 and 1997, so we started with a full deck. Then basically, we just allocated it down to one program or the other, and

we came out with a bottom line.

Mrs. MINK. So if you had the true data, it might turn out to be

quite different?

Mr. MCNAMARA. We did have the true data.

Mrs. MINK. You had the true data in terms of how to distribute

the administrative costs to each type of loan?

Mr. MCNAMARA. Yes, ma’am.

Mrs. MINK. You have confidence that the $4 difference is a true

difference?

Mr. MCNAMARA. I have confidence in what the actual costs were

for fiscal years 1996 and 1997. The $4 difference is derived by a

projection that we made using a U.S. Treasury study that estimated the cost of a large private lender to service a similar portfolio. We used that as a benchmark, and we compared that to the

actual cost.

Mrs. MINK. Which is the large private vendor that was used as

a benchmark?

Mr. MCNAMARA. There was no particular lender. This was a

Treasury study done to try to determine how much FFELP lenders

should be paid last year when there was a lot of controversy about

the interest rates and what they should get. This was their approximation of what it would cost a hypothetical large lender to

service loans.

Mrs. MINK. The decision of the Congress to go into the direct

loan program was basically to save money. As I recall the deliberations in my committee, there was an assumption that there would

be a $4 billion savings in establishing a direct loan program which

the universities would administer directly rather than going

through the private lenders route. Has that savings panned out?

Mr. MCNAMARA. I could comment on the results of our study.

The savings, I guess, would depend on what previous study you

were quoting and whether they said it would cost more or less.

Studies we looked at fell out on both sides. I think one of the major

flaws we found in all the studies we looked at was that some of

them were made before the law was passed. They were assumed

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nificant changes Congress made really invalidated the assumptions

of many of those studies. We know what we found, and I really

couldn’t compare it to the earlier studies because they didn’t use

the same assumptions.

Mrs. MINK. What is your conclusion then in terms of whether

there have been any budgetary savings overall by the transfer to

a direct loan program?

Mr. MCNAMARA. We didn’t make that conclusion. What our conclusion was that in any given year, and that really subsidy costs

drive it, either program could cost more or less. I think there are

projections available, and depending on what interest rates you use

going into the future, you could project one to be more or less than

the other.

Mrs. MINK. I have just one final question, Mr. Berthoud, representing the National Taxpayers Union. Certainly I appreciate

your comments with respect to the attention which your National

Taxpayers Union directs to the cost of various programs.

I just wanted, Mr. Chairman, to note that when this matter was

being debated in the Congress, specifically in my committee, the

author of the program was Congressman Robert Andrews, with the

support of our then chairman, Mr. Ford. We have a letter from the

record dated September 20, 1991, from the National Taxpayers

Union endorsing the bill that Mr. Andrews introduced, H.R. 3211.

The letter commends him for introducing it because it would yield

taxpayers savings of $1.5 billion a year. I’d ask unanimous consent

to have this inserted in the record.

Mr. MICA. Without objection so ordered.

Mrs. MINK. Thank you very much.

[The information referred to follows:]

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Mr. MICA. I’d like to now recognize the gentleman from Indiana,

Mr. Souder.

Mr. SOUDER. I thank the chairman, and I also thank him for this

hearing. This has been a difficult topic as we move through the

higher education bill over in the education committee, and it’s important that we continue to monitor this issue.

First, I’d like to ask Dr. Berthoud in general, I was on the small

business program, and every time we expanded small business

lending, people said, well, this is free. We have this little portion

that we can expand. Don’t you see this phenomena happening

across the government, that at the time we have economic good

times, we’re expanding all the risk of the Federal Government, and

we’re not really having an analysis of what this could cost the taxpayers long term?

Mr. BERTHOUD. I think that’s absolutely right. The Congress in

recent years has made important steps on better accounting of its

loan and direct loan and loan guarantee programs. But in many

cases, with Federal and State governments loans, loan liabilities,

the tremendous unfunded liabilities of the Social Security program

and others, there are a lot of long-term fiscal concerns that we

have.

Mr. SOUDER. Many conservatives such as you and I, favored moving toward loans from some grants and having accountability and

responsibility, but there also needs to be a balance of what amount

at risk the government would have if there was a downturn. I’ve

never seen such a projection in any forecasting. We see the total

cumulative, but not the differential cost to the government if

there’s a recession or a growth rate of X amount. It simply isn’t in

our budgetary calculations. We see the large hundred billion exposed, $11 billion annually, but we don’t see what that actually

means in the bad debt allowance that a private company would

have to be projecting, assuming an average bad debt ratio over

time. We assume a fixed bad debt ratio even if the exposure increases.

Mr. Butts, when the program was first conceived, was there any

consideration given to that variance in the amount of bad debts

and how that would be calculated in the budget?

Mr. BUTTS. The assumptions were that the defaults should be—

would be roughly similar, and that the Department of Education

needed to do everything it could to reduce the default rates, and

as direct lending comes on-line, it should have and maintain a loan

rate. You’ll note that in the last few years the overall default rate

in student loans has dropped from something like 22 percent to

under 10 percent now.

Mr. SOUDER. But isn’t this exactly where the administrative costs

come into play, because if you have fixed overhead plus the bad

debts, it’s no longer a savings because we don’t absorb—in other

words, if all of a sudden we have a recession and the bad debts go

up, we don’t ask the private lenders that we have to pay their overhead.

Mr. BUTTS. The private lenders are guaranteed 98 percent of repayment on their loans and are guaranteed an entitlement, mandatory payment from the Congress, a subsidy for every loan they

make, which would appear to be more than is necessary to make

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a reasonable profit and to cover their overhead costs for administration.

The direct loan program, it was anticipated—we’re in our 5th

year. We’re making over $10 billion a year in new loans. And students are beginning to come into repayment, so it is only logical

that the servicing costs should be increasing as that volume comes

on-line. That was anticipated when the program was enacted, and

the administrative funding that was put into the law anticipated

those costs.

