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INCREASING STUDENT AID 

THROUGH LOAN REFORM 

HEARING 

BEFORE THE

COMMITTEE ON 

EDUCATION AND LABOR 

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, DC, MAY 21, 2009 

Serial No. 111–24 

Printed for the use of the Committee on Education and Labor 

( 

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/education/index.html 
(II) 

COMMITTEE ON EDUCATION AND LABOR 

GEORGE MILLER, California, Chairman 

Dale E. Kildee, Michigan, Vice Chairman 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

Joe Sestak, Pennsylvania 

David Loebsack, Iowa 

Mazie Hirono, Hawaii 

Jason Altmire, Pennsylvania 

Phil Hare, Illinois 

Yvette D. Clarke, New York 

Joe Courtney, Connecticut 

Carol Shea-Porter, New Hampshire 

Marcia L. Fudge, Ohio 

Jared Polis, Colorado 

Paul Tonko, New York 

Pedro R. Pierluisi, Puerto Rico 

Gregorio Kilili Camacho Sablan, 

Northern Mariana Islands 

Dina Titus, Nevada 

[Vacant] 

Howard P. ‘‘Buck’’ McKeon, California, 

Senior Republican Member 

Thomas E. Petri, Wisconsin 

Peter Hoekstra, Michigan 

Michael N. Castle, Delaware 

Mark E. Souder, Indiana 

Vernon J. Ehlers, Michigan 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Joe Wilson, South Carolina 

John Kline, Minnesota 

Cathy McMorris Rodgers, Washington 

Tom Price, Georgia 

Rob Bishop, Utah 

Brett Guthrie, Kentucky 

Bill Cassidy, Louisiana 

Tom McClintock, California 

Duncan Hunter, California 

David P. Roe, Tennessee 

Glenn Thompson, Pennsylvania 

Mark Zuckerman, Staff Director 

Sally Stroup, Republican Staff Director 
(III) 

C O N T E N T S 

Page 

Hearing held on May 21, 2009 ............................................................................... 1 

Statement of Members: 

McKeon, Hon. Howard P. ‘‘Buck,’’ Senior Republican Member, Committee 

on Education and Labor ............................................................................... 4 

Prepared statement of ............................................................................... 8 

Additional submissions: 

‘‘Why I’m Sticking With FFELP,’’ from Inside Higher Ed, May 

21, 2009 ........................................................................................... 6 

Letter, dated March 16, 2009, from the Arkansas Association 

of Student Financial Aid Administrators, Inc. ............................. 82 

Letter, dated April 1, 2009, from College Goal Sunday .................. 83 

Letter, dated March 20, 2009, from the Kentucky Association 

of Student Financial Aid Administrators, Inc. ............................. 84 

Letter, dated March 17, 2009, from the Missouri Association 

of Student Financial Aid Personnel .............................................. 85 

Letter, dated March 13, 2009, from the North Carolina Association of Student Financial Aid Administrators .............................. 86 

Letter, dated March 20, 2009, from the North Dakota Association 

of Financial Aid Administrators .................................................... 87 

Letter, dated March 18, 2009, from the New York State Financial Aid Administrators Association, Inc. ..................................... 88 

Letter, dated March 19, 2009, from the Pennsylvania Association 

of Student Financial Aid Administrators ..................................... 90 

Letter from the Rhode Island Association of Student Financial 

Aid Administrators ......................................................................... 91 

Letter, dated March 27, 2009, from the Southern Association 

of Student Financial Aid Administrators, Inc. ............................. 92 

Letter, dated March 19, 2009, from the Virginia Association of 

Student Financial Aid Administrators ......................................... 93 

Letter, dated March 20, 2009, from the Western Association 

of Student Financial Aid Administrators ..................................... 94 

Letter, dated March 26, 2009, from the Wisconsin Association 

of Student Financial Aid Administrators ..................................... 95 

Statement of Dr. Philip R. Day, Jr., President and CEO, National 

Association of Student Financial Aid Administrators ................. 96 

Statement of the Consumer Bankers Association ........................... 103 

Statement of the Coalition of Higher Education Assistance Organizations .......................................................................................... 108 

Miller, Hon. George, Chairman, Committee on Education and Labor ......... 1 

Prepared statement of ............................................................................... 3 

Additional submissions: 

Letter, dated April 20, 2009, from Barry Keene, chair, California 

Student Aid Commission ............................................................... 75 

Letter, dated May 21, 2009, from the National Direct Student 

Loan Coalition ................................................................................. 76 

Letter, dated May 22, 2009, from Hon. Earl Pomeroy, a Representative in Congress from the State of North Dakota ........... 78 

Letter, dated May 21, 2009, from Eric Hardmeyer, president, 

Bank of North Dakota .................................................................... 78 

Prepared statement of Campus Progress Action ............................. 79 

Letter, dated April 29, 2009, from Mark G. Yudof, president, 

University of California ................................................................. 80 

Graphic: ‘‘Pell Grant Maximum Award Levels’’ .............................. 81 

Questions submitted to Mr. Drouin .................................................. 111 
Page

IV 

Statement of Members—Continued 

Miller, Hon. George, Chairman, Committee on Education and Labor— 

Continued 

Additional submissions—Continued 

Questions submitted to Mr. Shireman ............................................. 112 

Questions submitted to Mr. Remondi ............................................... 122 

Petri, Hon. Thomas E., a Representative in Congress from the State 

of Wiscon, prepared statement of ................................................................ 74 

Souder, Hon. Mark E., a Representative in Congress from the State 

of Indiana, ‘‘Cohort Default Rates’’ graphs ................................................. 63 

Statement of Witnesses: 

Chapman, Chris, president and CEO, Access Group, Inc. ............................ 44 

Prepared statement of ............................................................................... 45 

Drouin, Rene ́ A., president and CEO, the NHHEAF Network Organizations ................................................................................................................ 38 

Prepared statement of ............................................................................... 40 

Responses to questions for the record ..................................................... 111 

Griswold, Anna M., assistant vice president for undergraduate education, 

executive director, office of student aid, the Pennsylvania State University .................................................................................................................. 33 

Prepared statement of ............................................................................... 35 

Reed, Charles B., chancellor, the California State University ..................... 17 

Prepared statement of ............................................................................... 18 

Additional submission: ‘‘How a New Administration Can Change Federal Policy for the Common Good’’ ....................................................... 24 

Remondi, Jack, vice chairman and chief financial officer, Sallie Mae ......... 26 

Prepared statement of ............................................................................... 28 

Responses to questions for the record ..................................................... 123 

Shireman, Hon. Robert M., Deputy Under Secretary of Education, U.S. 

Department of Education ............................................................................. 11 

Prepared statement of ............................................................................... 13 

Responses to questions for the record ..................................................... 114 

Vedder, Richard, director, Center of College Afforability and Productivity; 

distinguished professor of economics, Ohio University; adjunct scholar, 

American Enterprise Institute ..................................................................... 48 

Prepared statement of ............................................................................... 49 
(1) 

INCREASING STUDENT AID 

THROUGH LOAN REFORM 

Thursday, May 21, 2009 

U.S. House of Representatives 

Committee on Education and Labor 

Washington, DC 

The committee met, pursuant to call, at 10:05 a.m., in room 

2175, Rayburn House Office Building, Hon. George Miller [chairman of the committee] presiding. 

Present: Representatives Miller, Payne, Andrews, Woolsey, Hinojosa, Tierney, Kucinich, Wu, Holt, Davis, Bishop of New York, 

Loebsack, Hirono, Altmire, Hare, Clarke, Courtney, Shea-Porter, 

Fudge, Polis, Tonko, Titus, McKeon, Petri, Castle, Souder, Biggert, 

Platts, Kline, McMorris Rodgers, Price, Guthrie, Cassidy, and 

Thompson. 

Staff present: Tylease Alli, Hearing Clerk; Jeff Appel, Senior 

Education Policy Advisor/Investigator; Alice Cain, Senior Education 

Policy Advisor (K-12); Fran-Victoria Cox, Staff Attorney; Denise 

Forte, Director of Education Policy; David Hartzler, Systems Administrator; Fred Jones, Staff Assistant, Education; Jessica 

Kahanek, Press Assistant; Mike Kruger, Online Outreach Specialist; Ricardo Martinez, Policy Advisor, Subcommittee on Higher 

Education, Lifelong Learning and Competitiveness; Stephanie 

Moore, General Counsel; Alex Nock, Deputy Staff Director; Joe 

Novotny, Chief Clerk; Rachel Racusen, Communications Director; 

Julie Radocchia, Senior Education Policy Advisor; Dray Thorne, 

Senior Systems Administrator; Margaret Young, Staff Assistant, 

Education; Mark Zuckerman, Staff Director; Stephanie Arras, Minority Legislative Assistant; Cameron Coursen, Minority Assistant 

Communications Director; Amy Raaf Jones, Minority Professional 

Staff Member; Alexa Marrero, Minority Communications Director; 

Susan Ross, Minority Director of Education and Human Services 

Policy; Linda Stevens, Minority Chief Clerk/Assistant to the General Counsel; and Sally Stroup, Minority Staff Director. 

Chairman MILLER [presiding]. Everyone being present, the committee will come to order. 

I want to welcome everybody to the committee this morning. The 

meltdown in our economy as a result of the financial scandals has 

made the growing college affordability crisis worse for many American families. Escalating tuition prices and college loan payments 

have become even more burdensome in the face of lost jobs, income 

and benefits. 
2 

Students are graduating with too much debt. We as a Congress 

need to refocus our efforts back on grant aid rather than loans. 

Twenty years ago, the maximum Pell Grant award covered about 

half of the in-state tuition. Today it covers about 30 percent. Over 

the last 3 years we have worked hard to reverse this trend by increasing the maximum Pell Grant award by $1,500, but work still 

needs to be done. 

Today, our committee will examine how we can continue to make 

college more affordable by significantly increasing grant aid for students. We can do this at no cost to the taxpayers by transforming 

the way our student loan programs operate. 

First, it is important to take stock of how we intertwine credit 

markets. Credit and economic crises have altered the student loan 

landscape. For years, the Department of Education has operated 

two programs that provide borrowers with the same federal college 

loans, at the same interest rates, terms and conditions. 

One is the Federal Family Education Loan program, or the FFEL 

program as it is known, under which private companies make loans 

to students and receive federal subsidies. These loans are virtually 

risk-free for lenders because they get reimbursed by the taxpayers 

when borrowers default on their loans. 

The other is the Direct Loan Program under which the federal 

government offers loans directly to students using Treasury capital. 

It is subsidy free and cheaper for taxpayers. 

Last year, as the credit markets froze, many FFEL lenders had 

trouble financing their lending activity. Some chose to discontinue 

making loans, while others became highly selective about whom 

they would lend to. With many students and families deeply worried about their student loan availability, Congress stepped in to 

perform emergency triage. Our goal was to make sure that families 

saw no interruption in the access to loans. 

We enacted a temporary program that to date has been successful. It allows the Secretary of Education to finance and purchase 

loans from lenders using Treasury funds, but this was never intended to be, and isn’t, a permanent solution. 

Meanwhile, seeing that the Direct Loan Program remained insulated from the turmoil in the economy, hundreds of colleges and 

universities switched to the Direct Loans for the first time. 

Two undeniable lessons have emerged from the past year. First, 

the economic crisis has exposed serious vulnerabilities to the current FFEL structure and students shouldn’t have to worry about 

whether the rollercoaster fluctuations of the financial market will 

hurt their college opportunities. 

Second, FFEL is currently on life support. In fact, the federal 

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

Students and families are not being served as well as they could 

be and taxpayers are spending billions of dollars annually to finance a broken system. The momentum is building for reforms that 

will deliver aid to families in a more sustainable way, shielded 

from the many ups and downs in the markets. 
3 

There are already several proposals on the table and we will take 

a close look at today. In his 2010 budget, President Obama proposed increasing Pell Grant Scholarships by ending lender subsidies and instead using the federal funds to originate all new federal student loans beginning in 2010. 

The Congressional Budget Office estimates that this would save about $94 billion over 10 years, all of which is to be redirected back 

to the students. I think this proposal sets the bar high. It yields 

an astonishing savings that will help students and make the most 

sense to the taxpayers and harness the private sector innovation 

for the public good. 

We also will hear about other proposals to reform our nation’s 

student lending. While the means and reforms may be different, 

any workable plan must meet two basic benchmarks. 

It must increase the efficiency of the loan programs so that we 

have more to invest for our students, and it must increase reliability so the students and families are never again left wondering 

where to turn in a difficult economy. 

We will hear about the experience of one school that entered the 

Direct Loan Program last year and what other schools might expect 

under the President’s proposal. We will learn more about student’s 

financial needs and how we can best reform these programs to 

work on their campuses. 

Now there are some who like things the way that they are. They 

have already begun to fight this change, but I think it is the students who have framed the issue candidly. We either can continue 

sending billions of dollars to the lenders to act as intermediaries 

or we can start sending that same money to the students and their 

families who are trying to pay for college costs, the costs that continue to go up, costs that continue to go up faster than inflation 

and that more and more families find themselves struggling with. 

And I think that the question that is before us today is how do 

we go about providing the best deal for the taxpayers, the students, 

their families and the institutions? I look forward to today’s testimony and I welcome all of the individuals who will be testifying 

and lending us their expertise and their experience in this field. 

And now, I would like to recognize Congressman McKeon, the 

senior republican on our committee for the purpose of his opening 

statement. 

[The statement of Mr. Miller follows:] 

Prepared Statement of Hon. George Miller, Chairman, Committee on 

Education and Labor 

The meltdown in our economy has made a growing college affordability crisis 

worse for American families. 

Escalating tuition prices and college loan payments have become even more burdensome in the face of lost jobs, incomes and benefits. 

Students are graduating with too much debt. We, as a Congress, need to re-focus 

our efforts back on grant aid, rather than loans. 

Twenty years ago, the maximum Pell Grant award covered about half of the average instate tuition. Today it covers about 30 percent. 

Over the last three years we have worked hard to reverse this trend by increasing 

the maximum Pell Grant award by $1,500. But work still needs to be done. 

Today, our committee will examine how we can continue to make college more affordable by significantly increasing grant aid for students. 

We can do this at no cost to the taxpayer by transforming the way our student 

loan programs operate. 
4 

First, it’s important to take stock of how the intertwined credit and economic crises have altered the student loan landscape. 

For years, the Department of Education has operated two programs that provide 

borrowers with the same federal college loans, at the same interest rates, terms and 

conditions. 

One is the federally guaranteed student loan program—or FFEL—under which 

private companies make loans to students and receive federal subsidies. These loans 

are virtually risk-free for lenders because they get reimbursed by taxpayers when 

borrowers default on their loans. 

The other is the Direct Loan program, under which the federal government offers 

loans directly to students using Treasury capital. It’s subsidy free and cheaper for 

taxpayers. 

Last year, as the credit markets froze, many FFEL lenders had trouble financing 

their lending activity. Some chose to discontinue making loans, while others became 

highly selective about whom they would lend to. 

With many students and families deeply worried about their student loan availability, Congress stepped in to perform emergency triage. 

Our goal was to make sure that families saw no interruption in their access to 

loans. 

We enacted a temporary program that to date has been successful. It allows the 

Secretary of Education to finance and purchase loans from lenders using Treasury 

funds. But this was never intended to be—and isn’t—a permanent solution. 

Meanwhile, seeing that the Direct Loan Program remained insulated from turmoil 

in the economy, hundreds of colleges and universities switched to Direct Loans for 

the first time. 

Two undeniable lessons have emerged in the past year. 

First, the economic crisis has exposed serious vulnerabilities in the current FFEL 

structure. Students shouldn’t have to worry whether the roller coaster fluctuations 

of the financial markets will hurt their college opportunities. 

Second, FFEL is on life support. In fact, the federal government, through both the 

Direct Loan program and this emergency program, is now funding six of every ten 

dollars in federal student loans made this year. 

In short, the status quo has become impossible to defend. Students and families 

are not being served as well as they could be. And taxpayers are spending billions 

of dollars annually to finance a broken system. 

Momentum is building for reforms that will deliver aid to families in a more sustainable way, shielded from any ups and downs in the markets. 

There are already several proposals on the table that we will take a close look 

at today. 

In his 2010 budget, President Obama has proposed increasing the Pell Grant 

scholarship by ending lender subsidies and instead using federal funds to originate 

all new federal student loans beginning in 2010. The Congressional Budget Office estimates this would save $94 billion over ten 

years—all of which would be redirected back to students. I think this proposal sets 

the bar high. It yields astonishing savings that will help students, makes the most 

sense for taxpayers, and harnesses private sector innovation for the public good. 

We’ll also hear about other proposals to reform our nation’s student lending. 

While the means of reform may be different, any workable plan must meet two 

basic benchmarks. It must increase the efficiency of the loan program so that we 

have more to invest in our students. 

And it must increase reliability so that students and families are never again left 

wondering where to turn in a difficult economy. We will hear about the experiences 

of one school that entered the Direct Loan Program last year and what other schools 

might expect under the President’s proposal. 

We’ll learn more about students’ financial needs and how we can best reform 

these programs to work on their campuses. Now there are some out there who like 

things the way they are. They’ve already begun to fight change. But I think it’s the 

students who have framed the choice candidly. We can either continue sending billions of dollars to banks and lenders or we can start sending it to students. 

As many people in this room know, student loan programs have historically been 

the subject of intense political debate. But this should not be about winning ideological battles. Instead, I hope that today begins an honest and constructive discussion 

that guides us toward a more reliable, effective and efficient program for students, 

families and taxpayers 

Mr. MCKEON. Thank you, Chairman Miller and good morning. 

Education, especially a college education, is an engine that drives 
5 

the American dream. I would like to see this committee do what 

it can to help those American dreams come true, and student loans 

are one tool that allow students and families to pursue that dream. 

Today we are going to hear about different student loan plans. 

We will discuss whether it is better to have loans come directly 

from the government or through other sources such as private lenders and nonprofits. I believe the American people have already 

made that choice. 

In the Federal Family Education Loan program, which features 

a public-private partnership, there are more than 4,000 participating institutions. Students attending these institutions have received approximately $66 billion this year. 

In the Direct Loan Program, where the loans come directly from 

the government, there are roughly 1,700 institutions. Students attending these institutions have received approximately $22 billion 

this year. 

This is clearly a case of schools voting with their feet. Much like 

the secretary told us, families that do when it comes to picking an 

affordable college, institutions have selected their loan program of 

choice. They have moved to a program that provides the choice, 

flexibility, and options to make college affordable thanks to that 

public-private partnership. 

The administration has argued that the FFEL program is on life 

support and does not provide a stable source of capital. With all 

due respect, this is like arguing that the federal government should 

directly manufacture and sell cars because the administration is 

now assisting Chrysler and GM. 

Some in the administration may want to fully take over the automotive industry, but I don’t think the American people would 

agree. Let us just consider the facts. Our nation is in the midst of 

a global economic meltdown. 

Our credit markets became paralyzed and no one, not mortgage 

lenders, not small business lenders, not consumer lenders and not 

student lenders was able to secure credit to keep capital flowing. 

The federal government stepped in with a temporary measure to 

restore liquidity, just like it did for the entire banking and financial system, but you don’t hear calls for the federal government to 

make all mortgages or all small business loans, at least I hope not, 

or all car loans. 

No, it is only in the student loan market where political forces 

are taking advantage of economic peril to create a federal monopoly. So to those who claim the FFEL program does not work, I 

would only ask you to look back on the 40 plus years before the 

credit crisis that crippled our entire financial system. 

The private sector is a stable source of capital. It is one that has 

served millions of students and families for decades. Instead of trying to keep private capital and innovation out of the student lending permanently, perhaps we should be looking for ways to bring 

it back. We have also heard a lot about lender subsidies and socalled waste in this program. 

So let me just take a moment to set the record straight. This 

year, the federal government is expected to make a profit on the 

FFEL program. The only subsidies being paid are interest benefits 

so that low income students do not accrue interest costs while they 
6 

are in school. But on the whole, the FFEL program is actually returning money to the U.S. Treasury this year. 

In a way, that means lenders are subsidizing the federal government and the administration’s own budget clearly expects the programs included in the Ensuring Continued Access to Student Loans 

Act to continue to return money to the government. It seems to me 

that we should consider those programs as a viable alternative to 

a complete conversion to the Direct Loan Program. 

Finally, what about the 4,000 plus institutions across the country 

who have decided that the FFEL program works well for their students? Don’t they get a say in all of this? In 1993 when the Direct 

Loan Program was created, it came about mainly because some institutions were not happy with the FFEL program and wanted another option. 

If the more 4,000 institutions currently in the FFEL program are 

happy with the program and wish to keep it, I think we should listen to their wishes just like we did in 1993 to the institutions who 

wished for change. In that vein, I have several letters from financial aid officers from all around the country who want to keep the 

options available to them today through the FFEL program. 

But this is one of the things that people really don’t like when 

the federal government or any government, local or state, wants to 

take choice away from them. Why would we want to do that? I 

would like to see these submitted into the record today. 

Mr. Chairman, what is best for schools and the students they 

serve seems to be lost in this debate and I am not the only one who 

thinks so. This morning, Inside Higher Ed published an op-ed written by the director of financial aid at Tallahassee Community College. 

The article is called ‘‘Why I am sticking with FFEL,’’ and he begins by saying, ‘‘But for all the talk about budget numbers and politics, the views of college financial aid administrators have been 

largely lost in the shuffle.’’ 

I would also like to insert this article into the hearing record. I 

hope we will think about people like this financial aid director as 

the debate unfolds. With that, I would like to thank our witnesses 

for appearing today and look forward to learning more from them. 

[The information follows:] 

[From Inside Higher Ed, May 21, 2009] 

Why I’m Sticking With FFELP 

By BILL SPIERS

President Obama’s proposal to end the Federal Family Education Loan Program 

and make all federal student loans through the Direct Loan Program has gotten a 

lot of media attention. But for all the talk about budget numbers and politics, the 

views of college financial aid administrators have been largely lost in the shuffle. 

All FAOs have their own, differing reasons for choosing a particular federal student 

loan program for their institutions, but I’d like to explain why I favor the FFEL program and why my college will stick with it. 

It comes down to this: FFELP provides outstanding service to students and our 

college and helps our students avoid defaulting on their loans, and competition— 

between FFEL lenders and between FFEL and direct lending—has provided for 

choice and, ultimately, excellence. 

In the ’90s, when direct lending was authorized, many of my friends moved to direct lending, for reasons I understood. Their decisions were based on solid logic and 

were in the best interest of their institutions. I supported their decision, and continue to support an institution’s right to select the program that is in the best interest of the students they serve. Processing issues were abundant in the FFEL pro-
7 

gram at that time; today, however, the processing concerns are gone. Banks are responsive to students and schools. If needed, I can intervene and get things done for 

my students. The automation we pushed for in earlier years is now in place, and 

the infrastructure used in the program is solid. 

Students are the primary beneficiaries of the simplicity and strong service of the 

FFEL program. Providing them with options to submit paper applications or to esign their promissory note without having to visit the financial aid office makes 

their life easier. In addition, the automation and verification of eligibility for FFEL 

funds expedites the delivery of funds to students. Students are confident the funds 

they receive are accurate and that their promissory notes are securely maintained. 

As a community college, we have the responsibility to ensure that our students 

understand the potential impact borrowing will have after graduation. With the 

help of our guarantor partners we have implemented financial literacy seminars for 

all student borrowers. Each new borrower must attend a seminar before their loan 

funds are released. The materials for this program are provided by guarantors, who 

are there in person to help make the presentations to our students. The support we 

receive helps us educate our students about loans and ultimately makes them better 

consumers of financial products of all kinds. Current budget cuts and reduced manpower would make it impossible to continue a program like this without the support 

of our partners. In addition to financial literacy, we also receive information on exit 

interviews and repayment options that are vital to keeping students in repayment 

and out of default. 

For many years lenders, guarantors and servicers have been active participants 

in financial aid awareness activities. These organizations devoted considerable financial resources and man hours to help financial aid professionals educate families 

about federal financial aid programs. From creating publications to high school financial aid nights and community-wide events, students throughout my state and 

nationwide have benefited from this support. When they apply for financial aid 

early because of this advice, needy students often receive more grant assistance and 

reduce or even eliminate their need for loans. In addition to financial aid awareness 

activities, lenders, servicers and guarantors also offer substantial training opportunities to financial aid staff. The loss of training opportunities could be detrimental 

to my staff and ultimately to the students we serve. 

Default prevention and aversion are critical issues in the community college sector. At the institution I serve, our selection of lenders, guarantors and servicers is 

based on their company default rates and their default rate at our school. The basic 

due diligence requirements of the Federal Government in default prevention and 

aversion simply are not good enough to prevent defaults with the community college 

sector. Our lending partners must offer exceptional customer service and go well beyond the basic federal requirements for our students. We conduct a thorough review 

to ensure that our students are well served. We are confident that the people serving our borrowers understand the issues that young, inexperienced student borrowers face. Competition between lenders, guarantors and servicers has pushed 

them well beyond the basic measures to reach and assist these young borrowers 

With the loss of competition that would come from the Obama proposal, we must 

ask ourselves if this level of commitment to default prevention and aversion will 

continue. If we are forced to move to direct lending and find ourselves dissatisfied 

with the default prevention and aversion efforts, what are our choices? Who will 

help us reach our borrowers? Will our schools have to pay for an outside company 

to do what our guarantors, lenders and servicers have done free all these many 

years? 

For our students, customer service is vital. They must receive correct information 

that they can understand the first time they call. Students need help—someone to 

hold their hands because they are in a learning curve. They don’t want to wait on 

the phone for 30 minutes for help and they won’t. By selecting lenders committed 

to creating long term relationships with student borrowers, we have found that they 

go the extra mile, and sometimes two, to ensure students are treated well and receive the information they need. The clarity of the information provided from the 

first day the loan is issued until the student finishes repaying their loans can make 

a difference for a population that is naive in their approach to borrowing, credit and 

responsibility. Notice I didn’t say ignorant because that isn’t true. They do, however, 

need guidance as they move through this pilgrimage of learning about financial responsibility. 

One of the great benefits of FFELP is the ability of the student, and where it is 

appropriate, their parent to decide with whom they want to do business. Students 

in direct lending are not given this choice, a clear distinction between the two programs. While we provide a list of lenders that have acknowledged they work with 

community colleges, a student is free to select any lender willing to issue their loan. 
8 

The student—not the school or the government—controls the choice of lender and 

has the opportunity to evaluate benefits offered by that lender. If a student has a 

solid relationship with a bank, he or she will often pick that bank as the lender for 

the student loan. 

Competition has fostered excellence in FFELP and DL. The innovations were a 

direct result of the push to stay viable and technologically advanced so that schools 

would select or continue to use that program Until recently When lenders also competed for borrowers which led to lower loan costs for our students The default prevention and aversion efforts we enjoy in the FFELP program represent efforts on 

the part of business partners to meet our demands and compete for marketability. 

Technology improvements in borrower interface are the result of competition between FFELP and DL. Our students have certainly benefited from that competition. 

While the media has focused on the profitability in the FFELP program, little has 

been said about the fact that the federal government must fund Federal Pell Grant 

Program increases off the backs of student borrowers. The government borrows 

money at very low rates, much lower than those available to lenders, yet the government would continue to charge the same interest rates as FFEL lenders. Under the 

current proposal the federal government isn’t providing any breaks to the students 

and is actually making more off the program than lenders ever could. Wouldn’t it 

be appropriate for the USDOE to set interest rates based on the student’s expected 

family contribution? Or offer borrower benefits that help students during repayment 

based on their income? Or perhaps set an interest rate that is more in tune with 

financial markets and allow lenders to compete? 

I support FFELP because of the benefits it provides students, parents and institutions. My institution and our students have been well served by this program. Times 

are changing. I can only hope that the Congress will find a way to maintain a worthy program that has benefited students for decades. And maybe, just maybe, financial aid administrators at over 4100 institutions that currently use FFEL will have 

an opportunity to be heard. 

We are on the front lines every day. And we care about our students. 

Bill Spiers is director of financial aid at Tallahassee Community College. 

Mr. MCKEON. Thank you, Mr. Chairman. I yield back. 

Prepared Statement of Hon. Howard P. ‘‘Buck’’ McKeon, Senior Republican 

Member, Committee on Education and Labor 

Thank you, Chairman Miller and good morning. 

Education—especially a college education—is an engine that drives the American 

Dream. I would like to see this committee do what it can to help those American 

Dreams come true. 

And student loans are one tool that allows students and families to pursue that 

dream. 

Today, we are going to hear about different student loan plans. We will discuss 

whether it’s better to have loans come directly from the government, or through 

other sources such as private lenders and non-profits. 

I believe the American people have already made that choice. 

In the Federal Family Education Loan program, which features a public-private 

partnership, there are more than 4,000 participating institutions. Students attending these institutions have received approximately $66 billion this year. 

In the Direct Loan program, where the loans come directly from the government, 

there are roughly 1,700 institutions. Students attending these institutions have received approximately $22 billion this year. 

This is clearly a case of schools ‘‘voting with their feet.’’ Much like the Secretary 

told us families would do when it comes to picking an affordable college, institutions 

have selected their loan program of choice. They have moved to a program that provides the choice, flexibility, and options to make college affordable, thanks to that 

public-private partnership. 

The Administration has argued that the FFEL program is ‘‘on life support,’’ and 

does not provide a stable source of capital. With all due respect, this is like arguing 

that the federal government should directly manufacture and sell cars because the 

Administration is now assisting Chrysler and GM. 

Some in the Administration may want to fully take over the automotive industry, 

but I don’t think the American people would agree. 

Let’s just consider the facts. Our nation is in the midst of a global economic meltdown. Our credit markets became paralyzed, and no one—not mortgage lenders, not 
9 

small business lenders, not consumer lenders, and not student lenders—was able to 

secure credit to keep capital flowing. 

The federal government stepped in with a temporary measure to restore liquidity. 

Just like it did for the entire banking and financial system. 

But you don’t hear calls for the federal government to make all mortgages, or all 

small business loans, or all car loans. No, it’s only in the student loan market where 

political forces are taking advantage of economic peril to create a federal monopoly. 

So to those who claim the FFEL program does not work, I would only ask you 

to look back on the last 40+ years before the credit crisis that crippled our entire 

financial system. The private sector is a stable source of capital—it’s one that has 

served millions of students and families for decades. 

Instead of trying to keep private capital and innovation out of student lending 

permanently, perhaps we should be looking for ways to bring it back. 

We’ve also heard a lot about lender subsidies and so-called waste in this program. 

So let me take just a moment to set the record straight. 

This year, the federal government is expected to make a profit on the FFEL program. The only subsidies being paid are interest benefits so that low-income students do not accrue interest costs while they’re in school. 

But on the whole, the FFEL program is actually returning money to the U.S. 

Treasury this year. In a way, that means lenders are subsidizing the federal government. And the Administration’s own budget clearly expects the programs included 

in the Ensuring Continued Access to Student Loans Act to continue to return money 

to the government. It seems to me that we should consider those programs as a viable alternative to a complete conversion to the Direct Loan program. 

Finally, what about the 4,000 plus institutions across the country who have decided that the FFEL program works well for their students? Don’t they get a say 

in all of this? In 1993, when the Direct Loan program was created, it came about 

mainly because some institutions were not happy with the FFEL program and 

wanted another option. 

If the more than 4,000 institutions currently in the FFEL program are happy with 

the program and wish to keep it, I think we should listen to their wishes just like 

we did in 1993 to the institutions who wished for change. In that vein, I have several letters from financial aid officers from all around the country who want to keep 

the options available to them today through the FFEL program. 

I would like these to be submitted into the record today. 

Mr. Chairman, what’s best for schools, and the students they serve, seems to be 

lost in this debate. And I’m not the only one who thinks so. 

This morning, Inside Higher Ed published an op-ed written by the director of financial aid at Tallahassee Community College. The article is called ‘‘Why I’m Sticking With FFELP,’’ and he begins by saying—quote—‘‘But for all the talk about 

budget numbers and politics, the views of college financial aid administrators have 

been largely lost in the shuffle.’’ 

I would also like to insert this article into the hearing record. I hope we’ll think 

about people like this financial aid director as the debate unfolds. 

With that, I would like to thank our witnesses for appearing today, and I look 

forward to learning from them. 

Thank you, Chairman Miller. I yield back. 

Chairman MILLER. Thank you. And I would like now to introduce 

our panel of witnesses. Robert Shireman is the Deputy Undersecretary at the U.S. Department of Education, a leading expert on college access and financial aid. 

Mr. Shireman has previously served as congressional appointee 

to the Federal Advisory Committee on Student Financial Assistance and as advisor to Senator Paul Simon and part of President 

Clinton’s White House National Economic Council. Mr. Shireman is 

the founder of the Institute of College Access and Success and the 

Project on Student Debt. 

Dr. Charles Reed has served as chancellor of the California State 

University System since 1998. He provides leadership to 46,000 

faculty and staff and to 450,000 students on 23 campuses and 

seven off-campus centers. 
10 

Prior to serving as chancellor of the California State University 

system, Dr. Reed was chancellor of the State University System of 

Florida from 1985 to 1998. Dr. Reed has served on a number of organizations, including the board of the Urban Serving Institutions, 

the President’s Roundtable for the National Board of Professional 

Teaching Standards and on the board of the California Chamber of 

Commerce. 

Mr. John F. Remondi is the vice chairman and chief financial officer of Sallie Mae. Prior to joining Sallie Mae, Mr. Remondi 

worked as a portfolio manager for PAR Capital Management, a 

Boston-based private investment management firm. 

Mr. Remondi will address Sallie Mae’s alternative proposal to reform the student lending program, which would allow the private 

companies to remain in the program while using federal capital to 

finance student loans. 

Ms. Anna Griswold is the assistant vice president of undergraduate education, executive director of student aid at Pennsylvania State University, which has one of the highest loan volumes 

of any institution in the country. 

Prior to working at Penn State, Ms. Griswold was the director 

of student aid at Washington State University and prior to that she 

was the director of student aid, Northern Virginia Community College at the Alexandria campus. Ms. Griswold has served in student 

aid administration for 39 years. 

This comes from Ms. Shea-Porter, whoI think is going to make 

the next introduction. Carol? 

Ms. SHEA-PORTER. Thank you, Mr. Chairman. It is my privilege 

to introduce Rene Drouin to the committee this morning. Rene is 

the president and chief executive officer of the New Hampshire 

Higher Education Assistance Foundation or NHHEAF as we call it. 

Mr. Drouin began his student loan career in 1978 as manager of 

the claims and recoveries division of New Hampshire Higher Education Assistance Foundation. 

He has served as president and CEO of both NHHEAF and the 

president of the Network Organization. During his over 30 years 

at NHHEAF, he has overseen a number of enhancements to the organizations’ infrastructure, including the establishment of a 

NHHEAF network education foundation with half a million dollar 

endowment in 2004. 

The charitable mission of the organization has been fulfilled by 

Mr. Drouin’s support for expansion of the Center for College Planning, which annually serves over 30,000 individuals statewide with 

free college planning programs and services. Mr. Drouin also 

served as chairman of the board at the National Council of Higher 

Education Loan Programs from 1999 to 2000. 

In October of 2003, Mr. Drouin received a congressional appointment to U.S, Department of Education’s Advisory Committee on 

student financial assistance for a 3-year term and he was reappointed for an additional term in July, 2006. He knows the key 

to prosperity in this country for America’s youth and for America’s 

business is education and he has devoted his life to providing access. 

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

Chairman MILLER. Congressman Castle. 
11 

Mr. CASTLE. Thank you, Mr. Chairman. I would like to welcome 

Chris Chapman to today’s hearing. Mr. Chapman is the president 

and chief executive officer of Access Group, a national nonprofit 

lender and servicer based in my hometown of Wilmington, Delaware. 

Although Mr. Chapman joined Access Group last year, Mr. Chapman’s been involved in the education financing field since 1994. 

Immediately prior to his current position, Mr. Chapman served for 

almost 7 years as president and CEO of All Student Loan, a Los 

Angeles based nonprofit lender and secondary market. 

He has also served as vice president of Student Loan Funding 

Resources, Incorporated and a director of his joint venture servicing company, Intuition Holdings, Incorporated. Mr. Chapman has 

also maintained a private legal practice, primarily focused on the 

representation of a variety of FFEL participants in public finance 

and general corporate matters. 

Mr. Chapman’s early career was spent working for two members 

of the U.S. House of Representatives and the mayor and city council of Cincinnati. Mr. Chapman earned his Bachelor of Arts degree 

from Xavier University in Ohio and his Juris Doctorate degree 

from the University of Cincinnati College of Law. We welcome you 

here, Mr. Chapman. 

