Legislature(1995 - 1996)

04/21/1995 09:35 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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       SENATE BILL NO. 123                                                     
       "An Act relating  to student loan programs,  interstate                 
  compacts         for postsecondary  education, and  fees for                 
  review of                           postsecondary  education                 
  institutions; and providing for an        effective date."                   
                                                                               
  Joe  McCormick, Executive  Director  for  the Commission  on                 
  Postsecondary Education testified before  the committee that                 
  SB  123  provides  three  broad  objectives for  the  Alaska                 
  Student  Loan Program: 1) to improve customer service, 2) to                 
  strengthen the financial viability of the program, and 3) to                 
  improve overall program administration.  He went through the                 
  bill, section by section.  To improve  customer service, the                 
  bill will expand the  loan limits in the program  for degree                 
  granting institutions.    The  graduate  limits,  which  are                 
  currently at $6500, would  increase to $9500 per year.   The                 
  undergraduate  limit,  which  is currently  at  $5500, would                 
  increase to $8500.  Section 3, requires that  Alaska Student                 
  Loan Funds be  only used for career education  programs that                 
  operate on a  physically sound basis, that have operated for                 
  at least two  years, and  that have entered  and executed  a                 
  program participation agreement with the college.  This will                 
  insure financial stability  of the schools participating  in                 
  the program.  Section  4 revises the borrowing maximum  term                 
  of repayment.  This will  allow for extended repayment terms                 
  for larger loan limits. Students are borrowing more and more                 
  each year. Historically, there has  been a 10-year repayment                 
  period.  We are recommending that  the period be extended to                 
                                                                               
                                                                               
  15 years.  The  grace period of 12-months, has  been reduced                 
  to 6-months, with a minimum of $50 repayment per month.  The                 
  time period,  whereby  a loan  goes into  default, has  been                 
  expanded  from  120 days  to 180  days,  this will  allow an                 
  additional 2 months to  work with the borrower before  going                 
  into default.   Section 16,  21 and 27,  would provide  that                 
  families who have  a need  to borrow from  both the  Alaskan                 
  Student Loan Program,  and the Alaska Family  Education Loan                 
  Program, may  do so.   Under current  law, participation  in                 
  both programs  is not  allowed. Mr.  McCormick said that  to                 
  obtain  the second  objective  of increasing  the  financial                 
  viability of the program, it  is recommended that: 1)  there                 
  is  an  appropriate  interest  rate  assessment  during  the                 
  qualifying  deferment period.  Loan  deferment for  military                 
  service or returning to school allows for a no-interest time                 
  frame.    The bill  proposes  eliminating the  interest free                 
  loans. Section 14 would  allow the commission to set  a loan                 
  origination fee in a range of 0% to 5%, as an offset against                 
  losses due to death, disability, default, and/or bankruptcy.                 
  Section 17  would  prohibit  incarcerated  individuals  from                 
  receiving  Alaska  Student  Loans.   Section  18  would give                 
  delinquent  student   loans  a  priority,  second  to  child                 
  support, in a wage garnishment proceeding.  These provisions                 
  would increase the  financial viability of the  loan program                 
  overall.  Lastly, there are technical amendments eliminating                 
  costly  and  unnecessary mailings  to  borrowers.   It would                 
  require that illegally obtained loans be paid in full and on                 
  demand.  It would remove an arbitrary cap on the loan volume                 
  from one year to the next.  The goal is to insure  that this                 
  loan program is financially solvent, now and  in the future,                 
  so that Alaskan's  can participate in  this program when  it                 
  comes  time for  them  to pursue  postsecondary  educational                 
  opportunities.                                                               
                                                                               