If you look at the administrative costs of the program that the

Department has, one of the things that we don’t have is a comparison of what those real administrative costs are in the FFELP program because it’s so diverse, it has never been studied. We’ve not

had a good study of the subsidies. The Congressional Budget Office

has studied those issues with the Treasury, and I have some concerns here. But the latest methodologies that I’ve seen from the

OMB and the CBO, if you take into account the subsidy payments

in both FFELP and direct lending and the administrative costs to

the Department, it is roughly $7 per $100 loaned cheaper to do a

direct loan than to do a FFELP loan, and if you reduce direct loan

volume, taxpayer costs will increase. If you increase direct loan volume overall, they will decrease.

Mr. SOUDER. I already have the yellow light. I want to make a

couple of points. One is that, in a factual basis, we’ve had a loan

increase since 1992 of 28 percent and an administrative increase

of 212 percent. Now, there may be many different reasons, but

we’ve heard a number today. This program was sold that it was

going to save the Federal Government money. At best, the Inspector General seems defensive in his report in saying he’s not saying

that the private loan programs are cheaper to administer. In other

words, at best you’re saying it’s a draw. Is that a misrepresentation

of what you said, Mr. McNamara?

Mr. MCNAMARA. We didn’t conclude it was a draw. We simply

said we didn’t draw a conclusion on the difference.

Mr. SOUDER. In fact, you did draw a conclusion in the sense you

said it could be higher under one program one year, and it could

be lower under another program, which means it could go back and

forth. But you did not suggest that, in fact, the way the program

was sold, which is that it was going to save the government money,

was a definitive conclusion.

Mr. MCNAMARA. Correct. We didn’t conclude that.

Mr. SOUDER. And that furthermore, if this was a private government audit—and we heard things, as the chairman already pointed

out, structural weaknesses in the technological skills of many employees, which is because the Department of Education is not expected to be a bank; the difficulty of firing anyone in the Department, which is true because it’s government; and as was also pointed out by those from Dr. Galloway and Mr. McNamara, having access to reliable information.

Well, yes, government departments aren’t private sector organizations that necessarily have this equipment, having qualified technical aid and contract management, because they’re not a bank

using compatible automated data processing systems. We have that

throughout the government, and it’s the danger of trying to expand

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and take over additional private sector things; we’re not going to

be able to afford all the data processing systems, including uncontrollable factors as Federal procurement. Yes, we do have personnel

rules. Yes, we do have that.

Furthermore, I think earlier in your testimony you said they

don’t have a cost accounting system. I can’t imagine a private sector company this big without a cost accounting system. And then

my personal favorite line of which I am very proud of is that the—

from Dr. Galloway, the 1994 congressional elections, me, I was one

of the people that came in, forced many direct loan decisionmakers

into adopting a risk-adverse posture. I would hope so. They are

loan officers.

As a borrower, I don’t like banks a lot of times. They only want

to give you money if you deserve it, and they sit there, and unless

you can prove you have plenty of money, they don’t want to give

you the loan. It’s aggravating. As a parent with two students in college, quite frankly, I understand that in initial procedures with direct lending, it actually helped simplify, much like sometimes a

public sector entity is needed, but then they back up after we’ve

fixed some of that.

The truth here is that I am concerned about the ability of the

government and definitely don’t believe it should be expanding, and

that I hope they continue to be somewhat concerned by Congress

so they adopt a risk-adverse policy, and I view that as a tremendous compliment, and I want to thank you for it.

Mr. MICA. I thank the gentleman from Indiana. I don’t think you

were asking for a response.

Mr. Cummings.

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

Mr. McNamara, a lot of times these hearings come about—I’m

not always sure about how they come about—but a lot of times

what happens, we read things in the newspaper or we hear it on

the news, and the next thing you know we have a hearing. There’s

nothing wrong with that. One of the articles that I think probably

had some impact here was a June 1, 1999, article, editorial rather,

of Investors Business Daily. Are you familiar with that?

Mr. MCNAMARA. No, sir, I’m not.

Mr. CUMMINGS. They talk about your report extensively.

Mr. MCNAMARA. The cost study?

Mr. CUMMINGS. Yes. When you look at an editorial, a lot of times

the editorial writer takes a lot of liberty, and I’m not sure whether—I mean, just based upon your testimony today, I question

whether the writer is accurate. I just want to make sure we’re

clear.

First of all, the editorial says that your report says, ‘‘one program

is costing taxpayers an extra $100 million a year.’’ Is that accurate?

Mr. MCNAMARA. No, sir.

Mr. CUMMINGS. You never said that?

Mr. MCNAMARA. No, sir.

Mr. CUMMINGS. It also says that the Department of Education ignored your report, do you believe that to be accurate?

Mr. MCNAMARA. No, I don’t believe that they have ignored it.

We’ve had a lot of discussions with them. They also plan to adopt

the methodology we use to allocate costs as they go forth to set up

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their accounting system, and we’ve had a few meetings with them

so far to get that process started.

Mr. CUMMINGS. This article was written on June 1. The actions

that you just spoke of, did some of them happen before June 1,

such as maybe something happened afterwards that the writer

didn’t know about? I’m just curious.

Mr. MCNAMARA. I would say it’s both.

Mr. CUMMINGS. Could you tell us what has happened since June

1 so I can sort of update this information in my mind?

Mr. MCNAMARA. Since June 1, and I’m doing this off the top of

my head.

Mr. CUMMINGS. I understand. Do the best you can.

Mr. MCNAMARA. We obtained information from the Army Materiel Command on activity-based costing. I had my staff member

that did this study review that. I know he’s had some discussions

and had preliminary meetings with the head of the accounting and

finance group in the new PBO, and she’s interested in working

with us as she decides on a new managerial cost accounting system. Some of that happened before the first, and some of it has

happened since the first.

Mr. CUMMINGS. Quite a bit of other things happened before the

first. It was only a few days ago.

Mr. MCNAMARA. Yes, sir.

Mr. CUMMINGS. Let me ask you this. Going back to the editorial,

I think you said you had four recommendations?

Mr. MCNAMARA. Yes, sir.

Mr. CUMMINGS. Can you just say them again for me real quick?

Mr. MCNAMARA. To institute a cost accounting system, a managerial cost accounting, activity-based cost accounting system was

one.

Mr. CUMMINGS. Some action is being taken on that based on

what you just talked about?