Chairman MILLER. Thank you and welcome to the committee. 

Our final witness on this panel will be Dr. Richard Vedder who is 

a professor of economics at Ohio University. He is the author of a 

number of books, including ‘‘Going Broke by Degree, Why Colleges 

Cost Too Much.’’ 

Welcome to all of you. We look forward to your testimony. Some 

of you have testified before, in front of Congress, but we do have 

a lighting system. When you begin to testify, in the small boxes in 

front of you a green light will go on. We allow you 5 minutes. We 

hope that you can convey your thoughts in that period of time. I 

know it is always difficult. 

An orange light will go on when you have 1 minute remaining 

and you should think about wrapping up your testimony. And then 

at the end of 5 minutes, a red light will go on and we want you 

to finish in a coherent fashion, but we want you to be mindful 

there will be a lot of questions. 

And unfortunately, I am told that we can expect votes on the 

floor at around 11:00, so we will begin. Mr. Shireman, welcome to 

the committee. 

STATEMENT OF ROBERT SHIREMAN, DEPUTY UNDER 

SECRETARY, U.S. DEPARTMENT OF EDUCATION 

Mr. SHIREMAN. Thank you. Chairman Miller, Mr. McKeon, thank 

you very much for the opportunity to testify today. 

In his speech to the joint session of Congress in February, President Obama established a bold goal for America and that is to restore our place as the country with the largest proportion of our 

adult population with college degrees. That was partly about education and the importance of education, but it is also critical to restoring our economy and our place in the world economy. 

To achieve that goal, we need our graduating high school seniors 

to continue on to college. We need our adults, who are either work-
12 

ing or perhaps unemployed right now, to return to college. We need 

both those populations to thrive in the programs and colleges that 

they attend, be able to focus on their studies and we need them to 

complete their degrees. And that is how we can reach that goal for 

America. 

President Obama proposed a number of tools to get there. First, 

the $2,500 American Opportunity Tax Credit which was adopted 

for 2 years in the Recovery Act and which his fiscal year 2010 

budget would make permanent. 

Second, a strong, secure Pell Grant entitlement. This is the core 

program for low and modest income families. And we need to make 

sure that money will be there, not just for the folks who are entering college in 6 months, but we need to be able to tell students in 

middle schools that this is a program that will be there, will be 

strong and secure, and will have enough for them to help them pay 

for college. 

That we have proposed increasing the Pell Grant instead of having—we have had a number of years where we have had just a flat 

Pell Grant. We want to be able to increase that by the consumer 

price index plus one percentage point into the future. 

Third, we need a reliable federal student loan program. We really dodged a bullet last year with—almost had a situation where 

schools had real trouble getting loans. In effect, what the Department of Education was able to do with the swift action of Congress 

was, in effect, to make direct loans to lenders so that they could 

make FFEL loans to students. 

What President Obama is proposing to do is to cut out the middleman, make those direct loans to students and schools. Schools 

already have a very efficient system of drawing down Pell Grant 

dollars for their campuses and it is that same system that is used 

for drawing down and reconciling Pell Grant dollars. So the switch 

over, from the perspective of a school, not all of it is new. It is an 

add-on to an existing system that works very well for colleges. 

We want to tap the expertise of private sector entities that are 

currently involved in the FFEL program to do the very important 

work of servicing student loans. We want to have a performancebased contract with these servicers that focuses on preventing defaults and delinquencies and making sure we have high levels of 

satisfaction of the borrowers whose questions need to be answered, 

as well as the schools that are involved in the program. 

By doing this, we save billions of dollars and that money can be 

poured into the Pell Grant Program. We also will be able to maintain a viable and growing student loan program. And I think there 

is a chart that will show the growth that we expect. 

While the current FFEL portfolio will decline slowly over time— 

and there has been a lot of talk about jobs—the FFEL loans will 

decline slowly over time. There will be a lot more loans overall. So 

overall, there will be more people employed in servicing in the 

United States than ever before. 

Another important element of the President’s proposal is to reduce the amount of private student loans that students are having 

to take out. This is where students really get in trouble. 

Non-federal student loans, no cap on the interest rate and our 

Perkins Loan Proposal is designed to give college financial aid ad-
13 

ministrators the flexible loan funds they need to apply to situations 

where students need more than what is available in the Stafford 

Loan Program. We also want to distribute money in a way that encourages colleges to keep college affordable. 

Finally, we have proposed and access an completion innovation 

fund and they really are two important goals of this program. One 

is to allow state agencies and nonprofit organizations that have 

been doing important work with the funds that they have earned 

in the FFEL Program, getting out to high schools, providing information. 

We want to be able to allow them to continue those activities. We 

also want to encourage innovation at colleges and universities and 

in states on persistence and completion. We have to do a lot better 

job of helping students to complete those degrees. 

Thank you very much. 

[The statement of Mr. Shireman follows:] 

Prepared Statement of Hon. Robert M. Shireman, Deputy Under Secretary 

of Education, U.S. Department of Education 

MR. CHAIRMAN, MR. MCKEON, MEMBERS OF THE COMMITTEE: Thank you for this 

opportunity this morning to discuss the Administration’s plan for higher education. 

As you know, President Obama has established a bold goal for America: to restore 

our place in the world as the country with the largest proportion of adults with college degrees. Having a more educated population is a worthy goal in and of itself. 

But this goal is about more than individual opportunity and social mobility. It is 

about the future of our economy and our place in the world. We must continue increasing the number of Americans pursuing higher education and redouble our efforts to ensure that more of them earn a credential. 

This renewed American commitment to education spans from cradle to career. 

The Administration’s 2010 budget request lays the foundation for the expansion of 

early childhood education. It promotes world-class standards and supports and rewards effective teaching. It expands efforts to turn around low-performing schools, 

including dropout-factory high schools. And for those students who make the grade, 

we must ensure that they are able to go on to higher education and training. That 

is what I am here to talk about today. 

The American Recovery and Reinvestment Act included a down payment on our 

higher education agenda. It expanded tax credits for higher education, making them 

larger and available to more families and to cover more types of expenses. It provided support to states to limit funding cuts and tuition increases at public universities. And it provided funding to pay for increasing Pell Grant costs and support 

a $500 increase in the maximum grant for students from lower-income families— 

combined with regular appropriations, the maximum grant will increase from 

$4,731 to $5,350 for the upcoming award year. We have taken further steps to help 

ensure that Americans who have lost their jobs know that their financial aid eligibility can be adjusted to reflect the fact that their prior income is no longer available. 

Our FY 2010 budget proposal for financial aid aims to (1) secure the future of the 

Pell Grant program beyond the Recovery Act, (2) ensure reliable access to federal 

student loans, and (3) partner with states to sustain college access efforts and to 

intensify the focus on college completion. It is only by improving college retention 

and completion—for both traditional-age students and returning adults—that we 

can meet President Obama’s challenge. 

Pell Grants serve the families who are most struggling in our economy and in our 

schools. We tend to think of the program as one that serves students who are high 

school seniors. But how we design the program also sends messages to students, 

parents, and teachers much, much earlier. We need to be able to tell students in 

middle school that the Pell Grant program is strong, and will be there for them in 

four to six years when they’re ready to go. 

That is why the President’s budget calls for making the Federal Pell Grant program an entitlement. It is imperative that our students—from high school seniors 

to middle-school students—as well as their families, understand that indeed there 

will be money available for college when they’re ready to apply. Research indicates 

that this is especially important if those students and their families are low income. 
14 

Today’s discretionary funding of Pell Grants leads to future uncertainty regarding 

the availability of student financial aid, and the near-term funding shortfalls of 

mandatory increases in the Pell Grant maximum award provided in the College 

Cost Reduction and Access Act (CCRAA) only increases that uncertainty. We firmly 

believe that concrete assurances today about the future availability of financial aid 

play a critical role in encouraging families to be certain their children undertake 

the academic preparation necessary for college. 

Putting the Pell Grant program on a strong and predictable financial footing does 

take considerable resources. Fortunately, our plans for the student loan programs 

generate significant budget savings. This is accomplished by originating all new 

loans under the Direct Loan program beginning with the 2010-2011 academic year. 

Reliable access to student loans is important not just for our students and their 

families, but also for our entire economy. We have seen the guaranteed Federal student loan system, known as the Federal Family Education Loan (FFEL) Program, 

come close to collapse this past year. Repeated interventions by the Congress and 

the Department were required to ensure that every student and parent who needed 

a Federal student loan received one. While I am pleased to report that these efforts 

were successful, I am less than pleased to report that the Department will have to 

replicate this year’s efforts—and then some—to ensure continued FFEL availability 

for all for the 2009-10 academic year. This repair is only temporary, and Congress 

will need to decide the future of the Federal student loan system. 

There are three functions to the student loan system, whether the loan is direct 

or guaranteed. First is raising the capital—the money that is actually lent to the 

student or parent borrower. Second is loan origination—providing the money to the 

borrower in exchange for a promissory note, the borrower’s promise to repay the 

debt. Third is ‘‘servicing’’, which is the bulk of the actual work in carrying out a 

loan program. Servicing means sending out bills and payment notices, and receiving 

and applying payments to accounts. Servicing is following up when a borrower does 

not pay on time. Servicing is collecting on loans that have defaulted. Servicing 

means answering the telephone calls such as, ‘‘Do I have a payment due?’’ ‘‘Am I 

eligible for a deferment?’’ ‘‘Where do I send my address change?’’ Servicing is letting 

people know about the full range of options for repaying their loans. And much 

more. In regards to raising capital, absent the extraordinary intervention by the Federal 

Government with direct Federal funds, FFEL loans would not have been universally 

available during the current academic year. By extending the loan purchase authority added to the Higher Education Act of 1965 (HEA) by the Ensuring Continued 

Access to Student Loans Act (ECASLA), Congress has made sure that lenders will 

have access to capital sufficient to ensure that FFEL loans will be universally available in the 2009-2010 award year. Additionally, the Department has established an 

asset-backed commercial paper ‘‘conduit’’ to leverage the value investors place on 

federally-backed student loans to help further ensure the availability of FFEL loans 

next year. The Department’s loan purchase authority, loan participation interest 

purchase and conduit programs, along with Direct Loans, have resulted this year, 

and will result next year, in the government’s providing a large proportion of the 

capital to lend to federal student loan program borrowers. The 2010 Budget estimates that the Federal government will finance nearly three quarters of all student 

loans in both 2009-2010 and 2010-2011 academic years. And, as I said earlier, these 

loan purchase authority programs will come to an end. Congress must make a decision about the future of the student loan programs. Instead of maintaining this 

elaborate web of programs designed to prop up the FFEL program, we should originate 100% of new loans through the less costly Direct Loan program. 

With respect to expanding the origination of Direct Loans, we already have a uniform, on-site system at every college, university and postsecondary trade and technical school in the country for originating, disbursing, and reporting Pell Grants. 

The Common Origination and Disbursement (COD) system is a contractor-operated 

platform through which schools receive their funding authority from the Department, draw down funds from the Department for payments to students, and then 

provide data back to the Department for those students who received Pell Grants. 

Expanding the capability of COD to originate and disburse student loans and then 

report that information back to the Department is an easy add-on for those schools 

that do not already disburse Direct Loans. In fact, not only do Direct Loan program 

participating institutions use COD for this purpose today, but the Department used 

COD’s common student record approach to implement successfully the authorizing, 

disbursing and reporting requirements for the Academic Competitiveness, National 

SMART, and Teach Grant programs within extraordinarily condensed timeframes. 

The single significant difference between administering a Pell Grant and administering a student loan, whether guaranteed or direct, is the promissory note that 
15 

must be signed by the borrower. In the FFEL program today, schools must follow 

certain lender-specific processes, and they must have a signed promissory note in 

hand prior to disbursing loan funds. Current Pell Grant participating institutions 

that move from FFEL into Direct Loans may have to learn a somewhat different 

process, but it is not something that is enormously complicated. 

Also with respect to student loan origination, it is important to note that FFEL 

program lenders by and large do not make the usual underwriting decisions that 

lenders otherwise make. Outside the student loan arena, lenders decide what interest rates to charge, how much to lend, and to whom to lend to. Indeed, we see this 

typical lender behavior in the private-label student loan market, in which FICO 

scores and type of institution attended are important underwriting considerations. 

In other words, lenders assess risk in making their lending decisions—except for 

federal student loans. Basically these underwriting decisions are replaced by criteria 

established by Congress for federal student loan borrowers, including annual and 

cumulative loan limits, the cost of attendance, and the availability and receipt of 

other student financial assistance by the borrower, and with the administration and 

coordination of all these activities accomplished by college and university financial 

aid administrators. 

Let me talk for a moment about loan servicing. In our view, servicing Federal student loans, irrespective of loan program, should address the two main goals that we 

want to achieve: default prevention and customer service. 

Regarding default prevention, the Department’s cohort default rate data show 

wide variation in these rates over the years when arranged by lender. Certainly 

there may be good reasons for different lenders having different default rates—portfolio composition and expanding and contracting local economies, to name just two— 

but we do little, if anything, in the FFEL program to encourage FFEL institutions, 

and prospective and continuing FFEL borrowers to turn to those lenders (or their 

servicers) that seem to rise to the top of the list in terms of success in preventing 

defaults. 

In fact, before its 2007 repeal, the statutory provision that granted ‘‘exceptional 

performer’’ status—and thus increased insurance payments—to lenders, servicers, 

and guaranty agencies was based on an acceptably high compliance rate—97 percent—with the Department’s due diligence requirements for loan servicing and collection rather than a straightforward, objective, and transparent measure of success 

in preventing defaults. In other words, we rewarded FFEL program participants for 

compliance with process rules instead of for achieving desired results. 

Guaranty agencies also have, at least nominally, a role in default prevention. 

However, the existing guaranty agency financing model creates incentives that arguably favor collecting on defaults instead of preventing defaults. In short, if more 

value is attached to collecting defaults than preventing defaults, then there are likely inadequate incentives to prevent defaults in the first place. 

Nevertheless, we believe many guaranty agencies provide significant and worthwhile services to students and families. The President’s Budget calls for the creation 

of a State-Federal partnership fund aimed at improving college success and completion, particularly for students from disadvantaged backgrounds. States could use a 

portion of these funds to continue the college outreach and information activities 

now supported by federal subsidies to guaranty agencies and other state-affiliated 

FFEL participants. If we think these services are valuable, then we as a Federal 

government should pay for these services directly instead of hoping that Guaranty 

Agencies will use a portion of their fees for these worthwhile activities. 

Regarding customer satisfaction, good customer satisfaction means that student 

and parent borrowers receive the information they need when they need it and in 

the form that they find most useful. So it is important to have the appropriate 

mechanisms in place to gauge customer satisfaction. The Department has employed 

such surveys in the past and we know that our Direct Loan servicer has performed 

as well, and sometimes better, under its contract than its FFEL industry counterparts. We also know that there are FFEL servicers with above-average rated customer satisfaction performance. So, given our increasing portfolio, due both to the 

recent expansion of the Direct Loan program and our acquiring significant numbers 

of FFEL loans via the loan purchase authority, the Department will contract with 

multiple private-sector student loan servicers. 

We intend for our servicing contracts to leverage competition among private firms, 

so that those servicers that do a better job in terms of default prevention and customer satisfaction will receive an increased share of the Federal student loan portfolio to service. Conversely, those firms that are less adept will have a smaller share 

of that portfolio to service over time. 

We are sensitive to the concerns expressed by the FFEL program community and 

others regarding jobs. However, annual Federal student loan volume is not declin-
16 

ing. We will need at least as many people in the private sector servicing student 

loans in the future—whether they are traditional FFEL loans, FFEL loans purchased by the Department, or Direct Loans—as we have today. It will be the Department’s job to build into our contracts the proper set of incentives so that we 

get the best service for our borrowers and the taxpayers. 

We are sensitive as well to the needs of those students and families whose circumstances are such that the annual loan limits in the FFEL and Direct Loan programs are inadequate. But, in recent years, too many students have turned to private-label loans without ever considering these Federal loan programs. 

To address these issues we are proposing to reinvigorate and refocus the Federal 

Perkins Loan program. Merely increasing loan limits for all borrowers could lead 

to over-borrowing. Instead, under our budget proposal, the annual Perkins Loan volume would increase from approximately $1 billion per year to $6 billion. This would 

be in the form of lending authority for both undergraduate and graduates, allocated 

to institutions by a formula that may include factors to encourage colleges to control 

their costs and offer need-based aid to limit indebtedness, and reward colleges for 

enrolling and graduating students from low-and middle-income families. Our expanded and modernized Perkins Loan program would retain the current five percent 

interest rate and contain a ‘‘hold harmless’’ for schools currently in the program, 

while eliminating the burden on schools to service and collect on the new Perkins 

loans. 

In closing, our student aid proposals would address important servicing issues by 

providing for construction of loan servicing contracts with multiple private-sector 

firms with appropriate incentives to ensure high-quality customer service while 

minimizing defaults. Our proposals would minimize program transition issues for 

institutions through the use the existing common student record approach of the 

COD system to provide for student loan origination functions for all institutions. As 

for capital acquisition for federal student loans, it is clear that the Federal Government is now the sole reliable and sufficient source of Federal student loan capital. 

The Administration’s proposed model would provide for a highly efficient student 

loan system by minimizing the layers between the source of loan capital and the 

borrower—the ultimate beneficiary of that loan capital. Alternative models add additional layers, which must be evaluated in terms of whether the often uncertain 

benefits of the additional layers outweigh their certain costs. We must preserve the 

maximum possible investment in the Pell Grant program and the future of America’s college students. 

Thank you Mr. Chairman and I will answer any questions you and the other 

Committee Members might have. 

Chairman MILLER. Thank you. Chancellor Reed, welcome to the 

committee and thank you for your service to the students in our 

state. 
17 

STATEMENT OF CHARLES REED, CHANCELLOR, THE 

CALIFORNIA STATE UNIVERSITY 

Mr. REED. Thank you Chairman Miller and ranking member 

McKeon and members of the committee. Thank you for the opportunity to discuss the California State University’s experience with 

federal loan programs and with federal need-based aid programs. 

As the chairman said, the CSU is the largest and most diverse 

4-year university system in the country. We have more than 

450,000 students. Fifty-five percent of our students are students of 

color, mostly from the underserved communities of California. Our 

mission is to provide high quality, affordable education to meet our 

state’s ever-changing economic needs. 

During the 1990s, the direct lending program was created. Ten 

CSU campuses joined that program then. This year five more campuses have joined the direct lending program and the remaining 

eight campuses will join next year. 

Why this shift? Events of the past few years have contributed 

significantly. First, changes to federal law through the budget reconciliation process that reduced FFEL lender margins have led to 

a decline in FFEL lender service and reliability and to a reduction 

in borrower benefits. 

Second, our nation’s financial crisis has raised significant concerns about the long-term viability of participating in FFEL. 

Third, previous concerns about the future viability of direct lending programs have been eliminated. Stability and reliability in a 

campus’ student loan programs are tremendously important to our 

students and to our institutions. 

When it comes to student aid, the Pell Grant Program, with its 

focus on student need, is essential to the California State University closing the gap in college enrollment and completion that exists between low income students and their more affluent peers. 

This is true even at low cost institutions like the CSU. 

In the 2009–2010 school year, our average campus tuition plus fees will be $4,155 which is the lowest among any of our comparison institutions and among the lowest in the nation. Even so, many 

CSU students continue to have financial need. 

However, thanks in part to programs supported by Chairman 

Miller and Mr. McKeon, most CSU students with family incomes 

of $75,000 or less pay no student tuition or fees at the CSU. Both 

of you have always focused on our most needy students, so thank 

you. 

Pell is a huge part of this equation in California. This fall we estimate that more than 128,000 of our neediest students will receive 

Pell Grants for a total of more than $445 million. Your support for 

Pell has also helped us maintain the CSU’s long-standing policy. 

This is our policy, increases in federal and state grant programs 

should reduce our students’ loan indebtedness dollar-for-dollar. 

Over 57 percent of our CSU graduate recipients graduate without 

debt compared to the national average of 33 percent. And the average debt in California of our students is a little less than $14,000 

a year, well below the national average of $20,000. 

More than 35,000 Pell recipients received CSU Bachelor’s degrees in 2008. The CSU endorses continued efforts to increase this 

vital aid for students. 
18 

This new administration’s proposed new $500 million per year 

post-secondary access and completion fund, which would provide 

grants to states and nonprofit organizations, to help the underserved population pursue and complete a post-secondary education 

is very important. 

The CSU is very supportive of this concept and would like to 

offer its experience in developing this new program, should Congress decide to authorize it. The CSU would also support including 

an incentive for maintaining state funding of higher education in 

this program, similar to the non-supplanting provision found in 

Title I of ESEA. 

I commend both Chairman Miller and ranking member McKeon 

for utilizing such maintenance of effort language. It is very helpful 

for public institutions. 

As this committee explores ways to improve educational attainment for lower income and under-represented students, I urge you 

to consider what I call a big and bold idea, and we sure don’t need 

any more little ideas, and that is to resurrect a concept that was 

authorized in 1972, which was the original Pell. 

It envisioned direct institutional grants to colleges and universities to support the educational services necessary for these students to succeed. The concept was known as the cost of education 

allowances and was similar to the concept contained in the Elementary and Secondary Education Act of 1965. 

A Title I for higher education would provide a flat capitation 

grant per lower income student for every institution that meets an 

enrollment threshold of at least 20 percent of these students. The 

program could require that funds be used to support academic and 

student service programs designed to assist Pell eligible students. 

It would create incentives for public and private institutions to 

not only enroll but to retain and graduate low or lower middle class 

income students. Here, too, the amount of the grant award could 

be moderately increased or decreased based on the maintenance of 

effort for higher education. 

If we are going to improve our nation’s achievements in higher 

education and reach the President’s goal we have got to reach out 

to the underserved communities of this country. 

Thank you again for this opportunity, and I will be happy to answer your questions. 

[The statement of Mr. Reed follows:] 

Prepared Statement of Charles B. Reed, Chancellor, the California State 

University 

Chairman Miller, Ranking Member McKeon, and members of the committee, 

thank you for inviting me to discuss the California State University (CSU) programs 

that support access to California’s neediest students and the importance of federal 

student financial aid to help achieve that goal. The CSU commends the committee 

for its attention to the important task of ensuring that every student that chooses 

to do so can pursue a postsecondary education. I am pleased to share with you our 

system’s experience with federal student educational loan programs and with federal need-based aid programs. 

The California State University—Background 

Few, if any, university systems can match the scope of the CSU system. The CSU 

is the largest four-year university system in the country, with 23 campuses, approximately 450,000 students and 47,000 faculty and staff. The CSU’s mission is to provide high-quality, affordable education to meet the ever-changing needs of the peo-
19 

ple of California. Since the system’s creation in 1961, it has awarded almost 2.5 million degrees. We currently award in excess of 91,000 degrees each year. 

The CSU plays a critical role in preparing outstanding candidates for the job market. Our graduates help drive California’s aerospace, healthcare, entertainment, information technology, biomedical, international trade, education, and multimedia industries. Altogether, about half the bachelor’s degrees and a third of the master’s 

degrees awarded each year in California are from the CSU. 

The CSU faculty’s applied research activities in agriculture, water resources, public health, biotechnology and homeland security, to name a few, emphasize real time 

solutions to support both decision-makers and practitioners. 

One key feature of the CSU is its affordability. For 2009-10, the CSU’s systemwide fee for full-time undergraduate students will be $3,354. With individual campus fees added in, the CSU’s total fees will average $4,155, which is the lowest 

among any of the CSU’s comparison public institutions and among the lowest in the 

nation. Even with our low costs, many CSU students continue to have great financial need. More than half of our students (255,741) receive financial aid. Thanks in 

part to federal programs supported by this committee and to California’s need-based 

aid programs, we have been able to keep costs down for those who need the most 

help; for example, most CSU students with family incomes of $75,000 or less pay 

no student fees at all. 

The California State University—Its Students 

CSU students are not necessarily the traditional 18 to 22-year-olds. A recent survey of CSU students revealed the following: 

—The average undergraduate age is 24, 

—About 92 percent are commuters, 

—39 percent are independent from their parents, 

—Nearly one in four have dependents, 

—Three out of four have jobs, and 18 percent work full time, 

—About 35 percent are the first generation in their family to attend college, 

—54 percent of CSU students are students of color. 

The CSU prides itself on its ability to provide college access to students across 

California’s increasingly diverse population. More than half of our campuses are 

designated as Hispanic-Serving Institutions. The CSU provides more than half of all 

undergraduate degrees granted to the state’s Latino, African American and Native 

American students. 

Additionally, CSU students are closely connected and committed to the communities in which they live. More than 194,000 CSU students participate in community 

service annually, donating nearly 32 million hours. The economic impact of this 

service equates to $624 million. 

CSU Participation in the Direct Lending and FFEL Programs 

CSU campuses participate in federal student educational loan programs either 

through the Federal William D. Ford Direct Student Loan (Direct Lending) or the 

Federal Family Education Loan (FFEL) program. Between the two programs, roughly 147,000 CSU students borrowed just under $1 billion in 2007-08. During the 

1990s, after the Direct Lending program was enacted, approximately ten CSU campuses made the transition to that program, and for the most part those campuses 

have remained with Direct Lending ever since. Earlier this decade, several other 

CSU campuses decided to make the switch to Direct Lending, such that by this coming fall fifteen of the twenty-three CSU campuses will be in the Direct Lending program. 

Historically, campuses that chose the Direct Lending program tended to view the 

following characteristics as advantageous: 

• Single point of contact for schools, student, and parent borrowers o Easier for 

schools to administer 

• Financial aid software incorporates the Direct Lending process much better 

than FFEL 

• Easier for staff to deal with students and offer better customer service 

• Direct Lending disbursement process mirrors Pell, ACG and SMART Grants in 

dealing with COD (Common Origination and Disbursement) system with US Department of Education 

• Schools do not have to deal with multiple lenders, servicers, and guarantors o 

Elimination of inconsistencies between lenders and lender response times to students 

• Faster origination and disbursement compared to FFEL 

• Funds not tied to individual students and loan types o School can determine 

which students and loan types to disburse 
20 

• Re-allocating funds from Subsidized to Unsubsidized loans is much easier ? This 

situation is caused by recalculation of eligibility due to enrollment changes or other 

aid coming later such as scholarships and stipends • Direct Lending offers standard borrower benefits • Income Contingent Repayment Plan is better than FFEL 

At the same time, these campuses tended to deem some aspects of the FFEL program to be less desirable: • Students and the university must deal with multiple lenders, servicers, third 

party systems for loan processing, guarantors • Each entity wants to meet with university personnel (particularly those in financial aid) to promote their particular business/services to the school and its students • The campus must initiate a Request for Information (RFI) to all lending partners in order to analyze services and benefits and determine if schools want to use 

them on their preferred lender lists • University must adhere to ‘‘sunshine’’ provisions dealing with lending partners • Students and the university must deal with multiple contacts with each entity 

to set up loan process o Guarantor flow, lender flow, school flow, etc. • Campus must return funds to third party disbursing agent by Master Check for 

students rather than individual check for each student 

During the 1990s and into early this decade, roughly half of the CSU campuses 

continued to participate in the FFEL program. Those that chose to do so were apt 

to find the following characteristics of the program appealing: • Multiple lenders, servicers, guarantors leads to competition; schools and students have choices • Traditionally, customer service was thought to be better than it is with Direct 

Lending (though less true in current financial environment) • Lenders and guarantors offered more default prevention activities and services 

to schools and borrowers • Lenders were able to choose to give better borrower benefits than Direct Lending (many have now stopped or drastically reduced given the current fiscal situation) 

FFEL campuses also were likely to have the following concerns about the Direct 

Lending program: • Single entity o The lack of competition could lead to complacency in addressing 

issues related to processing and customer service • If there is a problem with a student record, must wait until Direct Lending 

Servicer fixes problem • Political Uncertainty o In the mid to late 1990s, Congressional limitations on 

the percentage of institutions that could shift to Direct Lending kept many campuses from doing so • Congressional debate and continuous attempts to eliminate the Direct Lending 

program raised concern about the future viability of the program 

In 2008-09, 10 CSU campuses participated in Direct Lending. For 2009-10, 5 more 

CSU campuses have moved to Direct Lending, and the remaining 8 CSU campuses 

are in the process of moving to Direct Lending for 2010-2011. 

Many of these campuses were considering changing to Direct Lending anyway, 

but events of the past few years have contributed significantly to this shift. First, 

changes to federal law through the budget reconciliation process that reduced FFEL 

lender margins over the last two Congresses have led to a decline in FFEL lender 

service and reliability and a reduction in borrower benefits. Second, our nation’s financial crisis, which has hit the banking industry particularly hard, has raised significant concerns about the long-term viability of participating in FFEL. Third, previous institutional concerns about the future viability of the Direct Lending Program 

have been eliminated. 

Stability and reliability in a campus’s student loan program is tremendously important to our students and our institutions. Given this situation, coupled with the 

ready availability of a proven alternative in Direct Lending, beginning last year I 

strongly encouraged all of our remaining FFEL campuses to make the switch to Direct Lending. 

Increases to Student Aid 

Pell Grants Increases 

The Pell Grant program continues to represent the foundation of federal student 

financial aid programs. As the most need-focused federal financial aid program, 

strengthening Pell is essential to closing the gap in college enrollment and completion that exists between low-income students and their more affluent peers. A continued commitment to the Pell Grant program, and to increases in the maximum 
21 

Pell Grant award, are essential to ensuring access for disadvantaged students. 

Across the CSU System, 124,000 students received $364 million in Pell Grant 

awards in academic year 2007-2008 (the last year for which data are available). The 

average CSU Pell Grant recipient receives $2,943 per year from the program, and 

Pell Grants account for 18 percent of the funds awarded to CSU students. The recently enacted American Recovery and Reinvestment Act includes a $619 increase 

in the size of the annual Pell Grant, raising the maximum grant to $5,350 in 2009- 

10. We estimate that this will result in over 128,000 of our most financially needy 

students receiving an additional $81 million in 2009-2010, bringing total Pell Grant 

funding received by our students to $445 million. CSU’s long-standing financial aid 

policy will continue to require that increases in all federal and state grant programs 

reduce our students’ loan indebtedness on a dollar-for-dollar basis. Approximately 

30,000 Pell recipients received CSU bachelor’s degrees in 2006-2007. On behalf of 

CSU students across California, I would like to thank the members of the Committee for that support. The CSU endorses continued efforts to increase this vital 

aid for students. 

Effect of Increased Federal and State Grants on Loan Indebtedness for CSU 

Students 

CSU’s relative affordability, coupled with increases in the Federal Pell Grant and 

increases in CSU’s grant programs, have enabled us to hold down the extent to 

which CSU students incur debt to finance their education. Over 57% of our baccalaureate recipients graduate from CSU without any debt, compared to the national 

average of 33%. Of the 43% of our baccalaureate degree recipients who assume student loans, the average debt is substantially below state and national averages: 

$14,013 for CSU graduates, $17,215 for all other students graduating in California, 

and $20,098 for students who graduate nationally. Keeping student loan indebtedness low for CSU students is a direct result of the commitment of Congress to increase funding for the Federal Pell Grant. 

Furthermore, the CSU has taken an extra step in making this kind of financial 

information about student debt, lower-income student access, actual cost or ‘‘Net 

Tuition’’ available to students, families and taxpayers. The CSU has committed to 

providing data on student learning, student engagement, and enrollment and graduation as part of a national initiative called the Voluntary System of Accountability. 

Each of the 23 CSU campuses has developed a web-based page called the College 

Portrait that is designed to specifically communicate accountability data to the public. In addition, the CSU is going beyond the VSA College Portrait and has developed its own unique ‘‘public good’’ contributions page. Included in this page is campus specific information on total degrees awarded, the contribution of CSU students 

to the workforce, the number of Pell Grant recipients, average net tuition to attend 

a CSU and fees paid per student, as well as the average loan debt for CSU bachelor’s degree recipients. A copy of the CSU Systemwide Public Good page is also 

available. For more information, see http://www.calstate.edu/PA/news/2008/accountability.shtml. 

Concern about Year-Round Pell Implementation 

The CSU is thankful to members of this Committee, and particularly to Chairman 

Miller and Ranking Member McKeon, for their inclusion of a year-round Pell Grant 

in the Higher Education Act. Year-round study enables students to complete their 

academic degree in less time than might otherwise be required. This reduces the 

amount of time that a student spends in school, saves the student money (and reduces borrowing), and permits more efficient use of campus facilities and resources 

at a time when those resources are being stretched due to increasing enrollments 

and tightening state budgets. Increasing enrollment demand will be a national 

trend for the foreseeable future, and we fully expect a number of institutions to utilize a year-round calendar as a resource management strategy. The CSU is concerned by reports that the Department of Education may be considering tightening 

the definition of students who are eligible for year-round Pell Grants by requiring 

them to have completed 24 hours of academic credit during an academic year to 

qualify for continuing Pell Grant funds during the following summer. As noted earlier, the average age of CSU undergraduates is twenty-four. In addition, seventyfive percent of our students work, and eighteen percent work full time. Consequently, many of our students are not in a position to enroll full-time each term. 

Requiring students to complete 24 hours of academic credit during an academic year 

to qualify for a year-round Pell Grant will disadvantage non-traditional students 

served by institutions like the CSU and the community colleges. We urge the committee to oppose such an interpretation if necessary. 
22 

Proposed Access and Completion Fund 

The CSU notes that the Administration has proposed a new $500 million per year 

postsecondary ‘‘Access and Completion Fund.’’ This proposal would provide grants 

to states and non-profit organizations to help underserved populations pursue and 

complete a postsecondary education. Funding would be mandatory, and funding 

would be on a competitive basis. The CSU is very supportive of this concept, and 

would like to offer its experience in developing this new program, should Congress 

decide to authorize it. 

Access to and completion of a postsecondary education for low-income and underrepresented individuals is a primary purpose and function of the CSU. The CSU 

provides more than half of all undergraduate degrees granted to the state’s Latino, 

African American and Native American students, and roughly one-half of CSU campuses are Hispanic-Serving Institutions (HSIs). Approximately 35 percent of CSU 

students are the first in their family to attend college. For Academic Year 2006- 

2007, 37 percent of CSU’s undergraduate students were Pell Grant recipients. Currently, over 50 percent of CSU students (255,741) receive some financial aid. 

In order to best serve these students and ensure that they have the tools to complete their education, the CSU has undertaken a number of initiatives. For example, 

the CSU encourages students from underserved populations to prepare early for and 

pursue college through initiatives such as its ‘‘Steps to College’’ poster, which describes for middle and high school students (grades 6-12) and their families the 

steps they need to take to prepare and apply for college and financial aid. More than 

1 million copies of the award-winning poster in eight languages have been distributed to students throughout California and in many states throughout the country. 

CSU is also working with churches in the Southern California (Los Angeles Basin) 

and the Bay Area (Oakland, San Francisco, San Jose ́, and Vallejo) that serve African American congregations in an effort to increase the pool of African American 

students, particularly males, to become eligible to attend a four year university. In 

February/March 2008, CSU held ‘‘Super Sundays’’ at 22 churches in Los Angeles, 

reaching over 57,800 people. In the Bay Area, CSU ‘‘Super Sunday’’ programs were 

held at 30 churches reaching over 29,285 people. CSU campus presidents, and members of the Board of Trustees and Board of Governors, are given the opportunity 

by the participating churches to speak about how to get to college as part of the 

church service. The participating campuses set up booths to distribute materials and 

answer any questions regarding college preparation, admittance, retention and graduation. CSU’s ‘‘Steps to College’’ posters were distributed to over 29,000 parents, 

grandparents and students. This program has resulted in the identification of a contact person at every church who is dedicated to college knowledge and college preparation. 

One of the most important tools the CSU has developed to reach high school students is the Early Assessment Program, known in California as simply the ‘‘EAP.’’ 

CSU created this early assessment of college readiness program in collaboration 

with the California Department of Education and the State Board of Education. It 

provides 11th grade students a ‘snapshot’ of their mathematics and English/language arts proficiency. The test incorporates the CSU’s placement standards into 

the California Standards Tests for English and math. 

The EAP identifies students—before their senior year—who need to do additional 

work in English and/or mathematics prior to entering the CSU. The EAP informs 

students, families, and high schools of a student’s readiness for college-level work 

in these subjects. Most importantly, it provides an opportunity for the high school 

to work with the students while they are enrolled in 12th grade to help them to 

master the requisite English and math skills expected of a graduating high school 

senior. The three key components of the EAP are: (1) early assessment in 11th 

grade in English and mathematics, (2) supplemental high school preparation in 12th 

grade, and (3) teacher professional development designed to equip high school 

English and mathematics teachers with the tools necessary to ensure student mastery of the content standards. Although the EAP is voluntary, last year almost 

330,000 students took the EAP English test, and approximately 148,000 took the 

mathematics test. 

