Legislature(2015 - 2016)BUTROVICH 205

02/24/2015 03:30 PM EDUCATION

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Audio Topic
03:30:12 PM Start
03:30:40 PM SJR2
04:03:34 PM Presentation: Alaska Performance Scholarship Program and Alaska Education Grant Program
04:24:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SJR 2 CONST. AM: G.O. BONDS FOR STUDENT LOANS TELECONFERENCED
Heard & Held
+ Presentation: Alaska Performance Scholarship TELECONFERENCED
Program
Alaska Education Grant Program
Diane Barrans, Director, Alaska Commission on
Postsecondary Education
         SJR 2-CONST. AM: G.O. BONDS FOR STUDENT LOANS                                                                      
                                                                                                                                
3:30:40 PM                                                                                                                    
CHAIR DUNLEAVY announced the consideration of SJR 2.                                                                            
                                                                                                                                
3:31:12 PM                                                                                                                    
SENATOR ANNA MACKINNON, Alaska State  Legislature, sponsor of SJR                                                               
2, said  the constitutional amendment  proposes to try  to reduce                                                               
student loan debt, or at least  the interest rate a student would                                                               
pay.   She  stated   that,  "Our   forefathers  could   not  have                                                               
anticipated  the debt  required to  get an  education in  today's                                                               
world, let alone, America."  Alaskan disproportionately carries a                                                               
much higher interest  rate than the federal  rate. Currently, the                                                               
state's  interest rate  is 6.7  percent and  the federal  rate is                                                               
4.66 percent.                                                                                                                   
                                                                                                                                
She understood that should SJR 2  go forward, the state would ask                                                               
voters in  the 2016 general election  to approve a change  in the                                                               
state constitution that would allow  debts and the full faith and                                                               
credit of the  state of Alaska to  be used to back  that debt for                                                               
student loans.  Currently, under  Article IX,  Section 8,  of the                                                               
Alaska Constitution the only allowable  use of the full faith and                                                               
credit  of the  state  for is  capital  improvements and  housing                                                               
loans for  veterans. She concluded  that SJR  2 would be  a third                                                               
amendment  to that  section  and would  allow  student loan  debt                                                               
backed by revenue that students pay.                                                                                            
                                                                                                                                
SENATOR GARDNER requested to know how the state sets interest                                                                   
rates and how much flexibility it has in doing so.                                                                              
                                                                                                                                
3:33:39 PM                                                                                                                    
DIANE BARRANS, Executive Director, Post-Secondary Education                                                                     
Commission, Department of Education and Early Development                                                                       
(DEED), answered Senator Gardner's question about interest rate.                                                                
She explained that the Alaska Student Loan Corporation (ASLC)                                                                   
Board sets the interest rates annually. The essential components                                                                
are factored in; the cost of funds, the cost of providing and                                                                   
serving the program, as well as the cost of losses.                                                                             
                                                                                                                                
SENATOR GARDNER asked if the state or agency makes money based                                                                  
on the current loan rate and what the current net balance is.                                                                   
                                                                                                                                
MS. BARRANS explained that it is not the goal of the corporation                                                                
to make money, but to have a sustainable structure. A look back                                                                 
over 20 years would show a great variation of net income from                                                                   
less than $1 million in a given year to as high as $12 million.                                                                 
The way net income is distributed has also varied over the                                                                      
years. In 2001 the state statute was amended to permit the                                                                      
corporation to pay a dividend or return of contributed capital                                                                  
to the state. Since then, the corporation has returned over $31                                                                 
million to the state. Since the downturn in the market, the                                                                     
board has not elected to return a dividend to the state.                                                                        
                                                                                                                                
3:37:01 PM                                                                                                                    
SENATOR GIESSEL recalled during the time of her own student loan                                                                
and the tendency of students to not repay their loans. She asked                                                                
what the default rate of Alaska students is.                                                                                    
                                                                                                                                