Mr. MCNAMARA. Yes, sir.

Mr. CUMMINGS. Go ahead. Two.

Mr. MCNAMARA. The second one was to allocate employee cost to

the program that benefited.

Mr. CUMMINGS. Has there been anything happening on that?

Mr. MCNAMARA. That would probably be subsumed into the first

recommendation.

Mr. CUMMINGS. I’m not an accountant, but I kind of figured that.

No. 3?

Mr. MCNAMARA. Was to start studies on borrower behavior.

Mr. CUMMINGS. Tell me what you have in mind by that? What

does that mean?

Mr. MCNAMARA. Well, the more you know about borrower behavior, the more you know about what might happen if you change

various policies, what effect it might have on defaults and various

other things. I think lenders typically do this to know that if you

raise interest rates, are you going to make more loans or less loans;

what affect would certain collection practices have in terms of your

ability to get the loans back in, that sort of thing.

Mr. CUMMINGS. Has any action been taken on that?

Mr. MCNAMARA. I’m unaware of that. The Department would be

in a better position to talk about that.

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Mr. CUMMINGS. No. 4.

Mr. MCNAMARA. Recommendations. I’m almost going from memory now. Let me just refer to the fourth one. The final one was to

address the inefficiencies that we pointed out from previous studies

that we had done or the General Accounting Office had done. Problems with the—for instance, the information systems, trying to consolidate those, eliminate the stovepipe systems that have been discussed earlier.

Mr. CUMMINGS. Some action has been taken on that?

Mr. MCNAMARA. It’s currently under way. That’s why the PBO

was set up. Greg Woods is working on a blueprint that I’m sure

he’ll tell you about. Our office has been invited, and we are working with them as they design the systems to try to make sure that

internal controls are designed in at the start.

Mr. CUMMINGS. Do you feel comfortable with—having spent this

time doing your investigation? Do you feel satisfied that the Department is doing their part to followup on the things that you recommended generally, and from what you do know?

Mr. MCNAMARA. From what I do know, they clearly made a beginning on the first two, and that’s the cost accounting. The others,

you know, they’ve gotten started, but it’s really too early to tell.

Mr. CUMMINGS. I don’t have anything else.

Mr. MICA. Thank you.

We’ll recognize now Mr. Ose, the gentleman from California.

Mr. OSE. Thank you, Mr. Chairman.

Mr. Butts, I want to make sure I understand the process in the

direct program. The student comes in, applies to a university or

higher education facility seeking financial assistance for continuing

at school, for tuition, books and the like. The institution goes

through its underwriting criteria, I presume, exercises some judgment on the ability of the student to repay, and makes a loan.

Once the loan is made, what happens to the loan itself? You package it and sell it to Sallie Mae?

Mr. BUTTS. Once the university has given a student a financial

aid package of Pell grants, loans, and so forth, we distribute the

funds to the students with appropriate promissory notes and draw

down the money from the Federal Government, as we do for all of

our programs, and allocate it to the students’ account wherever it

is appropriately to go. The signed promissory note is sent to the

Department of Education’s contractor for servicing purposes. The

servicer then enters it and sends a confirmation notice to the student that reminds the student that they have a loan. The government then assumes the responsibility for the billing and servicing.

All the servicing of the student loans for direct loans is handled by

private sector contractors to the Department of Education.

Mr. OSE. That’s the $13 or $17 figure we keep talking about?

Mr. BUTTS. Yes, sir. That $17 figure, as I understand it, includes

the profit paid to the contractors. I’m not sure that the other number includes that.

Mr. OSE. In this process, somewhere along the way, the note is

sold, or is it held by the Federal Government?

Mr. BUTTS. It is held by the Federal Government. You see, the

capital for these loans have been obtained for all practical purposes

through the weekly auction in the private capital markets, similar

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to T-bills and at, of course, very good rates for the government because it can leverage its purchasing power in the marketplace. As

the loans are repaid in direct lending, then they are simply turned

to the Treasury.

Mr. OSE. The actual loan is never packaged and sold?

Mr. BUTTS. Not in the direct loan program.

Mr. OSE. How about the Federal family education program, the

FFELP?

Mr. BUTTS. In the FFELP program, there are, I think, some

7,000 lenders, over 300 or so very active lenders, and a variety of

secondary markets including Sallie Mae, tax exempts and so forth.

Those loans can be bought and sold in the marketplace. One of the

advantages, we think, of the direct loan program is that the student always knows who owns their loan and who to make the payment to.

Mr. OSE. Because the institution continues to hold it, and it is

serviced by the private contractor.

Mr. BUTTS. Because the government owns the loan, and it’s being

serviced by one entity.

Mr. OSE. Now, you would have the direct loans, so you would not

be involved in the guarantee, because if the Federal Government

isn’t paid, they just write it off or declare them dead.

Mr. BUTTS. At one point we were involved with the guaranteed

loan program, and we dealt with every lender and secondary market in the country as a national university and dealt with—it was

a very complicated process for us, which is why we changed. We

think direct loans provide better service to our students; other institutions think otherwise. Clearly the marketplace is now making

both programs competitive, but we think that the fact that the student in direct lending knows who owns their loan, and that doesn’t

change, may change repayment plans wherever possible, and has

access to income-contingent repayment plans are clear advantages

for the students.

Mr. OSE. Mr. Chairman, I thank you for the 5 minutes. I know

we have a vote, so I yield back.

Mr. MICA. I want to thank all of our panelists: Mr. Berthoud

from the National Taxpayers Union. Mr. Butts, we’re waiting to

hear back from the University of Michigan’s reconciliation of accounts from 1995–1996. Dr. Galloway, we wish you many further

studies and contracts. Mr. McNamara, thank you. We appreciate

the new Inspector General’s willingness to go forward today, even

though she’s not in place, but we wanted to get this matter before

the subcommittee in a timely fashion.

I might say, too, this is not the result of a GAO study ordered

by Congress. This is a study, as I understand, that the Department

authorized, and the audit results speak for themselves, but we do

need your interpretation and appreciate your cooperation.

We will hear from the second panel and the Department of Education in—I think we have four votes or so. We’re going to have to

recess the hearing until about 12:35. It will be just under an hour,

which will give folks an opportunity to catch a quick bite.