The CSU is a major participant in the federal TRIO and GEAR UP programs, 

which provide low-income students the skills, encouragement, and academic preparation needed to enter and succeed in high school and postsecondary education 

through partnerships between schools, universities, the private sector, and community organizations. In academic year 2007-2008, the CSU received $6.8 million in 

TRIO funding to serve 56,500 students. Since 1999, the CSU has received $112 million in GEAR UP funds to serve 29 California schools and 12,144 students. 

Finally, the California State University is developing a new ‘‘Center to Close the 

Achievement Gap,’’ which will be a partnership between the business community 
23 

through California Business for Education Excellence (CBEE) and the CSU, and will 

transform preparation and performance of new teachers and administrators in participating CSU Colleges of Education across the state. Teachers and administrators 

graduating from participating campuses will have enhanced skills to: (1) significantly reduce achievement gaps in reading, writing and math; (2) prepare high 

school graduates with the skills to succeed at college level work; and (3) decrease 

college remediation rates while increasing degree completion rates. 

The CSU and similar institutions are building the foundation to ensure that all 

Americans have the chance to pursue and complete a college education, and gain 

the skills they need to play a productive role in the economy of the future. As you 

consider this proposal, we hope that you will allow us to play a key role. 

Access and Completion: A CSU Proposal for a New Kind of Institutional Aid 

As this committee contemplates ways to improve educational attainment for 

lower-income and underrepresented students, I also urge you to consider a bold, new 

direction. In the early legislative history of what is now the Pell Grant program, 

Congress developed federal student aid grants to help economically disadvantaged 

students attend higher education institutions of their choice. In recognizing the educational disadvantage and substantially higher cost for educational services that accrue to the colleges and universities where many lower-income students enroll, the 

originally authorized Pell Grant or BEOG legislation envisioned direct institutional 

grants to colleges and universities that would accompany Pell Grant recipient students. These institutional grants were designed to provide the appropriate educational services necessary for these students to succeed and eventually graduate. 

This original program, which was authorized in 1972 but never funded, was 

known as the ‘‘cost of education allowances’’ and was based on a similar concept advanced in the Elementary and Secondary Education Act (ESEA) in 1965, known as 

Title I. At the heart of this concept is the widely accepted premise that economically 

disadvantaged students cost more money to educate than students from wealthier 

backgrounds. Title I was created to provide supplemental federal funding to those 

elementary and secondary schools with above-average numbers of lower-income students. In 1972, the cost of education allowances program was authorized to achieve 

the same objective by providing supplemental resource support to colleges and universities in order to provide essential educational assistance to Pell Grant recipient 

students. 

The time has come to resurrect this idea. This policy would provide a specific flat 

‘‘capitation’’ institutional grant per lower-income student to every college and university that meets a minimal enrollment threshold of 20 percent. To ensure that 

these funds are properly devoted to student enrichment, this current proposal could 

be shaped to require that federal funds must be used to support campus-based academic and student service programs specifically designed to assist Pell Grant-eligible students. Such a program could also create important and much needed fiscal 

incentives for public and private institutions to not only enroll, but to retain and 

graduate more lower-income and lower-middle income students. Also, the amount of 

the federal flat grant award to institutions could be moderately increased or decreased, based on state support for higher education. This would provide an incentive for maintaining certain levels of public funding of higher education, similar to 

the non-supplanting provision found in Title I of ESEA. This additional maintenance of state effort provision could help better stabilize higher education funding, 

and thus better stabilize student tuition and fees as well. Developing new federal 

policies that encourage states to maintain their commitment to financing widespread access and completion in higher education is essential if our nation is to reverse the relative international decline that we have experienced over the last few 

decades. If we are going to improve our nation’s achievements in higher education, 

America must invest in our most needy students, while also investing in those institutions that will serve them. 

A more detailed discussion of this proposal is attached as Appendix A. 

Conclusion 

The CSU has long appreciated this committee’s efforts to provide assistance to our 

neediest students. We welcome the opportunity to be a resource to you as you continue to explore ways to ensure access and success in higher education. 

[Additional material submitted by Mr. Reed follows:] 
24 

Institutional Aid (Title I) and Higher Education: 

How a New Administration Can Change 

Federal Policy for the Common Good 

By CHARLES B. REED and F. KING ALEXANDER

In a February address to Congress, President Obama stated that by 2020 our nation would need to regain its prominence as the world’s higher education leader if 

we are to enjoy the same kinds of economic success and stability that we have experienced during previous decades. This marked the first real admission by a U.S. 

president that we are no longer the global leader in higher education access and 

educational attainment. Furthermore, this statement indicates that we can no 

longer continue business as usual in the world of higher education policy, and that 

we must do more than simply argue at the federal level every two to four years 

about how much to increase Pell Grant maximum or the aggregate subsidized loan 

cap for undergraduates. This limited discourse has resulted in stagnant progress for 

our nation while much of the rest of the world has developed new and more innovative policies. For us to get back on track and reach President Obama’s higher education objective by 2020, we need much higher levels of educational attainment for 

lower-income and underrepresented students. 

Instead of promoting the same old arguments, we recommend a new direction— 

one that ironically has been excluded from federal policy dialogue for over 30 

years—despite being an important component of the original Pell Grant or BEOG 

legislation in 1972. 

In the early legislative history of what is now the Pell Grant program, Congress 

developed federal student aid grants to help economically disadvantaged students 

attend higher education institutions of their choice. In recognizing the educational 

disadvantage and substantially higher cost for educational services that accrue to 

the colleges and universities where many lower-income students enroll, the originally authorized Pell Grant or BEOG legislation envisioned direct institutional 

grants to colleges and universities that would accompany Pell Grant recipient students. These institutional grants were designed to provide the appropriate educational services necessary for these students to succeed and eventually graduate. 

This original program, which was authorized in 1972 but never funded, was 

known as the ‘‘cost of education allowances’’ and was based on a similar concept advanced in the Elementary and Secondary Education Act (ESEA) in 1965 known as 

Title I. At the heart of this concept is the widely accepted premise that economically 

disadvantaged students cost more money to educate than students from wealthier 

backgrounds. Title I was created to provide supplemental federal funding to those 

elementary and secondary schools with above average numbers of lower-income students. In 1972, the cost of education allowances program was authorized to achieve 

the same objective by providing supplemental resource support to colleges and universities in order to provide essential educational assistance to Pell Grant recipient 

students. 

The time has come to resurrect this idea. If we are going to change the way colleges and universities approach economically disadvantaged students, we need to 

provide actual federal funding for these ‘‘cost of education allowances.’’ Currently, 

there are no fiscal incentives for colleges and universities to attract and graduate 

lower-income students. In fact, current federal direct student aid programs in their 

totality encourage colleges and universities to pursue more free market agendas by 

providing incentives for tuition-based financial strategies. This essentially means 

that higher cost institutions, both public and private, have disproportionately benefited from federal student aid funding due to the cost sensitivity embedded within 

the system. Additionally, by supporting tuition and fee-based strategies, the federal 

government has also allowed state legislatures to more readily opt out of their funding responsibilities resulting in continuous reductions in state tax support of public 

higher education. An indirect result of this existing system is that there are no incentives for lower cost institutions that serve the masses or states that strive to 

keep higher education affordable. One important, but unanticipated, outcome has 

been that as states increasingly withdraw their public support of public institutions, 

many universities have found other alternatives to educate more costly lower-income students, such as increasing out-of-state enrollments in exchange for less 

wealthy in-state students. 

Also working against colleges and universities enrolling more lower-income students are current national ranking systems and the use of very simplistic institutional measurements by state authorities. Rankings such as the popular U.S. News 

& World Report indirectly encourage universities to reduce their lower-income student enrollments by rewarding higher graduation rates, admissions selectivity, and 

other variables that are aimed at promoting institutional prestige above common 
25 

purpose. This is just wrong. Many state authorities have also begun prioritizing 

very simplistic institutional measurements such as graduation rates without any regard for the aggregate numbers of graduates or the socioeconomic status of the students educated at the various institutions. 

In light of the many fiscal and cost-related disincentives for enrolling more lowerincome students, it should not come as a surprise that we continue to see four-year 

public and private universities decrease their commitments to larger numbers of 

lower-income students. In fact, from 1972 to 2006 the nation has witnessed an overall decline in Pell Grant-eligible students as a percentage of the total student population. At public universities, the drop was from 41 percent to 34 percent, and from 

nearly 22 percent to 14 percent on all private four-year college and university campuses. These significant declines have occurred despite the nearly $100 billion in 

federal direct student aid grants, subsidized loans, and tax assistance currently 

available. We think this becomes a civil rights question. 

However, for the colleges and universities that have maintained their commitment to lower-income and economically disadvantaged students, which have primarily been state comprehensive universities like the California State University 

and community colleges, the fiscal disincentives remain problematic. Over the last 

30 years, public comprehensive universities and community colleges have seen a 

substantial decline in fiscal competitiveness when compared with higher tuition 

public and private institutions. The irony, of course, is that those institutions that 

serve the broader public good are increasingly fiscally disadvantaged for maintaining these critical missions. 

To attempt to change this ominous direction to focus on the new generation of students with the greatest educational needs, it is imperative that we revisit the ‘‘cost 

of education allowances’’ program and develop a federal Title I type program for 

higher education institutions. This policy would provide a specific flat ‘‘capitation’’ 

institutional grant per lower-income student to every college and university that 

meets a minimal enrollment threshold of 20 percent. To ensure that these funds are 

properly devoted to student enrichment, this current proposal could be shaped to require that federal funds must be used to support campus-based academic and student service programs specifically designed to assist Pell grant eligible students. 

Such a program could also create important and much needed fiscal incentives for 

public and private institutions to not only enroll, but to retain and graduate more 

lower-income and lower-middle income students. Also, the amount of the federal flat 

grant award to institutions could be moderately increased or decreased, based on 

state support for higher education. This would provide incentive for maintaining certain levels of public funding of higher education, similar to the non-supplanting provision found in Title I of ESEA. This additional maintenance of state effort provision 

could help better stabilize higher education funding, and thus better stabilize student tuition and fees as well. 

This recommendation advanced by the California State University has earned 

support from numerous higher education economists and leaders, as well as from 

national organizations such as the American Association of State Colleges and Universities (AASCU) and in the College Board’s recent report ‘‘Rethinking Student 

Aid’’ where a similar concept was advocated. Developing new federal policies that 

encourage states to maintain their commitment to finance widespread access and 

completion in higher education is essential if our nation is to reverse the relative 

international decline that we have experienced over the last few decades. 

For nearly four decades, the federal government has prioritized an individualistic 

and market-oriented approach to funding higher education by simply putting resources in the hands of students. While this approach has been worthwhile, it has 

created a series of perverse fiscal and institutional incentives that could be remedied by the implementation of a new policy already authorized as part of the original 1972 legislative strategy. Creating financial incentives for institutions to remain 

committed or to recommit themselves to the public needs of society should be among 

the federal government’s highest priorities. 

If we are ever going to reach President Obama’s goal of 2020, America is going 

to have to invest in our most needy students who are disproportionally students of 

color while also investing in those institutions that will serve them. 

Charles B. Reed is chancellor of the California State University. F. King Alexander is president 

of California State University, Long Beach. 

Chairman MILLER. Mr. Remondi. 
26 

STATEMENT OF JOHN F. REMONDI, VICE CHAIRMAN AND 

CHIEF FINANCIAL OFFICER, SALLIE MAE 

Mr. REMONDI. Good morning, Chairman Miller, ranking member 

McKeon and members of the committee. My name is Jack 

Remondi, and I am the vice chairman and chief financial officer of 

Sallie Mae. 

On behalf of Sallie Mae’s 8,000 employees and the more than 20 

million college savings and student loan customers, I thank you for 

the opportunity to testify on federal student loan reform and the 

opportunity to provide for increasing student aid. 

The administration has made an important proposal to reform 

the federal student loan programs. At the outset, I want to underscore the significant agreement between Sallie Mae and the administration’s objectives of reforming the federal student loan program 

and increased funding for Pell Grants. 

Sallie Mae proposes to build on this model, with modifications 

that would preserve beneficial competition in the delivery of loans, 

create incentives to materially reduce defaults, and eliminate the 

risk of requiring more than 4,000 schools to convert to a new loan 

delivery process within the next 9 months. 

We believe our suggestions would preserve the value added by 

loan originators, including state and nonprofit providers, help all 

students better manage their debt burden, and increase the savings 

available for the Pell Grant Program. 

The President’s proposal builds a solid foundation for a new federal student loan program by utilizing federal funding, establishing 

common loan terms and replacing the subsidy model with a fee for 

service model. We believe, however, that it could be made better. 

Specifically, we recommend the following six enhancements. One, 

we would allow schools to choose the loan originator that works 

best for them and the students that they serve. We would introduce 

risk sharing so that all servicers have skin in the game and loan 

defaults are minimized. 

We would allow originating lenders to retain servicing regardless 

of their size; and permit schools to choose their loan servicer. We 

would require the Department of Education to set origination fees 

via market mechanisms, to preserve a broad participation of originators, including state and nonprofit service providers. 

And finally, we would require the Department of Education to 

fund default prevention initiatives, such as financial literacy programs and student counseling. 

The benefits of these programs and these modifications are significant. Using the existing loan delivery infrastructure eliminates 

the risks and costs associated with the conversion of more than 

4,000 schools to a loan origination platform that they did not 

choose. 

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

Great products and services result from consistent competition. 

Competition through the choice of loan providers and servicers will 

drive innovation and improvement in these programs. Mandating 

that all schools use a single loan originator will eliminate this competition and any incentives in innovation for improvement. 
27 

Today, loan originators add significant value beyond the delivery 

of funds. The new income-based repayment program or IBR is a 

great example of how competition adds value. IBR will help lowerincome borrowers shrink their payments to a manageable portion 

of their income. 

For students to benefit from this new tool, however, they need 

to be aware of it and know how to use it. To make sure this is the 

case, Sallie Mae has held school-based workshops on IBR since 

January, 6 months before the launch and has been asked by several direct lending schools to provide these same workshops for 

their students. 

These efforts are an example of how competition creates enhanced services, because we compete, lenders, secondary markets 

and guarantee agencies are all incented to create value-added programs and services. 

These initiatives are particularly valuable to schools and families 

with limited resources and some of the examples include financial 

literacy programs and tools like paying for college calculators and 

seminars, customized technology interfaces for schools, and outreach programs that help families understand, plan, and pay for 

college including customized programs for Hispanic, Latino and African American students and families. 

A specific example is Sallie Mae’s Education Investment Planner, 

a free tool that helps students and families save, plan and pay for 

college. I would also like to highlight the cost-saving aspects of our 

suggestions, some of which may not be captured by CBO models 

but are real nonetheless. 

Our risk sharing proposal would generate substantial savings. A 

modest 10 percent reduction in default rates, only one-third of the 

30 percent that Sallie Mae has actually achieved, would prevent 

more than $1 billion in loans from defaulting, sparing several hundred thousand students from the negative consequences of default. 

A delay in the conversion of the more than 4,000 schools into the 

Department of Education’s loan origination system would materially reduce the savings and could potentially disrupt student’s access to loans. By allowing schools to use the origination platforms 

that work best for them, implementation is guaranteed and the 

savings would be realized. 

Finally, using a market-based process for setting fees will insure 

the lowest cost to the taxpayer year-after-year. I hope I have been 

clear. Sallie Mae supports the administration’s objectives in reforming the federal student loan programs in increased funding for Pell 

Grants. 

We are not trying to preserve lender subsidies. We are offering 

recommendations that build on the foundation of the President’s 

proposal, particularly the use of low-cost Treasury funding for all 

loans. 

And with such changes, we and our competitors can guarantee 

the seamless delivery of student loans and meet the financial objectives of the administration, this committee, and America’s students 

and families. 

Thank you, and I would be pleased to answer any questions you 

may have. 

[The statement of Mr. Remondi follows:] 
28 

Prepared Statement of Jack Remondi, Vice Chairman and Chief Financial 

Officer, Sallie Mae 

Good morning Chairman Miller, Ranking Member McKeon and Members of the 

Committee. My name is Jack Remondi. I am the Vice Chairman and Chief Financial 

Officer of Sallie Mae. I am here on behalf of Sallie Mae’s 8,000 employees, 1 million 

college savings plan customers and 10 million student loan customers, and I thank 

you for the opportunity to testify on federal student loan reform and the opportunities it provides for increasing student aid. 

The student loan reform proposal in the President’s FY 2010 budget outline continues an important discussion about improving access to postsecondary education, 

and as a saving-, planning- and paying-for-college company with a 37-year history 

of helping make higher education accessible and affordable for America’s students, 

Sallie Mae is grateful for this opportunity to add our voice to the discussion. 

Overview 

First, I’d like to take a moment to introduce you to Sallie Mae. Since our creation 

in 1972, we have helped more than 21 million Americans pay for college. Through 

our Upromise affiliates, the company manages more than $17 billion in 529 collegesavings plans for more than 1 million families, and is a major, private source of college funding contributions in America with 10 million members and more than $475 

million in member rewards. 

Sallie Mae is a shareholder-owned, for-profit business. We are proud to employ 

more than 8,000 workers in 17 states. As a participant in the Federal Family Education Loan Program (FFELP), Sallie Mae has raised billions in private sector capital to lend to students and parents to help them meet the cost of college. In the 

last decade alone, Sallie Mae has provided approximately $120 billion in federal student loans to students and parents. 

At the outset, I want to underscore significant areas of agreement between Sallie 

Mae and the Administration. Sallie Mae fully supports the Administration’s objectives of assuring stable funding of the federal student loan program while generating tens of billions of dollars in taxpayer savings that can be used to increase 

need-based grant aid for students, specifically to put the Pell Grant program on stable footing. Sallie Mae also supports the objective of achieving the most efficient and 

effective student lending infrastructure, which should preserve an important role for 

private student loan originators, including smaller, regional, state and non-profit 

providers. 

Within this context, Sallie Mae proposes improvements to the Administration’s 

outline that would meet these objectives, and do so in a manner that eliminates 

transition or implementation risk, and preserves beneficial competition in the delivery of service to schools and students. 

Our objective is straightforward: construct a responsive, evolving student loan 

program that best meets the needs of students and schools, while delivering the best 

value to taxpayers. We propose using a competitive student loan delivery infrastructure to originate, service and collect student loans on behalf of the government, on 

a fee-for-service basis, using low-cost federal funding direct from the United States 

Treasury. 

We believe that the best program for the long term is one that allows consumer 

choice and competition to drive efficiency, innovation and improvement. The Administration’s proposal acknowledges the benefits of competition by reserving a role for 

competitively bid loan servicing and collections. Retaining these positive forces in 

the loan origination process as well will ensure that the individual needs of students 

and schools will continue to be met in the new program. By combining choice, competition and innovation with low-cost and stable direct government funding, we will 

have a system that serves the needs of students, schools, taxpayers, and the 35,000 

people who work directly for student loan providers—all without risk of transition 

problems or unnecessary additional school expenditure. 

And we do know for a fact that such a program would work, because it did this 

year. 

Sallie Mae’s ability to meet the growing demand for federal student loans today 

is due to the programs established by the Ensuring Continued Access to Student 

Loans Act (ECASLA). ECASLA, which is the direct result of the leadership and 

hard work of this Committee, authorized the programs that allow every student at 

every school to have access to student loans this year and next. In fact, unlike virtually every other consumer loan market, with or without government support, 

every eligible student or parent who sought a federal student loan got one. This is 

an amazing statistic in this economic climate. Sallie Mae is very proud of the role 

it played in making this happen. 
29 

The temporary ECASLA programs have done more than see students through this 

uncertain time; they have demonstrated a way forward. 

The Administration’s proposal and the ECASLA programs share the savings-generating component of federal ownership of student loan assets. The major difference 

is the process and timing of how and when the government owns the asset. Under 

ECASLA, lenders originate the loans and decide whether or not to sell them to the 

government. Under the Administration’s proposal, the loans are originated by the 

government and owned by the government. Our suggested modification to the Administration’s proposal authorizes lenders to originate the loans for the government, 

with government capital, on a fee-for-service basis—ending lender subsidies altogether. 

Under this construct, as in the Administration’s, the government, not the lender, 

enjoys the economic benefit of loan ownership from the beginning, so lender subsidies are eliminated. Under this construct, as under ECASLA, schools and students 

remain free to choose the loan origination process and service provider that works 

best for them. 

The Administration’s proposal, once a detailed version of it is officially evaluated 

by the Congressional Budget Office (CBO), will likely generate tens of billions of dollars in budget savings that can be used to pay for increasing Pell Grants. We agree 

that major budget savings should be a feature of loan reform. Modifying the Administration’s proposal as we suggest will likewise generate tens of billions of dollars 

of budget savings for Pell Grants, in addition to other benefits that may not be fully 

captured within the budget-scoring model. 

The Administration’s proposal would end the politically set lender subsidy rates 

that have been the cause of so much contention. We support that outcome completely, and elimination of lender subsidies is a feature of the Administration’s plan 

we would leave unchanged. 

The Administration’s proposal guarantees that loan capital always will be available and insulated from volatile capital markets. We, too, support a structure that 

achieves that result. 

We enthusiastically support creation of a program that generates savings by capitalizing on low-cost federal funding—the heart of the Administration’s proposal— 

and that offers students and schools the ability to choose the loan origination platform and processes that best meets their needs, fosters competition and shares risk 

to enhance the level of service, lowers costs for taxpayers and preserves 35,000 existing private sector jobs in the student loan industry. 

Specific Enhancements and the Resulting Benefits 

By utilizing federal funding, establishing common loan terms, and replacing a 

subsidy model with a fee-for-service model, the President’s proposal builds a solid 

foundation for a new federal student loan program. We respectfully submit, however, that it could and should be made better to ensure it is even more accountable 

to students, schools and taxpayers. Specifically, we recommend the following key enhancements to the Administration’s student lending reform proposal: 

• Allow schools to choose the loan delivery platform and loan originator that 

works best for them, including the Department of Education’s Direct Lending infrastructure; 

• Introduce a new risk-sharing program that requires all student loan servicers 

to have ‘‘skin in the game’’ so loan defaults are minimized; 

• Allow originating lenders the opportunity to retain servicing if they meet the 

Department’s basic criteria (e.g., price, quality, financial controls, compliance, etc.), 

with no minimum thresholds for servicer size; 

• Permit schools choosing the Direct Lending originations process, or those choosing private lenders who do not provide servicing, to choose a loan servicer from 

among the Department’s servicing contractors; 

• Require the Department to set origination fees via market mechanisms designed to preserve broad participation of originating lenders, including smaller, regional, state and non-profit lenders; and 

• Require the Department to set parameters for other school-based and borrowerbased default prevention initiatives—such as financial literacy programs and borrower counseling. 

Avoidance of Implementation Risk 

The Administration’s proposal would require all schools to originate loans through 

a single, Department of Education-run platform. This would require more than 

4,000 schools to convert from the platform of their choice. 
30 

Moving to a Direct Lending-only delivery system would quadruple the volume of 

loans delivered by the federal government within one year, and rely on one delivery 

‘‘pipe’’ for some 6,000 schools and $90 billion in loans annually. 

In contemplating such a drastic increase in volume, one should consider that in 

2008, in the midst of unprecedented fears over the credit crisis, only about 400 

schools converted to the Direct Lending delivery platform and actually made loans 

through the Direct Lending system. A wholesale move to the Direct Lending platform by July 1, 2010 would mean converting more than 10 times as many schools 

to the Direct Lending origination system than have ever converted in a single year. 

In fact, the July 1, 2010 date is misleading as most schools must start processing 

loans as early as February 2010, less than 9 months from now. 

By maintaining a competitive delivery network, such as the one that currently 

serves 75 percent of colleges and universities, the risks associated with requiring 

thousands of schools to switch to the Direct Lending origination platform—potentially disrupted student access to loans and the consequent lost savings for Pell 

Grants—are removed completely. 

Preservation of Choice for Students 

Two years ago, Congress passed legislation requiring that schools participating in 

FFELP include at least three lenders on a preferred lender list. This requirement 

guarantees that borrowers have a choice of lender during the loan process, to say 

nothing of the fact that then and now borrowers have been free to choose any qualified lender, including their hometown bank or credit union. We know that competition and choice are good for consumers. Great products and services come from entities that have great competition. When customers can be lost through competition, 

the pressure to innovate and improve products and services is unrelenting. 

Competition from Direct Lending forced private lenders to invest in and improve 

their loan delivery systems. Undoubtedly, competition from private lenders forced 

Direct Lending to invest in its loan delivery system. Mandating that every student 

at every school must use a single loan originator, irrespective of suitability, will 

eliminate any incentives for future investments in a loan delivery system. Monopolies, even governmental ones, are antithetical to high-quality service and innovation. 

Absent competition and investment in loan origination systems, it is unlikely that 

what works for students today will continue to work for them tomorrow. 

Preservation of Choice for Schools 

Since the inception of Direct Lending in 1993, schools have been free to convert 

to the Direct Lending program, and indeed many schools have. After peaking at 34 

percent of volume in academic year 1998-99, the Direct Lending program now serves 

about 25 percent of colleges and universities. However, the fact that the Direct 

Lending origination platform works for some schools does not mean it will work for 

all of them. Schools utilizing the Direct Lending program tend to be larger schools, 

which are more comfortable dealing directly with a federal department and more 

adept at performing the required functions, such as reconciliation of funds and 

promissory note collection. 

To illustrate this point, I note that 30 percent of public, 4-year colleges are in the 

Direct Lending program. Only 10 percent of community colleges, which have smaller 

student bodies, lower tuition, and smaller staffs, are in the Direct Lending program 

today. Requiring all schools to use the Direct Lending origination platform may pose 

significant and ongoing burdens on schools least able to absorb additional implementation, programming and staffing costs. With the changes to the Administration’s plan that we propose, no school would be required to convert to the Direct 

Lending delivery system, but every school would retain the freedom they have today 

to convert if they choose. 

No Additional Costs to Schools 

By not requiring all schools to convert to Direct Lending, our proposal would save 

staff time and expense—sometimes ranging into the hundreds of thousands of dollars—that might otherwise be passed on to students or state taxpayers. 

Risk Sharing in Loan Servicing 

We believe that it is in everyone’s interest to require all servicers to have ‘‘skin 

in the game’’ by sharing in the performance of every loan. Loans originated and 

serviced by Sallie Mae have a roughly 30 percent lower cohort default rate by school 

type compared with the Direct Lending Program. In fact, if Sallie Mae had been 

servicing the Direct Lending portfolio for borrowers entering repayment in 2005 and 

2006, we estimate that we could have helped 15,000 borrowers avoid the consequences of default, and saved taxpayers $200 million in avoided defaults. 
31 

We attribute this superior performance to the fact that Sallie Mae has ‘‘skin the 

game’’ in the form of fees and costs we incur to originate loans and a three percent 

risk-sharing component that provides a strong incentive to reduce defaults. Direct 

Loans are serviced on a pure fee-for-service basis. To maintain the incentives that 

have driven superior default prevention results by Sallie Mae, we propose adding 

a three percent risk sharing arrangement to the servicing structure to create the 

incentives for all servicers to help borrowers avoid default and save taxpayer dollars. If this modification reduces defaults by only 10 percent, hundreds of thousands 

of students would avoid the increased fees, damaged credit, and obstacles to obtaining other credit, housing, and professional advancement that result from a default, 

while saving taxpayers billions of dollars. 

Value-Added Services in Private Sector Loan Delivery 

Loan originators add significant value to students and schools beyond the delivery 

of funds. It is important to preserve the role they play at 75 percent of the nation’s 

colleges and universities. In evaluating any one benefit or service, it is important 

to remember that from the student’s perspective, the act of paying for college is not 

a series of steps that begins with ‘‘origination’’ and ends with ‘‘servicing.’’ For the 

student, the process begins with planning and saving for college, continues with 

debt counseling, applying for a loan, receiving the funds, graduating, managing the 

debt and paying the money back. 

Student lenders bring expertise, insight and understanding to that entire borrowing lifecycle and know how to present the right information and options at the 

right time. 

The upcoming launch of Income Based Repayment (IBR) illustrates this concept. 

IBR is a welcome, new, borrower-friendly repayment option Congress provided to 

student borrowers starting July 1 of this year. IBR will help lower-income borrowers 

lower their monthly payments to a manageable portion of their income. 

This new benefit might be considered a ‘‘servicing’’ issue because it is technically 

a repayment option, but that would be a mistake. For students to benefit from this 

new tool, work needs to be done. Schools need to counsel their current students on 

this option before they leave campus. Future students need to learn about this option and what it means to them, and they need to have this information with them 

at application, during origination, and before going into repayment. 

Sallie Mae began holding workshops and in-person school visits to discuss IBR in 

January—six months before it becomes available. Sallie Mae has been asked by several Direct Lending schools to provide these same briefings on how students can get 

the most of a new benefit, an example of how competition leads directly to enhanced 

services. 

Starting in March, Sallie Mae began to identify students who are likely to benefit 

from the new program and started educating those individuals about it with targeted counseling. Sallie Mae has posted information and worksheets and employed 

an interactive presentation on our website to educate borrowers 

(www.salliemae.com/ibr). We have built, and will launch in early June, a robust 

payment calculator that allows borrowers to model whether IBR makes sense for 

them. In a non-competitive environment, these value-added services would exist 

only if specifically called for by contract terms. 

In these economic times, it is more important than ever that the borrower benefits 

Congress builds into the federal student loan programs reach each eligible student. 

Student loan providers have the expertise, ability, and incentives to make that happen. 

Other Examples of Loan Provider ‘‘Value-Added’’ Services 

School-Specific Services: Private sector loan originators tailor loan delivery systems and support services to meet the needs of every school type, regardless of IT 

systems, staffing levels, special requirements or sophistication. 

The real world of school financial aid is an often hectic environment with a seasonal crush of work at the beginning of the semester, serving students and families 

that are increasingly stressed by the weak economy. School financial aid offices 

range from one or two professionals to many dozens, and information systems range 

from name brand ‘‘enterprise’’ systems to those that are ‘‘home grown.’’ 

In delivering loans to 75 percent of schools, competitive private sector loan providers have adapted to the needs of many different types of schools, with many different types of administrative systems to get the job done. The result is that schools 

are better able to manage the seasonal crush of volume and students and families 

have the opportunity to get high-quality service, regardless of the institution they 

attend. 
32 

In addition to providing customized technology interfaces, private sector loan providers also offer schools extensive technical and program policy support. For example, Sallie Mae’s dedicated school loan delivery services team provides comprehensive technical and process training to institutions and responds to approximately 

750,000 school questions and requests for support every year at more than 4,000 

institutions. 

In contrast, a single origination platform would be a ‘‘one size fits all’’ approach. 

This may work for some schools, but it is not tested to address the tremendous diversity of administrative and technology environments and support needs represented by the school community as a whole. 

Front End Default Prevention Programs: Many loan originators and guarantors 

provide end-to-end debt management and default reduction programs that begin 

with education before students take out their first loan, and continue through successful repayment. Today, guarantee agencies also provide a variety of debt education and debt management programs, which further strengthens the quality of 

outreach at the ‘‘front end’’ of the lending process. 

Other Value-Added Programs and Services: Because they compete for business, 

private sector lenders, secondary markets and guaranty agencies are incented to 

provide a variety of ‘‘value added’’ programs and services that directly support the 

needs of students and families, and strengthen the ability of schools to serve students and families. These initiatives are particularly valuable to schools and families with limited resources. Examples include: 

• Financial literacy programs and tools (e.g., paying for college calculators, paying 

for college seminars, information on maintaining good credit). Sallie Mae’s Education Investment Planner is a recent example of this. The Education Investment 

Planner is a free tool for students and families to show them that with planning, 

knowledge, and smart decisions, a college education is within their reach. It also 

provides families with the information they need to make knowledgeable decisions 

about which school is right for them. The Planner is available at 

www.salliemae.com/content/landing/planner/eip. 

• Access programs (e.g., scholarship search tools, customized outreach programs— 

about college planning and funding—for Hispanic/Latino and African American students and families); and 

• Tools to help schools counsel borrowers on changing regulations and repayment 

options. 

Innovation: Competition among loan providers and between the FFEL and the Direct Lending programs has made each program better over the years. Competition 

has driven investment and innovation in more automated and streamlined disbursement processes, and in web sites, brochures, and other materials that explain the 

myriad of financial aid options to students and families. 

Competition creates a culture of accountability for customer satisfaction. Removing incentives to innovation and accountability for customer satisfaction will result 

in a complex, nearly $100 billion per year lending program that will be left with 

just one model, prescribed completely by government specifications, with no choice 

for schools or borrowers to ‘‘vote with their feet’’ if their needs are not being met. 

Preservation of Jobs 

In passing the budget resolution last month, this Congress clearly expressed a 

preference for moving forward in a way that minimizes job losses in this difficult 

economic time. It is worth reiterating that most of the savings of the Administration’s proposal and the structure we recommend are driven by government ownership of student loan assets, not from the intentional elimination of good private sector jobs. 

Further, we believe that the job-preserving policy option, in which the existing 

structure is utilized, is the more promising, more efficient, less risky course of action, even if concern for jobs is taken out of the equation. 

Additional Benefits to Taxpayers (and Financial Aid Recipients) 

I want to highlight that some additional benefits of the structure we are proposing 

may or may not be captured by the Congressional Budget Office’s assumptions. 

Nonetheless, these benefits will bring value to the taxpayer and possibly generate 

additional resources for student aid. They are: 

• Savings from Lower Defaults: The value of the lower defaults we expect to generate by introducing the risk-sharing component is substantial. Even assuming a 

modest reduction of 10 percent from current default rates (e.g., 13.5 percent vs. 15 

percent lifetime default rate), taxpayers would collect on more than $1 billion per 

year in loans that would have otherwise defaulted. 
33 

• Savings from Immediate Implementation: Much of the savings assumed by CBO 

occur in the first years of implementation. This means that any delay in the conversion of more than 4,000 schools to the Direct Lending program would have severe 

consequences to the estimated savings of the Administration’s proposal. By using 

the existing FFEL loan delivery infrastructure, there is no risk of a delay in program implementation, and the savings are realized immediately. 

• Savings from Competitive Fee Setting: We recommend that after two years of 

operating the new program with a set fee, a market-based process be used to drive 

further efficiencies into the program, saving taxpayers yet more. 

Conclusion 

In conclusion, Sallie Mae supports the Administration’s objectives of reforming the 

federal student loan programs and increasing funding for Pell Grants. We are not 

trying to preserve lender subsidies, nor are we trying to preserve the FFEL program 

as we know it. We are offering recommendations that build from the foundation of 

the President’s proposal, to make that proposal even better, and to guarantee that 

it seamlessly delivers the shared objectives of the Administration, this Committee, 

and America’s students and families. 

Thank you. I would be pleased to answer any questions you may have. 

Chairman MILLER. Thank you. 

Ms. Griswold? 

STATEMENT OF ANNA M. GRISWOLD, ASSISTANT VICE PRESIDENT FOR UNDERGRADUATE EDUCATION AND EXECUTIVE 

DIRECTOR FOR STUDENT AID, PENNSYLVANIA STATE UNIVERSITY 

Ms. GRISWOLD. Good morning, Mr. Chairman and ranking member McKeon and members of the committee. My name is Anna 

Griswold, and I am the assistant vice president and executive director for student aid at Penn State University. Thank you for the 

opportunity to be here today to talk about Penn State’s experience 

converting to the Direct Loan Program this past year. 

Penn State University is a large, public, multi-campus research 

university enrolling just over 90,000 undergraduate, graduate, 

medical and law students at 23 campuses. Seventy-three percent of 

our students receive some form of financial aid. Twenty-three percent of our undergraduates receive Pell Grants. About one-third of 
34 

our undergraduates are first generation college students for their 

families. 

The federal student loans represent over 50 percent of our student aid funding. Last year, more than 46,000 Penn State students 

borrowed $466 million in federal loans to help pay their education 

costs. 

Last year’s turmoil in the financial markets threatened to destabilize both the federal student loans and our efforts to maintain an 

efficient and student-friendly loan delivery model in the FFEL program. 

As lenders across the country began to terminate or suspend 

their participation, this quickly became cause for alarm among our 

students and parents that relied heavily on Stafford Loans. To 

allay their concerns, we needed to act quickly and decisively to assure students that they would be able to get their loans. 