MS. BARRANS agreed that the default rates used to be high. Back                                                                 
in the 80's and early 90's, the default rate was in excess of 27                                                                
percent. The current default rate is less than 6.5 percent.                                                                     
                                                                                                                                
CHAIR DUNLEAVY asked why that is.                                                                                               
                                                                                                                                
SENATOR MACKINNON added that the Student Loan Corporation is                                                                    
third in line to garnish a student's PFD, which increases the                                                                   
corporation's ability to recoup payments.                                                                                       
                                                                                                                                
MS. BARRANS replied that there are a number of factors that                                                                     
enable collection of payments and one of the most effective is                                                                  
the ability to garnish the PFD. Over the years more than $12                                                                    
million has been collected on defaulted loans.                                                                                  
                                                                                                                                
She said in late 80's and early 90's there were over 140 for-                                                                   
profit institutions that delivered training programs, many of                                                                   
which were not valuable investments. There was also a mindset                                                                   
where students expected to only have to repay 50 percent of the                                                                 
loan. The loan was not treated like a legitimate debt. In the                                                                   
mid-90's, the corporation adopted levels of underwriting                                                                        
standards. It began with a credit-ready standard and then, after                                                                
the market collapse in 2007-8, the credit criteria was increased                                                                
to having positive credit or a cosigner with positive credit.                                                                   
                                                                                                                                
3:40:29 PM                                                                                                                    
CHAIR DUNLEAVY asked what the current interest rate is.                                                                         
                                                                                                                                
MS. BARRANS reiterated that it is 6.7 percent.                                                                                  
                                                                                                                                
CHAIR DUNLEAVY asked what interest rate the bill targets.                                                                       
                                                                                                                                
SENATOR MACKINNON explained that the delta is between 1 percent                                                                 
and 1.3 percent gain, but is variable depending on the bond                                                                     
market. It provides a better rating so the corporation can                                                                      
borrow at a lower interest rate.                                                                                                
                                                                                                                                
CHAIR DUNLEAVY asked how the rate would be set.                                                                                 
                                                                                                                                
MS. BARRANS said the process would not be different, but the                                                                    
cost factors to the board would be lower. The cost of funds                                                                     
would be between 1 percent and 1.3 percent lower, resulting in                                                                  
directly benefitting borrowers.                                                                                                 
                                                                                                                                
CHAIR DUNLEAVY recalled the history of the loan fund.                                                                           
                                                                                                                                
MS. BARRANS corrected that in 1987 about $260 million in loan                                                                   
assets was turned over to the corporation for capitalization. In                                                                
1994 small infusions of cash brought the total contribution from                                                                
the state to $306 million.                                                                                                      
                                                                                                                                
CHAIR DUNLEAVY asked how much is in the account now.                                                                            
                                                                                                                                
MS. BARRANS replied that about $460 million is currently in the                                                                 
portfolio.                                                                                                                      
                                                                                                                                
She observed, in addition to the annual dividend payments the                                                                   
corporation made between 2001 and 2008, in 2004 and 2005 loan                                                                   
assets were used to issue approximately $150 million in capital                                                                 
project bonds which were used to finance various projects. The                                                                  
total return on the "state's investment" is over $192 million                                                                   
from ASLC.                                                                                                                      
                                                                                                                                
3:44:07 PM                                                                                                                    
SENATOR HUGGINS asked what Trendsetters is.                                                                                     
                                                                                                                                
MS. BARRANS said they train in haircutting.                                                                                     
                                                                                                                                
SENATOR HUGGINS asked what AEG means.                                                                                           
                                                                                                                                
MS. BARRANS explained that the Alaska Education Grant is a                                                                      
needs-based grant program.                                                                                                      
                                                                                                                                
SENATOR HUGGINS said he was glad to see a long list of                                                                          
institutions for whom loans are available. He concluded that                                                                    
students have choices when it comes to scholarships.                                                                            
                                                                                                                                