I apologize to our next two witnesses, but there will be a series

of votes, and we can’t conduct business in the interim. I thank this

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panel. You’re excused. This meeting of the subcommittee is in recess.

[Whereupon at 11:45 a.m., the subcommittee recessed to reconvene at 12:35 the same day.]

Mr. MICA. I would like to call this meeting of the subcommittee

back to order.

We have our second panel before us: Dr. Marshall S. Smith, Acting Deputy Secretary, Department of Education; Mr. Greg Woods,

Chief Operating Officer, Office of Student Financial Assistance Programs under the Department of Education.

Gentlemen, this is an investigation and oversight subcommittee.

Would you please stand and be sworn?

[Witnesses sworn.]

Mr. MICA. The witnesses answered in the affirmative.

If you have lengthy statements, we’ll make them part of the

record by unanimous consent. Otherwise, you’re recognized.

The first witness is Dr. Marshall Smith, Acting Deputy Secretary, Department of Education.

Welcome, and you’re recognized, sir.

STATEMENTS OF MARSHALL S. SMITH, ACTING DEPUTY SECRETARY, DEPARTMENT OF EDUCATION; AND GREG WOODS,

CHIEF OPERATING OFFICER, OFFICE OF STUDENT FINANCIAL ASSISTANCE PROGRAMS, DEPARTMENT OF EDUCATION

Mr. SMITH. Thank you, Mr. Chairman, Mrs. Mink.

The Department of Education administers two Stafford student

loan programs. Under the FFEL, Federal family education loan

program, the Federal Government subsidizes private lenders to

make student loans and then guarantees those loans against defaults.

Under the direct loan program, we fund student loans with Federal capital and hire private companies under performance-based

contracts to deliver and service the loans.

This year, the FFEL program will provide an estimated $20.4 billion in new loans for approximately 3.5 million students; and the

direct loan program will provide $10.6 billion in loans to 1.9 million

students.

Before the direct loan program was founded in 1994, students

and schools were often confused by an array of different paperwork,

procedures and schedules in the FFEL program. Only 68 percent

of schools expressed satisfaction with the program. Federal subsidies for FFEL lenders and guarantee agencies were too costly for

taxpayers, and the program had not received a clean audit opinion

at least since the Department of Education was founded in 1980.

The direct loan program reduced paperwork, created a single

loan account with one point of contact for each student and allowed

the graduates greater flexibility in repaying the loans, including

the new income contingent repayment plan. In 3 years, over 1,200

schools chose to leave the FFEL program and join direct lending.

The direct loan program now originates as many loans as the largest 15 FFEL lenders together. It holds one-third of one of the largest financial markets in the world.

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A new and strong competitor, the direct loan program helped inspire FFEL lenders to help improve their services. As a senior

FFEL executive said last year, ‘‘Direct Loans have introduced some

ways of doing business and some delivery mechanisms that made

the private industry wake up a little bit. It’s been good for the industry, particularly for students and schools.’’

Competition does help, primarily to improve service in the FFEL

program. Satisfaction with both student loan programs among

schools increased from 68 percent in 1994–1995 to 81 percent in

1997–1998.

Students are also satisfied. A 1998 survey found that 94 percent

of all student borrowers were satisfied with their loan program.

With the help of Congress and our partners, the Department

strengthened the financial management of the loan programs. The

national cohort default rate has been reduced from 22.4 percent 5

years ago to a record low 9.6 percent. At the same time, annual collections have increased by two-fifths, from 6.6 percent of outstanding defaults in fiscal year 1993 to 9.2 percent in fiscal year 1998.

The National Student Loan Data System has helped prevent ineligible students from receiving as much as $400 million in grants

and loans this year. These and other improvements helped the Department receive an unqualified opinion from its auditors on its fiscal 1997 financial statement.

The subcommittee heard this morning from the Department of

Education’s Office of the Inspector General, which recently completed a study of direct loans and FFEL costs. We welcome the

findings of the study, which I hope will help us reduce administrative costs and improve our internal accounting. However, I’m concerned that some have misunderstood the study and wrongly concluded that the direct loan program is more expensive for taxpayers than the FFEL program.

The report does not compare the total cost to the taxpayer of

these programs. It’s that simple. Instead, the Inspector General’s

report compares documented direct loan administrative costs with

estimates of what it might cost a large FFEL lender to manage the

same loans. It does not report actual administrative costs in the

FFEL program. More importantly, it does not combine the Federal

administrative costs with the Federal subsidy costs.

The overall Federal subsidy includes default costs, interest subsidies and other expenses that are the large majority of Federal expenses in operating the FFEL program. Adding the subsidy costs

to the Federal administrative costs would present a clearer picture

of the total cost to taxpayers.

The table on page 8 of my written testimony does this. That table

shows that using current economic assumptions, both by the CBO

and by the administration, the direct loan program is substantially

less expensive for taxpayers than the FFEL program. In this analysis, each FFEL loan is nearly twice as expensive for taxpayers as

a comparable direct loan, according to either the administration or

the CBO’s estimate. As a result, direct loans are estimated to save

taxpayers over $700 million this fiscal year compared to the cost

of all direct loans if they were FFEL loans.

In summary, the student loan programs have come a long way

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provements to the program include healthy competition between

the two student loan programs, creating marketplace incentives to

improve service and increase customer service satisfaction. Now

schools can move to the program that they believe will best serve

their students.

We now have lower interest rates for students who have saved

$4.7 billion—since 1994.

Finally, there have been over $5 billion in savings—$5 billion in

savings for taxpayers since 1994 due to reduced subsides for FFEL

financial institutions and the lower Federal costs for direct loans

than for FFEL loans. That’s $5 billion.

In addition, taxpayers have saved additional billions in reduced

default costs.

Now the loan programs are poised for further improvements. The

new performance-based organization established by Congress has

greater management flexibility, accountability for results, and incentives for high performance.

We supported this law and have been pleased to implement it

quickly and enthusiastically. The first Chief Operating Officer for

Student Aid, Greg Woods, has hit the ground running. He has the

right experience, including being the CEO of a software company

and 5 years at the Reinventing Government initiative, to make the

PBO a success.