In our case, some 38,000 current student borrowers were with a 

single lender that announced it would have to suspend making 

loans last year. Given the uncertainty about future lender participation and the new restrictions that limit schools’ use of preferred 

lenders, we knew this would be a challenge for our students. 

So, Direct Loans was really the logical solution for us. In March 

2008, Penn State began implementing the Direct Loan Program. A 

core team of 10 to 12 existing staff from several Penn State offices 

started the conversion, linking our system to the department’s common origination and disbursement system, one already familiar to 

us for processing Pell Grants. 

We also developed a communication plan to inform students and 

parents of the change in how they would secure their loans and the 

steps that they would need to take. Students readily accepted this 

change. 

Our existing staff did all the work. We did not hire additional 

staff to convert to direct lending and the cost to convert was within 

normal budgetary costs required for any new student aid program 

implantation that comes along. 

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

We have one of the largest student loan volumes in the country, 

a homegrown computing environment, and our own programmers 

to run our student aid system. We do not use vendor-supported 

software. 

Most schools will not face these same circumstances and would 

not require the same resources that we used. Smaller schools with 

fewer resources will likely be able to convert to Direct Loans without too much trouble, especially if they have vendor-supported student aid systems or if they use the department’s EDExpress software. 

Ample lead time may be necessary for most and is always something welcomed by aid administrators. It is testimony though to the 

streamlined nature of the Direct Loan process, the single point of 

contact model it represents, that we were able to convert fairly 
35 

quickly. It helps that Direct Loans uses the same COD system that 

schools use for Pell. 

We had excellent technical support from the Department of Education’s Direct Loan and COD staff. Our first Direct Loan disbursements went very smoothly. Our bursar’s office reports great satisfaction with the disbursement and reconciliation functions, having 

reconciled summer 2008 loans in 4 months ahead of the required 

deadline. 

The cash draw down system, already familiar to us as well with 

other student aid programs, has greatly improved cash flow at 

Penn State. Our frontline staff reports that this program is very 

simple to explain to students. 

Staff feel more in control of advising them about the status of 

their loans and my written statement contains a number of comments from staff about their experience with Direct Loans. 

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

student loans. 

The state of the economy makes adequate student aid funding an 

even more important consideration for students and their families 

in deciding if college enrollment is possible. We encourage Congress 

to take whatever measures possible to increase appropriations in 

the Pell Grant Program as we all work toward insuring college access and affordability for students from low and moderate income 

families. 

I would be happy to answer any questions. 

[The statement of Ms. Griswold follows:] 

Prepared Statement of Anna M. Griswold, Assistant Vice President for Undergraduate Education, Executive Director Office of Student Aid, the 

Pennsylvania State University 

Good morning Mr. Chairman and members of the Committee. My name is Anna 

Griswold and I am the Assistant Vice President and Executive Director of Student 

Aid at the Pennsylvania State University. Penn State is a large public, multi-campus, research university enrolling just over 90,000 undergraduate, graduate, medical 

and law students at 23 campuses. Over 60,000, or 73%, of our students receive some 

form of financial aid, including 23% of undergraduates receiving Pell Grants. About 

one-third of our undergraduates are the first generation in their families to attend 

college. Increased funding and simplifying and improving student aid programs and 

systems are matters of great importance at Penn State. The entire university is 

committed to maintaining a student-centered focus in all areas of service to students. 

The federal student and parent loans represent over 50 percent of all our student 

aid funding. Last year, more than 46,000 Penn State students borrowed $466 million in federal loans to help pay their education costs. However, last year’s turmoil 

in the financial markets together with changes in federal regulations affecting 

school use of preferred lenders threatened to destabilize both the federal student 

loans and the efforts of our student aid office to maintain an efficient and studentfriendly loan delivery model in the Federal Family Education Loan (FFEL) Program. 

As lenders across the country began to terminate or suspend participation in the 

FFEL Program, this quickly became a cause for alarm for students and parents that 

relied heavily on both the Stafford student loan and Federal PLUS/Parent Loan. To 

allay the concern of our students and their families, we needed to act quickly and 

decisively to reassure them that they would still be able to find federal student and 

parent loans to help pay their costs. We turned to the Federal Direct Loan Program. 

We had 38,000 current student borrowers using a single non-profit lender with 

whom we had worked for years and who had provided loans to our students, a lender that, unfortunately, had to suspend making loans last year. All these students 

were in need of locating another lender. Given the uncertainty about future lender 
36 

participation, and the new restrictions that limit schools on advising students about 

lender selection, we felt we had few tools with which to guide our students. Direct 

Loans offered a logical alternative to the FFEL Program in light of our circumstances. 

I would like to add that for about a decade, with the majority of our students selecting the Pennsylvania Higher Education Assistance Agency (PHEAA) as their 

lender, we were able to build compatible systems between Penn State and PHEAA 

to better facilitate the data exchange between us for processing of student loans. 

This certainly served students and our institution well. By trying to use a single 

lender, we had replicated most of the Direct Loan model within the FFEL Program, 

with the exception of cash draw down and return of funds. However, students choosing lenders outside this process required different handling depending on the lender, 

guarantor or servicer. Having had a good experience in FFEL as long as the majority of our students used PHEAA, we are pleased that Direct Lending is designed 

as a single lender program. That, and the added features of cash draw down and 

return of funds further enhanced the model we previously had in place for processing student loans. 

In March, 2008, Penn State announced it would enter the Federal Direct Loan 

program. This offered several benefits to students including access to a secure 

source of funds, elimination of the need to find a new lender on their own, and providing a more efficient, single point of contact to transact their loans. In addition, 

Direct Loans would provide better loan repayment and loan forgiveness options. 

In early March we identified a core team of 10 to 12 existing staff from Administrative Information Systems, the Bursar’s Office, and the Student Aid Office and 

began the work of developing new automated systems and processes between the 

U.S. Department of Education’s Common Origination and Disbursement (COD) system and Penn State’s homegrown integrated student information system. Other 

staff in these offices also participated in supporting roles during the period of implementation. For example, in addition to the technical programming work, we executed an extensive communication plan to ensure that students and parents understood the changes in how they would now secure their loans and the steps they 

would need to take. We heard little resistance to this change and students reported 

on the ease of signing their electronic master promissory notes on the Department 

of Education’s Direct Loan website. 

Our existing staff did all the work; we did not hire additional staff to convert to 

direct lending and the cost to convert was within normal budgetary costs required 

for any adjustments that schools must make when regulations change. The work 

was not unlike implementing other new student aid programs such as ACG, SMART 

and Teach Grants in recent years. In some respects those programs presented greater challenges. During Direct Loan implementation, we were also implementing 

changes due to the increase in student borrowing limits and we were implementing 

new automation and the use of Commonline for alternative loan processing. When 

new programs are enacted into law or new regulations are passed, preparing systems to administer those programs is simply a part of the normal work of student 

aid offices. These types of changes do take extra time and effort. However, it is important to keep in mind Penn State’s unique circumstance last year: 1) the need to 

move quickly to convert to Direct Lending (four months), 2) our loan volume and 

the large number of students across 23 campuses that we needed to inform ($466M 

and 46K borrowers), and 3) the fact that we have a homegrown computing environment and use our own computer programmers (no vendor supported software) to 

run our student aid program. Most schools will not face these circumstances and 

would not require the same resources. 

With adequate lead time, even most of the smaller schools will likely find converting to Direct Loans a manageable process, especially for those with vendor supported student aid software. I think most schools have such software. One smaller 

institution in Pennsylvania with whom I spoke began the conversion this January 

and is now ready to submit their first direct loan records to COD. They have vendor 

supported software and indicate that they were able to incorporate implementation 

tasks into the normal operational activity of their office. Since resources do vary 

across institutions I am certain that the Department of Education will be ready to 

offer assistance where needed for schools that may need help and, the Department’s 

ED Express software works very well for schools with smaller loan volumes. 

It is testimony to the streamlined nature of the direct loan process and the single 

point of contact model it represents, that we were able to convert fairly quickly. Like 

most schools, we were already familiar with the COD system used for Pell Grant 

processing. Direct Loans uses this same system. We had excellent technical support 

from the Department of Education’s Direct Loan and COD staff. Ideally, an institution would benefit from having a year’s lead time to implement this program. But 
37 

many schools that I am aware of have done so in less than a year. We often implement program changes with less time. Our first Direct Loan disbursements in summer of 2008 and the larger volume disbursed for the fall and spring semesters went 

very smoothly. 

Our Bursar’s Office, with whom we partnered closely during the implementation, 

manages the loan disbursements, adjustments, cash drawdowns (G5), and reconciliation function. They indicated that the reconciliation in FFEL was not a required 

formal monthly process but was to match receipts with postings to students’ accounts on a daily basis. Now, under direct lending, we formally reconcile monthly 

and this task takes about a few hours a month to perform. This adds greatly to program accountability. For summer 2008, we completed reconciliation four months 

ahead of the deadline. Other time savings with Direct Loans comes with the return 

of funds which are simply netted out of the cash drawdown. This compares to actual 

return of funds to the lender as required in the FFEL Program. Cash drawdown 

in direct lending takes us two days from origination of the loan to receipt of funds 

by the University. This is a one day improvement over the FFEL Program and represents a significant improvement in cash flow. 

In summary, we believe that by entering the Direct Loan Program, we have 

shielded our students from the impact of turmoil in the financial markets. 

The state of the economy will make the availability of student aid funding even 

more important considerations for families in choosing a college or in determining 

whether they can even send their children to college in the coming years. Returning 

adult students face this same challenge. We continue to work hard to advocate in 

the best interest of our students for increased funding in the federal and state student aid programs. We encourage Congress to take whatever measures possible to 

increase appropriations in the Pell Grant program as we all work toward ensuring 

access and affordability of higher education for students from low and moderate income families. 

I would be happy to address any questions you may have. Thank you. 

Comments from Staff about Penn State’s first year in the Direct Loan Program 

As you know student lending has become very complicated and needs to be simplified. One loan from one lender seems to fit well. I can attest to this first hand 

because I have just spent the last week helping my graduating medical students 

sort out their loans, servicers and repayment options. It has been exhausting for all 

parties. 

Whenever a student makes an entry error in the system, an incorrect social security number or birth date, we can now easily fix the error on-line while we are talking with the student. Then we know that we can tell the student exactly when their 

funds will be available to them. 

We feel more in control of the process. The COD system is easy and quick to review and determine the status of a student’s loan. We feel empowered to resolve 

problems for students quickly and efficiently. There is no need to call another agency to make the correction or to explain the student’s problem. 

The students like it when they call with a question about their loan or when they 

need to change the amount of their loan and find out that we can help them without 

their needing to contact another entity. We can work on their behalf. It’s easier for 

us and saves time for the student. 

The change to direct lending was the right decision at the right time for our office 

and our students. 

Direct lending gives schools the authority to be immediately responsive to the 

needs of its students without ‘‘middle-men’’, time delayed transactions. 

To reconcile multi-million dollar transactions to the PENNY raises the bar on accountability to unprecedented levels, unmatched in the FFEL Program. 

When several of the law school’s preferred lenders quit lending last year, I was 

so grateful that we went into direct lending. I was not so sure at first because our 

lenders did a good job for our students. But direct loans provided an immediate solution and a less complicated and labor-intensive process. 

Parents of Penn State students with children at other colleges that are not Direct 

Loan schools often comment that they wish getting the loan we as easy at the other 

school as it is here at Penn State. 

Time for Change and Value Added Opportunities 

Pennsylvania schools and students have benefited for decades from the services 

of the Pennsylvania Higher Education Assistance Agency in its role as the State 

Grant Agency and the Guaranty Agency. Agencies such as PHEAA certainly have 

a role to play in the Direct Loan Program, many with infrastructures and systems 

already in place to facilitate servicing. In addition, PHEAA and other agencies can 
38 

offer value added services within the Direct Loan Program should Congress so chose 

to deploy them to accomplish new goals and objectives for federal student aid. Many 

offer financial literacy programs within their states or regions, debt management 

tools and college outreach programs to encourage access to and planning for college. 

Congress should consider this opportunity to blend the strengths of the Direct Loan 

Program with the strengths of higher education agencies for servicing and value 

added program delivery. 

Chairman MILLER. Thank you. 

Mr. Drouin. 

STATEMENT OF RENE ́ DROUIN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NEW HAMPSHIRE HIGHER EDUCATION ASSISTANCE FOUNDATION 

Mr. DROUIN. Chairman Miller, Mr. McKeon, and members of the 

committee, thank you for inviting me here today to testify. I also 

want to personally and professionally thank Congresswoman SheaPorter for her dedication to higher education. For the record, I am 

Rene Drouin, and I am president and CEO of the nonprofit New 

Hampshire Higher Education Assistance Foundation NHHEAF 

network organizations. 

It is an honor to participate in this discussion on behalf of the 

students and parents that we serve and on behalf of the organization’s dedicated and talented staff of over 200 New Hampshire residents. 

I have been asked to describe ideas for loan reform which increase student aid through cost-saving, make federal loan funding 

more reliable, and preserve the best aspects of the existing FFEL 

program and DL programs. 

I have dedicated 30 years of my life to making higher education 

more accessible through my work with the FFEL program. Still, I 

see clearly that the student aid program is in need of transformation. However, to suggest that the federal government or its 

big contractor located outside the state of New Hampshire could do 

a better job of supporting New Hampshire college students, their 

schools and their communities, is unimaginable. 

Under NHHEAF’s proposal, a student completes the master 

promissory note from the designated local provider. That would be 

NHHEAF in the state of New Hampshire. All post-secondary 

schools would utilize the department’s current systems to administer all federal aid, common origination disbursement system, 

COGS and G5 Web site. 

Once the loan is approved through COGS, NHHEAF would disburse the funds to the school. Both technologies were built with 

taxpayers dollars and should be used to administer this new loan 

program. 

The biggest advantage for schools should be, with these systems, 

includes managing payments and data across multiple programs. 

From the loan perspective, it would provide a uniform way for 

agencies and schools to share information for more efficient processing and, more importantly, default diversion practices. 

The credit crisis has made it clear that the federal student loan 

program would benefit from changes which ensure the availability 

of funding from the Treasury. NHHEAF would then participate 

each loan 15 days after the initial disbursement and then put the 
39 

loan or sell the loan to the department after 120 days of final disbursement. 

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

It simplifies the process of students and schools while ensuring 

funding for the program and guaranteeing excellence in borrower 

education in compliance while the student is in school. 

Loans in periods of grace or repayment are then serviced by the 

originating private lender in line with the department’s servicing 

and pricing standards. This creates life of loan servicing, which we 

credit in New Hampshire to our achievement of continuously low 

default rate. This drives service excellence with pay-for-performance pricing which will result in savings to the department and innovation in servicing. 

Moreover, it utilizes existing infrastructure and knowledge at the 

state and nonprofit agencies and supports borrowers from application through final payment. This is critical to successful default 

prevention. The most recent draft cohort default rate for NHHEAF 

is only 3.1 percent while the national default rate is 6.9 percent. 

It has been said that going to 100 percent DL puts the taxpayer’s 

interest first. But the reality is that in every category of loan FFEL 

default rates are lower than DL’s. We need a plan that allows students to enjoy higher level of service and effective default programs 

offered by FFEL agencies. 

Our reputation has been built on personalized service to students. Our greatest strength is by far the dedicated New Hampshire-based employees who provide borrowers in repayment with 

expertise throughout the life of their loan. 

There already exists the infrastructure to provide the K through 

12 outreach, entrance and exit counseling, compliance for schools 

and community outreach program. Under the new budget proposal, 

no small nonprofit agency will qualify to service the Direct Loans, 

only the big players. 

I wholeheartedly believe that smaller, well-managed agencies can 

be most-effective because they are nimble and can respond to rapidly changing national priorities and local realities. 

Finally, this model allows agencies like ours to continue the commitment to creating a college going culture locally. President 

Obama has passionately expressed that expanding college access 

and success is a national priority. New Hampshire is well prepared 

to actualize this vision. 

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

dislocated worker, rural student, and grad students. 

So the report that going 100 percent DL would help students, not 

lenders, simply does not apply to nonprofit loan providers. In New 

Hampshire, we serve 30,000 individuals each year with direct, personal service. 

This plan incorporates the best aspects of DL Web-based administrative tools and reliable funding. This plan also incorporates the 

best aspects of FFEL, expert default prevention practices, personal-
40 

ized and local service and commitment to creating a college going 

culture locally. 

The FFEL program has provided education funding to millions of 

Americans since its inception. I ask you to carefully consider the 

significance of eliminating FFEL nonprofit organizations like 

NHHEAF and instead choose to imagine a loan program that upholds the best aspects of the public, non-for-profit, private partnerships which in so many ways has worked so very well for so very 

long. Thank you. 

[The statement of Mr. Drouin follows:] 

Prepared Statement of Rene ́ A. Drouin, President and CEO, the NHHEAF 

Network Organizations 

Chairman Miller and Members of the Committee: For the record, I am Rene ́ A. 

Drouin, a resident of New Hampshire and the President and CEO representing the 

nonprofit New Hampshire Higher Education Assistance Foundation (NHHEAF) Network Organizations. The Organizations are comprised of four 501(c)(3) nonprofit 

agencies that provide students and families with the resources and funding to pursue higher education aspirations. Funds generated by the Organizations make its 

charitable mission possible as student loan earnings are reinvested in programs and 

services that benefit citizens of New Hampshire. 

It is an honor to participate in these discussions on behalf of the students and 

parents we serve and on behalf of the Organizations’ dedicated and talented staff 

of over 200 New Hampshire residents. 

I have been asked to describe ideas for loan reform which: increase student aid 

through cost saving, make federal loan funding more reliable and preserve the best 

aspects of the existing Federal Family Education Loan (FFEL) and Direct Loan (DL) 

programs. 

I began my career at NHHEAF in 1978 managing its default claims. I experienced 

first-hand the value that a local nonprofit agency can have on the repayment of federal loans. I have served as Chair of the National Council of Higher Education Loan 

Programs where I came to appreciate the importance of dedicated people and infrastructure in every region to serve students and parents. And, as a two-term member 

of the Advisory Committee on Student Financial Assistance, I have been actively involved in advocating for financial aid policy which increases opportunities for lowincome students. I have dedicated 30 years of my life to making higher education 

more accessible through my work with the FFEL program. Still, I see clearly, that 

the student aid program is in need of transformation. However, to suggest, as the 

President’s 2010 budget proposal does, that the federal government, or its big contractor located outside of New Hampshire, could do a better job of supporting NH 

college students, their schools and their parents is unimaginable. So, the NHHEAF 

Network Organizations has developed the following conceptual loan program in response. 

Proposed Loan Flow & Rationale 

Under NHHEAF’s proposal, the following occurs: 

1. A student completes the Master Promissory Note (MPN) from the designated 

local provider (For discussion, in New Hampshire NHHEAF would be a designated 

provider.) 

2. All postsecondary schools would utilize the Department’s current systems to administer all federal aid—Common Origination & Disbursement System (CODS) and 

G5 Website. Once the loan is approved through CODS, NHHEAF would disburse 

funds to the school. Both technologies were built with taxpayer dollars and should 

be used to administer this new loan program. The biggest advantage for schools 

with these systems includes managing payments and data across multiple programs. From the loan perspective, it would provide a uniform way for agencies and 

schools to share information for more efficient processing and default aversion practices. 

3. The credit crisis has made it clear that the federal student loan program would 

benefit from changes which ensure the availability of funding from Treasury. By 

leveraging federal funding, NHHEAF then participates the loan within 15 days of 

initial disbursement to the Department and sells or ‘‘puts’’ the loan within 120 days 

of final disbursement. The key is that NHHEAF continues to support schools and 

students with entrance and exit counseling, financial literacy programs and local 

compliance expertise. And, the Department holds the asset—keeping the interest 
41 

from the loans it already subsidizes resulting in cost savings to fund increases in 

Pell and other aid programs. This leaves one loan program with standard terms, 

conditions and administration. It simplifies the process for students and schools, 

while ensuring funding for the program and guaranteeing excellence in borrower 

education and compliance while the student is in school. 

4. Loans (in periods of grace or repayment) are then serviced by the originating 

private lender (in line with the Department’s servicing and pricing standards). This 

creates ‘‘life-of-loan’’ servicing (which we credit with our achievement of continuously low default rates.) This drives service excellence with pay for performance 

pricing which will result in savings to the Department and innovation in servicing. 

Moreover, it utilizes existing infrastructure and knowledge at the state and nonprofit agencies, and supports borrowers from application through final payment. 

This is critical to successful default prevention. The most recent draft cohort default 

rate for NHHEAF is only 3.1%, while the national default rate is 6.9%. It has been 

said that going 100% DL puts the taxpayers’ interests first. But, the reality is that 

in every category of loan, FFEL default rates are lower than DL’s. We need a plan 

that allows students to enjoy high levels of service and effective default prevention 

programs offered by FFEL agencies. Our reputation has been built on personalized 

service for students. And, our greatest strength is, by far, the dedicated New Hampshire-based employees who provide borrowers in repayment with expertise throughout the life of their loan. There are 40,000 FFEL staff nationally. There already exists the infrastructure to provide the K-12 outreach, entrance and exit loan counseling, compliance for schools and community support. Under the new budget proposal, no small agency will qualify to service the Direct Loans but the big players. 

I wholeheartedly believe that smaller, well-managed agencies can be most effective 

because they are nimble and can respond rapidly to changing national priorities and 

local realities. 

Finally, this model allows agencies like ours to continue the commitment to creating a college-going culture locally. President Obama has passionately expressed 

that expanding college access and success is a national priority. New Hampshire is 

well prepared to actualize this vision. In fact, increasing college aspirations has 

been NHHEAF’s highest goal. We provide programs throughout the educational continuum for all populations of student: foster youth, adult learner, dislocated worker, 

rural student, grad student. So, the retort that going 100% DL would ‘‘help students, not lenders’’ simply does not apply to nonprofit loan providers. In New Hampshire, we serve 30,000 individuals each year with direct service. And, ninety-three 

percent of the public high schools rely upon our programs and materials. When 

asked last year to describe how our agency has impacted his students, a very wellrespected and experienced guidance director replied, ‘‘NHHEAF is the best thing to 

happen to higher education since I started teaching in 1978.’’ 

This plan incorporates the best aspects of DL: web-based administrative tools and 

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

A proposal like this could fundamentally change the way student loans are provided while simplifying and enhancing that which already exists. The FFEL Program has provided education funding to millions of Americans since its inception. 

As the Committee compares options, I ask you to carefully consider the significance 

of eliminating FFEL completely and, instead, to choose to imagine a loan program 

that upholds the best aspects of the public private partnership which in so many 

ways has worked so very well for so very long. 

Considerations in the Development of the Proposal Included: 

• Preserve local nonprofit agencies’ ability to facilitate college access and successful student loan repayment 

• One common loan program for simplicity and standardization 

• Access to federal agency COD system by non-profit participants 

• Funding advantage with combination of public/private funding combining bridge 

funding and restructured participation and ‘‘put’’ funding 

• Support budget savings goals while maintaining competition and choice by preserving the best aspects of the FFELP & DL system 

• Pay for performance incentives to ensure default prevention and customer service excellence 

• Restructure guaranty agency role to focus on default prevention and financial 

literacy 
42 

Features 

• Hybrid Private/Federal Funding—Private Loan Bridge Funding, Participation to 

ED within 15 days of disbursement, ‘‘put’’ to ED within 120 days of final disbursement. 

• Participate direct to ED—no custodian 

• Ability to participate daily 

• Eliminate Lender Fee 

• No SAP or Interest Subsidy 

• Loan Terms—One loan program providing standard terms and conditions with 

two loan channels, direct and private. 

• Lender provides short term funding and loan origination customer service support 

• Servicing—Meet student/borrower needs by allowing existing nonprofit student 

lenders to choose a loan servicing provider in line with ED’s servicing and pricing 

standard criteria. 

• Guarantor restructuring to focus on default prevention activities for successful 

borrower repayment—pay for performance pricing. 

• Monthly pre-claim letters during delinquency—a series of eight auto-generated 

preclaim letters sent monthly to delinquent borrowers. 

• ‘‘Don’t Default’’ Literature Mailing—outlines borrower options save prevent student loan default. 

• Handwritten ‘‘Quick Memo’’—requests borrowers to contact us to assist them in 

preventing default. 

• Late Stage Delinquency—persistent contact attempts via phone, email, and 

mail to borrowers and references 

• Extensive Skip Tracing—to locate both borrowers and references, including the 

use of Internet tools. 

• Borrower contact for education and assistance, focusing on life circumstances, 

completion of paperwork, and follow up to ensure the borrower completes the appropriate steps in order to prevent default. 

Benefits 

• Supports cost savings to the President’s budget 

• Strengthens default prevention programs through performance based pricing 

• Provides stability, simplicity, and competition to benefit schools and borrowers 

• Preserves best practices in the industry to support default prevention efforts, 

customer service excellence, and low cohort default rates 

• Local support to schools and borrowers 

• Minimizes local job loss 

• Drives innovation, efficiency, and service excellence through competition performance based criteria 
43 

Chairman MILLER. Thank you. 

Mr. Chapman. 
44 

STATEMENT OF CHRISTOPHER CHAPMAN, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, ACCESS GROUP 

Mr. CHAPMAN. Thank you, Mr. Chairman, ranking member 

McKeon, and members of the committee. My name is Chris Chapman, and I am the president and chief executive officer of Access 

Group, Incorporated, a national, nonprofit, student loan provider 

and loan servicer. 

Access Group was formed in 1983 and we currently originate 

more than $1 billion of FFELP loans annually and hold more than 

$6 billion of FFELP loans in our portfolio, making us one of the top 

10 lenders nationwide. 

Access Group is mission-based. As I said, we are a not-for-profit 

entity and mission-based, you know, implies more than making 

loans with low rates and good terms and excellent service. 

As you have heard today from some of the other members of the 

panel, there is much more that goes along with making loans that 

relate to outreach services, education services for schools, students, 

and parents. These are done all in support of our programs, and 

as a nonprofit who does student loans, nothing else, it is all that 

we do. 

Again, as I said this isn’t unique to Access Group, certainly within the nonprofit arena. The more than three dozen nonprofit entities that currently operate all across the country and in many, 

many states perform these services and they, as Mr. Drouin mentioned, are adapted to local realities. 

In my career as I have had the opportunity to work in a number 

of entities in different geographic locations, the role we played has 

been very localized and very adaptive to the circumstances and the 

problems not only of the geography but of the time. 

I would also like to thank this committee and Congress for moving swiftly on ECASLA last year. The crisis that hit the financial 

world did not spare anyone including student lenders. Due to quick 

action and the quick implementation by the Department of Education and lenders getting together, no student was left without a 

loan or no student was materially disrupted in the timing of that 

loan last year. 

We also thank you for the extension into the 2009–2010 academic year and we think this year will be even smoother. 

What I would like to focus my testimony on primarily is what is 

called phase two of the ECASLA which is the asset-backed commercial paper conduit that has just been implemented and gone 

into effect within the past few weeks. 

As you may know the conduit is utilizing the federal liquidity out 

of the federal financing bank coupled with a program from the Department of Education to finance loans made under the Federal 

Family Education Loan program. 

The whole idea of the conduit is it is structured to utilize private 

capital in the program and not have to have federal government 

borrower $1 or utilize one Treasury dollar in order to fund the program. 

Though it has only been up a few weeks this is an extremely 

positive path. By June 4th about $10 billion will be funded in the 

program. The program is executed at pricing levels well within ex-
45 

pectations and at levels which are very similar to those prior to the 

credit crisis. 

What this proves is that student loans can be financed in the private markets, even in today’s environment. Given the right circumstances, which in this case includes potentially a federal back 

top, ensuring investors that if they need to get out of their investment they can, which in a credit crunch, during a credit crisis, is 

the crux of the problem. 

We are here to encourage continuation of the ECASLA principles 

as a means of going forward and funding the student loan programs under FFELP. The reason we say that is we believe keeping 

private capital in the program ensures continuing a diversity of 

providers, a diversity of origination systems, and diversity of 

servicers which will retain choice, competition, and the superior 

service that FFELP has provided for 40 years. 

Now I admit that as the conduit sits today it is not nirvana for 

everyone. There are some issues that need to be worked out with 

the conduit to ensure broader participation but they are certainly 

workable within the current structure and at no cost to the government. 

I want to conclude by emphasizing that there aren’t just two 

choices here. There is not a choice of 100 percent direct lending or 

the status quo. You have heard a number of options that have 

come along the table as we have moved on here. 

I encourage the committee to look at them closely and I encourage you to retain the option that ensures the choice, competition, 

flexibility and superior service remain in the FFELP program for 

years to come. Thank you. 

[The statement of Mr. Chapman follows:] 

Prepared Statement of Chris Chapman, President and CEO, 

Access Group, Inc. 

Mr. Chairman, Ranking Member McKeon, and members of the Committee, my 

name is Chris Chapman and I am the President and CEO of Access Group, a Delaware-based, national nonprofit student loan provider. During my career, I worked 

for several other nonprofit student loan entities—immediately prior to my current 

position, I served as President and Chief Executive Officer of ALL Student Loan 

Corporation, a nonprofit loan provider based in Los Angeles, California. I might also 

note that my career began as a staff member for a long-time House Democrat from 

Ohio named Tom Luken. Thank you for inviting me to come before you today and 

for holding a hearing to discuss the issue of student loan reform. 

Access Group is a nonprofit student loan provider with over 25 years experience 

specializing in federal financial aid and graduate and professional student loans. 

Student loans are our only business. We originate more than $1 billion of FFELP 

loans annually and currently hold more than $6 billion of FFELP loans. Moreover 

to support and maximize our charitable mission to enhance access to higher education, we conduct outreach and educational programs that support students, parents, school administrators and other interested constituencies. Our in-person sessions that range from information about financing an education, to understanding 

and maintaining your credit score, to life after graduation, are supported by a panoply of free educational material, available online and in print. 

It may sound cliche ́ that as a nonprofit entity we are free to focus on ‘‘stakeholders’’ rather than ‘‘shareholders’’. But it’s true. Furthermore, as a board member 

of the Education Finance Council—the national trade group for nonprofit student 

loan providers—I can tell you that this outlook and sense of mission is broadly 

shared by the three dozen nonprofit student lenders based in states all across our 

Nation. These entities have historically and consistently channeled loan revenue 

back into the program in the form of discounted student loan rates, origination fee 

waivers, and the implementation of college outreach and access efforts. This is because the question that each of their management teams and boards of directors 
46 

must face every day is ‘‘how do we help more Americans achieve their higher education dreams?’’ rather than ‘‘how do we maximize shareholder return?’’ This is not 

a value judgment, and should not be interpreted as an indictment of for-profit entities—but, rather, it should be construed as the core basis for the distinction and importance of nonprofit loan providers in supporting the policy goals of a strong and 

diverse student loan program. 

I think I speak for all FFELP lenders in expressing thanks to this committee for 

drafting last spring the Ensuring Continued Access to Student Loans (ECASLA) legislation that has maintained the ability of all eligible students to get a FFELP loan 

during the 2008-09 academic year—and for extending the legislation through the 

upcoming 2009-10 academic year. Access Group has financed more than $800 million of new FFELP loans for the 2008-09 academic year through the participation 

interest facility created by the Department of Education under the ECASLA authority. We are also among the first issuers to finance student loans through the student 

loan asset-backed commercial paper conduit, also created under ECASLA. 

I intend to focus in my testimony today on the commercial paper conduit facility, 

and its potential implications for the future of student loan finance. 

As mentioned earlier, just last week, Access Group became one of the initial lend- ers to issue commercial paper backed by loans financed through the conduit. $1 billion in commercial paper was issued on May 11, of which $250 million was backed 

by Access Group loans. This successful funding was the culmination of months of 

shared effort put forth by members of the last Administration, members of the current Administration, and a number of private-sector entities 

I was a member of the initial conduit advisory board, which was created when 

the conduit was first being structured late last year, and I have continued as one 

of the five members of the advisory committee overseeing the implementation of the 

facility. I feel there are lessons to be learned from this effort that suggest a positive 

path forward for federal student lending and a way to keep private capital involved 

in the federal student loan program. This path could enable the Administration, the 

Congress and student loan providers to achieve the widely-shared objective of making available increased private funding for federal student aid at no additional 

budgetary cost. And it would simultaneously allow for the retention of the key virtues of the current FFELP, such as the maintenance of a diverse array of originators, servicers and financers of federal student loans, and the choice, competition, 

flexibility and service that only such diversity can deliver. 

As you are aware, ECASLA was enacted to address an environment in which the 

yield on FFELP loans was set at an all time-low and the financing costs had 

reached unprecedented highs due to the broad-based seizure of the credit markets. 

Student loans played no part in the creation of the financial crisis, but the capital 

markets effectively shut down, leaving lenders unable to finance new loans beyond 

already committed capital. 

Based on its initial performance, it appears that the conduit has been successfully 

structured to persuade investors to purchase student loan assets at yields similar 

to those that existed prior to the severe credit market downturn. This indicates that 

is possible to finance new FFELP originations—even at the existing low statutory 

yield and the current extremely abnormal capital market environment—so long as 

there is federal liquidity support involved. 

Of course, no discussion of federal student loan policy and the associated programs that support a given policy is complete without considering their budgetary 

impact. 

Direct lending scores large federal budget savings because—at least the way the 

program is scored—it allows the loans to be financed at Treasury bond rates. For 

instance, the Office of Management and Budget assumes that direct loans originated 

in Fiscal Year 2010 will be financed by Treasury notes yielding a weighted average 

of 2.8-percent. The most common borrower rate on these loans will be 6.8 percent, 

creating a 400-basis point spread for the Government. This works as long as longterm Treasury borrowing rates remain low—and as long as scorekeepers continue 

to omit consideration of the increased government-wide economic cost of that additional Treasury borrowing on the scale required to directly finance all federallybacked loans will bring. The Analytical Perspectives volume of the budget projects 

Government federal direct loan accounts (the largest of which is the direct student 

loan program) to grow from nearly $200 billion in 2008 to $1.6 Trillion in 2019. Presumably, most of this $1.4 Trillion increase in the loan-backed public debt is attributable to the projected expansion of the direct student loan program. 

The conduit also can reduce program cost by leveraging Treasury support, but in 

this case the support comes not from leveraging Treasury borrowing directly, but 

rather from leveraging the Treasury’s liquidity strength. The advantage of using 

only the liquidity support is that it would prevent the necessity of borrowing rough-
47 

ly $100 billion a year to finance all new student loan originations. Under the conduit—or any other liquidity ‘‘backstop’’—the Government only needs to actually step 

in and finance loans when the conduit is unable to refinance maturing commercial 

paper—an event made extremely unlikely even in financial crises due to the existence of the backstop itself. This allows for a reduction in student loan financing 

costs that would simultaneously produce revenue to the Government. In short, the 

Administration’s recommendation of leveraging Treasury support could be implemented in a manner that also leverages private capital. 

On May 7, the Administration released its detailed FY 2010 Budget Appendix, 

which shows that student loans subject to the various ECASLA programs created 

by the Department of Education are projected to perform at a level much better 

than the ‘‘budget neutrality’’ required by ECASLA. Rather, they are projected to 

generate more than $8 billion in income for the Treasury. The conduit alone is projected in the budget to generate $1.4 billion in net revenue from $25 billion in student loan volume—even after including life of loan administrative expenses. This 

revenue is generally from fee income, since participants pay 25 bps as a fixed liquidity fee and 5 bps (escalating to 25 bps over time as a fixed put fee. The actual savings could increase significantly beyond this projected total, as demand for the program increases and investors accept lower yields as more comfort with the program 

is achieved. This is because the Government captures 80-percent of the benefit if 

the financing cost sets below a specified target rate. So there is a significant additional upside potential to the Government, but virtually no downside. There is little 

downside because the expected conduit revenue included in the budget numbers is 

essentially fully collateralized fee income, which makes it more predictable and reliable than projected savings from the direct loan program—which are highly dependent on future interest rate projections. 

To illustrate the peril in projecting future interest rates, we need only to look to 

past student loan program projections. Indeed, according to the re-estimate chart in 

the President’s Budget Appendix the actual cost of the $250 billion in direct loans 

disbursed since the program was created is nearly 20 times higher than original estimates—$11.7 billion, rather than $600 million. Another way of looking at this is 

that direct loans when issued were scored as costing a fifth of a penny per dollar 

loaned out, but those same loans are now projected to cost close to five cents per 

dollar loaned. FFELP loans, in contrast, cumulatively cost $12.5 billion less than 

original projections. If this pattern were to hold going forward, the actual savings 

from a transition to 100-percent Treasury-financed student lending would save only 

a fraction of what scorekeepers currently project. 

