Legislature(2011 - 2012)CAPITOL 106
03/19/2012 08:00 AM House EDUCATION
| Audio | Topic |
|---|---|
| Start | |
| Discussion: Proposed State Education Standards with Eed | |
| Presentation: Northwest Arctic Borough School District/ University of Alaska-chukchi College/ Star of the Northwest Magnet School Alaska Technical Center | |
| HB272 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 137 | TELECONFERENCED | |
| += | HB 272 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
HB 272-STUDENT LOAN INTEREST REDUCTIONS
9:28:19 AM
REPRESENTATIVE SEATON announced that the final order of business
would be SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 272, "An Act
providing for a reduction in interest on postsecondary education
loans for residents." [Before the committee was CS 2d SSHB 272,
Version 27-LS1162\R, Luckhaupt/Mischel, 3/2/12, adopted 3/5/12.]
9:29:13 AM
REPRESENTATIVE LES GARA, Alaska State Legislature, reminded the
committee that SSHB 272 provides a principal reduction for
students who stay in state or return to Alaska after completing
their degree.
9:29:49 AM
The committee took a brief at-ease.
9:30:01 AM
REPRESENTATIVE SEATON reviewed the materials that should be
included in the committee packet.
9:32:37 AM
REPRESENTATIVE GARA, referring to a question from Representative
Cissna, explained that the statutes referenced in SSHB 272 are
regarding the rules for default, consolidating loans, and
eligibility. Those statutes weren't changed but had to be
referenced in the legislation.
9:33:11 AM
REPRESENTATIVE GARA reminded the committee that the original
intention of the legislation was to reduce the interest rates
for those students who, upon completion of a degree, stayed in
Alaska or returned to Alaska. To reduce the cost, the discount
isn't given until the student completes his/her degree. The
commission has the authority to determine what a timely
completion of a degree/certificate is. It is much easier to
administer the program by reducing the principal versus the
interest rate as it would save on staffing. Therefore, the
legislation currently specifies that for those students who,
after completing their degree, remain in or return to the state
would receive a 3 percent reduction in the principal annually.
The program has residency requirements that reflect those that
are in the permanent fund dividend qualification. He reported
that currently roughly 40 percent of the students who leave the
state [for education] do not return. The existing student loan
rates are between 6.2 percent and 7 percent for new loans and
higher for older loans. He compared student loan rates to car
loan rates, which can sometimes be as low as 3 percent.
9:37:08 AM
DIANE BARRANS, Executive Director, Alaska Commission on
Postsecondary Education (ACPE), Department of Education and
Early Development (EED), directed attention to the memorandum
dated March 14, 2012, that she provided to the committee. The
memorandum addresses information requested by the committee in
regard to default rates, expectation of the effect of a
principal reduction program on the default rate, and timely
completion of the degree in Alaska.
9:37:53 AM
REPRESENTATIVE P. WILSON noted that the out-of-state default
rates are much lower than the in-state default rates.
MS. BARRANS said that has historically been the case. Although
ACPE hasn't performed a study regarding the reasons for the
higher default rate for in-state students, she pointed out that
the types of schools students attend out-of-state tend to be
more highly selective. Therefore, one can assume that the
students [attending out-of-state schools] are more prepared and
are succeeding at a higher rate, and thus have the wherewithal
to earn wages that allow them to repay the loans.
9:38:59 AM
REPRESENTATIVE SEATON, upon reviewing the first page of the
memorandum, surmised that in-state default rates in Alaska have
been consistently 2 percent higher than the default rate for
out-of-state schools. He asked if [Alaska's] out-of-state
default rate is comparable to other states and other loan
programs.
MS. BARRANS answered that hasn't been reviewed. Comparing state
alternative loan programs is difficult because often the terms
and conditions vary from state to state. For instance, the
alternative program in New Jersey has a very high underwriting
standard for students to qualify, including having a credit
worthy co-signer. Therefore, the default rate is substantially
lower than those in Alaska. The practice, at least until the
last two to three years, in Alaska basically has been to offer a
loan that's available to anyone, regardless of their credit
history or lack thereof. Only in recent years would Alaska
expect to have rates that are comparable to other state
programs.