MS. BARRANS agreed. The loan is portable for out-of-state                                                                       
education; the scholarship and grant are not.                                                                                   
                                                                                                                                
SENATOR HUGGINS said UAA has the largest number of recipients.                                                                  
He asked if a student could use the scholarship during a                                                                        
semester abroad.                                                                                                                
                                                                                                                                
MS. BARRANS explained if the semester is a formal exchange                                                                      
program, it qualifies.                                                                                                          
                                                                                                                                
3:46:42 PM                                                                                                                    
SENATOR GARDNER asked if loans and grants go to individual                                                                      
students, not the institution.                                                                                                  
                                                                                                                                
MS. BARRANS clarified that the funds are dispersed through the                                                                  
institution to the student.                                                                                                     
                                                                                                                                
SENATOR GARDNER said the student pays back the funds, not the                                                                   
institution.                                                                                                                    
                                                                                                                                
MS. BARRANS said correct.                                                                                                       
                                                                                                                                
SENATOR GARDNER concluded that programs abroad not affiliated                                                                   
with a college do not qualify for the funds.                                                                                    
                                                                                                                                
CHAIR DUNLEAVY noted Western Interstate Commission for Higher                                                                   
Education (WICHE) and Western Undergraduate Exchange (WUE)                                                                      
programs are available to Alaskans.                                                                                             
                                                                                                                                
MS. BARRANS agreed. She said also under WICHE are the                                                                           
Professional Student Exchange Program and the Graduate Regional                                                                 
Exchange Program. A student could not use the scholarship or                                                                    
grant funds for these programs.                                                                                                 
                                                                                                                                
CHAIR DUNLEAVY noted a zero fiscal note on the resolution this                                                                  
year, whereas there was one last year for $1,500 for publishing                                                                 
ballots and publications. He asked if those expenses would be                                                                   
absorbed by the Division of Elections.                                                                                          
                                                                                                                                
3:48:45 PM                                                                                                                    
SENATOR MACKINNON understood they would. All costs are rolled                                                                   
into a bond proposition which the students will pay for at a                                                                    
later date.                                                                                                                     
                                                                                                                                
SENATOR HUGGINS requested examples of scenarios whereby the                                                                     
state would lose money with this initiative.                                                                                    
                                                                                                                                
MS. BARRANS explained if it is structured correctly there should                                                                
be no cost to the general fund. The bonds would be structured                                                                   
similar to those from 1988 through 2008 and would adequately                                                                    
cover debt service. She noted ASLC carries a moral obligation if                                                                
it cannot pay its own bond to request the legislature for                                                                       
funding to cover the debt service. She concluded that the                                                                       
legislation does not present a material risk.                                                                                   
                                                                                                                                
SENATOR HUGGINS pointed out that the Scholars Program is missing                                                                
from the chart.                                                                                                                 
                                                                                                                                
MS. BARRANS said the UAS Scholars Program is funded and                                                                         
administered by the university.                                                                                                 
                                                                                                                                
SENATOR HUGGINS asked if a student could get a supplemental                                                                     
student loan if the Scholars Program money is not adequate.                                                                     
                                                                                                                                
MS. BARRANS said yes. She explained that the supplemental loan                                                                  
is available to cover a student's unmet costs.                                                                                  
                                                                                                                                
3:51:54 PM                                                                                                                    
SENATOR GARDNER said the state has contributed $306 million over                                                                
time.                                                                                                                           
                                                                                                                                
MS. BARRANS explained that a small portion was cash and the rest                                                                
was outstanding loans made when the state funded the program                                                                    
from the general fund. The portfolio was turned over to the                                                                     
corporation and it used the income to pledge against the bonds                                                                  
it began to issue in 1988.                                                                                                      
                                                                                                                                
SENATOR GARDNER summarized that the state invested about $306                                                                   
million and now the value of the portfolio is about $460                                                                        
million.                                                                                                                        
                                                                                                                                