In sum, the most recent budgetary data demonstrates that policy makers have a 

range of options available and considerations to take into account in pursuing the 

objective of increasing student aid spending through student loan reform. 

I will point out that the conduit as it stands is not financing nirvana for every 

student loan provider—especially nonprofit providers. While Access Group and several other nonprofit providers are able to utilize the facility effectively, its one-sizefits-all nature necessarily limits its accessibility for many. But this need not be the 

case going forward. More portable and flexible versions of the conduit could be created, operating under the same fundamental principle of federal liquidity support, 

provided in order to make possible low-cost capital for financing student loans, with 

lenders paying a fee(s) that generates revenue for the Government. 

Along these lines, it is worth noting that the House Financial Services Committee 

majority just last week posted on its website draft legislation—the ‘‘Municipal Market Liquidity Enhancement Act of 2009’’—authorizing the Federal Reserve to establish new, federally-supported liquidity facilities for the financing of certain municipal securities. That bill seems to clearly envision an array of liquidity facilities that 

need not conform to one specific format. 

There obviously needs to be some exploration of potential facilities, and how they 

could be best structured to encourage lender participation while generating projected budgetary revenue. The practical example of the existing student loan conduit, however, provides a useful new precedent that gives policymakers actual experience and data with which to work. 

Federal fiscal considerations aside, the bottom line consideration should be that, 

from the borrower and school standpoint, there is tremendous value in a system 

that enables a diverse array of student loan providers to continue to finance, originate and service federal student loans in a manner that maintains the long-standing, productive partnerships forged over time. Avoiding the massive job displacement and loss of experienced borrower support personnel that would arise from an 

uprooting of these partnerships should be a goal of any student loan reform effort. 

Students have benefited from having their choice of student loan provider and 

from all of the services provided by the FFELP community. I urge the committee 
48 

to explore the use of federal liquidity support structures as an avenue for creating 

savings for student aid that preserves the best elements of the current student loan 

program. 

Chairman MILLER. Thank you. 

Mr. Vedder? 

STATEMENT OF RICHARD VEDDER, PROFESSOR OF 

ECONOMICS, OHIO UNIVERSITY 

Mr. VEDDER. Thank you, Chairman Miller. Belated happy birthday by the way and—— 

Chairman MILLER. Thank you. 

Mr. VEDDER [continuing]. Mr. McKeon, you will be joining the 

Medicare generation in another year and be part of the—— 

Chairman MILLER. Thank you for your opening remarks. [Laughter.] 

Mr. VEDDER. I have three points I want to make today. First, the 

law of unintended consequences has led to outcomes far different 

than intended as Federal Student Assistance has expanded over 

time. 

Proposed additional expansions will likely not have the intended 

effects on student participation, access and equality of educational 

opportunities. Second, the proposal to end the FFEL program and 

replace it with direct federal student lending will have negative 

consequences on students, it is fiscal madness and the alleged financial benefits to the federal government are likely illusionary. 

Third, the proposal to sharply expand the Pell Grant Program 

and make it an entitlement is likewise fiscally irresponsible and 

potentially might add to already inflated college costs. 

Turning to the first point, the rate of increase in educational attainment in the United States slowed significantly beginning in the 

mid 1970s. From the mid 1950s to the mid 1970s, before Pell 

Grants and large federal student loans programs higher education 

enrollments almost quadrupled. 

The era of exploding federal financial assistance has paralleled 

a significant slowdown in enrollment growth. The notion that federal financial aid has promoted college access to the United States 

is a myth not a reality. 

Expanding these programs will not promote higher access. Moreover, the era of greater federal aid is a period of declining equality 

of educational opportunities. When Chairman Miller completed his 

higher education in 1972, I have been reading up on you, before the 

Pell Grant Program, persons from the top quartile in the income 

distribution had about six times as likely a probability of earning 

a bachelor’s degree by age 24 as by persons in the bottom quartile. 

Today the upper income student has eight times the probability 

of getting the degree. 

Regarding the second point it is highly debatable whether an expanded direct student loan program will reduce federal budgeted 

outlays. CBO scoring appears to have ignored Direct Loan administrative costs and not scored the corporate income tax revenue loss 

in student loan firms. 

Moreover, people prefer choices to monopolies. FedEx, UPS, and 

email are booming while the federal postal monopoly wanes. Col-
49 

leges have largely shunned the direct lending program because of 

the additional choices in services offered by private providers. As 

a financial aid person put it in an email to me yesterday, ‘‘the direct lending program is more like an ATM machine, with very limited much needed personal contact with students.’’ 

Private providers are not earning monopoly profits from federal 

subsidies, as recent exits from the industry and falling stock prices 

that loan providers indicate. Moreover, federal financing of student 

loans increases federal government borrowing precisely when we 

are recklessly expanding public debt and expansion is foisting a 

large burden on future generations of Americans. 

This is not only fiscally irresponsible but immoral. The powerful 

are foisting burdens on young persons who are weak all in the 

name of frankly political expediency. Regarding the last point, as 

previously indicated empirical evidence quests whether the Pell 

Grant Program effectively promotes equal educational opportunities. 

Moreover, the present value of the funded, unfunded liabilities of 

federal entitlement programs now exceed $50 trillion for the entire 

value of the physical capital stock of this nation. It is the height 

of irresponsibility to add to that liability; rather you should be 

working to reduce it. 

Finally, significantly expanding total federal student aid as proposed almost certainly will contribute to the tuition price bubble 

that is one factor in the slowdown in the growth in college participation. 

When someone else pays the bills, costs rise, and statutory moves 

to stop this will simply lead to denied student access, reductions in 

academic quality, and/or more bloated university bureaucracies. 

Thank you very much, Mr. Chairman. 

[The statement of Mr. Vedder follows:] 

Prepared Statement of Richard Vedder, Director, Center of College 

Afforability and Productivity; Distinguished Professor of Economics, 

Ohio University; Adjunct Scholar, American Enterprise Institute 

Chairman Miller and members of the committee. I appreciate the opportunity to 

be here. I have testified on several occasions before this committee and appreciate 

the opportunity to appear again today. 

I have three points I wish to make. In addition to this statement, my views are 

more elaborately outlined in the attached study on federal student financial assistance prepared by my colleague at the Center for College Affordability and Productivity, Andrew Gillen. 

First, the law of unintended consequences has led to higher education outcomes 

far different than intended as federal student assistance has expanded over the past 

35 years. For example, I think it is hard to demonstrate that enhanced federal assistance has either significantly expanded college participation or brought about 

much greater access to higher education by those who are financially disadvantaged. 

In their totality, federal programs have contributed to the ‘‘tuition bubble’’ that has 

been an unfortunate feature of American higher education. The proposed additional 

expansions contemplated will likely not have the intended effects on student participation, access and equality of educational opportunity. 

Second, the proposal to end the Federal Family Education Loan (FFEL) program 

and replace it with direct federal student lending will have negative consequences 

on students quite independent of the alleged financial consequences to the federal 

government. People like to have choices, and private loan providers do not follow 

the one-size-fits-all model implicit in the federal direct loan program. I understand 

that there is some dispute on the potential savings arising from a budgetary perspective to going to direct loans, and I suspect the true savings are in fact exagger-
50 

1 Claudia Goldin and Lawrence Katz, The Race Between Education and Technology (Cambridge, MA: Harvard University Press, 2008). 2Goldin and Katz, p. 22. 

3This and subsequent statistics, unless otherwise indicated, are derived from various issues 

of the National Center for Education Statistics, Digest of Education Statistics. 4This discussion barely scratches the surface of this issue. For more, see Richard Vedder, 

Going Broke By Degree: Why College Costs Too Much (Washington, D.C.: AEI Press, 2004), or 

Andrew Gillen, Financial Aid in Theory and Practice (Washington, D.C.: Center for College Affordability and Productivity, April 2009). 

ated, but even if that is not the case, the move away from diversity in provider offerings is a step backward. 

Third, the proposal to sharply expand the Pell Grant program by making it an 

entitlement offered to far more students than presently, with larger sized grants, 

is fiscally irresponsible. It may even be a potential factor in raising college costs, 

statutory provisions to control costs notwithstanding. 

Turning to the first point, in their latest book Harvard professors Claudia Goldin 

and Lawrence Katz argue that the rate of increase in educational attainment in the 

United States slowed significantly beginning in the mid 1970s.1 Speaking of the 

twentieth century, Goldin and Katz assert that ‘‘during the first three quarters of 

the century educational attainment rose rapidly, but during the last quarter of the 

century, it stagnated.’’ 2 It is not entirely a coincidence, I think, that the major federal grant program, Pell Grants, and, even more importantly, federal student loans, 

began around 1975. 

From the mid 1950s to the mid 1970s, higher education enrollments almost quadrupled, before Pell Grants existed and before federal student loans were large and 

universally available. Tuition tax credits were decades away during this era of huge 

enrollment growth. The era of exploding federal financial assistance has paralleled 

a significant slowdown in enrollment growth. From 1955 to 1975, enrollments grew 

at a compounded annual rate approaching 7.5 percent a year.3 From 1975 to 2007, 

enrollments rose under 1.6 percent a year, not dramatically more than population 

growth. In the one-third of a century since 1975, when Pell Grants were just getting 

underway, enrollment growth has far less than doubled, at a time that the American population has grown well over 40 percent. America has fallen behind a double 

digit number of nations in the proportion of young adults with bachelor’s degrees. 

The notion that federal financial aid has promoted college access in the United 

States is more a myth than a factual reality. Large expansion of these programs 

will almost certainly not promote higher access; this is particularly true of the student loan programs which are quantitatively larger in importance than Pell Grants, 

which have some possibility to have positive access attributes. 

Now I am aware that other things are occurring in this era as well. Changes in 

income, the cost of college, the college-high school earnings differential, and changing state appropriations for colleges are a few variables that are relevant. Many of 

them, however, changed in ways that should increase enrollment. The point I am 

trying to make here is not that rising federal aid reduced the growth in participation itself, but rather that it is not correct to say that federal loan and grant programs have dramatically improved educational attainment in the U.S.—if anything, 

the evidence suggests the impact of the programs likely has been to lower, not raise 

participation. 

Why might that be? Most importantly, student aid potentially has increased the 

demand for higher education far more than it has increased supply, raising the price 

of colleges to students. If the price increases are substantial—as indeed they have 

been—it is possible that the enrollment reducing effects of higher federal student 

financial aid has more than offset the enrollment enhancement effects arising from 

lowering net effective prices to the student arising from student aid. If sticker prices 

have risen more than tuition discounting, counting federal aid as a form of that discounting, it is easy to arrive at a solution where the total college participation effect 

of student aid is negative.4 To be sure, this is a simple generalization, and Pell 

Grants have probably had significantly different effects than student loans and tuition tax credits, but in aggregate the federal programs have almost certainly pushed 

the cost of higher education upwards. 

Moreover, the era of greater federal aid is a period of declining equality of educational opportunity. When Chairman Miller completed his higher education, 1972, 

before a single Pell Grant had been awarded, persons from the top quartile of the 

income distribution had about six times as likely a probability of earning a bachelor’s degree by age 24 as persons in the bottom quartile. Today, the upper income 

student has nearly eight times the probability of getting a degree. See the enclosed 

graph prepared by Matthew Denhart, showing the trends over time in this factor; 
51 

5 National Center for Education Statistics, 2007-08 National Postsecondary Student Aid Study 

(NPSAS:08) (Washington, D.C.: U.S. Department of Education, April 2009), p. 9. 

although there has been modest improvement in recent years, inequality is greater 

today than it was when the Pell Grant program began in the mid-1970s. 

Part of the explanation for this trend relates to non-aid related factors, such as 

the fact that some schools have deliberately restricted supply, especially for marginally achieving students, many of whom are low income, as part of an academic arms 

race where colleges try to gain prestige in published rankings that depend in part 

on the quality of students admitted and the proportion of students denied admission. But part no doubt relates to the fact that student loan programs have become 

very much a phenomenon utilized by comparatively affluent students who come 

from families with incomes exceeding the national median. 

Department of Education data affirm this. For example, take Stafford loans. For dependent students from families of less than $20,000 income, 47.2 percent received 

Stafford loans in 2007-08, about the same percent (45.1 percent) as for students 

from families with over $80,000 income, a figure well above the median family income. Over 35 percent of students from families with over $100,000 income received 

such loans.5

The President has spoken about his goal of dramatically expanding college participation. This is not the forum to discuss whether than goal is either practically reasonable or desirable. However, I can say that I very much doubt that the totality 

of the proposed legislative changes with respect to student aid will substantially further either the president’s goal with respect to participation or with respect to 

equalizing educational opportunities among Americans. 

Regarding the second point, it may be true that the direct student loan program 

will reduce the budgeted outlays of the federal government, but even the extent to 

which that is true I believe is open to debate. For example, with expanded lending 

occurring in a deep recession environment, can one predict with any accuracy student loan default rates? As the ratio of debts to starting postgraduate incomes rise, 

will not default on loans become a bigger issue? Indeed, are we perhaps setting 

some students up to fail, luring marginally qualified students to college, only to 

have them not succeed in graduating, but nonetheless incurring large debts? 

But I want to emphasize a different point. Our government is one of the people, 

by the people, and for the people. And the people prefer choices to monopoly. We 

rejoice that technology has robbed the Post Office of much of its monopoly power, 

and reduced our reliance on unreliable delivery and long lines to buy stamps. Similarly, we find it far more pleasant to buy insurance for a new car from competitive 

insurance agents and companies than buying license plates for the car from the monopolistic Bureau of Motor Vehicles. Colleges have rightly mostly shunned the direct 

lending program because of the additional choices and services offered by private 

providers. To win business, the private providers have to please the customer, an 

incentive totally lacking if the government is the only major game in town. Are private providers earning monopoly profits from federal subsidies? Hardly, if recent 
52 

6 As of May 18, 2009. Calculations are by Luke Myers of the Center for College Affordability 

and Productivity. 

exits from the industry and the stock prices of loan providers are valid indicators 

of profitability, as I think they are. I would note that in the past year, the price 

of Sallie Mae stock has plunged 71 percent, the Student Loan Corporation stock has 

fallen 62 percent, and that of Nelnet by 38 percent.6 The loss in wealth to stockholders, including pension funds, in these companies, in addition to the potential 

unemployment of workers, is another reason you should give pause before endorsing 

the Obama Administration proposals, the testimony of Sallie Mae notwithstanding. 

Have some private providers engaged in dubious ethical or outright illegal practices 

in consort with universities? Probably, and they should be punished severely, perhaps by being forced to attend and write summaries of 100 congressional hearings, 

or some other form of near torture. But we should not deny students the opportunity 

to choose amongst multiple options because of a few ethically challenged individuals 

or institutions. 

Moreover, any federal financing of student loans requires additional borrowing 

from a government that has engaged in extraordinarily reckless long term expansions in its own debt, an expansion that foists a large burden on future generations 

of Americans. The Congressional Budget Office tells us we will have nine trillion 

dollars in deficits over the next decade, which on average is more than $100,000 

debt for each family of four. To me, this is not only fiscally irresponsible, but downright immoral, since powerful persons, namely Congress and the Administration, 

are foisting burdens on young persons who adults should be protecting rather than 

harming—all in the name of short term political expediency. I am a patriotic American who loves our representative democracy, but with a heavy heart I must say, 

‘‘shame on you.’’ 

Moreover, the present value of the unfunded liabilities of federal entitlement programs now well exceeds 50 trillion dollars, or the entire value of the physical capital 

stock of this nation. Most of this is the Medicare and Social Security entitlement 

programs. It is the height of irresponsibility to add to that liability; rather, you 

should be working to whittle it down, for example, by reforming Social Security. 

Let me also reiterate that the empirical evidence is unclear in my judgment 

whether the Pell Grant program is an effective means of promoting equal educational opportunity. My colleague Andrew Gillen has shown beautifully how Pell 

Grants can have positive enrollment effects without severe effects on tuition costs, 

but there is some empirical evidence to the contrary, and the historical evidence 

does not make one confident that Pell Grants have powerfully promoted equal economic opportunity given rising higher education inequality. Proposed revisions in 

the Perkins loan program are harder to interpret owing to a lack of detailed explanations, but both my colleague Dr. Gillen and I suspect that the proposals will serve 

to raise tuition costs. 

Also, a significant expansion in federal aid programs, especially student loans, almost certainly will contribute to the tuition price explosion. When someone else is 

paying the bills, costs always rise, and all sorts of clever regulatory moves to stop 

this will simply either lead to denied student access, reductions in academic quality, 

and/or increased university bureaucracies, already obscenely large. In the past, the 

Pell Grant program has had relatively little tuition fee impact in my judgment, for 

reasons explained in the enclosed study by Dr. Gillen. But as Pell Grants increasingly become a middle class entitlement going to students who otherwise would go 

to college anyway, and grow in size, the probability that Pell expansion will be relatively tuition fee neutral becomes more problematic. Pell Grants are dwarfed in 

magnitude by student loan programs in any case. In total, the law of unintended 

consequences is at work, as the tuition bubble that federal policies such as student 

loans and tax credits have contributed to have undone any positive impacts that 

otherwise would occur. 

Thank you for your attention. 

Chairman MILLER. Thank you. Mr. Shireman, as you have outlined in your testimony, what the administration is trying to do 

here is trying to get additional resources into the Pell Grant. I 

don’t know if we have the chart but it is up, but here you can sort 

of see where we have been with the Pell Grant. 
53 

The green is where the administration is under its proposal—it 

is a lot—I can’t read any of that from here but—see I am waiting 

for Medicare to get my glasses. 

Not going to get covered. [Laughter.] 

All right, let us get back to the subject here. It is not about me. 

So what they would like to do is to provide the direction it would 

take to get us back to where we were for low income students— 

a greater portion of their opportunity at college would be covered 

by a grants, the grant that is made available in the Pell Grant Program, is that correct? 

Mr. SHIREMAN. Absolutely. We want to make sure that the Pell 

Grant Program grows at a little bit more than inflation, not college 

inflation because we need to bring that down but we need to provide not just those graduating high school seniors but students in 

middle school with the assurance that Pell Grant Program will be 

there and that it will be significant enough to really help them pay 

for college. 

Chairman MILLER. And Ms. Griswold, your testimony is that as 

you switched over at your institution, I don’t want to paraphrase 

as you described it, but it appeared in your testimony that this was 

relatively easy to do for you because of the common platforms between the Pell program and the requirements of the Direct Loan 

Program? 

Ms. GRISWOLD. That is correct. It was an undertaking in that we 

had a pretty short timeframe to be up and running. We needed 

within 6 weeks of realizing we had some significant changes coming in how our students would need to get their loans, we had a 

very short period of time to be talking both to our incoming class 

and as well as our returning students about how they would receive their student loans. 

We were getting ready to award financial aid that included their 

loans, and with that comes imparting information about how that 

program works and what students need to do. 

But the mechanics of getting it done were relatively straightforward. With the departments help and the technical manuals 

that are available and there are a number of schools out there in 

direct lending that we turned to. To get some questions answered, 

the promptness of the department was exceptional in responding to 

us, so for us the experience went very well. 

Chairman MILLER. Thank you. Chancellor Reed, two things. You 

have institutions that have done it both ways and you are planning, as I understand it, as a system to convert to the Direct Loan 

program in its entirety over the next year is it? 

Mr. REED. Next year. 

Chairman MILLER. Yes, next year. Okay. Your written testimony 

suggests that it has worked for the institution. It has made a decision. It seems to have worked fine? 

Mr. REED. Yes, has and as my colleague said it has gone very 

smoothly. What we have found is it is not brought an additional 

burden or cost to our institutions, especially our institutions that 

are mid-sized, 16,000 to 20,000 students. 

We have found that the institution of 40,000 plus students have added one employee at about $40,000 to $50,000 salary including 

their benefits. So that has been our experience in the conversion. 
54 

Chairman MILLER. In your testimony you spoke to it, but you obviously believe that this trade off, if we could increase Pell as the 

administration is suggesting, you think will in fact help those students? 

Mr. REED. Absolutely. We have an outreach program that goes 

out into the middle schools and the high schools. We have Super 

Saturdays, Super Sundays, in the African American churches 

where we really carry the message about Pell especially and the 

availability of Pell. 

In the CSU we have a $2 billion student aid program, about $1 

billion in loans and $1 billion in grants and we try to get that information out as early as we can in the middle schools. 

Chairman MILLER. Thank you, Mr. Shireman, the question of default rates has come up and the suggestion was made I think by 

Mr. Chapman that in any category at any time the default rates 

are worse in the DL program than they are in the FFEL program. 

Is that accurate? 

Mr. SHIREMAN. No it is not, it is really the opposite. If you look 

at by type of school defaults rates in the Direct Loan Program by 

type of school are either comparable or lower than in the FFEL 

program. 

Chairman MILLER. Do we not inherit some defaults from the 

FFEL program? 

Mr. SHIREMAN. Some of the numbers that you can look at are 

looking at the whole Direct Loan Program and the Direct Loan Program does take in defaulted loans from the FFEL program. Those 

are more likely to default again so some of the numbers can appear 

as if there is a higher default rate in the Direct Loan Program for 

that reason. 

Chairman MILLER. Chancellor Reed? 

Mr. REED. Mr. Chairman, just to report in 2006 we had 13 of our 

institutions in FFEL, their average default rate was 2.56 percent. 

Our 10 direct lending institutions average default rate was 2.4 so 

that was you know a difference there. 

Chairman MILLER. Mr. McKeon? Thank you. 

Mr. MCKEON. Thank you, Mr. Chairman. Dr. Vedder, we have 

long valued your opinion on the college cost crisis with a lot of talk 

here, but no talk that I have heard is really talking about lowering 

the costs of education. 

We are talking about putting more money in and giving more 

money to students and you have written about that. You understand the problem, and how it is facing the country. The Chronicle 

of Higher Education recently published an article arguing that the 

higher education sector would be the next bubble to burst. 

How should the higher education community reform itself to 

avoid a crash like we have seen in other industries? 

Mr. VEDDER. Well, thank you for that shrewd observation, which 

of course is mine. [Laughter.] 

The cost of college has been rising at three times the rate of inflation, two times, three times the rate of inflation for 30, 40 years. 

That is precisely the period, by the way, since loan programs and 

the Pell Grant Program began back in the early 1970s late 1960s 

we started into this. 
55 

The demand for education has been rising faster than the supply. 

Now, part of the problem is that colleges, and I am not talking 

about Charlie’s colleges so much as other colleges, the elite universities, he wanted me to say that by the way, the elite universities 

put limits on. 

So you drop more money over at Harvard University or over to 

the University of Michigan, or the University of California Berkeley. You give more money to kids it allows them to raise tuition 

more. 

Tuitions have gone up because they can. And you have been 

part—you, generically, collectively, have been part of the problem. 

Now, you are trying to solve the problem. You need to look at it 

from a different way. 

How can we change the incentives, the behavior, of college administrators to get them to think small, to get them to cut costs 

and so forth? You need to look at a different paradigm. 

Mr. MCKEON. Thank you. Mr. Chapman, the conduit saves the 

federal government money and it keeps private capital in the program, which means it went for students, schools and employees 

who are hoping to keep their jobs past July 1st, 2010. 

As a member of the initial conduit advisory board and one of the 

members of the advisory board overseeing the implementation of 

the facility, could you comment on whether you have been approached by Secretary Duncan or other high level officials at the 

Department of Education, who have been interested in talking to 

you about the availability of the conduit as a more permanent financing structure? 

Mr. CHAPMAN. To date I have not been, and to my knowledge no 

one on the committee has been as well. 

Mr. MCKEON. If Congress implemented some version of the conduit, what changes in loan delivery, availability of service or services will institutions and students see on their end, as compared to 

the changes they would experience if we went to 100 percent direct 

lending? 

Mr. CHAPMAN. Well, I am not sure I can speak exactly to what 

changes it would experience if they went to direct lending. What 

I can tell you is with respect to maintaining private sector financing and the diversity of lenders, originators, and servicers that 

exist today and existed over the last 40 years, schools would see 

the continued great service, the continued value-added services 

that have been provided over all these years. 

From a funding standpoint, it would be seamless and blind. The 

lenders today in the program finance loans in many different ways 

in the background and that is all for school perspective, for student 

perspective, for a parent perspective, it is seamless, so they would 

see no change. 

And in fact, you know, not only not a deterioration but probably 

an improvement by where if there was a consistent and reliable 

source of funding that we could see out into the future. 

Mr. MCKEON. Remember the meeting that we had with Mr. 

Shireman and the secretary and the lady that was a financial aid 

administrator at the University of Maryland? Her comment, how 

she is helping China now, where they have a one-of-a-kind system 

where the government provides everything. 
56 

And they want to reach out to bring competition into their lending market at the same time as we are talking about moving it all 

to the government. Do you have any comments on that? 

Mr. CHAPMAN. I will just note that she said those comments with 

a lot of irony in her voice, but I think, you know. I think those comments get to, again, choice. And I think, you know, what is critical 

to this discussion, what is critical to these direct lending versus 

FFELP debate, you know, we can talk about savings and dollars 

and numbers and whether they are real or not. 

But what is critical, and what when I think about what the best 

deal for the taxpayers is, it is not all about dollars and cents. It 

is about what the full package is. It is best, not cheapest and sometimes the best isn’t the cheapest. 

I think that financial aid officers point and I think, you know, 

the overarching point of comments about keeping private capital in 

the program and keeping the diversity of lenders in the program 

is that taxpayers, students, and schools are better served by maintaining competition, by maintaining choice because it leads to better outcomes over the long term. 

Mr. MCKEON. I think the competition has been good. I fought direct lending when they first brought it in, but over 16 years we 

have seen where the competition, I think, has made both programs 

better. One side has 4,000 institutions, one has 1,700. 

I think the people have accepted and understood, and I think 

competition is better and I am really sorry to see the government 

moving in so many areas, but especially in this one to take over 

the whole program. 

Chairman MILLER. Mr. Andrews? 

Mr. ANDREWS. Thank you, Mr. Chairman. I am glad to hear that 

my friend from California, Mr. McKeon believes that competition 

between public and private is a good thing. I am sure he will reflect 

that view in the health care debate when the public option. 

Mr. MCKEON. Oh, exactly—— 

Mr. ANDREWS. I am sure he will. The word irony was used a few 

minutes ago, there is an irony overarching our discussion this 

morning. I think it was brought out in Mr. Shireman’s testimony. 

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

this point, is that right? 

Mr. SHIREMAN. Yes, it is money we are providing through the 

participation—— 

Mr. ANDREWS. So, the way this is working now that an institution gets taxpayer money, lends it out, and then we pay them a 

premium on top of what the student would otherwise pay to reward 

them for taking a risk with our money? Is that essentially right? 

Mr. SHIREMAN. Effectively, if they—especially if they keep it they 

have the option, they can buy it from us ultimately or give it back 

to us and we pay them a fee for their work. But in the meantime, 

we could have just made the loans directly and that is really the 

point. 

Mr. ANDREWS. But either way the taxpayers are absorbing the 

risk of that capital not the person in the private sector. 

Mr. SHIREMAN. Yes, any way we do this it is a government program run by private sector participation. 
57 

Mr. ANDREWS. With respect to 60 percent of what is being called 

private loans here this morning, with respect to 60 percent of those 

loans the taxpayer is, in fact, absorbing the risk and we are paying 

someone a premium to take a risk with our money. Is that right? 

Mr. SHIREMAN. Exactly. When they say they are leveraging our 

liquidity strength that means they are using our borrowing ability. 

Mr. ANDREWS. Yes. The ranking member also in his opening 

statement talked about—he made an analogy to the auto industry. 

And it seems to me the analogy falls apart in that although we did 

advance a substantial amount of money to some auto industries, 

we did not supplement the price of the car, did we? If somebody 

buys a $20,000 car we don’t pay the automaker $24,000? 

Mr. SHIREMAN. That is exactly right. We have a whole federal financial aid system for Pell Grants and student loans where the decisions about who can borrow, what institution they can borrow at, 

how much they can borrow and what the interest rate is, are all 

a part of the federal financial aid system. And we don’t have that 

in auto loans, home loans, so the analogy does not really work. 

Mr. ANDREWS. Ms. Griswold, we are hearing all the horror stories of these additional administrative costs that will be visited 

upon institutions that make the switch. What was Penn State’s experience in a vast system, making the switch from the FFEL program to direct loans, in terms of your internal administrative costs. 

Ms. GRISWOLD. Right. It was a matter of shifting priorities and 

some pretty intense work for about a 4-month period to get up and 

running. We did not hire additional staff—— 

Mr. ANDREWS. You didn’t have to hire anybody else? 

Ms. GRISWOLD. No, we did not. We did not need $400,000, a figure that grew to $1 million the second time I heard it on the 

streets, to pay any cost associated with this. Any time we implement a new program or a new system at the university, a new financial aid process or a change in regulation, there is always cost 

associated in terms of staff priorities. 

You shift staff where they need to be. This happens all the time; 

it is the way student aid offices work. And so the notion that we 

had to go find $100,000, $200,000, $300,000 to be able to bring direct lending up couldn’t be further from the truth. I am not sure 

where that came from. 

Mr. ANDREWS. Mr. Shireman testified that essentially the only 

different between processing the Pell Grant and the direct loan is 

the student signs a note for the direct loan and not the Pell Grant, 

is that essentially right? 

Ms. GRISWOLD. Yes, it is. 

Mr. ANDREWS. So that is the only one administrative step that 

is really added. 

Dr. Vedder, I want to ask you one thing. You testified that the 

CBO score for the savings on direct loans did not take into account 

additional administrative costs or foregone corporate tax revenues. 

What is the source of your testimony for that statement? 

Mr. VEDDER. I received that information from members of the 

minority. 

Mr. ANDREWS. But do you know, independently know it is true? 

Mr. VEDDER. I have not first-handed, scored it, and in my full 

testimony I made it very clear that I understand—— 
58 

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

Mr. VEDDER. I have looked at them; I have not read them carefully. 

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

Mr. VEDDER. I am not sure I am sounding right, but neither are 

you. 

Mr. ANDREWS. I am not—that is why I am asking. You made the 

statement that they did not take into account administrative costs 

or foregone tax? 

Mr. VEDDER. The scoring on things like—I am an economist, 

Representative Andrews, and I understand that the people at CBO 

are honest people. I am not saying that—— 

Mr. ANDREWS. They sure are. 

Mr. VEDDER. And they are good people. They are professional 

people. I used to work with them. But economists make mistakes 

and if you look at, for example, default rates, can you predict default rates? 

Mr. ANDREWS. My time is up, but I just want to be clear that 

you don’t know whether that is true or not, right? 

Mr. VEDDER. I don’t know that it is true. 

Mr. ANDREWS. Thank you very much. 

Chairman MILLER. Mr. Petri? 

Mr. PETRI. Thank you very much, Mr. Chairman. Thank you all 

for your testimony. This has been fascinating for me because I can 

remember when I just was a new member of this committee. The 

head of the Wisconsin Higher Education Agency came to my office 

and in a response to a question, saying that in his experience the 

guarantee program was wildly costly to the government, and suggesting a direct-type loan program, which he thought would be 

much more efficient both for students and for the taxpayers. 

We did try it out despite a lot of doubts on a three school basis 

including Marquette in my own state, and now it has been expanded and we have seen competition between the two. And now 

we are finding that the direct program is being scored, I can’t believe it. 

I think it is excessive, a $94 billion saving over 10 years, $9 billion a year couldn’t possibly—I mean, obviously, with that much 

money you can provide a few perks and little extra tweaks and 

bells. But I am not sure it is worth it to the taxpayer when the 

terms of the loans are the same to the students and the schools. 

So I just would like to ask Mr. Shireman if you could tell us how 

you are doing to lay the groundwork for expanding the Direct Loan 

Program? I mean you are going to try to switch by July 1st, 2010. 

Could you tell me how many schools do not have their participation 

agreements set so that they can move to the Direct Loan Program 

if they choose to do that? 

Mr. SHIREMAN. I don’t have a precise answer to that question, 

but we are conducting outreach right now on contacting schools 

that are not yet making direct loans, or have not conducted those 

initial steps. 

And we have also invited the Higher Education Association, as 

well as members of Congress, to let us know about the schools they 

are most worried about, the schools where there is, you know, 
59 

maybe one staff person who is handling federal aid. And it is important to get them in early, talk to them about what the steps are 

so that they can take those steps. 

Because it is a relatively minor addition to the existing efficient 

Pell Grant process that is run by Accenture, that front-end origination side is not the biggest concern. The biggest concern is we have 

to ramp up the servicing capability to collect on those loans and the 

previous administration actually started that process with an RFP 

that we are in the process of completing. 

Mr. PETRI. And now other countries have gone to a Direct Loan 

Program, I think Great Britain and Australia and New Zealand. 

They have an additional feature which gives borrowers the option 

of repaying their loans through the Inland Revenue Service or their 

equivalent of the IRS. 

And if we do have a direct loan program we could save collection 

costs and default costs and so on by giving people the option of having, say, up to 15 percent of their income withheld from each paycheck, and the loan is automatically rescheduled through the withholding process of the IRS. 

Would the administration be at all open to looking and exploring 

whether doing in the United States what is already being done in 

the United Kingdom, Australia, and New Zealand would make 

sense? 

Mr. SHIREMAN. In those other countries, which are very interesting programs, all of the participants are paying off their loans 

as a percentage of their income. And we have made the policy decision here that the majority of borrowers are probably going to be 

fine paying a flat payment based on the amount that they borrowed, but that there are some that need income-based repayment 

and that type of help. 

So it is more on an exception basis here, so it probably doesn’t 

fit with the system that we have. I would be glad to go back and 

take a look at it, but at this point we are focusing on really using 

the system that we have developed over time here. 

Mr. PETRI. One other area, several people—I think someone testified here from Vermont and the guarantee agency in that state. 

It is my understanding that guarantee agencies in many cases 

have close relationships with private lenders, and one of their missions is to provide oversight over lenders. 

Is that an area where we should be, our self, exercising more 

oversight to make sure that they haven’t gotten in bed with each 

other rather than supervising? 

Mr. SHIREMAN. Well, certainly there are some situations where 

there are close relationships between lenders, our secondary market and guarantee agencies. There has been some increased oversight of that situation over the past couple of years, and it is an 

area that we will continue to look at. It is of concern. 

Chairman MILLER. Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Mr. Chairman. I enjoyed yesterday’s 

hearing that you brought to us, and this one seems to be just additional information that I am enjoying very much. I want to direct 

my first question to Chancellor Reed. 

I am very happy to hear your statement and how your university 

system focuses on the most needy students and underserved fami-
60 

lies helping them access higher education, and you highlighted in 

your testimony that your system includes many HSIs and involves 

many first generation college students, residents who need the 

most financial, academic, and social support to successfully complete college. 

What do you see as the core services that will help low income 

first generation minority students successfully manage their student loans and college financing? 

Mr. REED. Mr. Hinojosa, one of the things that I have found is 

to reach out to the families and the students together, and in California we have initiated an outreach program into the middle 

schools, including the distribution of over 3 million posters that 

have financial aid information, both grant and loan information. 

As you know, the Latino community does not have a history of 

borrowing money and one of the things that we try to reach into 

the middle school is to have Super Saturdays where we bring parents and students together to the campuses to share with them the 

different kinds of financial aid that they will be eligible for and let 

them know how to apply for it, when to apply for it and give them 

the assistance that they need. 

Mr. HINOJOSA. Chancellor Reed, I come from a Mexican American family and that practice is a European practice that you don’t 

borrow money, you save money and you pay for it in cash. So I understand it very well and I would like to direct my next question 

to Secretary Shireman. 

In your testimony you said that it would be the department’s job 

to build into contracts the proper incentives to get the best service 

for students and I couldn’t agree more. I like those incentives, 

proper incentives, and that there will be competition amongst the 

universities to show that it can be done, just as Ms. Griswold 

shows that at Penn State they didn’t need to hire more people to 

get this Direct Student Loan Program in. 

So let me say that in the State of Texas, Secretary Shireman, our 

state guarantee agency and nonprofit secondary markets have provided valuable financial illiteracy education and outreach programming for students and families and technical support for colleges 

and universities. 

So I am going to ask you a question. It was interesting to also 

hear CEO Rene Drouin talk about one of the parts—I think it was 

on page two, bullet number three. It says the key is that your organization, your foundation, continues to support schools and students with entrance and exit counseling, financial literacy education programs and local compliance expertise. 