9:40:21 AM
REPRESENTATIVE SEATON pointed out that Alaska required a credit
worthy co-signer in 2009, but the 2010 default rate increased
significantly. He asked if there is any correlation between
those two.
MS. BARRANS clarified that the [2010 default rate is the rate]
for loans that went into repayment and were in repayment for at
least a year in 2010. She told the committee that as the
students who took loans in 2009 and 2010 complete their
education and begin repayment, ACPE expects there to be
substantial improvements in those rates.
REPRESENTATIVE SEATON surmised then that [the 2010 default rate]
includes all of the previous loans that were being paid back,
and thus would likely not include credit worthy co-signer loans.
MS. BARRANS agreed, and also noted that the default rate has
been affected by the state of the economy. For example, the
default rates for the federal loan program have increased
substantially.
REPRESENTATIVE SEATON noted that student loan debt now exceeds
credit card debt, nationwide.
9:42:29 AM
REPRESENTATIVE SEATON directed attention to page 2 of the
memorandum, and asked why there was such an increase in the
Alaska Student Loan default rate for 2010.
MS. BARRANS informed the committee that the Alaska Student Loan
program is the predecessor to the Alaska Advantage loan, which
was initiated in 2002. In 2008 and 2009, ACPE instituted some
alternative repayment options that provided borrowers with
relief. However, it was determined that the relief merely
postponed the delinquency, and thus some of the options were
eliminated. She explained that the interest costs for the
borrowers was increasing when the costs were added back to their
debt after the periods of relief and the borrowers still weren't
able to address their delinquency.
REPRESENTATIVE SEATON pointed out that the default rate for
Alternative Loan Consolidation is extremely low, nearly non-
existent for 2007-2010. Therefore, he inquired as to why.
MS. BARRANS explained that in 2004 an Alternative Consolidation
Loan was instituted such that a discounted loan rate was
offered. Because borrowers had loans over a period of years and
the terms of those loans were all different, there was an
advantage to offering a lower rate to consolidate all the loans
under a single note. In the new promissory note, many of the
forbearances and deferments that existed in the underlying
original notes were eliminated. The goal was to incent
borrowers to consolidate. Therefore, a lower rate was offered
in exchange for borrowers to meet a minimum FICO score or have
made full and timely payments for two years on the underlying
loans. Ms. Barrans said the quality of those loans were some of
the best of the old Alaska Student Loan program, which resulted
in a very low default rate.
REPRESENTATIVE SEATON inquired as to how much of the Alternative
Loan Consolidation is taking place.
MS. BARRANS recalled that in the first two to three years of
operation there was $40 million worth of loan volume in the
Alternative Loan Consolidation program. At this point, she
estimated that there are close to $100 million in consolidated
loans at a 7.5 interest rate. She explained that many students
who borrowed in the early 2000s have an interest rate that's
lower than 7.5 percent, and therefore they're not motivated to
consolidate.
9:47:07 AM
REPRESENTATIVE SEATON, referring to the chart entitled
"Institutional Cohort Default Rates" on page 2 of the
memorandum, related his understanding that the top line is the
Alaska Institution rate. He also related his understanding that
ACPE doesn't believe the program proposed in SSHB 272 wouldn't
materially change the default rate on the loans.
MS. BARRANS replied yes to both. The majority of students who
default do so because they fail to complete a degree program and
are unable to be gainfully employed. A smaller proportion of
the default rate is those students who over borrowed and have
very high levels of debt. Therefore, a 3 percent principal
reduction wouldn't really impact that.
REPRESENTATIVE SEATON remarked that if the lower principal rate
motivates students to complete their degree, the default rate of
those students would be a lesser rate than other students.
Therefore, the additional earning capacity may have some impact.