After Mr. Woods describes his plans for improving the administration of student aid, I’d be happy to answer any questions you

may have. Thank you, Mr. Chairman.

Mr. MICA. Thank you.

[The prepared statement of Mr. Smith follows:]

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Mr. MICA. I’d like to recognize Mr. Greg Woods, Chief Operating

Officer, Office of Student Financial Assistance Programs.

Mr. WOODS. Mr. Chairman, committee members, thank you very

much.

I’ll focus on the improvements we’re making in the PBO in the

overall delivery of student financial assistance; and, with your permission, I will submit a written record.

Mr. MICA. Without objection, that will be made part of the

record. Thank you.

Mr. WOODS. I’ll summarize it briefly here.

Six months ago, I became the first Chief Operating Officer of the

government’s first performance-based organization. Congress created that performance-based organization to focus on the operational aspects of student aid, as distinguished from its policymaking functions, the whole idea to make the thing run more like

a business.

That’s my background. I’d been a success in business, and I bring

that point of view to this job.

My specific mandates in the legislation are to improve customer

service and to reduce cost and, as a way of doing both, to integrate

and streamline the computer systems. I view my ultimate customer

here as the student who needs financial help to get an education,

but the aid is delivered in the system. That system includes partnerships with schools and the financial community.

The overall cost of getting aid to the student includes everything

that our delivery partners and we spend on that entire process.

That means my job, as I view it, is to do whatever I can to make

both these programs, the direct loan program and the FFEL program, efficient and effective, to make them both excellent values

for the student and the taxpayers and to make them both excellent

investments for America.

The natural competition between the two programs I view is a

good thing and a powerful tool to that end. The Secretary has already spoken to the advantages that competition has introduced

into this arena and that competition continues. On the other hand,

OSFA and these commercial lenders are partners with a common

goal. That is, we’re helping to put America through school. So we’re

trying to constantly collaborate with these partners to improve

service and cut costs in the entire system.

Our overall goal in the PBO is service that equals the best in

business. To get to that level of performance, we’re in the process

of changing absolutely everything that goes on in this organization.

We’re reorganizing the Office of Student Financial Assistance along

the lines of private sector corporations to focus in channels on the

people that we deal with, a channel for students, a channel for

schools, and a channel for our financial partners.

We’re instituting a financial management system to get the kind

of cost data that the IG referred to as necessary to do proper cost

estimates and to manage this business day in and day out.

We have a Customer Service Task Force that’s been in consultation with our partners listening to students, listening to partners,

listening to our own employees; and, next month, we’ll publish a

report with about 200 ideas on ways to improve service delivery in

our organization.

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We have a new acquisition strategy. We are in the process of renegotiating all of our contracts for our computer systems into performance contracts with goals that would tie to my own as the

Chief Operating Officer of the organization.

With the help of the schools community, technical centers like

Highway One and financial powerhouses like the Bank of America,

we’ve been preparing a Modernization Blueprint that will go after

the reengineering of our stovepipe computer systems. And in September, I’ll deliver to the Congress a 5-year performance plan that

will have an aggressive set of goals for improving service and lowering cost. In fact, everything we’re doing goes back to the PBO

mandates from Congress to improve service to the students and to

cut costs, whether they be FFEL or direct loan costs.

Thank you very much. I would be happy to assist the Secretary

now in answering any questions that you might have.

Mr. MICA. Thank you.

[The prepared statement of Mr. Woods follows:]

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Mr. MICA. I have questions for both of you. We’ll try to cover this

pretty quickly here.

First of all, we’ve seen the audit, the report, and there are a

number of criticisms. There were some items that we had a report—was it Mr. McNamara who cited that corrections are being

instituted, some corrections he was aware of, some he was not?

Specifically, what has brought this hearing to such a peak are

questions about disability and people having their payment waived

and then coming back on the system and being reeligible. Could

you tell us, first of all, what’s being done to correct that?

Mr. WOODS. Absolutely. One thing I’d like to make sure is understood here, this is an example of the Department identifying a

problem and trying to get after it on its own. The study that the

IG did here was at the request of the Department. The Department

was concerned about fraud and other disability programs and was

concerned about trends in the rise in its disability claims and

asked the IG to look into it.

The results of the study confirmed those fears, as you’ve indicated, in the worst way. We have things in process already with

our partners here.

Note that this problem exists within the FFEL program primarily. That’s where the difficulties have been found because more

of the loans in the FFEL program are into the repayment status.

And we’re working with the guaranty agencies on new procedures

here, looking again at commercial practices.

We can require certified certificates. That’s something we haven’t

done. It’s common practice in the insurance industry.

We can require doctors’ identification numbers and phone numbers. We can go into training programs with the guarantors and

their people who are reviewing these applications for disability so

that they’re better informed about what to look for.

The other thing I’d like to state here is that we, in fact, believe

we can go after and recover this money. Where we find that there

were mistakes made in processing, we can reinstitute these loans

and collect on them.

Mr. MICA. Well, Dr. Smith, in the record, page 8, I believe it is—

there’s a chart. It says, new loans after disability discharge, and it

shows 1994–1995 pretty much stable and then 1995 just shoots off

the charts. It’s my understanding that the Department changed the

regulations in 1995 to make it easier for students who have gotten

loans forgiven to get new loans. Has that policy been changed back

or are we still operating under the policy that had this sort of shoot

off the charts?

Mr. SMITH. At this moment we’re still operating under the policy.

The regulation will be under review. It is now under review. All

these regulations have to go through something called negotiated

rulemaking. It’s the congressional intent for all of our regulations.

So we have to bring people together in order to change things, and

we intend to look at that. I intend to talk with the Secretary soon

about this, and we’ll be moving.

Mr. MICA. We just heard reports coming out in a month after

this hearing or so with a lot of suggestions, but to get things done

and—you know, we have to focus on the big enchiladas here. Certainly, this is the biggest area, we have identified the program.

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Your audit which—I congratulate you for taking that step, but now

our job in oversight is making certain that there’s a change in action and a change in policy. So we’re going to have to followup on

this, and we need a change in the policy.