So I ask you, Secretary Shireman, will you agree with me that 

we in Congress make this component of financial literacy education 

a mandatory as we are trying to finish out our legislation? 

Mr. SHIREMAN. Certainly as part of our college access and completion innovation fund we want to include that type of financial 

literacy education, helping students know about college, how to 

plan for college, how to pay for college and so that can be a very 

important part of that program. 

Mr. HINOJOSA. Excellent. The next question I want to ask the 

gentleman from that foundation, the experience that you all have 

had, in terms of minority students going to college, do you find that 
61 

they are able to repay their loans, or do they have a high percentage that are failing and cannot pay their loans? 

Mr. DROUIN. Congressman from the State of New Hampshire our 

Latino population is one of the fastest growing populations within 

our state. We have programs that we have designed specifically for 

our Latino group, and what we find is they need early awareness 

and often and we find that with all of our individuals. 

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

Chairman MILLER. Mr. Souder. 

Mr. SOUDER. Thank you Mr. Chairman. This is a pretty amazing 

hearing, the party of Andrew Jackson who opposed the national 

banks not only proposing another national bank and advocating 

common stock in existing national banks. It is an amazing turn of 

events that I find this hearing ironic in so many different ways. 

As we are debating about Fannie Mae and how Fannie Mae was 

undergirding much of our financial crisis, by not being careful, we 

are proposing, in fact, to duplicate Fannie Mae and the problems 

that occurred in Fannie Mae. 

At a time when California is begging on their knees, we are 

being held up as California a model of how they did low income 

and affordability in college. I am sorry. It has been a great university system. It is not the only problem in California but I wouldn’t 

hold it up as our economic model. 

At a time when we are debating health care, my friend from New 

Jersey said, that there is an option on the table for public and private. If you want to know why republicans have no trust whatsoever that the purpose of the public part isn’t to drive out the part 

that is private just look at today. 

Just look at today. If there is a single republican who will take 

the word of the other party that says when there is a public and 

private offered that the intent isn’t to drive out the private, look 

at this example, 74 percent of colleges chose the private. 

That just can’t be. We just can’t allow that. The public side has 

to take it over, and I would like to ask Mr. Chapman why since 

this is humiliating to have a duplicate public-private and only 26 

percent take the private, why would they choose you? 

What is it, is there a bias in the system? Is it rigged? Why did 

they choose the private sector over the public? 

Mr. CHAPMAN. I would say as a general response to that question 

is private sector was chosen because of the service that was provided and not only the service in terms of loan delivery, in terms 

of customer service, but in terms of value-added services that we 

provided to their students through outreach services, these literacy 

services. 

How do you pay back your loan when you get out? You know, it 

is a competition and admittedly when I got into this business and 

when direct lending first came about, the private side of the student lending business was struggling as far as service went. 

So, but over time then very quickly common standards, it solved 

most of the administrative issues that schools were having with the 

private sector. 

I come from Ohio originally. And The Ohio State University, I 

believe in 1992, had students from all fifty states. They had ap-
62 

proximately 275 lenders, I believe, who all had different applications. 

Those days are long over, and they were long over, you know, 

probably by 1993 or 1994, and the service improved benefits to students as far as lower prices, quicker turnarounds as far as loan delivery happened and for those schools that have stayed in the private loan program that is who they have liked. 

The schools that were doing direct lending have, you know, they 

have made their decision, and I am glad they had the ability to 

make that decision. I am glad Penn State had the ability to make 

the decision they made, but cutting off that choice we believe will 

be very problematic. 

Mr. SOUDER. In 1997 basically the direct lending system failed 

and that led to a lot of trying to make sure there was diversification to be able to handle changing loan amounts and the rigidity 

of the federal system basically collapsed and the private sector had 

to bail the federal sector out. 

Was that partly when and why a lot of people moved to the private sector? There was an 8-month delay that unlike this where 

the federal government provides a back up in tough times to the 

private sector to keep it moving smoothly, when the federal government took over the whole thing and then had problems and got 8 

months behind there was nobody. 

They had to go back out to the private sector, and it took 8 

months to fix the problem. That is the risk of just one national system, and I was wondering, were you involved at that particular 

point in time or familiar with that? 

Mr. CHAPMAN. Well, as far as that particular time, I am not sure 

I can speak to that. But again it goes to, for the same reason Penn 

State and some other schools have been able in times of concern 

about availability of loan funds or students, switched to the Direct 

Loan Program. But at that time where the situation was reversed, 

the schools had the option to switch back to a more reliable source 

of funds at that time. 

Mr. SOUDER. Mr. Chairman, I know my time is up, I would like 

to announce consent to insert into the record these are from USA 

Funds, an Indiana Company, on their default rates which were 2 

percent over 6 years lower than the direct lending including for 

Hispanics. 

[The information follows:] 
63 

Chairman MILLER. Thank you. The gentleman’s time has expired. We are going to try one more question here. Mr. Bishop, you 

will just have to work out the clock with yourself Mr. Bishop how 

long you want to keep asking questions but we are in the middle 

of a vote. 

We have a series of votes. I plan to recess the committee here 

so we can make the vote. We will probably not be back before 12 

o’clock so if that creates time problems for some of you, I understand that and feel free to leave. 

I would hope that those who can remain would remain because 

I think there are clearly questions that the members of the committee have—this is an important proposal before the committee. 

Mr. Bishop? 

Mr. BISHOP. Thanks, Mr. Chairman, and I will try to be quick. 
64 

Chairman MILLER. It is your voting record, not mine. [Laughter.] 

Mr. BISHOP. Thank you, Mr. Chairman. I appreciate that reminder. I have listened very carefully to Mr. Souder’s questions 

and just for clarification had we not passed ECASLA, what would 

have happened to student loan availability in the current academic 

year, Mr. Shireman? 

Mr. SHIREMAN. Many, many schools would have shifted to direct 

lending, and they would have had to do it in a very rushed way, 

and we would have seen delays in terms of students getting funding. 

Mr. BISHOP. And $6 out of every $10 is being made available to 

students currently enrolled right now in the student loan program 

is a federal dollar, is that correct? 

Mr. SHIREMAN. Yes. 

Mr. BISHOP. It may be originated privately but it is supported 

publicly, correct? 

Mr. SHIREMAN. Right. And it is important to point out that both 

of these programs are public programs that involve the private sector doing the work and the difference is really how we pay. 

Mr. BISHOP. We have heard an awful lot of discussion this morning about choice and that certainly is a sort of a seductive argument. I did student financial aid for 7 or 8 years back in the dark 

ages. I was a college administrator for 29 years. Every day practically that I was on my campus I dealt with students in terms of 

how to pay their bills. 

I never once heard a student say, ‘‘God, I wish I had a choice.’’ 

They were grateful to know that there was a source of money available to them. They wanted to know how much, they wanted to 

know what the terms and conditions of repayment were, and they 

wanted to know that it was available to them. 

Ms. Griswold, is that your experience as well? 

Ms. GRISWOLD. That is my exact experience, that students are 

far more concerned about the availability, the efficiency and getting 

their funds, less concerned about who the provider of those funds 

are. We had years where students who understand that many 

banks participate in making the loans. 

We regularly got the question, which one should I pick, and the 

other, you know, the other thought and the notion of competition 

with these loans has always been my lament, and I shared this 

with my colleagues in the FFELP community, as well as in the Direct Loan community, that lack of standardization is sort of a sad 

thing. 

A student in a rural community, at a small university, hopefully, 

hopefully, has a school that has worked sufficiently with lenders to 

negotiate service and availability of loans that are at the best 

rates. Not all students get the same benefits that come and as the 

national program it would seem those benefits for students should 

be equal across all students. 

Mr. BISHOP. Thank you. I only have time for one more. 

Dr. Vedder there are many things that you have said in your testimony. I have heard you testify before. I have read much of what 

you have written, and I have a lot I could engage you on. I have 

about 30 seconds. 
65 

In 1974 when the Pell Grant began, the maximum award was 

$1,400. Is it your contention that had that award stayed at $1,400 

or some reasonable variant thereof, that tuitions would not have 

increased? 

Mr. VEDDER. It is my contention if we had not put in the Pell 

Grant or the Student Loan Program we would have as many students enrolled in American universities today as in fact—— 

Mr. BISHOP. So if I may interrupt, so if you were constructing a 

student financial aid portfolio now, federal, state, institutional, 

what would it look like from your vantage point? Would you have 

student aid? 

Mr. VEDDER. If I were the czar which, thank God I am not—— 

Mr. BISHOP. I am sort of thanking God I am not also, but—— 

[Laughter.] 

Mr. VEDDER. You should pray every day that I am not. You 

should—I would not—the federal government would get out of the 

student loan business completely. The federal government has corrupted higher education with the disincentive effects that it has 

provided to universities to engage in bloated bureaucracies, arrogance, elitism, and so forth that has caused these problems. 

Mr. BISHOP. I think my time has expired, Mr. Chairman. Thank 

you very much. [Laughter.] 

Chairman MILLER. Recess. I want to thank all of you for your 

testimony. If you can remain, I would hope that you would and we 

will return as quickly as possible. 

[Recess.] 

Chairman MILLER. Thank you very much for being willing to remain. My, well, there are no apologies. This is just the way it is 

on the Hill. Most of you are familiar with the Congress, but I wanted to make sure my colleagues, some of them said they will return. 

If they do they will have to do it inside my question period, otherwise we are going to let you all be free. 

Just a couple of things, Chancellor Reed, as the gentleman, Mr. 

Vedder, was talking that he thought the federal loan, federal financial assistance should be abolished, or dismantled, you were moving around in your chair a little bit. Do want to comment? 

Mr. REED. Well, America’s future workforce is going to come from 

a majority of the underserved students of color in this nation, and 

I don’t look at either the Pell Grants or the Student Loan Programs 

as expenditures. 

I look at that as investments in America’s future, and those are 

very good economic investments in the future of this country. And 

providing a college education is something that can be shared by 

the individual, by the states, and by the federal government. 

One of the things that you have tried in the last couple of years 

is to focus on making states maintain their effort. And I think this 

is a shared partnership and when one of the questions was why 

has tuition and fees increased, and I think, my experience has 

been, because states have withdrawn the kind of support that they 

need to be as a part of their partnership in this effort. 

So I don’t look at this as an expenditure and breaking America’s 

back. I look at it as making America stronger. 

Chairman MILLER. Well, thank you and, you know, I don’t think 

any of us who have sat on this committee—I mean we have lis-
66 

tened to so many people, certainly out of the business world and 

economists, you know, that this investment we make in education 

probably returns more than any other investment that we make. 

We all know what it leads to in whatever field that it is, and the 

idea that somehow we would then dismantle the program and that 

it would return to the days when I was in school. 

If you drive by San Francisco State or if you drive by the University of California at Davis, it is a far different campus with far 

more of opportunities available to that student body and that student body is far different than when I went there. 

Certainly it is a very different law school today than when I went 

there and the diversity of people who have the opportunity now to 

pursue that education. So that idea that somehow we can return 

there if we just dismantle the federal student assistance that somehow that is a credible position that the nation would be well 

served, I just didn’t want to leave on the record at that point. 

Mr. Remondi, in your testimony you have essentially said that 

this program is going to have to change given what has transpired 

over the last couple of years, and it is a pretty fundamental change 

that you are talking about. 

Mr. REMONDI. Yes. 

Chairman MILLER. I just wanted to be able to make sure that 

people on the record understand that. I mean I have looked at your 

proposal. We are giving it very serious consideration and discussing 

it among members and staff, but I think there is sometimes the 

characterization that you are here saying, ‘‘No, we just want to go 

back to where we were,’’ and I don’t think that—I want to clarify 

that is not your position. 

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

Mr. REMONDI. That is right. And I think, you know, the federal 

loan programs kind of mirrored what was going on in the capital 

markets and as the capital markets continue to ratchet down credit 

spreads, we were the beneficiaries of that. And the federal loan 

programs kind of followed and tried to keep step with it. One sometimes often got ahead of the other. 

In 2007, that environment changed completely and credit spreads 

have widened to levels I don’t think any of us could have predicted. 

We used to raise money at about 10 basis points over LIBOR. Now 

that same bond would cost us about 200 basis points over LIBOR. 

Obviously, it doesn’t work with the economics that are built into 

the Student Loan Program today. 

But we also see that the funding environment is not going to return to those same old levels, and so if there is a predicted and consistently large spread between where the private sector can borrow 

money and where the federal government can borrow money, it 

does create an opportunity to utilize that to create savings that can 

be used to expand the Pell Grant Programs and fully support that. 

Chairman MILLER. Mr. Guthrie? 

Mr. GUTHRIE. Thank you, Mr. Chairman. And it is great to be 

here. I think the number one issue for all of us regardless of where 

we stand is how do we make college more affordable? I think that 

is the biggest concern. I know it is the biggest concern within middle class America right now. 
67 

Maybe it is because I have one heading that way and so those 

are the kind of parents that I talk to every day when I am home 

at soccer fields and so forth, but really concerned about the ability 

to send their children to college. And so that is where we are going. 

Whatever program we do, I think that has got to be our end result 

and that is everybody’s interest. 

The question that I, and I kind of caught on it Monday when I 

was kind of studying for this, and if Mr. Shireman, on the score 

for the CBO, the $90 billion plus score for the CBO, my understanding with that, and please correct me if I am wrong, is that 

is not necessarily money that we send to the private lenders or it 

is not money we send to the private lenders. 

It is what would be gained by the Direct Loan Program being 

able to borrow at lower rates and then also charging the same rate 

that the private industry does to our, I guess middle class students 

who would be doing these student loans. And then that money is 

used to subsidize the Pell Grants in the proposal? 

Mr. SHIREMAN. I think this is the way to think about it. Remember that these are fixed rate loans to students at 6.8 percent, in 

some cases lower than 6.8 percent. So you have got a 6.8 percent 

fixed rate loan over the next 10 to 25 years. Our borrowing, say 

our cost of funds is here. The amount that we have to pay in the 

FFEL program so that loans are made in FFEL is here. 

Mr. GUTHRIE. Right. 

Mr. SHIREMAN. And there is a gap there and if we make the 

loans in direct loans, when interest rates are low in the economy, 

that is an amount that comes to us. When interest rates are high, 

it is an amount that we actually pay to—— 

Mr. GUTHRIE. Right. 

Mr. SHIREMAN [continuing]. The FFEL participants. So depending on interest rates over the next 25 years, sometimes we have 

more money come in because we do direct loans instead of FFEL 

and sometimes we have less money going out—— 

Mr. GUTHRIE. But the last couple of years—— 

Mr. SHIREMAN [continuing]. With direct loans than FFEL. 

Mr. GUTHRIE [continuing]. There has been money coming in. 

Would it be, and I understand the increase in the Pell and I think 

honest people can disagree on whether there should be an entitlement or the Congress every year decide how much money is going 

into the Pell program. 

I think that is a reasonable area to discuss and debate. But my 

understanding is though, if 6.8 percent is the fix and we can borrow as the government at a lower rate, why shouldn’t—why is 6.8 

the number? 

I mean why shouldn’t it be 5.5 or when the times are—when 

money is coming in and these middle class, typically middle class 

people who are struggling and then the moderate and lower income 

or the Pell Grants, why not give a lower interest rate to the people 

going to college? 

I can’t understand why we wouldn’t have that policy and then 

when it goes up and then 6.8 percent is what we decide as a Congress and as an executive branch is the right level. 

Mr. SHIREMAN. It is a decision that Congress can make. A few 

years ago we had a variable rate approach. I mean the tradeoff is 
68 

usually that a variable rate approach can go to a higher rate, so 

we had a variable rate with a cap of 81⁄2 percent. When we went 

to a fixed rate, Congress decided to go to that 6.8 percent. 

So if there was a shift, and obviously, in the private student loan 

market, non-FFEL, non-guaranteed, they are almost all variable 

rate loans, with no cap at all. 

Mr. GUTHRIE. Right. 

Mr. SHIREMAN. So if we have interest rates at 12, 14, 18, 25 percent, we don’t want to have that kind of a variable rate program—— 

Mr. GUTHRIE. And I agree with you on that. 

Mr. SHIREMAN [continuing]. And so there are tradeoffs there and 

the tradeoff can involve some federal costs, so that is the kind of 

decision that Congress needs to make. 

I will say that you cannot get a personal loan at 6.8 percent fixed 

rate right now, so from the standpoint of whether this is a good 

deal for students, these are good loans, personal finance experts 

will say this is the loan to take. 

Mr. GUTHRIE. I am not saying they are not good, but it could be 

better. It could be better if Congress—— 

Mr. SHIREMAN. All the costs to make it better and that is the 

kind of decisions, you know, those are the kinds of decisions that 

Congress—— 

Mr. GUTHRIE. But in the score, isn’t that 6.8 percent versus what 

Congress can borrow for or what the federal government can borrow for? Isn’t that the score of the $90 billion? 

Mr. SHIREMAN. Well, you have to remember that 6.8 is a longterm rate, so we are going to see interest rates, whether it is next 

winter or next year or 5 years from now, we are going to see interest rates change a lot over time. 

Mr. GUTHRIE. Right, so you could be upside down or the federal 

government could be upside down. 

Mr. SHIREMAN. Absolutely. There will be times when we are putting money out—— 

Mr. GUTHRIE. But the scoring of CBO assumes that there will be 

more money coming in than going out, and that money is used—— 

Mr. SHIREMAN. CBO currently uses—— 

Mr. GUTHRIE [continuing]. To create—— 

Mr. SHIREMAN [continuing]. Relatively low interest rates into the 

future. What really doesn’t change that much is the fact that there 

is a gap. So the gap exists whether we are above the fixed rate and 

paying money out or below the fixed rate and having money coming 

in. 

Mr. GUTHRIE. And my time is up, but we could loan money to 

students at the cost of the federal government borrowing, plus 

servicing or whatever kind of—and it would be cheaper than 6.8 in 

today’s numbers, right? 

Mr. SHIREMAN. It would involve work with CBO to figure out 

what that would cost and compare that to investing in Pell Grants. 

Mr. GUTHRIE. In current times, the students’ money would subsidize—— 

Mr. SHIREMAN. Well, students are getting—— 

Mr. GUTHRIE [continuing]. Pell Grants, given the way you are 

moving on that. 
69 

Mr. SHIREMAN. Well, students are getting a loan at a rate that 

they cannot get in the private sector right now, at the rate that is 

being offered right now, so whether it should be even lower than 

that, at a cost to the federal government, which would mean we 

couldn’t do as much for Pell Grants, that is not the choice that the 

administration has made. 

We think we have a rate that works for students and we keep 

that rate and put more funding into Pell Grants. 

Chairman MILLER. Ms. Shea-Porter. 

Ms. SHEA-PORTER. Thank you very much. I guess you know who 

I am going to be talking to first, right? 

Could you please explain to me—I have some questions about the 

program there. And in your testimony, you talk about ‘‘needs lifeof-loan servicing.’’ Could you please explain, in greater detail, what 

you meant by this and the benefits that you see? 

Mr. DROUIN. Yes, thank you, Congresswoman. From our standpoint, in the state of New Hampshire, we have never sold a loan 

outside the state of New Hampshire since the secondary market 

came into an existence. We have got about $1.5 billion outstanding 

right now in the student loan program, on that side. 

We attribute that to the fact that, as far as not selling a loan, 

curtails the default rate and delinquency rate on these loans. It 

also, from the standpoint of—we are the only constant that that 

student has throughout the life of this loan. We were there at the 

early awareness programs and we are there when they make their 

final payment on their student loan. 

It creates, as far as I am considered, a better, if you will, a better 

mousetrap, if you will, from the standpoint of looking at the student and making sure that they understand who they can deal 

with, throughout the life of their loan. 

Ms. SHEA-PORTER. Okay. So you are minimizing all the additional layers there. 

Mr. DROUIN. We do. We do, and as I have said before, we have 

always kind of looked at ourselves as the mini direct loan program 

in the state of New Hampshire for quite a few years. We were established in 1962, 3 years prior to the federal government even 

thinking about student loans. 

And so I think we have a lot of history there. And when I say 

a mini direct loan program, basically, it is from soup to nuts. We 

do the origination, the upfront work, right through payout. 

Ms. SHEA-PORTER. Do you think this would work just for New 

Hampshire or do you think this could help other states as well? 

Mr. DROUIN. Oh, I think we are not the ones who solely that invented this. There are quite a few agencies just like us. They call 

us bundled agencies. And I think it works out well from the standpoint of cost savings and I think it can work across the country. 

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

services. 

We have heard Mr. Drouin’s testimony that because of some of 

the thresholds set in recent opportunities to bid for servicing of the 

loans that the small, nonprofits, like NHHEAF, were shut out of 

the process and will be shut out of the process going forward. 
70 

Given NHHEAF’s exceptionally low default rates and its well-respected and appreciated status in New Hampshire, and I can attest 

to that, doesn’t NHHEAF represent exactly the type of services 

that you would like to retain and what steps are being taken by 

the department to ensure that services like NHHEAF will have 

this opportunity going forward? 

Mr. SHIREMAN. Well, we are in the middle of a procurement. It 

is currently being negotiated, so the amount that we can talk about 

some of the servicing issues, we will be able to talk more about 

that in coming months. 

But I would say that we have seen a lot of state agencies and 

state affiliated nonprofit organizations that are doing all things for 

students, in terms of financial literacy, outreach, and information, 

and that is the reason that we created a fund that goes to states 

that can be used for those kinds of purposes because we see the 

value in those. 

So we may need to have different kinds of funding mechanisms 

to continue these important works, but they are valuable and 

something we would like to continue. 

Ms. SHEA-PORTER. But in the end are you saying there is life for 

NHHEAF? 

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

is something we need more of. 

Ms. SHEA-PORTER. Okay, and will organizations like NHHEAF be 

at the table, as you work out these details and decide what direction you want to go? 

Mr. SHIREMAN. Absolutely. We have been meeting with all of the 

different associations and many of the entities for the past—during 

the transition, as well as since we have been in the administration. 

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

Chairman MILLER. If the gentlewoman would just yield, just on 

this point, my understanding is whether it is Sallie Mae or Citicorp 

or New Hampshire, that they would all continue to service their existing portfolio; is that correct? 

Mr. SHIREMAN. The current FFEL portfolio would continue—— 

Chairman MILLER. Whatever they have? 

Mr. SHIREMAN [continuing]. So there would not be some immediate end to the current portfolio of FFEL loans, so there will be 

a ramp down over time, a lot more loans in the Direct Loan Program, and those would be serviced by private sector entities that 

we contract with. 

Chairman MILLER. And that—okay. I won’t complicate it. Okay, 

thank you. 

Ms. SHEA-PORTER. Could I—— 

Chairman MILLER. It is complicated, but yes. 

Ms. SHEA-PORTER. Could I ask for one more minute, please, Mr. 

Chairman? 

Chairman MILLER. Yes, you still have some time. 
71 

Ms. SHEA-PORTER. Okay, thank you. I just wanted to make clear 

that, under the Ensuring Continued Access to Student Loans Act 

will they be servicing those loans? 

Mr. SHIREMAN. The loans that are being purchased by the department over the coming months, at least at the start, will need 

to be serviced by entities that we have contracts with, by the end 

of this summer and those would be the ones that are in the current 

procurement that was begun by the prior administration. 

The question of whether beyond that there might be more and 

more opportunity is something that we will entertain, when the 

current procurement is done, in the next month or so. 

Ms. SHEA-PORTER. Thank you. I yield back, thank you. 

Chairman MILLER. Thank you. 

Mr. Tierney. 

Mr. TIERNEY. Thank you, Mr. Chairman. I am glad this is all so 

crystal clear. Earlier we talked and we heard some of our colleagues talk earlier about all the wonders of competition on that. 

It seems to me that, you know, there really isn’t any pure competition in this at all. 

We have one pool of money, Mr. Shireman, I guess we have one 

pool of money, and if it were private companies or non-governmental companies I should say, on the other side, then they 

wouldn’t be getting subsidies and they wouldn’t be getting guarantees. 

So, if we really want a competition and allow them into the game 

and not give them subsidies and not give them guarantees, how 

would that change the competition do you think? Would those people stay in the business or would they get out? 

Mr. SHIREMAN. Well, I checked last night to find out what the 

interest rate would be on a personal, unsecured loan with somebody with good credit, like me, and it was 141⁄2 percent, fixed rate. 

That was a fixed rate. 

It looked maybe there were some where maybe I could get it 

down to eight or nine, in some special kind of circumstances, but 

people would be paying much, much higher interest rates, if they 

could get a loan. And usually, students at 18, 19 years old, don’t 

have much of a credit rating. 

Mr. TIERNEY. Right. I mean so it looks like we are just finding 

a way here to funnel money to the FFEL program people as an alternative to a direct loan, where we could just keep it on the direct 

loan here. The only difference might be some of the services, which 

you are also providing for in the new proposal, am I right? 

Mr. SHIREMAN. Absolutely. We are talking about two different 

ways of running a government program that uses the private sector 

and it is not a true government vs. private—— 

Mr. TIERNEY. And picks up costs along the way of marketing, of 

higher salaries, of profits—— 

Mr. SHIREMAN. Yes. 

Mr. TIERNEY [continuing]. Of all those things that means that 

the student gets a worse deal on his loan and the taxpayer gets a 

worse deal. 

Mr. SHIREMAN. Yes, there are a lot of added transactions there. 

Mr. TIERNEY. Right. So just one final thing on that point that my 

colleague raised a second, we right now are looking at a 6.8 percent 
72 

rate. Congress could change that rate, which would mean that the 

borrower student would actually get a benefit and pay less. 

When you talk about that being a cost, what you really mean is 

it would be less revenue into the government, not that you would 

have to put money out-of-pocket, but less revenue. 

Mr. SHIREMAN. It would be less revenue. In a low interest rate 

environment—— 

Mr. TIERNEY. Right, it would be less revenue. 

Mr. SHIREMAN. Right. 

Mr. TIERNEY. So it is not a cost, it is just less revenue. 

Mr. SHIREMAN. In the current environment, yes. 

Mr. TIERNEY. Right. And then that less revenue would mean less 

to go into a Pell Grant proposal that you have? 

Mr. SHIREMAN. Right. 

Mr. TIERNEY. So Congress could decide to split the baby on that 

and change the interest rate, put some more into Pell, but also give 

that student borrower more of an advantage than they currently 

have. 

Mr. SHIREMAN. Congress could make that decision, yes, sir. 

Mr. TIERNEY. Thank you very much. 

Mr. SHIREMAN. The President would have to sign the bill. 

Mr. TIERNEY. I have heard about that process. Thank you. I yield 

back. 

Chairman MILLER. Mr. Kildee. 

Mr. KILDEE. Thank you, Mr. Chairman. I apologize for not being 

here before. We had another hearing. First of all I see in the audience, Tom Butts who worked with Bill Ford to—you were kind of 

the obstetrician of the direct loan bill and he was the father of it. 

Good to see you here, Tom. I know the University of Michigan has 

used that very much and glad to see you here today. 

When I went to college back in 1947, you mentioned that you go 

by San Francisco State University and how huge it is now and, you 

know, that is true all over the country. 

Even small, community colleges, we didn’t have many community 

colleges in those days, but in my city, Mott Community College has 

grown and that is the entry point for so many students now and 

there has been a proliferation of that. 

So, higher education has really grown throughout the country, 

with a combination of financial means to get that student into a 

college. My dad had couldn’t borrow from the bank. 

I didn’t have any value to the bank or anything that they could 

get the money back on, so he just put his money together somehow 

and sent only one of his five children to college. That is all he could 

afford. 

So the loan program has been tremendous and I, myself, have 

felt that the Direct Loan Program has been a very, very important 

program in this, in helping students. I know the University of 

Michigan has used it very, very well in attracting students not only 

to its campus in Ann Arbor, where I went to school, but also its 

campus in Flint. 

But I do think that we have an enormous responsibility to make 

sure that the bottom line for this is what loan program or programs will best serve the students and best serve the taxpayers of 
73 

this country, and I will be reading the testimony to try to learn 

more about that. I thank you for the hearing this morning. 

Chairman MILLER. Thank you. Earlier on, I referred to a chart 

that we had that sort of demonstrates where we have been and 

what we have tried to do in the last couple of years, and that was 

really a transfer of money from the FFEL Program to the Pell Program that we did in the last 2 years, and then you see where the 

President wants to take us. 

I don’t think anybody involved in education, and again understanding the opportunity that we are trying to extend in this country to all qualified students to go and pursue a college education, 

cannot appreciate how serious of a decision this is. 

That is a significant amount of resources to be made available 

to those who struggle most financially, and again, we have a fair 

amount of evidence, good evidence, that a significant number of 

those students are deciding not to pursue a college education because they don’t believe that they can afford it. 

I think I can persuade most of them, certainly in the state of 

California, that they can knit together the resources to do that and 

receive a first class education. But as we have talked with various 

universities and colleges and community colleges around the country, I don’t think there is anyone that has suggested that this 

would not be a major boost to attracting those individuals to college. 

So to the question of, you know, we have had a fundamental 

change in this program because of the credit markets. We didn’t 

create it, you didn’t create it. It is part of the tragedy of the financial scandals. They spilled over onto every facet of financial life in 

this country and we are reeling from those activities that were undertaken. 

But the fact of the matter is we now have to decide, since we are 

essentially the only real player in the game here, with certainty, 

what we do. And, you know, we are still discussing with CBO what 

these various programs and changes would mean or not mean. 

But the idea that we could just leave money on the table here 

when we know the struggle that these students and families are 

engaged in to try to pay for an education is not a minor decision. 

And the administration has given us a proposal where they want 

to go. Whether it is an entitlement or not an entitlement, certainly 

over the next 10 years you can see your way clear to a very significant addition of resources. 

You know, what we don’t want to have happen is where we are 

back to the left of the chart there, where we were sort of on a flat 

line, but the cost of college never broke a sweat, you know, in going 

above that and we saw the ability to afford that continue to be diminished for these individuals or, well, diminished and they ended 

up taking on much more debt. 

And I think there is sort of a consensus in the country that more 

and more debt is not the answer. Chancellor Reed and a lot of 

other people at this table agree, something more has to—Buck 

McKeon has been a leader on this—something more has to be done 

to get support. 

We need some partners with these institutions, especially the 

public institutions where the states, for a whole host of reasons, 
74 

walked away from maintaining that effort that they had 10 years 

ago and 15 years ago. We somehow have to recreate that partnership. 

But I know that, you know, there has been some suggestion that 

this is all a done deal, that this has all been very cavalier. This 

is a very big important question. We are moving from a system 

that, in many ways, worked very well. 

I always thought it was too expensive, and I was always stunned 

every year when George Bush’s budget said, well, you know, here 

is the money on the table if you guys want to do something about 

it, and finally it happened. 

I mean I think there is agreement that there is a serious cost to 

the way that this program has been run. What we do with that is 

an important question for the members of the committee, and I 

think you saw that in the attendance of the first part of this hearing. Unfortunately, we were interrupted by a vote. 

But what we would like to do is to stay in touch with you, obviously, as we wind our way through this and consider what options 

we want to put before the committee and the Congress, but I think 

it is very important that this committee do address this matter. 

And I haven’t gotten in the habit of telling President Obama ‘‘no’’ 

yet, so we will proceed here, because it is a very, very important 

decision in terms of the resources that we can put behind those 

most financially challenged to educate their children. 

It is just not much more complicated than that and we are talking about young people who are fully qualified to take advantage 

of a college education, and that is what this committee exists for 

is to try to expand that opportunity. 

So, thank you for your time, your expertise and my apologies for 

the interruption. I know some of my colleagues, because I was talking to them on the floor, they had scheduling conflicts, but I think 

they may have some questions for you. 

I would hope if we submit them to you, you would be able to get 

them back to us. We will have them single spaced and typed or 

double spaced and typed. But I think they do have some questions. 

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

you very much. 

[The prepared statement of Mr. Petri follows:] 

Prepared Statement of Hon. Thomas E.Petri, a Representative in Congress 

From the State of Wisconsin 

I want to thank Chairman Miller and Ranking Member McKeon for holding today’s hearing on student loan reform. 

I fully support the President’s proposal to end the Family Federal Education Loan 

(FFEL) Program and originate all new federal student loans through the Direct 

Loan Program. 

For over two decades, I have argued that our student loan system has unnecessarily lined the pockets of lenders and middlemen at the expense of students and 

taxpayers. Recently, the Congressional Budget Office reported that this change 

would save $94 billion over ten years. That’s a fantastic amount, and it illustrates 

how rich the subsidies are to the financial institutions which participate in the student loan program, and why they have fought tooth and nail to keep the guarantee 

program going. 

Besides being costly to taxpayers, the FFEL program has also been plagued by 

abuse and scandal. For instance, last Congress it was found that from 2001-2006 

nonprofit lenders illegally claimed, according to one estimate, over $1 billion in improper subsidies by knowingly manipulating a loophole in the law. And then there 

was the ‘‘pay for play’’ scandal when it was revealed that college aid administrators 
75 

and Department of Education officials in charge of overseeing FFEL received special 

favors, benefits and kickbacks from lenders in exchange for steering students to 

their loans. 

Last year, the credit crunch further highlighted the drawbacks of FFEL. Many 

lenders cut back their lending to certain institutions, particularly community colleges. Finding FFEL unreliable, hundreds of schools switched to the Direct Loan 

Program where the availability of money has never been in question. Congress was 

forced to pass emergency legislation to allow access to Treasury funds so they could 

continue to make their loans. Therefore, according to the President’s Budget for the 

2008-2009 school year, 75% of all federal student loans will be financed by Treasury 

funds. 

Today’s hearing will highlight the benefits of originating all new loans through 

the Direct Loan Program. Besides the tremendous cost savings to taxpayers, I expect several of the witnesses to detail their school’s positive experience switching 

to the Direct Loan Program and the benefits the program provides to both students 

and college aid administrators. 

Advocates of FFEL will also present various complex counter proposals to keep 

their role in the federal student loan program. One only has to look at the author 

of the various proposals to understand the winners and losers. The fact is that for 

far too long the FFEL program has been structured in the interests of lenders and 

other middlemen. The Direct Loan Program is tested and has proven to be the most 

cost effective, reliable, and efficient federal student loan program. 

[Additional materials submitted by Mr. Miller follow:] 

April 20, 2009. 

Hon. GEORGE MILLER, 

U.S. Congress, 7th District, Rayburn House Office Building, Washington, DC. 

DEAR REPRESENTATIVE MILLER: As Chair of the California Student Aid Commission, I write to inform you that the California Student Aid Commission has voted 

to support President Obama’s concept in the 2010 Budget proposal to originate all 

new federal student loans through the Direct Loan Program and to use the savings 

to create a stronger and more reliable Pell Grant program. 

The Commission supports the President’s proposal even though, perhaps ironically, we are designated by the United States Department of Education as the student loan guarantee agency for California under the Federal Family Education Loan 

Program (FFEL Program), and are the second largest guarantee agency in the country. If you make California’s position known, it may well induce other states to follow. We shall certainly communicate it to all members of our congressional delegation. 

In addition to its FFEL Program responsibilities, the Commission is the primary 

agency in California responsible for the administration of student financial aid programs supported by the state and federal governments, including the state-funded 

Cal Grant Program. 

Since the State of California has determined that the student loan guarantee 

business is not a core mission of state government—to the extent that the State is 

currently attempting to sell its student loan guarantee program assets and forego 

the State’s involvement in FFEL Program administration—I believe the Commission’s perspective on this issue emanates solely from a desire to act in the best interests of students. 

We agree that the President’s goal of reducing unnecessary lending costs in order 

to strengthen the Pell Grant program is in the best interests of students. 

The Commission also adopted a motion stating that the Direct Loan Program 

should provide quality services essential for students, including, among other 

things, default aversion, outreach, early withdrawal counseling, and training for financial aid officers, and that those services should specifically address the diverse 

needs of the students and institutions. 

The Commission, however, does not have in mind any particular proposal by 

which these services would be provided. 

I and the Commission’s Executive Director, Diana Fuentes-Michel, would be 

pleased to discuss these matters with you. The Executive Director and I serve as 

the Commission’s contacts on all matters relating to the President’s Budget Proposal 

and Direct Loan Program. We applaud your continuing good work in this vital area, 

and we want to help in any way that we can. 

Sincerely, 

BARRY KEENE, Chair, 

California Student Aid Commission. 
76 

*Congressional Budget Office (CBO) March 2009 estimate of the effect of President Obama’s 

budget proposal to cancel the Federal Family Education Loan Program (FFELP) and move all 

student loans into the Federal Direct Student Loan Program (DL). 