MS. BARRANS agreed.
9:48:54 AM
REPRESENTATIVE FEIGE directed attention to the language on page
3 of the memorandum that read as follows:
Generally, regardless of the underlying reasons for
the lack of capacity to pay as agreed, borrowers fail
to be influenced or motivated by the consequences of
delinquency or default, so it seems reasonable to
conclude that the default rate would not be materially
impacted by this new potential benefit.
REPRESENTATIVE FEIGE then inquired as to the consequences of
delinquency.
MS. BARRANS answered that the consequences of delinquency
include ACPE's ability to garnish permanent fund dividends
(PFDs), wages, and suspend professional licenses. The ACPE also
reports a student's delinquent loans such that they are
reflected on their credit reports.
REPRESENTATIVE FEIGE surmised then that the consequences of
default are severe, and therefore he pondered what other
measures could be taken.
9:50:45 AM
MS. BARRANS, in response to Representative Seaton, explained
that the loans in question are assets of the Alaska Student Loan
Corporation. In financing the loans in the bond market and
through other types of debt for which the corporation is liable,
the corporation commits to certain income streams from those
loans. Therefore, any time the legislature creates a program to
relieve debt, such as SSHB 272, there needs to be an associated
compensation to ensure the corporation is held harmless and can
continue to make its debt payments. The fiscal note that will
be prepared for the new CS will reflect both the cost of the
interest reduction as well as a component for the interest lost
to the corporation. A principal reduction, she further
explained, will accelerate the rate at which the loans are paid
down.
9:52:35 AM
REPRESENTATIVE SEATON asked whether the Alaska Student Loan
Corporation has been constrained by the amount of principal
available to offer as loans or has that been relatively
unlimited.
MS. BARRANS told the committee that since 2008 the corporation
has been funding new loans with the assistance of the state.
The corporation entered into a relatively short-term loan from
the state in order to continue to finance. Therefore, the
corporation uses both recycled payments and the state loan to
finance new loans. The aforementioned has been the case through
the current year, but in 2013 the corporation intends to reenter
the bond market in order to issue new debt for new alternative
loans. She noted, however, that the loan volume has
substantially decreased over the last two years. Currently, the
corporation makes less than $15 million in alternative loans
annually, which she mainly attributed to changes in the federal
rules that prohibit institutions in Alaska from packaging loans
for students.
REPRESENTATIVE SEATON returned the gavel to Chair Dick.
9:53:58 AM
REPRESENTATIVE SEATON inquired as to why the state providing
principal for loan purposes is viewed as a detriment of early
payment of debt when it's being paid to the corporation and can
be used to re-loan.
MS. BARRANS announced that Version R addresses the concerns
expressed relative to the initial versions of SSHB 272, and thus
she didn't believe the negative perceptions carry through.
Version R ensures the Alaska Student Loan Corporation is held
harmless. In further response to Representative Seaton, Ms.
Barrans confirmed that under Version R the prepayment of the
principal through an appropriation by the state isn't viewed as
a significant negative so long as the corporation is held
harmless. She noted that the fiscal note will reflect the
aforementioned.
9:56:46 AM
CHAIR DICK announced that SSHB 272 would be held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CS for 2nd SSHB 272 Version R - Statutes listed under Section 2.pdf |
HEDC 3/19/2012 8:00:00 AM |
HB 272 |
| CS for 2nd SSHB272 Version R.pdf |
HEDC 3/19/2012 8:00:00 AM |
HB 272 |
| 2nd SS HB272-EED-ACPE-02-28-12.pdf |
HEDC 3/19/2012 8:00:00 AM |
HB 272 |
| 2nd CS SS HB272 ACPE Response to Information Request.pdf |
HEDC 3/19/2012 8:00:00 AM |
HB 272 |
| 2nd CS SS HB 272 03 02 12 Legal Memo.pdf |
HEDC 3/19/2012 8:00:00 AM |
HB 272 |