We’ve also satisfied the PBO with I’m told more than 1,000 folks;

is that correct?

Mr. WOODS. The staffing level——

Mr. MICA. Tell me what our staffing level is. We’ve ramped that

up pretty dramatically, and our administrative costs I guess have

risen 200 percent in 6 or 7 years.

Mr. WOODS. I’d be delighted to address that.

Actually, the staffing level in the PBO is relatively stable at

1,200 people. These people were involved in the loan——

Mr. MICA. That’s a third of the Department of Education.

Mr. WOODS. It’s a third of the Department of Education—a quarter.

Mr. MICA. I’m sorry, 25 percent approximately; and when did

they come on?

Mr. WOODS. This staff?

Mr. MICA. Yes.

Mr. WOODS. The staff was increased over the past few years with

the direct loan program, but that staffing increase number I don’t

have for you here today. It’s nothing like the kind of percent that’s

shown on this chart. The indication in the chart is that we’ve dramatically increased the cost without an increase in workload, and

I’d like to dispel that idea. That’s just not the case at all.

What we’ve been doing in the direct loan program for several

years now is issuing on the order of $10 billion a year in loans. So

each year a loan is put out, that adds to the workload. It doesn’t

go away after the first year.

Now we’re actually entering a period of time where as the loans

go into servicing, the workload increases. The servicing is a much

more expensive proposition than simply issuing them. They’re not

being serviced to that extent while they’re in school. So our workload has actually increased dramatically over this time.

Mr. MICA. We’re told that one of the biggest problems with the

PBO is that there’s no chief information systems officer. Is that

still the case?

Mr. WOODS. We have an excellent man who’s been leading the

information systems work there for some time. We’ve been able to

add a couple of experts, for example, in privacy and security to support that. And, of course, this is my background. I’m certainly fully

qualified to carry that work out and make decisions in that area.

So compared to where we were 6 months ago, we’re probably dramatically stronger.

Mr. MICA. Two other areas, there’s been great concern expressed

about both in this panel and in the public arena, and that’s payments for students who claim to be dead and are very much alive

and then the problem with our foreign student loans. Could you address both of those for me?

Mr. WOODS. The death and disability claims is what we referred

to earlier and the changes we’re making there with death certificates and training and those improvements as well as the policy

issue you addressed to the Secretary.

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Mr. MICA. Specifically, though, are you now requiring the death

certificate?

Mr. WOODS. Yes. We’re——

Mr. MICA. Is that in place?

Mr. WOODS. We have notified the guarantors that we intend to

do this.

Mr. MICA. But it’s not in place?

Mr. WOODS. No, sir. They are already looking at changing their

policies. Where we stand with each of the guarantors I couldn’t tell

you today. I would be happy to answer that detailed question for

the record.

Mr. MICA. Is that a policy question that Dr. Smith would have

to address that becomes——

Mr. WOODS. We don’t believe that change is a regulatory change,

so we believe we can proceed administratively to deal with this.

The community is very eager to work with us on this.

Mr. MICA. But it’s still not in place. It’s a request at this point?

Mr. WOODS. That would be accurate.

Mr. MICA. Dr. Smith, did you want to respond?

Mr. SMITH. Well, it’s just that Mr. Woods has to work with a variety of guaranty agencies out there and explain to them exactly

what they need to do and they need to look it over and see how

quickly they can put their changes into practice. I think that’s the

delay in this process. It’s not as though they’re going to get a

choice. They will have to carry out the policy.

Mr. MICA. That would be a variety, I guess, of participants.

What about the direct loan program where you can make a decision. Has that been made?

Mr. WOODS. That decision has been made.

Mr. MICA. And is taking place?

Mr. WOODS. Yes, sir.

Mr. MICA. The other item was the foreign student problem.

Mr. WOODS. Right. The foreign schools issue I don’t believe is a

schools issue per se. Several years back, the Department undertook

a review and went through a recertification on schools and a number of schools dropped out of the program—in fact, over 400. We

have about 450 foreign schools currently involved in the direct loan

program. The cases that were found seemed to be cases that were

involved with students, and 18 cases is what we’re talking about

here. Eighteen cases of fraud identified where students are being

pursued for that, a relatively small number.

The other point I’d make about the foreign schools program is

that the overall default rate, which has been much at issue here

this morning and this afternoon, that default rate is 5.5 percent,

which is better than the national average. So while we’re concerned

about fraud any time we find it, I just want that to be in perspective.

We also think we’ve instituted some practices here that will improve the performance going forward. We’re notifying schools, for

example, when loans are issued to students who are alleged to be

enrolled there. That will get the schools involved as a checkpoint

on whether that student is actually there and eligible for funding.

Mr. MICA. Dr. Smith, did you want to respond?

Mr. SMITH. No, that’s fine.

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Mr. MICA. You said that one of the things you wanted to do was

study borrower behavior. Could you elaborate a little bit more on

that?

Mr. WOODS. My private sector experience was that it’s very important to be focused on the customer and to think in terms of

what the private sector talks about as customer segmentation. Different parts of the population have obvious different needs. Small

business is different than big business, seniors different than juniors.

In our case, students in 4-year, 2-year and proprietary schools

have different needs and, as we find, much different default rates

among those institutions. We think that by understanding behaviors in these customer segments and the needs of those populations, we can intervene earlier, and thereby reduce the cost in

terms of default and produce a better situation for that borrower

in terms of services. That’s what we are interested in.

Mr. MICA. One other quick question before I get to the ranking

member, I did not ask you. I asked you about the number of employees with the PBO. Do we have any way of assessing the contract employees or employees that are involved through contract?

Mr. WOODS. We certainly could get you an accurate number if

you’d like. I believe that number, at a peak during the year, might

run to 3,000 employees if you totaled it up for all the peak periods.

The reason I say peak is because our business is cyclical. When

we’re consolidating loans, we ramp up in that area. We don’t maintain that staff level. As soon as we don’t need the people, these

part-time people under contract are reduced.

The same thing with our student eligibility application. We ramp

up and tail off in order to minimize the cost. So that’s the way

we’re managing that contract work force.

There was conversation here about the practice of involving the

private sector, using private sector firms to handle the loan programs. The truth is that this organization is well on the path to

contracting out these service functions and processing functions.