NATIONAL DIRECT STUDENT LOAN COALITION, 

May 21, 2009. 

Hon. GEORGE MILLER, Chairman, 

Committee on Education and Labor, U.S. House of Representatives, Washington, DC. 

DEAR CHAIRMAN MILLER: President Obama’s proposal to transfer $94 billion in 

lender subsidies to students merits your support.* The President’s education budget 

proposal includes changes to the status quo of higher education funding that will 

result in stabilizing and increasing Federal Pell Grant aid for needy, qualified students. Under the President’s plan, Pell Grants for financially at-risk students would 

not only increase significantly in the short term, but also increase systematically 

going forward by moving Pell from discretionary to entitlement spending and indexing increases to the Consumer Price Index (CPI) plus 1%. It is not fiscally responsible for the government to support two student loan delivery systems. However, for 

the past 15 years, Congress has supported both the Federal Family Education Loan 

Program (FFELP) and the Federal Direct Student Loan Program (DL). 

• FFELP ideally (though not currently) uses private capital to loan to students, 

encouraged to do so by statutorily set federal subsidies, special allowance payments, 

and guarantees against defaults. Recently, however, it has been funded by the 

Treasury just like DL. There are thousands of entities who participate in FFELP 

loan delivery, including thousands of banks and other lenders, more than 30 guaranty agencies and numerous servicers. 

• The DL is a simplified system in which students receive their loans from the 

Department of Education, through their school, using the same process for delivering Pell, ACG, and SMART. 

Today, Congress leaves the choice of loan delivery selection to the discretion of 

schools. However, this allows colleges and universities to decide how $94 billion in 

taxpayer subsidies will be spent. We are not aware of any other government program where this is allowed. 

You have undoubtedly heard from FFELP industry lobbyists arguing against the 

President’s proposal, as well as from organizations proposing hybrid loan delivery 

ideas that are incomplete, unproven, and inherently more expensive for taxpayers 

than DL. As a grass-roots organization representing financial aid administrators at 

over 1600 Direct Loan schools, we want to reassure you that the DL program is 

strong, proven and simple and has been working very well for students and schools 

for over 15 years. We have prepared the enclosed fact sheet to provide you additional information on the DL program that we hope will assist you as you deliberate 

this historic proposal to shift precious federal resources from lenders to students. 

Please accept our best wishes and heartfelt thanks for all you do for our students, 

assisting them in affording the higher education they so desperately want and our 

country needs. You may call upon any member of the NDSLC’s executive board for 

further information, data, or clarification. 

Sincerely, 

ROBERTA JOHNSON, Chair, 

National Direct Student Loan Coalition Executive Council, 2008-09. 

Direct Loan Facts 

Is choice of lender or delivery system an essential element of a successful federal 

student loan system? 

• In no other federal financial aid program are schools or recipients provided a 

choice of fund delivery methods 

• Loan benefits are statutorily set and virtually no FFELP lenders are providing 

differentiated benefits; the concept of ‘‘choice’’ is not relevant. 

Won’t a move to DL increase the national debt? 

• Direct Loans are an investment that pay for themselves and even make a profit 

for the government. While the proceeds of Treasury auctions used for DL may be 

temporarily part of the national debt, the debt is paid for by the repayment of the 

loans. FFELP loans are considered a ‘‘contingent liability’’ of the federal government 

and, as such, are also a part of the total real debt of the government. 

• Issues with private liquidity led to passage of the Ensuring Continued Access 

to Student Loan Act of 2008. Through ECASLA, many of the FFELP loans made 

for FY08 are already owned directly by the federal government. 

Can the Department of Education provide superior, consistent service in DL? 
77 

• Proven through repeated internal measurements and feedback from DL schools 

and borrowers, the U.S. Department of Education provides consistent and superlative service from origination of loans and borrower contact, through servicing and 

eventual collections. Schools continue to report their high satisfaction with contractors selected and hired by the Department to handle the DL operations. These contractors are selected based on competitive bidding process with compensation tied 

to performance measures. • Servicing in DL is handled by private sector companies, under competitive contract to the government Current FFELP servicers are now bidding on these contracts as DL expands. It is disingenuous to argue that the service would be worse, 

given the servicers would be the same as in FFELP. • FFELP schools are reporting that they are having trouble finding lenders for 

their students, with many community colleges virtually black-listed by FFELP lenders. Will default rates go up if all schools use the DL delivery system? 

• The Department of Education has published the comparative default rates for 

DL and FFELP for each year in which the programs have operated concurrently. 

In each year except two, the DL default rate has been about 20% lower than in 

FFELP. • In the FFELP profit model, there exists a perverse incentive in which profits 

are increased when borrowers default, as late fees, penalties, and collection costs are 

capitalized before lenders are reimbursed for the defaulted loans. Balances are so 

high as a result, that many borrowers can never recover. • In the DL model, there is no profit motive driving servicers to increase borrower 

indebtedness. In fact, they are rewarded for keeping defaults down. Borrowers have 

no reason to default since Income Based Repayment and Income Contingent Repayment options can provide relief to all, regardless of their financial circumstances. 

What about the loss of services that lenders and guaranty agencies provide? 

• The non-statutory outreach programs currently provided by many guarantors 

can be worthwhile. However, the continued existence of these programs is not contingent upon FFELP’s existence, and could certainly be paid for by Congress outside 

of the guaranty agency funding structure. • Some FFELP lenders, guarantors, and servicers provide training to FFELP 

schools, as well as assistance in default management and financial literacy programming; however, their training programs are duplicative and therefore unnecessary: • The Department of Education provides extensive training to all schools in all 

areas of federal financial aid management, including DL. • The Department provides annual conferences, webinars, Dear Colleague Letters, etc., to educate financial aid administrators and others in legislative, regulatory, and operational issues. • The Department has a default management program called ‘‘Late Stage Delinquency’’ which has successfully assisted borrowers to prevent default. Schools are 

able to participate in the process or may leave the efforts to the Department. 

• Schools are not and should not be dependent upon lenders and guaranty agencies for financial literacy information for their students. Many schools have mandatory financial literacy courses, and others provide superior web programs, including 

an exceptional course from the National Endowment for Financial Education available to all institutions at no cost. 

Will the loss of FFELP mean employee layoffs? 

• It is expected that current FFELP entities will participate in the competitive 

bidding process and become new DL contractors for the U.S. Department of Education as volume shifts from FFELP to DL. (Sallie, NelNet, and other FFELP lenders have already announced their intention to do so.) Therefore, many FFELP employees will not see job loss, just job change. 

• Many of the employees engaged in FFELP activities are involved in FFELP 

servicing operations. Their companies have billions in outstanding student loans 

that will continue to need servicing and these FFELP servicers are in a position to 

compete for servicing contracts with the government. It is incorrect to state that all 

of these employees will be laid off if the President’s proposal is adopted. 

Has competition among FFELP lenders and between DL and FFELP really resulted in improvements to both programs? 

• Undoubtedly, the competition among FFELP lenders has resulted in improvements to FFELP. 

• Historically, the U.S. Department of Education has not sought to increase DL 

market share since its inception and as such has not competed with FFELP for market share. As a result, the Department’s improvements have been instigated by 

their mandate to manage all federal financial aid programs to the highest standards. 
78 

• The most significant improvement to DL delivery in recent years is the implementation of the Common Origination and Delivery (COD) system, which was created as a simplified and single method for all student financial aid to be disbursed 

to students, including PELL, ACG, SMART, and DL. 

Will it cost schools a significant amount of money or time to convert to Direct 

Lending? 

• Nearly 700 schools transitioned into the DL program for the 2008-09 academic 

year. Not one has indicated inordinate resources were required to convert to DL. 

• Many schools utilize enterprise software systems which already include DL 

modules as an option. Also, the U.S. Department of Education offers a software program (ED Express) which many schools use to process all federal aid. ED Express 

includes a DL module. 

• Schools that participate in PELL, ACG, or SMART already interface with the 

COD system. Transitioning to DL requires transmission of a few additional data 

fields. Schools can actually save money by not operating one computer platform for 

PELL, ACG, and SMART and a separate platform for loans. Staff and resources now 

spent operating two systems can be spent assisting students. 

U.S. CONGRESS, 

Washington, DC, May 22, 2009. 

Hon. GEORGE MILLER, Chairman; 

Hon. HOWARD P. ‘‘BUCK’’ MCKEON, Senior Republican Member, 

Committee on Education and Labor, Rayburn House Office Building, Washington, 

DC. 

DEAR CHAIRMAN MILLER AND RANKING MEMBER MCKEON: I respectfully request 

to submit the following letter to the record from the Bank of North Dakota for the 

hearing the Education and Labor committee held on May 21, 2009, entitled, ‘‘Increasing Student Aid through Loan Reform’’. I believe the Bank of North Dakota’s 

insights will significantly contribute to this hearing. I appreciate your attention to 

this request. 

Sincerely, 

EARL POMEROY, 

Member of Congress. 

May 21, 2009. 

Hon. EARL POMEROY, 

U.S. House of Representatives, Washington, DC. 

DEAR MR. POMEROY: Bank of North Dakota (BND) is the only state-owned Bank 

in the country. Our mission, established in 1919, is to promote agriculture, commerce, and industry. An educated workforce is crucial to further development of our 

state and that is why we strongly tie education to our mission. 

BND has been involved in the federal student loan program since 1967 when the 

program was called the Federally Insured Student Loan Program. In fact, BND 

made the first federally insured student loan in the nation. North Dakota has ensured that students attending school in the state will have access to a student loan 

program—either through a federal student loan program or by a state administered 

program in state statute. Our residents are assured that reaching a higher education is possible and that the state supports BND as the administrator of such program(s). 

Also by state statute, BND administers the North Dakota guaranty agency. This 

agency guarantees loans for lenders, provides financial literacy education and training to students and colleges, and provides additional assistance to lenders in order 

to prevent defaults from occurring. The default rate for the guaranty agency is 3.1 

percent. This rate is a compilation of all lenders with loans guaranteed in North 

Dakota for FY2006. BND’s rate as a loan originator is 1.8 percent. 

BND serves a state that is 100 percent Federal Family Education Loan Program 

(FFELP). We have worked hard to gain the support of all the higher education institutions in North Dakota—both public and private. Today BND guarantees, originates, and services in excess of 70 percent of all student loans in the state. We pride 

ourselves on providing the best customer service possible and it is done locally, not 

through a national servicer. 

Profitability is not our primary motivator; BND is one of a few lenders who fulfill 

federal requirements while continuing to provide borrower benefits to keep student 
79 

costs down. BND profits have traditionally been sent back to the state general fund 

used to grow capital or to provide new economic development tools. 

Building on supporting an educated workforce; BND provides a companion alternative loan program—the Dakota Education Alternative Loan (DEAL) that fills the 

gap when the federal program limits have been reached. Unlike most alternative 

loans, DEAL loans are guaranteed by the North Dakota guaranty agency. As education costs continue to climb, we have used this program increasingly to meet student needs. Currently, BND processes our DEAL loans at a 5.99 percent fixed interest or a 2.69 percent variable interest rate. We understand the increasingly large 

debt burden students carry and believe that by pricing their loans fairly, we can 

maximize their ability to succeed in repaying their student loan debt. 

This philosophy may differ from other lenders. We believe we have North Dakota’s students’ best interests at heart. 

In addition to its administration role in student loans, BND also administers the 

state’s 529 college savings plan along with acting as the state administrator for all 

of North Dakota Dollars for Scholars chapters. Both programs assist North Dakota 

students reach their higher education goals without debt burden. 

In summary, BND, for the past 42 years, has been synonymous with student lending and that is what the citizens of North Dakota would like to preserve. 

Sincerely, 

ERIC HARDMEYER, President. 

Prepared Statement of Campus Progress Action 

Campus Progress Action, the youth division of the Center for American Progress 

Action Fund, a 501(c)(4) organization, respectfully submits this statement to the 

Committee on Education and Labor. We are grateful for the opportunity to share 

our views. 

Campus Progress Action works with and for young people to bring about progressive change on the issues of most importance to them, from economic opportunity, 

to environmental sustainability, to human rights. Campus Progress Action also 

works to train the next generation of young people, so our country will have leaders 

with the preparation, vision, and determination to address our nation’s most critical 

challenges. 

President Obama’s student lending proposal, contained in the budget he submitted to Congress, and included in the budget resolution passed by Congress on 

April 29, is a common sense idea that would help thousands of low- and middleincome Americans go to college. Because student loan repayment is guaranteed by 

the federal government, private lenders assume very little risk under the Federal 

Family Education Loan Program (FFELP), and yet they are rewarded handsomely— 

a subsidy that makes little economic sense. The President’s plan would end these 

wasteful, expensive subsidies and use government funds to lend directly to students 

under the Direct Lending Program. The savings would help support the President’s 

proposal to increase Pell grants to $5,550 for the 2010-11 school year and to make 

the Pell grant a mandatory government program guaranteed an increase (inflation 

plus 1 percent) each year. 

Campus Progress Action and our partner 501(c)(3) entities Campus Progress and 

the Center for American Progress have long advocated for a move to direct lending. 

See the articles collected at: http://fundingourfuture.campusprogress.org/2009/04/ 

291/ See also Pedro de la Torre III and Carmen Berkley, Aid for Students, Not 

Banks, Inside Higher Ed, April 21, 2009, http://www.insidehighered.com/views/ 

2009/04/21/delatorre 

The President’s proposal supports his pledge that ‘‘by 2020, America will once 

again have the highest proportion of college graduates in the world.’’ With the 

Lumina Foundation for Education estimating that by 2025 we will face a shortage 

of 16 million college-educated workers, this is an urgent call to action. The current 

economic crisis reminds us of the critical need to draw on talent across all communities in our country and give them the education and training needed to lead all 

sectors of our economy and society. In addition, Campus Progress Action is committed to economic opportunity and mobility for young people, and we want to work 

toward a world in which economic and social disadvantage do not prevent qualified 

young people from obtaining access to higher education. 

As President Obama noted, in reaction to his proposal student loan companies 

‘‘have mobilized an army of lobbyists’’ to protect their subsidies. These companies 

have powerful allies in Congress, whose support for the student loan industry cannot be separated from the extensive campaign contributions the industry provides 

to federal lawmakers. As New York Attorney General Andrew Cuomo found in an 
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extensive investigation, the loan companies also have used gifts to colleges and college administrators to gain allegiances on some campuses. Despite the support the 

loan companies have garnered through such questionable practices, many of the 

leading higher education associations have signed a letter supporting the President’s 

proposal. 

That the current FFELP system is rife with such corruption is one more argument for its elimination. In addition to the practices documented by Attorney General Cuomo, some lenders and guarantee agencies, such as NelNet, aggressively 

and, many argue, illegally, grew the volume of loans that would earn them extra 

subsidies from the Department of Education; these overpayments, now called the 

‘‘9.5% scandal,’’ totaled more than $1.2 billion over six years. 

Beyond its susceptibility to improper practices by loan companies, FFELP is also 

less reliable for students. In fact, Congress was forced to put the industry on life 

support—by purchasing FFELP loans in order to provide struggling companies with 

fresh capital—late last year. 

Campus Progress Action is moving swiftly and aggressively to promote public understanding of and support for the President’s proposal and to ensure that the 

voices of millions of young Americans—those paying for college and those who cannot afford to do so—are heard in the debate. Through research, events, grassroots 

organizing, social networking, and multimedia, Campus Progress will use real stories from young people to demonstrate how every dollar saved from the switch to 

direct lending can have a meaningful impact on the lives of students. 

Young people from all economic backgrounds deserve access to a higher education, 

and that access should in no way be limited or hindered by wasteful subsidies to 

private companies. 

We are urging people to take action on this issue by visiting: http:// 

www.campusprogress.org/StudentsOverBanks 

UNIVERSITY OF CALIFORNIA, 

FRANKLIN STREET, 

Oakland, CA, April 29, 2009. 

Hon. GEORGE MILLER, 

2205 Rayburn House Office Building, Washington, DC. 

DEAR CHAIRMAN MILLER: The University of California, with more than 220,000 

students on ten campuses, supports the proposal President Obama outlined in his 

FY 2010 budget to fund Pell Grants with mandatory dollars and make this program 

a true student entitlement. Congress has an opportunity this year to add significant 

new funds to student financial aid and to provide regular, predictable annual adjustments to the maximum Pell Grant award. 

To help achieve the increase in funding for the Pell Grant program, UC supports 

the President’s proposal to save $94 billion by eliminating the Federal Family Education Loan Program. UC will work with Congress to ensure a smooth transition 

for institutions that would need to convert to the Direct Loan Program. 

Nearly one-third of UC undergraduates received Pell Grants—55,000 students— 

totaling more than $170 million in academic year 2007-2008, and there are even 

more today. These students and families, as well as students across the nation, will 

benefit from the 

Administration’s efforts to revitalize Pell and stabilize the funding to avoid the 

problems created by chronic shortfalls. 

The University urges your support for this proposal, which makes sound economic 

sense, represents good public policy, and is needed to improve meaningful access to 

college. 

Sincerely yours, 

MARK G. YUDOF, President, 

University of California. 
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[Additional materials submitted by Mr. McKeon follow:] 
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Prepared Statement of the Coalition of Higher Education Assistance 

Organizations 

To Members of the U.S. House of Representatives, Committee on Education and 

Labor: Thank you for the opportunity to present testimony to the Education and 

Labor Committee’s hearing on Increasing Student Aid Through Loan Reform. This 

testimony is presented on behalf of the Board of Directors of the Coalition of Higher 

Education Assistance Organizations. COHEAO is a coalition of more than 300 colleges, universities and commercial organizations with a shared interest in fostering 

improved access to postsecondary education. Our focus is on legislative and regulatory advocacy for Perkins and other campus-based student loan programs. 

The Perkins Loan Program is a campus-based program that represents a partnership between the Federal Government and the participating institutions of higher 

education. The institutions contribute one-third or more of Perkins funds as a match 

to the federal capital contribution. This amounts to institutional risk sharing in the 
109 

Perkins Program, and it also serves to multiply the federal taxpayer contribution 

to the Perkins Fund. 

As a result of the Federal-institutional partnership, the Perkins Loan is the best 

student loan available. No interest accrues during the in-school, nine-month grace, 

and deferment periods, an important benefit to students. There are no origination 

or guarantee fees, and the interest rate is fixed at 5%. There is a 10-year repayment 

period. 

The Perkins Loan program plays a critical role in our nation’s financial aid system, especially for the lowest-income and lower middle-income students. The Perkins Loan Program provides flexibility to the financial aid office so it can direct 

these low-cost loans to the students who most need them. For many who have no 

other options, Perkins makes the difference between attending college or not being 

able to go. 

COHEAO has advocated for many years for funding of the Perkins Loan Program 

and for improvements in it so that it can best serve students. In the Higher Education Amendments of 2008, several important improvements were made, including 

increasing the loan limits, expanding loan forgiveness options to firefighters, the 

military and some librarians, and increasing the authorized level for appropriations 

to $300 million. In addition, Congress expressed strong support for the program, 

noting in the final Conference Report: ‘‘It is the sense of Congress that the Federal 

Perkins Loan Program, which provides low-interest loans to help needy students finance the costs of postsecondary education, is an important part of Federal student 

aid, and should remain a campus-based aid program at colleges and universities.’’ 

In addition, the revolving funds system results in the funds being repaid and reused over and over again, so that future students will continue to benefit from capital contributions made as long ago as 1958. This is a unique feature in the student 

aid area, one that COHEAO believes is important to the functioning of the program 

and that will be increasingly important in years ahead. 

President Obama and Secretary Duncan have taken the welcome step of proposing a major expansion of the Perkins student loan program, calling for these lowest-interest, public service-oriented loans to be made to more students at more institutions. COHEAO has advocated funding for this critical loan program for many 

years, and has fought attempts to close it as misguided and lacking an understanding of the program’s value to students. 

However, COHEAO believes that students and the American people will be best 

served by maintaining the well-established infrastructure for operating a broadly 

expanded Perkins Loan program. We believe this can be accomplished while still accomplishing the worthy goal of expanding the program to include many more students and schools. The main hurdles that have to be overcome are federal accounting issues that actually do not affect federal expenditures. It is important to deal 

with these issues on their own terms rather than being forced to eliminate the campus-based backbone of the Perkins Loan program in order to deal with them. 

COHEAO urges Congress to retain the current subsidized Perkins Loan Program. 

Perkins Loan borrowers are students with high need and often have other loans. 

However, the proposed expanded program would not provide for that interest subsidy. Since students can seldom make interest payments while in school, interest 

would accumulate and significantly increase debt levels upon graduation. 

Families with Dependent Undergraduate Students comprise the largest percentage of Perkins borrowers. During Award Year 2006-2007, 27% percent of these families had an income under $25,000. Twenty-one percent of Perkins Loan borrowers 

are independent students. Thirty-six percent of these students have incomes below 

$12,000 with an additional 11% falling in the $12,000-$19,999 income range. Thus, 

47% of independent students have incomes less than $20,000. 

An undergraduate who borrows the maximum Perkins Loan each year would owe 

an additional $5,000 upon graduation. Some students would be forced to seek excessive part-time work that may be inconsistent with their studies, especially since 

many low-income students are challenged in preparation for college due to inadequate elementary and secondary education systems. We understand the desire to 

generate savings from the Perkins Loan Program, but we don’t believe that this 

should be done at the expense of Perkins Loan borrowers. 

Here are more of our proposals: 

Expand funding for the Perkins Loan Program so that it can serve more students 

and retain the in-school interest benefit. Expanding the program and providing for 

its ongoing funding could make higher education affordable to thousands more students every year. 

Make Perkins Loans available to more students at more schools without penalizing current students. The formula for allocating Perkins Loan federal capital contributions to schools for lending was designed to make sure that needy students at 
110 

older schools were not hurt when new schools joined the program. Making additional funds available will ensure that students at schools who don’t presently participate in the Perkins Program aren’t simply taking aid from students at schools 

who do participate. The controversial allocation formula for Perkins Loan capital 

contributions, which also is used for other campus-based aid programs, can be 

scrapped without hurting students at participating schools if Perkins is adequately 

funded, as the President proposes. COHEAO supports modifying the formula for 

Perkins Loan funding so that funds are targeted to institutions with high populations of students with substantial financial need. We believe this can be done 

without penalizing students at schools who now participate in the program, given 

the President’s expanded funding proposal. 

Make use of schools’ expertise in managing the Perkins Loan Program to best 

serve their students’ needs. Since the Perkins Loan Program was created in 1958 

as the National Defense Loan Program, colleges have had the flexibility to make 

loans available to students according to their need. Today, Perkins Loans remain 

a key tool for financial aid administrators to tailor aid to their students. Schools 

also collect loan repayments, either directly or by hiring a service provider who is 

accountable to them. Those that wish to remain responsible for loan collection 

should be allowed to do so. They have been successfully collecting Perkins Loans for 

many years. The latest Perkins default rate of 5.5% is comparable to the Direct 

Loan and FFELP default rates, an important achievement considering that Perkins 

Loans are specifically targeted to low-income students. In addition, schools have instituted financial literacy and customized default prevention programs to help their 

students on an individual basis. 

Retain the institutional match but phase it in for new schools There is no other 

entity within the federal loan processes that has a greater vested interest in the 

borrower’s successful repayment than that of the institution participating in the 

Perkins Loan Program. This is especially true since the institution has a substantial 

amount of its own funds involved, a risk sharing concept that should be retained 

in order to keep loan costs down. COHEAO does believe, however, that provisions 

should be made to reduce the institutional match in special circumstances. For example, new institutions that are joining the program could have their match requirement phased in over five years, with no match during the first year, when 

there would be additional administrative burdens on the institution. In addition, institutions with unusual funding constraints, such as those facing state budget cuts, 

could apply for a waiver of the institutional match requirement for a particular 

year. 

Allow schools to continue loan collection in order to achieve the best results for 

the program and its students. The experienced professionals at schools are best 

equipped to work with their former students. COHEAO members have found that 

a borrower who is behind on his or her payments will set things right once they 

realize that they are denying opportunity to other students at their alma mater. 

Rather than having the federal government responsible for all collections, COHEAO 

supports giving schools additional flexibility and tools that can be used before involving the government in the collection process. This is in the best interest of borrowers who may have circumstances that deserve careful, individualized consideration. 

Retain the public service cancellation benefits that are available now in the Perkins Program. These are more generous than in the Stafford Program and have 

drawn hundreds of thousands of students into public service over the years. Since 

the inception of the Federal Perkins Loan Program in 1958, over $1.16 billion in 

Perkins Loans have been forgiven for students who took advantage of program benefits. Today, Perkins Loan cancellation is available to public servants who work in 

16 different professions, including teaching, nursing, the military, law enforcement, 

the Peace Corps, firefighting, librarians and social work. 

For example, one COHEAO member university has received a total since 1958 of 

$166 million in federal capital contributions to its Perkins Loan revolving fund. It 

has contributed a total of $53 million in institutional funds to its Perkins Loan fund. 

Yet is has lent $912 million, benefiting 392,141 students. In addition, the University’s students now receive over $1 million in annual public service cancellations. 

Another COHEAO member university has contributed a total of $140 million in 

federal and institutional funds to the Perkins Loan revolving fund, but has made 

$690 million in loans to date. This has helped 429,500 students pay for college. A 

total of $30.2 million has been cancelled for students who worked in public service 

professions, 21.5 percent of the total loaned. 

The Perkins Loan cancellation benefits are especially advantageous to students 

because with a Perkins Loan, the borrower gets credit for each year he or she works 

in the qualifying public service profession, with full cancellation after five years. 
111 

This recognizes that borrowers should get credit for what they accomplish, without 

being punished by losing all cancellation benefits if their circumstances change. We 

believe this sort of incentive serves as a truly powerful way to attract young people 

to public service and, at the same time, reduces their loan indebtedness. 

In summary, COHEAO’s members are excited by the prospect of an Administration that joins with Congress to recognize that the Perkins Loan Program is an essential part of the financial aid system that makes higher education possible for millions of Americans. Expanding the funding available will make millions of additional 

students eligible for the program. We look forward to working with the Committee, 

the Congress and the Administration on ways to meet our mutual goals of expanding the program to more students and schools while also continuing to take advantage of the hands-on experience that schools have in administering the program for 

their students. 

We appreciate the opportunity to submit testimony to the Committee. Please contact us or any member of the Board of Directors if you have any questions. Please 

see our website is www.coheao.org for information about our association or contact 

the executive director, Harrison Wadsworth at hwadsworth@wpllc.net or 202-289- 

3900. 

[Questions submitted to the witnesses and their responses follow:] 

[VIA ELECTRONIC MAIL], 

May 28, 2009. 

RENE ́ DROUIN, President and Chief Executive Officer, 

Granite State Management & Resources, Concord, NH. 

DEAR MR. DROUIN: Thank you for testifying at the May 21, 2009 hearing of the 

Committee on Education and Labor on ‘‘Increasing Student Aid through Loan Reform.’’ 

Representative Carol Shea-Porter (D-NH), member of the Healthy Families and 

Communities Subcommittee and member of the Workforce Protections Subcommittee, has asked that you respond in writing to the following question: 

1. In your testimony you mention that you were unable to compete under the previous RFP. What specifically prevented NHHEAF’s participation in bidding for a 

servicing contract? 

Please send an electronic version of your written response to the questions to the 

Committee staff by close of business on Wednesday, June 3, 2009—the date on 

which the hearing record will close. If you have any questions, please do not hesitate to contact the Committee. 

Sincerely, 

GEORGE MILLER, 

Chairman. 

[VIA ELECTRONIC MAIL], 

June 1, 2009. 

Chairman GEORGE MILLER, 

Committee on Education and Labor, Rayburn House Office Building, U.S. House of 

Representatives, Washington, DC. 

DEAR CHAIRMAN MILLER: Thank you for the opportunity to testify before your 

committee and the opportunity to clarify my remarks regarding the NHHEAF Networks inability to bid for its own loans for servicing under the ECASLA program. 

I have responded to your question regarding NHHEAF’s participation in bidding for 

a service contract below: 

1. In your testimony you mention that you were unable to compete under the previous RFP. What specifically prevented NHHEAF’s participation in bidding for a 

servicing contract? 

Constraints to NHHEAF Participating in Title IV Student Loan Management/Servicing 

Background 

NHHELCO, the lending arm of The NHHEAF Network Organizations, participated 2008/2009 school year loans under ECASLA. Participated loans must be redeemed or PUT by September 30, 2009. In the event of a PUT ED becomes the 

owner of the participated loans and servicing is transferred to ED’s servicer. Granite 
112 

State Management and Resources (GSM&R), the servicing arm of The NHHEAF 

Network Organizations, prepared to submit an RFP response for the 

Phase I Solicitation Number: FSA-Title IV-09, Title IV Student Loan Management/Servicing in order to continue servicing NH originated loans as well as other 

loan volumes deemed appropriate by ED. Based on ED’s minimum loan volume 

servicing requirement in the initial WEB posting and Phase I RFP document, 

NHHEAF did not meet the Go/No-Go Factor eligibility requirement criteria for participation in Phase II of the solicitation process listed below: 

2.1 Go/No-Go Factor 

(1) Demonstrate experience in processing a minimum of 500,000 student loan 

sales conversions annually and servicing at least 2,000,000 student loans. Federal 

Student Aid reserves the right to utilize resources available to the Government to 

validate an offeror’s proposed experience, as appropriate. 

GSM&R currently services 422,000 loans. Additionally, annual new loan volume 

serviced by GSM&R is listed below: 

FY ’08 70,000 

FY ’07 166,000 

FY ’06 99,000 

If you should need additional information or clarification please feel free to contact me. 

Sincerely, 

RENE ́ A. DROUIN, President & CEO, 

The NHHEAF Network Organizations. 

[VIA FACSIMILE], 

May 28, 2009. 

Hon. ROBERT SHIREMAN, Deputy Under Secretary, 

U.S. Department of Education, 400 Maryland Avenue, SW, Washington, DC 

DEAR DEPUTY SECRETARY SHIREMAN: Thank you for testifying at the May 21, 

2009 hearing of the Committee on Education and Labor on ‘‘Increasing Student Aid 

through Loan Reform.’’ 

Representative Carolyn McCarthy (D-NY), Chairwoman of the Healthy Families 

and Communities Subcommittee, and member of the Health, Employment, Labor, 

and Pensions Subcommittee has asked that you respond in writing to the following 

questions: 

1. Financial literacy is a big concern of mine. Especially in the current economic 

climate, consumers need to be more aware and informed of how their finances work 

and how to avoid some common financial pitfalls. Does the Administration plan to 

continue to support important borrower services like financial literacy and default 

prevention that have traditionally been an integral part of FFEL? As these services 

are not now generally part of the Direct Loan program are you willing to maintain 

the current (FFEL) investment and extend it to all federal loan borrowers? 

2. Currently parents and Graduate students who have PLUS loans have an interest rate of over 8 percent. Given the current interest rate environment of almost 

the lowest rates ever, why shouldn’t we return to the pre July 1 2006 rate formula 

which if applied would provide for less than 2 percent interest rates? 

Representative Robert C. ‘‘Bobby’’ Scott (D-VA), member of the Early Childhood, 

Elementary and Secondary Education Subcommittee and member of the Healthy 

Families and Communities Subcommittee, has asked that you respond in writing to 

the following questions: 

1. When considering the elimination of the FFEL program, what conclusions did 

you draw as to the impact that this decision would have on Historically Black Colleges and Universities? 

2. Describe the trends of student loans (including the number of loans and the 

loan volume of the FFEL and the Direct Loan Program) that have been distributed 

since 1978. 

Representative Jason Altmire (D-PA), member of the Healthy Families and Communities Subcommittee and member of the Workforce Protections Subcommittee, 

has asked that you respond in writing to the following questions: 

1. Considering the uniqueness and complexity with the various Financial Aid 

Management Systems and School Information Systems, combined with the human, 

financial, technology and capacity resources necessary to modify systems and train 

staff, how does the Department of Education plan to support and transition 4,000+ 

schools of various types, sizes and locations into Direct Loans by July 1, 2010? 
113 

2. If the administration’s proposal is enacted, what is the Department’s contingency plan to cover the risk that may surface if they are not able to support and 

transition all 4000+ FFELP schools into Direct Loans by July 1, 2010? 

3. Can you please provide insight to what the Department has done to reach out 

to schools to better understand their concerns about transitioning to DL? 

4. FFEL loan providers have suggested that more than 30,000 jobs will be lost 

if the FFEL program is ended as proposed by the administration. These jobs include 

front end functions such as sales and marketing, as well as operations including 

origination, servicing, default prevention and collections. Are these claims claim 

valid? 

5. Current employees of FFEL loan providers have substantial expertise in working with borrowers to help them with their loan obligations. Will this expertise be 

lost as the employers of these loan providers cease operations? 

6. Concerns have been raised that the elimination of guaranty agencies and other 

loan providers will result in a lower quality of service to students. Is this a legitimate claim? What evidence against this claim can those that suggest the fear is unfounded offer? 

7. The administration’s proposal assumes that the elimination of FFEL guaranty 

agencies will not result in an increase in student loan delinquencies or defaults. On 

what basis has the administration reached its conclusion? 

8. How does the Department plan to contract for additional Direct Loan servicing 

capacity? Will it rely on the RFP process currently underway for servicing on loans 

put to the Department or will it hold a new competition? How will the Department 

determine the service provider for each school? 

9. The schools, students, and families of Pennsylvania depend on our current 

guaranty agency, PHEAA to provide essential services. These services include early 

college awareness and financial literacy programs as well as technical assistance 

and training for schools. They also provide crucial and successful default reduction 

and delinquency prevention services. Does the Department have a realistic proposal 

for maintaining and funding these services that will ensure that PHEAA and its sister agencies around the country have the resources they need to continue to carry 

out their public mission? 

Representative Carol Shea-Porter (D-NH), member of the Healthy Families and 

Communities Subcommittee and member of the Workforce Protections Subcommittee, has asked that you respond in writing to the following questions: 

1. The Department made the determination that it was necessary to provide an 

opportunity for servicers to compete for participation in the servicing of the 

ECASLA loans based on fact that the servicing of the ECASLA loans constituted 

a change to the existing servicing contract. Base on this past determination, it 

would seem that a similar determination should be made given that the additional 

private servicing as part of the President’s budget proposal constitutes a significant 

change, requiring an additional opportunity for competition, just as the servicing of 

the ECASLA loans required an opportunity for competition. Will there be another 

RFP for the servicing of loans under the restructuring plans? 

2. You have mentioned the bid process and the utilization of private servicers. 

What specific steps are being taken by the Department of Education to ensure that 

the small non-profits have an opportunity to compete for these servicing contracts? 

Representative Thomas Petri (R-WI), member of the Early, Elementary and Secondary Education Subcommittee has asked that you respond in writing to the following questions: 

1. Can you explain the financial incentives to guaranty agencies in preventing default on student loans relative to the subsidies they receive for collecting on defaulted student loans? 

2. Mr. Shireman, advocates for FFEL highlight the borrower services, such as default prevention that lenders and guarantors provide students. Besides cohort default rates which we know to be a fairly weak accountability measure, is there any 

oversight or accountability measures in FFEL regarding these services? Do we know 

if they are actually working? Or which ones work best? 

3. Although the Administration’s budget provides $2.5 billion over five years in 

grants to states to promote college access and student retention, many guaranty 

agencies see this funding stream as being insufficient or wanting their own specific 

funding stream. Can you comment on this critique? 

Representative Todd Platts (R-PA), Ranking Member of the Healthy Families and 

Communities Subcommittee, and member of the Health, Employment, Labor, and 

Pensions Subcommittee has asked that you respond in writing to the following questions: 

1. The two school systems represented here today, Penn State, and the entire 

California State School system are very large entities. My District contains a num-
114 

ber of small and mid-sized institutions. If we move forward with the Administration’s proposal to convert all schools to the Direct Lending program, how can the 

Department of Education ensure that smaller schools will get the same loan servicing assistance that their larger counterparts will receive? 

2. I have heard from schools that have historically participated in the Direct Loan 

program that they felt they received better service through the Direct Loan program 

before the recent influx of participating schools. What specific steps has the Department of Education taken to ensure that it will have the capacity to service ALL 

schools in the Direct Loan program by the end of 2010, as the Administration proposes? 

Representative Joe Wilson (R-SC), member of the Health, Employment, Labor, 

and Pensions Subcommittee and member of the Workforce Protections Subcommittee has asked that you respond in writing to the following questions: 

1. You propose to stop new FFEL loan originations as of July 1, 2010. How many 

schools will need to transition from FFEL to Direct Loans between today and July 

1st? 