MS. BARRANS said you can't equate the original portfolio and the                                                                
current one. The state has funded, overall, about $1.6 billion                                                                  
in student loans since the program was established in 1968. The                                                                 
outstanding portfolio is just the outstanding portfolio of                                                                      
loans. In order to look at the full value of the corporation,                                                                   
you would have to look at the corporation's investments, as                                                                     
well. The corporation has several million dollars of                                                                            
investments.                                                                                                                    
                                                                                                                                
SENATOR GARDNER she said, "If we considered loans to students -                                                                 
Alaskans - to be an investments, what other kinds of investments                                                                
does the trust make?" She stressed that the effort is to fund                                                                   
student education.                                                                                                              
                                                                                                                                
MS. BARRANS offered to provide information about ASLC's                                                                         
investment portfolio. She said they are typically conservative,                                                                 
low-return investments.                                                                                                         
                                                                                                                                
SENATOR GARDNER said she is trying to understand whether the                                                                    
state is profiting by charging high interest rates and if it                                                                    
should lower rates and profit less.                                                                                             
                                                                                                                                
3:55:12 PM                                                                                                                    
MS. BARRANS explained that the corporation has created a set of                                                                 
borrow benefits that are annually reviewed. These are an                                                                        
opportunity to lower the cost to students by creating credits.                                                                  
For example, in the current 6.7 percent interest rate there is                                                                  
an "Alaska presence" discount credit of .5 percent. The                                                                         
corporation has also approved a .25 discount for on-line                                                                        
automatic payment which drops the interest rate below 6 percent.                                                                
                                                                                                                                
She said the corporation's goal is to ensure that it remains in                                                                 
the black, covers operational costs, and is a sustainable                                                                       
enterprise, not do more. When the legislation was enacted in                                                                    
2001 to create the capacity to do a return to the state, it was                                                                 
clear that payments could be made to the state only when they                                                                   
would not put the corporation's core mission at risk. Low                                                                       
borrower rates were driven by market circumstances. She                                                                         
concluded that in terms of the interest rate environment, timing                                                                
is everything.                                                                                                                  
                                                                                                                                
3:58:27 PM                                                                                                                    
SENATOR MACKINNON pointed out that the resolution requires voter                                                                
approval and then it would return to policy makers to scrutinize                                                                
any kind of investment in an additional bond before it was put                                                                  
out to voters a second time in the 2018 election. The first time                                                                
a loan would be available would be in 2019. She said it is a                                                                    
forward thinking tool that is not available now for refinancing                                                                 
high interest rate loans. She disclosed she is a cosigner on one                                                                
of her son's student loans, but would not benefit by this                                                                       
legislation.                                                                                                                    
                                                                                                                                
4:00:16 PM                                                                                                                    
CHAIR DUNLEAVY announced the arrival of Senator Stevens.                                                                        
                                                                                                                                
SENATOR MACKINNON requested a public testimony notice.                                                                          
                                                                                                                                
CHAIR DUNLEAVY opened public testimony. Seeing none, he closed                                                                  
public testimony.                                                                                                               
                                                                                                                                
CHAIR DUNLEAVY held SJR 2 in committee.                                                                                         

Document Name Date/Time Subjects
SJR 2 Constitutional Am G.O. Bonds for Loans.pdf SEDC 2/24/2015 3:30:00 PM
SJR 2 Fiscal Note.pdf SEDC 2/24/2015 3:30:00 PM
SJR 2 Sponsor Statement.pdf SEDC 2/24/2015 3:30:00 PM
SJR 2 Sectional Analysis.pdf SEDC 2/24/2015 3:30:00 PM
SJR 2 UA Letter of Support.pdf SEDC 2/24/2015 3:30:00 PM
SJR 2 Juneau Chamber Letter of Support.pdf SEDC 2/24/2015 3:30:00 PM
APS and AEG Awards.pdf SEDC 2/24/2015 3:30:00 PM
APS Stats at a Glance.pdf SEDC 2/24/2015 3:30:00 PM