We have experts for phone service, experts for computer processing,

experts for transforming paper into electronic images, and contractors who ramp up and down to meet the particular business cyclical needs.

Mr. MICA. Let me yield now to Mrs. Mink, if I may.

Mrs. MINK. Thank you very much, Mr. Chairman.

I served on the Education and Workforce Committee when it was

known as the Education and Labor Committee, and as I recall, the

initiation of the whole idea of direct loans, it was something that

was generated by Congressman Robert Andrews and supported by

the chairman, William D. Ford of Michigan. Those were the two individuals most responsible for the initiation and creation of this

program.

After a number of discussions and debates and meetings with the

administration, the administration came on board and supported

the program. Is my memory correct on that?

Mr. SMITH. I think that’s right, Mrs. Mink. I believe that a direct

loan program existed in the prior Congress as well, a small direct

loan program. Congressman Petri as well as, I believe, Congressman Andrews and, of course, the chairman were all involved in

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that. And then I believe there was discussion early in Mr. Clinton’s

administration, and there was a decision to move with a larger program rather than just the pilot.

Mrs. MINK. Yes. What I wanted to note with reference to this

history is that—to dispute or dismiss the assumption that this was

a grab on the part of the Federal Government for the administration, supervision and management of a program. Rather, as I recall, it was an initiation by the Congress at a time when everyone

was looking for ways in which to reduce the deficit and balance the

budget. And because of the high interest that the private sector

banks and financial institutions were charging for the management

of this program, there was this idea that maybe the Federal Government, even though you realize you have to put on more manpower and personnel and create a whole new system, that it could

be done with a cost savings.

Now, in your statement, Dr. Smith, you say substantial savings

have occurred for the taxpayers. Can you elaborate on that?

The testimony we heard this morning seemed not to conclude

that that has, in fact, occurred; and since that was the genesis of

this whole idea, I’m very anxious to really get to the bottom as to

whether we, in fact, have enjoyed any savings.

Mr. SMITH. Mrs. Mink, we estimate and the Congressional Budget Office estimates that the savings have been considerable. As I

mentioned, we can estimate them at about $700 million this year

if all of the direct lending students were, in fact, in the FFEL program.

Now, there have been a lot of other savings as well to the taxpayers and to the students, and they’ve come about in two ways.

One is the way I just mentioned. That is, that the direct lending

program, because it doesn’t have to pay huge subsidies to private

lenders, turns out to be a cost saver under most economic assumptions.

As you recall, the IG said he wasn’t sure. There are certain economic assumptions one can make about the interest rates and so

on where it might not be a cost saver but, by and large, and certainly over the last 6 years, the life of this program, it has clearly

been a cost saver. We estimate that the cost savings to the taxpayer have been roughly $5 billion since 1994.

We can supply more detail on that if you’d like, but it is from

a couple of things. One is from the direct lending program having

one-third of the business. The other is the reduction in some of the

subsidies that have gone to the private sector. The private sector,

as you know, continues to make a reasonable profit on this, a fair

profit.

Mrs. MINK. What is the percentage surcharge now on the loans

that the private sector charges the student or the program?

Mr. SMITH. The interest rates?

Mrs. MINK. Yes. The surcharge for managing the program.

Mr. SMITH. To the Federal Government? We do it in terms of

subsidies. The private sector gets an origination form of fee, which

is about 4 percent. They also then charge interest rates to the students, and they get to keep whatever profits on those interest

rates. In effect, they have to give some money back.

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By and large, what you have is a system where the Federal Government guarantees the private sector payments and then pays

them a reasonable subsidy in order to provide loans for students.

It has worked reasonably well over the last 4 or 5 years.

I think here is where the other real savings comes in. There’s

competition between the two programs, which I believe resulted in

savings to students and much better service to students and has

gotten the two sectors competitive. The private sector, the FFEL

program, for example, has become quite competitive in the reduction of some of the origination fees and in some of the other costs

to students. So I think we’ve got a very healthy, competitive system

now that has saved students a large amount of money and saved

taxpayers a large amount of money.

Adding them together, it’s almost $10 billion over the last 6

years.

Mrs. MINK. About a third of the loans currently expected are

about one-third in the direct loan and the balance in the private

sector; is that correct?

Mr. SMITH. That’s correct.

Mrs. MINK. That’s a balance you expect to maintain over the long

haul?

Mr. SMITH. That’s certainly what we expect to maintain over the

foreseeable future, that’s right. And it is, as I said, a competitive

market; and we’re working to maintain that.

Mrs. MINK. The direct loan program was initiated when? When

was the first loan issued?

Mr. SMITH. I believe in 1994.

Mrs. MINK. Now, has there been, since the initiation of the direct

loan programs, any experience with collections and defaults and determinations of waivers and discharges of debt and so forth with

respect to the direct loan program?

Mr. SMITH. Well, there’s been some but not very much to make

a real generalization.

Mrs. MINK. It hasn’t been in existence that long to

experience——

Mr. SMITH. That’s right. In fact, the numbers are very low right

now. The percentages are low. I wouldn’t count on that as being

something that will hold up in the future. We see no reason that

this will behave any differently than the FFEL program.

Mrs. MINK. The reason for my question, the reports that generated the call of these hearings with respect to the discharges for

disability and the erroneous notion of students being dead and having their debt discharged emanate not from the direct loan program but from the existing private sector loan program.

Mr. SMITH. I believe that’s true. It’s probably true for 98 to 99

percent of the cases, if not 100 percent.

Mrs. MINK. So the management of the private sector loans to

which this problem is attributed is a responsibility of the private

sector? Or is it the responsibility of the Federal Government to institute control so that it doesn’t occur?

Mr. SMITH. I believe it’s a shared responsibility. These are

fiscal——

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Mrs. MINK. Who recommends the waiver of the collection? Is that

the private sector that recommends it or is it the Federal Government that recommends it?

Mr. WOODS. The process would have the private sector agency

processing the paperwork. As the chairman indicated earlier, there

are regulations that the Department issues that cover this practice

and then——

Mrs. MINK. Who makes the final decision?