2. While some schools with tremendous resources have said making the transition 

to Direct Lending is relatively easy, many schools are projecting that they will incur 

additional administrative costs and face additional compliance risk as a result of 

being required to convert to the Direct Loan program. Has the Department produced 

an estimate of the costs of transitioning to the Direct Loan program for a small to 

medium size independent college? What are those costs? 

3. Will the administration provide direct financial assistance to schools to support 

their transition into the Direct Loan program? If so, what assistance will be provided and when? 

Please send an electronic version of your written response to the questions to the 

Committee by close of business on Wednesday, June 3, 2009—the date on which the 

hearing record will close. If you have any questions, please do not hesitate to contact 

the Committee. 

Sincerely, 

GEORGE MILLER, 

Chairman. 

Responses From Mr. Shireman to Questions Submitted 

DEAR MR. CHAIRMAN: Thank you for your committee’s follow up questions from 

the May 21, 2009, hearing, ‘‘Increasing Student Aid Through Loan Reform.’’ Please 

see the enclosed document for responses to the questions that members of the committee submitted. 

If you have any issues or questions about the Department’s responses, please contact Gabriella Gomez, Assistant Secretary for the Office of Legislation and Congressional Affairs at the Department, at 202-401-0020. 

Sincerely, 

BOB SHIREMAN. 

Representative Carolyn McCarthy 

Question: Financial literacy is a big concern of mine. Especially in the current economic climate, consumers need to be more aware and informed of how their finances 

work and how to avoid some common financial pitfalls. Does the Administration 

plan to continue to support important borrower services like financial literacy and 

default prevention that have traditionally been an integral part of FFEL? As these 

services are not now generally part of the Direct Loan program are you willing to 

maintain the current (FFEL) investment and extend it to all federal loan borrowers? 

Mr. Shireman: The need for better financial literacy, particularly among our 

young adults, has been placed under a spotlight by recent economic issues faced by 

our nation. Traditionally, lenders and guaranty agencies participating in the Federal Family Education Loan (FFEL) program have developed entrance and exit 

counseling tools that have been used by schools to assist borrowers in understanding their financial obligations. At the same time, the Department has provided, and will continue to provide, these tools to schools participating in the William D. Ford Direct Loan program. Similarly, the Department provides default prevention assistance to borrowers with loans under the Direct Loan program just as 

the lenders and guaranty agencies do in the FFEL program. The availability of financial literacy services should not turn on whether a lender or guaranty agency 

has extra resources. The administration’s proposed College Access and Completion 

Fund program would include funds that would allow states to continue college out-
115 

reach and information activities, including financial literacy training that goes beyond student loans. 

Question: Currently parents and graduate students who have PLUS loans have 

an interest rate of over 8 percent. Given the current interest rate environment of 

almost the lowest rates ever, why shouldn’t we return to the pre-July 1, 2006, rate 

formula, which, if applied, would provide for less than 2 percent interest rates? 

Mr. Shireman: Long-term fixed-rate loans are available at a higher interest rate 

than loans with rates that adjust every few months, such as those that are currently 

at historic lows. Reducing rates on federal student loans would place greater risk 

and cost on taxpayers. Although Congress could decide to change the statute, the 

administration believes these funds are better used for Pell Grants and other student financial assistance programs serving low-income populations. 

Representative Robert C. ‘‘Bobby’’ Scott 

Question: When considering the elimination of the FFEL program, what conclusions did you draw as to the impact that this decision would have on Historically 

Black Colleges and Universities? 

Mr. Shireman: The delivery mechanism for the William D. Ford Direct Loan program is built on the Common Origination and Disbursement (COD) System used by 

the Department to deliver Pell Grants, Academic Competitiveness Grants, National 

SMART Grants, and TEACH Grants. HBCUs and other institutions of higher education—both large and small—have been able to adapt readily. For the relatively 

small number of institutions that do not offer Pell Grants, such as graduate-only 

Clark Atlanta University, a one-time adjustment to their business processes will be 

necessary. This change will result in each institution working with a single entity 

originating loans instead of the multiple lenders that they deal with today. We have 

been reaching out to institutions to make sure they have enough time and assistance for a successful transition to direct lending. 

Question: Describe the trends of student loans (including the number of loans and 

the loan volume of the FFEL and the Direct Loan Program) that have been distributed since 1978. 

Mr. Shireman: The requested information is provided in the attached table. 
116 

DIRECT LOAN PROGRAM 

Fiscal Year 

Consolidation Loans PLUS Loans Stafford Subsidized Loans Unsubsidized Loans Direct Loan Total 

Volume ($) No. of Loans Volume ($) No. of Loans Volume ($) No. of Loans Volume ($) No. of Loans Volume ($) No. of Loans 

1994 ................................................. .............................. .................. 71,135,741 12,335 533,586,511 131,268 213,818,203 55,001 818,540,456 198,604 1995 ................................................. 319,827,446 11,769 392,136,544 68,421 2,888,040,722 775,101 1,335,494,334 365,862 4,935,499,047 1,221,153 1996 ................................................. 1,035,648,522 80,507 774,413,535 139,063 5,070,081,229 1,555,998 2,569,976,666 803,719 9,450,119,952 2,579,287 1997 ................................................. 1,369,159,000 89,930 878,163,068 152,287 5,658,864,589 1,724,892 3,221,673,576 977,995 11,127,860,233 2,945,104 1998 ................................................. 2,427,511,901 106,653 1,020,223,689 169,945 5,640,707,200 1,736,332 3,426,742,721 1,034,583 12,515,185,512 3,047,513 1999 ................................................. 7,973,130,807 410,033 1,020,812,774 167,655 5,290,759,591 1,618,272 3,494,201,083 1,011,096 17,778,904,254 3,207,056 2000 ................................................. 5,418,255,434 270,845 1,224,546,074 189,273 5,457,099,337 1,588,249 3,895,894,617 1,046,641 15,995,795,462 3,095,008 2001 ................................................. 7,772,817,303 369,512 1,270,394,823 184,754 5,174,292,505 1,503,851 3,879,679,931 1,028,478 18,097,184,562 3,086,595 2002 ................................................. 8,902,127,749 365,388 1,426,990,460 193,648 5,450,652,409 1,571,719 4,240,365,153 1,099,884 20,020,135,772 3,230,639 2003 ................................................. 6,679,506,841 298,258 1,690,575,674 220,317 5,644,253,828 1,606,076 4,407,467,375 1,119,575 18,421,803,718 3,244,226 2004 ................................................. 7,713,186,196 330,512 2,054,456,228 245,523 5,781,985,500 1,624,741 4,612,168,789 1,137,098 20,161,796,713 3,337,874 2005 ................................................. 15,765,230,978 645,426 2,188,106,154 247,978 5,650,724,391 1,584,375 4,731,126,241 1,138,602 28,335,187,764 3,616,381 2006 ................................................. 19,385,219,165 755,486 2,205,957,766 235,775 5,383,233,351 1,497,139 4,587,051,900 1,081,044 31,561,462,183 3,569,444 2007 ................................................. 3,507,514,220 150,970 2,255,198,201 233,094 5,542,522,663 1,455,270 4,707,087,502 1,037,339 16,012,322,586 2,876,673 2008 ................................................. 5,839,603,081 207,169 3,204,964,020 297,374 7,380,388,668 1,783,261 7,627,694,455 1,649,244 24,052,650,224 3,937,048 2009 ................................................. 16,431,482,111 470,757 3,775,715,237 455,063 8,463,896,102 2,495,393 9,596,054,954 2,683,306 38,267,148,404 6,104,518 

Grand Total ......................... 110,540,220,753 4,563,215 25,453,789,990 3,212,505 85,011,088,598 24,251,937 66,546,497,500 17,269,467 287,551,596,841 45,232,925 

Note: Totals for 2009 reflect estimated activity for the entire year 

FFEL PROGRAM 

[Not Including ECASLA Programs] 

Fiscal Year 

Consolidation Loans PLUS Loans SLS Loans Stafford Subsidized Loans Unsubsidized Loans FFEL/Non-ECASLA Total 

Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans 

1978 ....... ............................ .................. .......................... ................ .......................... ................ 701,840,203 372,974 ............................ .................. 701,840,203 372,974 1979 ....... ............................ .................. .......................... ................ .......................... ................ 2,174,270,000 1,134,360 ............................ .................. 2,174,270,000 1,134,360 1980 ....... ............................ .................. .......................... ................ .......................... ................ 3,858,150,000 1,911,760 ............................ .................. 3,858,150,000 1,911,760 1981 ....... ............................ .................. 24,640,000 9,790 .......................... ................ 6,555,740,000 3,071,880 ............................ .................. 6,580,380,000 3,081,670 1982 ....... ............................ .................. 58,960,000 24,030 27,280,000 11,700 5,251,890,000 2,434,320 ............................ .................. 5,338,130,000 2,470,050 1983 ....... ............................ .................. 129,360,000 51,620 96,800,000 37,800 5,817,930,000 2,654,200 ............................ .................. 6,044,090,000 2,743,620 1984 ....... ............................ .................. 170,720,000 65,860 154,000,000 60,300 6,680,340,000 2,986,320 ............................ .................. 7,005,060,000 3,112,480 
117 

1985 ....... ............................ .................. 222,640,000 84,550 228,800,000 87,300 7,476,890,000 3,349,720 ............................ .................. 7,928,330,000 3,521,570 1986 ....... ............................ .................. 212,080,000 81,880 245,520,000 95,400 7,164,500,000 3,139,960 ............................ .................. 7,622,100,000 3,317,240 1987 ....... 262,615,879 17,762 284,240,000 97,010 726,880,000 257,400 7,642,430,000 3,203,440 ............................ .................. 8,916,165,879 3,575,612 1988 ....... 641,051,919 45,398 476,080,000 158,420 1,775,840,000 644,400 8,238,730,000 3,329,480 ............................ .................. 11,131,701,919 4,177,698 1989 ....... 683,396,589 49,354 658,240,000 212,710 1,870,000,000 713,700 8,537,770,000 3,387,440 ............................ .................. 11,749,406,589 4,363,204 1990 ....... 816,797,019 55,907 771,760,000 242,970 1,497,094,403 551,093 8,658,866,077 3,304,996 ............................ .................. 11,744,517,500 4,154,966 1991 ....... 1,115,705,613 71,906 943,360,000 292,810 1,647,267,518 584,622 9,385,562,726 3,512,852 ............................ .................. 13,091,895,857 4,462,190 1992 ....... 1,358,610,961 83,136 1,138,005,492 349,984 1,952,933,657 676,236 10,046,650,502 3,674,417 ............................ .................. 14,496,200,612 4,783,772 1993 ....... 1,484,159,987 83,619 1,155,574,259 304,387 2,726,513,080 739,746 11,202,850,857 3,766,255 901,542,727 380,097 17,470,640,910 5,274,103 1994 ....... 1,992,532,245 110,165 1,483,565,386 309,291 1,654,123,210 503,663 13,276,449,718 4,203,650 4,219,498,456 1,211,892 22,626,169,015 6,338,661 1995 ....... 3,227,303,674 206,884 1,455,648,219 270,551 .......................... ................ 11,492,996,046 3,528,214 5,789,106,418 1,701,142 21,965,054,357 5,706,791 1996 ....... 4,074,655,077 261,335 1,473,583,387 255,160 .......................... ................ 10,433,243,733 3,096,960 5,871,037,779 1,644,279 21,852,519,976 5,257,734 1997 ....... 3,998,401,328 203,534 1,737,686,709 282,058 .......................... ................ 10,727,129,433 3,178,247 6,760,361,632 1,814,795 23,223,579,101 5,478,634 1998 ....... 3,353,209,551 162,942 1,908,313,559 301,581 .......................... ................ 10,764,806,761 3,183,913 7,283,686,207 1,905,777 23,310,016,077 5,554,213 1999 ....... 4,917,972,742 205,684 2,074,486,590 311,983 .......................... ................ 10,566,374,757 3,104,338 7,919,742,290 1,988,008 25,478,576,379 5,610,013 2000 ....... 6,588,622,659 243,125 2,405,432,780 340,716 .......................... ................ 11,160,709,135 3,270,690 9,108,932,546 2,240,906 29,263,697,120 6,095,437 2001 ....... 9,411,520,436 319,355 2,726,888,248 366,704 .......................... ................ 11,909,461,955 3,508,999 10,179,708,670 2,493,719 34,227,579,308 6,688,777 2002 ....... 22,907,047,646 731,960 3,200,803,176 403,393 .......................... ................ 13,430,701,706 3,965,045 11,967,510,188 2,908,346 51,506,062,716 8,008,744 2003 ....... 35,223,215,400 1,256,173 4,064,536,508 476,225 .......................... ................ 15,587,370,202 4,558,823 14,178,557,986 3,388,178 69,053,680,096 9,679,399 2004 ....... 36,082,038,079 1,241,235 4,111,628,579 452,583 .......................... ................ 13,033,511,202 3,784,853 12,337,987,509 2,906,898 65,565,165,368 8,385,568 2005 ....... 54,589,284,588 1,989,579 5,077,757,232 529,840 .......................... ................ 15,553,731,527 4,492,551 15,344,090,363 3,551,802 90,564,863,710 10,563,772 2006 ....... 72,541,481,669 2,633,118 6,669,423,005 622,284 .......................... ................ 17,395,566,988 5,012,020 17,444,512,100 4,001,108 114,050,983,762 12,268,531 2007 ....... 47,268,022,607 1,675,491 6,667,933,350 603,288 .......................... ................ 16,496,978,117 4,594,767 17,300,310,703 3,817,123 87,733,244,777 10,690,669 2008 ....... 9,270,170,988 287,691 3,101,126,165 270,858 .......................... ................ 9,765,470,949 2,603,723 11,219,697,386 2,514,211 33,356,465,488 5,676,483 2009 ....... 1,006,964,596 10,542 1,551,825,080 155,520 .......................... ................ 4,225,903,846 1,198,780 5,394,207,087 1,327,115 12,178,900,608 2,691,956 

Total ... 322,814,781,253 11,945,895 55,956,297,722 7,928,054 14,603,051,868 4,963,360 305,214,816,438 102,519,946 163,220,490,045 39,795,396 861,809,437,326 167,152,652 

FFEL VOLUME FUNDED THROUGH ECASLA PROGRAMS 

Fiscal 

Year 

Consolidation 

Loans 

PLUS Loans SLS Loans Stafford Subsidized Loans Unsubsidized Loans FFEL/Non-ECASLA Total Total Loans 

Volume 

($) 

# of 

Loans 

Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans 

1978 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 701,840,203 372,974 1979 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 2,174,270,000 1,134,360 1980 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 3,858,150,000 1,911,760 1981 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 6,580,380,000 3,081,670 1982 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 5,338,130,000 2,470,050 1983 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 6,044,090,000 2,743,620 
118 

FFEL VOLUME FUNDED THROUGH ECASLA PROGRAMS—Continued 

Fiscal 

Year 

Consolidation 

Loans 

PLUS Loans SLS Loans Stafford Subsidized Loans Unsubsidized Loans FFEL/Non-ECASLA Total Total Loans 

Volume 

($) 

# of 

Loans 

Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans Volume ($) # of Loans 

1984 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 7,005,060,000 3,112,480 1985 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 7,928,330,000 3,521,570 1986 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 7,622,100,000 3,317,240 1987 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 8,916,165,879 3,575,612 1988 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 11,131,701,919 4,177,698 1989 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 11,749,406,589 4,363,204 1990 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 11,744,517,500 4,154,966 1991 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 13,091,895,857 4,462,190 1992 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 14,496,200,612 4,783,772 1993 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 17,470,640,910 5,274,103 1994 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 23,444,709,471 6,537,265 1995 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 26,900,553,404 6,927,944 1996 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 31,302,639,928 7,837,021 1997 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 34,351,439,335 8,423,738 1998 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 35,825,201,589 8,601,726 1999 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 43,257,480,633 8,817,069 2000 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 45,259,492,582 9,190,445 2001 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 52,324,763,870 9,775,372 2002 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 71,526,198,488 11,239,383 2003 .... .......... .......... .......................... ................ .......... .......... .......................... .................. .......................... .................. ............................ .................. 87,475,483,814 12,923,625 2004 .... .......... .......... 1,039,478,094 114,419 .......... .......... 4,517,691,893 1,311,910 4,170,098,812 982,498 9,727,268,800 2,408,828 95,454,230,881 14,132,270 2005 .... .......... .......... 955,526,953 99,705 .......... .......... 3,211,985,271 927,752 3,119,962,479 722,199 7,287,474,703 1,749,656 126,187,526,177 15,929,809 2006 .... .......... .......... 725,947,454 67,734 .......... .......... 2,201,807,099 634,386 2,245,837,610 515,110 5,173,592,163 1,217,229 150,786,038,108 17,055,204 2007 .... .......... .......... 1,798,801,575 162,748 .......... .......... 5,335,460,031 1,486,042 4,198,810,890 926,421 11,333,072,496 2,575,211 115,078,639,859 16,142,553 2008 .... .......... .......... 5,105,998,916 445,967 .......... .......... 13,289,069,579 3,543,204 14,814,607,390 3,319,791 33,209,675,886 7,308,962 90,618,791,598 16,922,493 2009 .... .......... .......... 7,150,602,922 716,615 .......... .......... 19,659,492,970 5,576,889 25,997,629,761 6,396,092 52,807,725,654 12,689,596 103,253,774,667 21,486,071 Total .... .......... .......... 16,776,355,915 1,607,188 .......... .......... 48,215,506,844 13,480,184 54,546,946,943 12,862,111 119,538,809,702 27,949,483 1,268,899,843,869 244,399,258 
119 

Representative Jason Altmire 

Question: Considering the uniqueness and complexity with the various Financial 

Aid Management Systems and School Information Systems, combined with the 

human, financial, technology and capacity resources necessary to modify systems 

and train staff, how does the Department of Education plan to support and transition 4,000+ schools of various types, sizes and locations into Direct Loans by July 

1, 2010? 

Mr. Shireman: The Federal Student Aid (FSA) system that originates Direct 

Loans is called the Common Origination and Disbursement (COD) system. COD is 

the same system that institutions of higher education use to originate Title IV 

grants (Pell, ACG, National SMART, and TEACH). Therefore, most institutions (and 

their computer systems) already interact with COD. The Department has ramped 

up, and is continuing to ramp up, its COD capacity to support 100 percent Direct 

Lending. 

The institutions that have recently transitioned to Direct Lending have done so 

with little or no problem. However, to ensure that all institutions are prepared, we 

have shifted human and capital resources to enable FSA to properly manage and 

support 100 percent school participation in the Direct Lending program. In addition, 

we have created a specially trained team whose task is to assist institutions that 

may have unique situations or need additional support. FSA is hosting monthly 

webinars for schools, attending and presenting at conferences, and offering targeted 

training. FSA also is in the process of reviewing and updating all of its Direct Lending publications. 

Question: If the administration’s proposal is enacted, what is the Department’s 

contingency plan to cover the risk that may surface if they are not able to support 

and transition all 4000+ FFELP schools into Direct Loans by July 1, 2010? 

Mr. Shireman: Because Direct Loans is part of the COD system run by Accenture, 

the switch is relatively simple when it comes to delivering funds to institutions. The 

key to a smooth transition is to ensure that schools do not wait until the last minute 

to adjust their systems. Accenture has increased its call center capacity, and we are 

reaching out to FFEL institutions to encourage them to get ready early so there is 

not a last-minute rush that could result in longer wait times for technical assistance. Question: Can you please provide insight to what the Department has done to 

reach out to schools to better understand their concerns about transitioning to DL? 

Mr. Shireman: Our Direct Loan Transition Team has identified types of institutions that might need additional support and information to smoothly transition to 

Direct Lending. Team members are reaching out to those institutions to answer 

questions and to offer assistance. We’ve also reached out to HBCUs, Hispanic-Serving Institutions, and Tribally Controlled Colleges and Universities. We have conducted, in association with their national organizations, a Direct Loan webinar for 

community colleges and one for independent private colleges. We have also met with 

the Council of Independent Colleges and the National Association of Independent 

Colleges and Universities to discuss issues and activities targeted to smaller independent colleges. Finally, we are developing plans for transitioning foreign schools 

into the Direct Loan program. 

Question: FFEL loan providers have suggested that more than 30,000 jobs will 

be lost if the FFEL program is ended as proposed by the administration. These jobs 

include front-end functions such as sales and marketing, as well as operations including origination, servicing, default prevention and collections. Are these claims 

valid? 

Mr. Shireman: The volume of FFEL loans will decline slowly over many years. 

At the same time, Direct Loan volume will increase, resulting in more domestic jobs 

servicing federal loans. Some of the current FFEL servicers have won contracts with 

the Department to service Direct Loans, and others may end up as subcontractors. 

One area that will be affected by a shift to Direct Loans will be the intermediaries 

who simply market Federal loans to schools without providing benefits to students 

and who have, in the past, been accused of improper behavior. 

Question: Current employees of FFEL loan providers have substantial expertise 

in working with borrowers to help them with their loan obligations. Will this expertise be lost as the employers of these loan providers cease operations? 

Mr. Shireman: The volume of FFEL loans will decline slowly over many years. 

At the same time, Direct Loan volume will increase, resulting in more domestic jobs 

servicing federal loans. Some of the current servicers have won contracts with the 

Department to service Direct Loans, and others may end up as subcontractors or 

work with the Department in other ways that are still being developed. 

Question: Concerns have been raised that the elimination of guaranty agencies 

and other loan providers will result in a lower quality of service to students. Is this 
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a legitimate claim? What evidence against this claim can those that suggest the fear 

is unfounded offer? 

Mr. Shireman: For nearly 15 years, the current Direct Loan program has operated 

with the same level of student support, performance, and satisfaction as the FFEL 

program, and the default and repayment rates are similar in both programs. The 

Department has experience in running a successful loan program without guaranty 

agencies. That said, as Direct Loan expands to 100 percent of volume, we hope to 

find ways to take advantage of the skills and resources developed in state and nonprofit agencies. 

Question: The administration’s proposal assumes that the elimination of FFEL 

guaranty agencies will not result in an increase in student loan delinquencies or defaults. On what basis has the administration reached its conclusion? 

Mr. Shireman: Cohort default rates, by sector, are the same or lower in the Direct 

Loan program for similar loans. In addition, the Higher Education Act provides a 

set of statutory payments to guaranty agencies that will continue as the outstanding 

FFEL portfolio is repaid. Some agencies have experience in providing valuable student support services, especially in promoting college access. The Department looks 

forward to working with agencies to refocus their activities on broadening student 

access to higher education. 

Question: How does the Department plan to contract for additional Direct Loan 

servicing capacity? Will it rely on the RFP process currently underway for servicing 

on loans put to the Department, or will it hold a new competition? How will the 

Department determine the service provider for each school? 

Mr. Shireman: We have not made a decision regarding another servicing procurement. However, the procurement that was just completed does include the requirement that the selected vendors be able to service all Title IV federally held loans, 

including Direct Loans. Allocations of types and volume to any one vendor will be 

determined based upon servicer capabilities and performance. 

Question: The schools, students, and families of Pennsylvania depend on our current guaranty agency, PHEAA, to provide essential services. These services include 

early college awareness and financial literacy programs as well as technical assistance and training for schools. They also provide crucial and successful default reduction and delinquency prevention services. Does the Department have a realistic proposal for maintaining and funding these services that will ensure that PHEAA and 

its sister agencies around the country have the resources they need to continue to 

carry out their public mission? 

Mr. Shireman: The administration’s fiscal year 2010 budget request includes 

funds for states to use to continue the college outreach and information activities 

now provided by some guaranty agencies through FFEL subsidies. 

Representative Carol Shea-Porter 

Question: The Department made the determination that it was necessary to provide an opportunity for servicers to compete for participation in the servicing of the 

ECASLA loans based on fact that the servicing of the ECASLA loans constituted 

a change to the existing servicing contract. Based on this past determination, it 

would seem that a similar determination should be made given that the additional 

private servicing as part of the President’s budget proposal constitutes a significant 

change, requiring an additional opportunity for competition, just as the servicing of 

the ECASLA loans required an opportunity for competition. Will there be another 

RFP for the servicing of loans under the restructuring plans? 

Mr. Shireman: We have not made a decision regarding another servicing procurement. However, the procurement that was just completed does include the requirement that the selected vendors be able to service all Title IV Federally held loans, 

including Direct Loans. Allocations of types and volume to any one vendor will be 

determined based upon servicer capabilities and performance. The current contractors have committed to sufficient capacity for the expansion of direct lending. 

Question: You have mentioned the bid process and the utilization of private 

servicers. What specific steps are being taken by the Department of Education to 

ensure that the small nonprofits have an opportunity to compete for these servicing 

contracts? 

Mr. Shireman: The contractors that were just selected have committed sufficient 

capacity for the expansion of Direct Lending. The work we have ahead of us over 

the next 18 months is substantial: first allocating ECASLA loan volume this fall to 

the new servicers and making sure that those systems are working properly, and 

then launching a multiple-servicer approach in the Direct Loan program. Once that 

implementation is complete next year, we will consider initiating another procurement that could focus on nonprofit servicers. 
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Representative Thomas Petri 

Question: Can you explain the financial incentives to guaranty agencies in preventing defaults on student loans relative to the subsidies they receive for collecting 

on defaulted student loans? 

Mr. Shireman: In the existing FFEL program, guaranty agencies receive annual 

Account Maintenance Fee (AMF) payments on non-defaulted loans averaging approximately $200 million. They also receive approximately $160 million annually 

from default aversion fees (DAFs) on delinquent loans that are brought current. 

Agencies retain a portion of collections on defaulted loans but must also pay their 

servicing and collection costs. In the past, collection revenues far exceeded collection 

costs, reducing the incentive for effective default aversion. Statutory decreases in retention rates have reduced the margin available to guaranty agencies through collections to address this problem. 

Question: Mr. Shireman, advocates for FFEL highlight the borrower services, such 

as default prevention, that lenders and guarantors provide students. Besides cohort 

default rates which we know to be a fairly weak accountability measure, is there 

any oversight or accountability measures in FFEL regarding these services? Do we 

know if they are actually working? Or which ones work best? 

Mr. Shireman: As you know, cohort default rates are comparable in Direct Loans 

and FFEL. Incentives in the non-ECASLA FFEL program, however, do not necessarily aim in the direction of default prevention. In our latest procurement for 

servicers, we have included strong financial incentives to promote default prevention: the venders receive higher payments for loans in good standing, and the companies with the best records will receive more new loan volume. 

Question: Although the Administration’s budget provides $2.5 billion over five 

years in grants to states to promote college access and student retention, many 

guaranty agencies see this funding stream as being insufficient or wanting their 

own specific funding stream. Can you comment on this critique? 

Mr. Shireman: The agencies have not provided us with sufficient information 

about the outreach and information services they provide for me to be able to comment. 

Representative Todd Platts 

Question: The two school systems represented here today, Penn State and the entire California State School system, are very large entities. My District contains a 

number of small and mid-sized institutions. If we move forward with the Administration’s proposal to convert all schools to the Direct Lending program, how can the 

Department of Education ensure that smaller schools will get the same loan servicing assistance that their larger counterparts will receive? 

Mr. Shireman: The schools that have recently transitioned to Direct Lending have 

done so with little or no problem. However, to ensure that all schools are prepared, 

we have shifted human and capital resources to enable it to properly manage and 

support 100 percent school participation in the Direct Loan program. In addition, 

we have created a specially trained team whose task is to assist schools that may 

have unique situations or need additional support. FSA is hosting monthly webinars 

for schools, attending and presenting at conferences, and offering targeted training. 

FSA also is in the process of reviewing and updating all of its Direct Lending publications. Further, all vendors selected to service Direct Loans will receive their allocations of new loans based on performance. In addition to their performance related 

to borrower services and satisfaction, one very important part of measuring performance will be the service they provide to schools. Each servicer’s performance will be 

measured by school type, control, and size. 

Question: I have heard from schools that have historically participated in the Direct Loan program that they felt they received better service through the Direct 

Loan program before the recent influx of participating schools. What specific steps 

has the Department of Education taken to ensure that it will have the capacity to 

service ALL schools in the Direct Loan program by the end of 2010, as the Administration proposes? 

Mr. Shireman: Starting last year when a number of FFEL schools began to transition to Direct Lending, we were aware that some of our current Direct Loan schools 

had concerns that the influx of new schools might degrade service levels and suggested that we take efforts to avoid that result. We are pleased to say that, even 

with the 50 percent increase in new schools last year, no degradation was experienced and we have not heard from either the older participants or the new schools 

that they have experienced any problems. That said, in preparation for a larger 

number of schools coming into Direct Lending, we are in the process of implementing a comprehensive plan to ensure that there is adequate staff both at the 
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Department and at our contractors to ensure that we maintain the current high 

level of customer service for all schools and for all students and borrowers. 

Representative Joe Wilson 

Question: You propose to stop new FFEL loan originations as of July 1, 2010. How 

many schools will need to transition from FFEL to Direct Loans between today and 

July 1st? 

Mr. Shireman: As of June 1, 2009, there are just over 3,500 schools that would 

need to transition to Direct Lending. For most of these schools, the initial administrative steps to begin transition have already occurred. 

Question: While some schools with tremendous resources have said making the 

transition to Direct Lending is relatively easy, many schools are projecting that they 

will incur additional administrative costs and face additional compliance risk as a 

result of being required to convert to the Direct Loan program. Has the Department 

produced an estimate of the costs of transitioning to the Direct Loan program for 

a small- to medium-size independent college? What are those costs? 

Mr. Shireman: The Department has worked closely with the National Direct Loan 

Coalition to identify potential costs and other resources that might be needed for 

schools joining the Direct Loan program. The Coalition, after surveying 35 small 

schools that recently transitioned to Direct Lending, found that those schools did not 

have any significant costs in transitioning to Direct Lending. In terms of originating 

loans, the schools reported that the process is similar to transmitting FFEL loan 

certifications to FFEL lenders and that the use of the Department’s Common Origination and Disbursement (COD) System, that is also used for Title IV grants, also 

made the transition relatively easy and cost efficient. Most, if not all, software vendors and third party servicers have software and operations that support both the 

FFEL and Direct Loan programs. 

Schools with technology challenges can use the Department’s ‘‘EDExpress’’ software to transmit loan data in batches from their systems to our system at no cost. 

Small schools with low volume can also use the Direct Loan Web site to enter loan 

origination and disbursement data instead of using software products. 

Question: Will the administration provide direct financial assistance to schools to 

support their transition into the Direct Loan program? If so, what assistance will 

be provided and when? 

Mr. Shireman: While the Department has provided, and will continue to provide, 

support to schools (training, customer service, school visits, etc.), there is no statutory authority to provide direct financial support to schools. Furthermore, based on 

the feedback we have heard from schools that have made the transition in the past 

year, there are no net added costs to be covered. 

[VIA FACSIMILE], 

May 28, 2009. 

JOHN F. REMONDI, Vice Chairman and Chief Financial Officer, 

Sallie Mae, 12061 Bluemont Way, Reston, VA. 

MR. REMONDI: Thank you for testifying at the May 21, 2009 hearing of the Committee on Education and Labor on ‘‘Increasing Student Aid through Loan Reform.’’ 

Representative Dina Titus (D-NV), member of the Higher Education, Lifelong 

Learning, and Competitiveness Subcommittee and member of the Early Childhood, 

Elementary and Secondary Education Subcommittee, has asked that you respond in 

writing to the following questions: 

In your testimony you suggest modifying the Administration’s proposal by ‘‘authorizing lenders to originate loans for the government, with government capital, on 

a fee-for-service basis, thus ending lender subsidies altogether.’’ 

1. What do you anticipate the fee-for-service amount will be? Second, who ultimately pays the fee-for-service? Will costs be passed on to the student? If so, that 

seems counterproductive to the needs of the average family in finding a way to pay 

for higher education. Will costs be passed on to the institute of higher education? 

Again, this seems counterproductive. Surely it would incentivize schools to go to direct lending. Further, how would this help schools keep the rising costs of tuition 

and fees down? Will the federal government pay the fee-for-service? If so, that seems 

counterproductive to the goal of reducing subsidies, a goal you state in your testimony that you agree with. An added cost of a fee-for-service also seems to inhibit 

the savings of the Administration’s plan that can be used to increase Pell grants, 

something you also say you agree with. 

2. I would imagine that for most hard-working Americans trying to pay for college, a subsidy to a lender and a fee-for-service appear to be quite similar in their 
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effect. Would you please elaborate more on your fee-for-service proposal, including 

the costs to all stakeholders, and how exactly a ‘‘fee-for-service’’ would work? 

Please send an electronic version of your written response to the questions to the 

Committee by close of business on Wednesday, June 3, 2009—the date on which the 

hearing record will close. If you have any questions, please do not hesitate to contact 

the Committee. 

Sincerely, 

GEORGE MILLER, 

Chairman. 

Responses From Mr. Remondi to Questions Submitted 

DEAR REPRESENTATIVE TITUS: Thank you for the opportunity to clarify my recent 

testimony on suggested reforms of the federal student loan programs. Please find 

my answers to your questions below. 

1. What do you anticipate the fee-for-service amount will be? Second, who ultimately pays the fee-for-service? Will costs be passed on to the student? If so, that 

seems counterproductive to the needs of the average family in finding a way to pay 

for higher education. Will costs be passed on to the institute of higher education? 

Again, this seems counterproductive. Surely it would incentivize schools to go to direct lending. Further, how would this help schools keep the rising costs of tuition 

and fees down? Will the federal government pay the fee-for-service? If so, that seems 

counterproductive to the goal of reducing subsidies, a goal you state in your testimony that you agree with. An added cost of a fee-for-service also seems to inhibit 

the savings of the Administration’s plan that can be used to increase Pell grants, 

something you also say you agree with. 

We propose a market-based fee, to be paid by the federal government, for the 

services attendant to origination of federal student loans. To ensure an orderly transition to a new program, we propose an initial fee of $75 per loan. This fee is what 

is already being paid by the government to loan originators for loans sold to the Department of Education under the authority granted by the Ensuring Continued Access to Student Loan Act (ECASLA). Under ECASLA, the $75 fee was designed 

under strict ‘‘no net cost to the taxpayer’’ requirements. 

The fee will not be passed on to students or schools. To the contrary, by using 

the existing loan origination infrastructure and not requiring schools to convert to 

Direct Lending, no school will be faced with conversion and administration costs 

that might otherwise have been passed on to students. 

Lender subsidies were historically employed to compensate lenders a fair market 

value for holding assets which, by design, generate artificially low returns due to 

caps on student-paid interest rates. Sallie Mae supports an end of lender subsidies 

and moving to a model of federal student loan ownership. 

We believe that a model built on the Administration’s proposal that includes the 

benefits of lender-provided origination services, paid for on a fee-for-service basis, 

will drive tens of millions of dollars for increased Pell Grant funding, while guaranteeing seamless implementation and retaining high-quality services. 

2. I would imagine that for most hard-working Americans trying to pay for college, a subsidy to a lender and a fee-for-service appear to be quite similar in their 

effect. Would you please elaborate more on your fee-for-service proposal, including 

the costs to all stakeholders, and how exactly a ‘‘fee-for-service’’ would work? 

There are costs associated with the origination of federal student loans. Moving 

toward a Direct Lending only model means that those costs will be borne by some 

combination of the government, the institutions of higher learning themselves or 

students if those costs are passed on in the form of higher tuition or fees. 

We support modifications to the Administration’s proposal that would retain the 

loan origination services that 75 percent of colleges and universities prefer, and that 

would ensure that the costs of loan originations would be borne by the government, 

the ultimate owner of the loan assets. 

We propose a market-based fee, to be paid by the federal government, for the 

services attendant to origination of federal student loans. To ensure an orderly transition to a new program, we propose an initial fee of $75 per loan. This fee is what 

is already being paid by the government to loan originators for loans sold to the Department of Education under the authority granted by the Ensuring Continued Access to Student Loan Act (ECASLA). Under ECASLA, the $75 fee was designed 

under strict ‘‘no net cost to the taxpayer’’ requirements. The fee will be for the services attendant to the process of originating federal student loans for the federal government. The fee would compensate loan originators for services that include the 

paperwork associated with loan origination, as well as related services that include 
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technical and operational support for schools, financial literacy programs and default aversion programs that benefit students. 

We also recommend a requirement that, after the initial transition period, the Department establish a process to set origination fees via market mechanisms designed to preserve broad participation of loan originators, including smaller, regional, state and non-profit entities. 

Thank you again for the opportunity to clarify my testimony. 

[Whereupon, at 1:13 p.m., the committee was adjourned.] 

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