Mr. WOODS. At that instant in time on the piece of paper, the

private organization would make that determination, but we have

required certain things of them. Once they’ve gone through that,

they’re perfectly within their rights to make that call.

Mrs. MINK. If they sign off and say this is discharged because of

disability, in the end it’s the taxpayer that loses because it’s unable

to collect.

Mr. WOODS. That’s correct.

Mrs. MINK. What is the process then that the Federal Government has set up to look at these discharges to make sure they’re

all valid? Is there someone in the Department that does that?

Mr. WOODS. We have not had a review function specifically focused on this issue. We have an active review program that looks

at the overall practice, makes site visits, program reviews for these

guarantors. And naturally those reviews in the future, any one of

them that we make, would focus on this issue. But we haven’t got

a medical examiner or a medical reviewer at the Department level

for this function.

Mrs. MINK. Can you say with some assurance that, with respect

to the new program, the direct loan, that you have this in hand

and that these sorts of misdeterminations would not occur under

the government-managed program?

Mr. WOODS. I wouldn’t want to assure you that there would be

zero, but I know we can reduce this number dramatically by instituting the kind of practices that are followed in other Federal agencies and in other retirement programs in making these determinations. Those are available to us, and we’ll be able to institute those.

Mrs. MINK. Mr. Chairman, I’m at the end of my questioning; I

just simply want to say that I’m very much reassured by the testimony of the two witnesses from the Department that the direct

loan program is being well administered. The questions that we

raised have now been brought to their attention, and I have confidence that they’ll be able to correct it. I say this not as an early

supporter of the direct loan program. I have to make a public confession that I had great misgivings about the creation of this huge

bureaucracy to manage a program that I considered so vital. At

that point in our early deliberations, it seemed to me that it was

an undertaking that was going to challenge our witnesses and our

abilities.

But I’m pleased to hear today that it’s progressing along, and I

commend the Department for initiating the audit to look at yourselves and come up with safeguards to make sure that this program will continue to be managed well and that the taxpayers’ dollars will indeed be saved by it.

Thank you, Mr. Chairman.

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Mr. MICA. Thank you. I appreciate the comments of the

gentlelady and the ranking member.

I wish I could be as confident in the bureaucracy we’ve created

to oversee this program. Quite frankly, I do have some concerns,

as I said even during their testimony, that they had commented

that corrections are on the way. I think I’ve sat and heard that before and then some of the mechanisms and resources that we’ve

provided for them, including PBO, which have been put in place at

great expense, still have not produced the results we hoped for.

We now have 24 percent of the entire Department of Education,

as far as personnel, involved in the program, and costs are escalating for administration, so I have some concerns. Not to mention

that we have some great loopholes in forgiveness of payments for

people who are ineligible and, in fact, by their own report and

these are not insignificant amounts.

Again those corrections are not in place. Some policy changes are

not in place, and we need those in place. Some of the administrative corrections are not in place by their own general audit. We still

have some serious personnel deficits and problems that need to be

addressed to make this whole program work. I have additional

questions regarding the differential between the administrative

costs that have been presented, not by me but by the audit, and

I think we’ll have some very specific questions in writing so that

we can get a written response.

Additionally, I have specific questions which I didn’t get to about

loan consolidation costs.

In closing, maybe I could just ask a quick question. The information that our subcommittee obtained said that loan consolidation

costs of the direct loan program greatly exceed those of the guaranteed loan program. For example, I guess you have indicated that

the direct loan consolidations in 1998 cost $12.9 million for 107,000

loans or $121 per consolidation. In 1999 you reported $21.8 million

for 194,000 consolidations equaling a little bit less than cost, bigger

volume, $112 per consolidation.

However, we’re told that these figures may, in the private sector,

be about half the amount, far less than the consolidation loans that

are done by you. In fact, I guess the consolidation problem got so

bad, and this has been testified to, that in August 1997, the Department had to close down the direct loan consolidation program.

What’s being done to correct this situation? And, in fact, is it still

costing almost twice as much for loan consolidation by the Department?

Mr. SMITH. Mr. Chairman, we’re going to have to check your figures. The $110 figure is actually the maximum figure, the underperformance-based contract. They’re expected to hit a target of, I

believe it’s 65 days, or whatever the industry standard is. If they

come in earlier than that with a consolidated loan that is faster for

the student, they get an increase in that payment. If they come in

later, they can deduct it from their amount of money.

The average amount of money here is $70 per loan. For a regular

loan, we charge—it costs us, in terms of paying the consolidator,

considerably less for certain other kinds of loans. So there’s a real

mixture of loans, and I believe what—the figure you’re using is actually the figure for the maximum amount that could be paid rathVerDate 11-MAY-2000 08:43 Aug 04, 2000 Jkt 000000 PO 00000 Frm 00163 Fmt 6633 Sfmt 6633 C:\DOCS\63517.TXT HGOVREF1 PsN: HGOVREF1
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er than the amount that on average is actually paid. But we will

get you those figures.

I also believe that the numbers for 1998 were not quite right, but

we’ll also get you those.

Mr. MICA. Again, we’re using figures that have been supplied by

the Department or figures that have been taken from the audit

studies. So we have some very specific, lengthy questions. And I

know that you have a limited time schedule; and you’ve been most

patient, Dr. Smith. We appreciate your testimony today.

Mrs. Mink, why don’t we, by unanimous consent, submit the balance of the questions to the Department for response in writing?

Mrs. MINK. Fine with me.

Mr. MICA. And we’ll leave the record open for 30 days to give you

extra time to respond.

Again, I think we’ve raised some important issues here. It’s not

our job just to be bad guys. Mrs. Mink practices in trying to be one

of the nicest Members in Congress, and she’s a wonderful ranking

member, but we have a responsibility to conduct oversight of these

programs. Your audit helped trigger some of the reports about continuing problems, and they certainly need to be addressed by our

panel. Working with you we hope we can get this program in order

and make it work efficiently and take whatever legislative steps

are necessary. We hope that we’ll get response from the policy and

operational end.

There being no further business to come before the subcommittee

at this time, this meeting is adjourned. Thank you.

[Whereupon, at 1:20 p.m., the subcommittee was adjourned.]

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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