  Senator Sharp asked how the loans are tracked for repayment?                 
  Mr. McCormick stated that it is easier for the commission to                 
  track  dollar amounts opposed to  the number of years, since                 
  many students have interruptions in the educational process.                 
  He said that the Family  Education Loan (FEL) program  would                 
  share the same dollar cap that the Alaska Student Loan (ASL)                 
  program would  have.  The  combined cap is  $158,000 because                 
  the  parent  would  be  borrowing  under  the  FEL  program.                 
  Section 21 refers  to the  Teachers Scholarship Loan  (TSL),                 
  which is not part of the  ASL or the FEL.  It is  a separate                 
  loan.    Senator Sharp  stated  that  he is  not  willing to                 
  provide for bigger  loan debts  and longer payback  periods.                 
  Mr.  McCormick  responded  that  the  University  of  Alaska                 
  represents 70% of the  borrowing.  The $5500 loan  limit has                 
  been set in loss since 14 years ago.  In that 14 year period                 
  the university  has increased its  tuition by over  250%, so                 
  there have been increases for  a period of time in 14  years                 
  in what it costs the student to  go to school, but there has                 
  been  no adjustment  to  the loan  limits  during that  same                 
  period of time.   Senator  Sharp said that  Alaska has  more                 
                                                                               
                                                                               
  students, and if  there is more money loaned, the multiplier                 
  creates a tremendous impact on the revolving fund.                           
                                                                               
  Senator Rieger asked  about the  trigger for an  institution                 
  whose default  rate is over  150%.  Mr.  McCormick responded                 
  that the program's  default rate  as of June  30, 1994,  was                 
  19.6%.   If the  default rate  went above  30%, it  would be                 
  triggered.  Senator Rieger asked  what sorts of institutions                 
  are exceeding 30%  default rates?   Mr. Mccormick  responded                 
  that   the   short-term   programs   that   offer   training                 
  opportunities  of less  than  9 months  in  length have  the                 
  higher default rates.  Those  default rates range from  26%-                 
  50%.                                                                         
  Senator Rieger  stated his biggest  objection is from  1% to                 
  5%.   Mr. McCormick responded that 5% was a middle ground of                 
  the  maximum  of 8%.   He  said  that the  system  would not                 
  tolerate more  than 5%. The  important point  that is  being                 
  made, is that a range is  being set.  The bill does  not say                 
  that every  year a 5% fee will  be charged, but rather, that                 
  an assessed fee will be between 0%-5% depending on the level                 
  of death, disability, and default experience of the program.                 
  As the  default rate is brought down,  the origination could                 
  be brought  down from 5%.   The rate  will be 5%  within the                 
  first few years because the losses to the loan fund have not                 
  been  offset  in the  past.  Over  time, as  the  losses are                 
  recovered, the origination fee will go down.                                 
                                                                               
  Senator Rieger spoke  to the 30% default issue, stating that                 
  to raise the  interest for the  new student because the  old                 
  loan was not repaid  by the preceding student does  not seem                 
  fair.  Mr. McCormick stated that he does not support the use                 
  of a default rate as a criterion to determine whether or not                 
  a school participates in the loan program.  The default rate                 
  experience  reflects a  combination of occurrences  with the                 
  students who  attended those programs.  There may be  a good                 
  school  with a good  program, but high  unemployment in that                 
  particular field of  study. Upon graduation, if  the student                 
  is not  able to find  employment, naturally, the  payback is                 
  put   off.     He   supports   raising  the   standards  for                 
  participation of schools,  before allowing participation  in                 
  Alaska Student Loans.   For example, the provisions in  this                 
  bill that say they should be physically sound, and that they                 
  should have operated  for at  least two years,  are ways  to                 
  avoid the bad experiences that this  loan program has had in                 
  the past.  He is confident that such action is more positive                 
  than an arbitrary default rate.                                              
                                                                               
  There  was  discussion  on a  Pete  Marwick  study regarding                 
  outsourcing.                                                                 
  Mr. McCormick  stated than in administering the size of this                 
  loan program, along with the distance from the mainstream of                 
  the student loan industry, it isn't  feasible.  He noted his                 
  concerns in outsourcing to a servicer in another area within                 
  the United States, it may be, 1) risky, 2) may not be doable                 
                                                                               
                                                                               
  (not  from  this end,  but from  the  host end)  because the                 
  system may  not be  adjustable to  accommodate a  very small                 
  loan program which is  located a long way from  their market                 
  area.  It  is for these  reasons that it  is being done  in-                 
  house.                                                                       
                                                                               
  Senator  Sharp  did  not  want  the  bill to  move  out,  he                 
  questions  the amendment,  which  he did  not  have time  to                 
  analyze.   He asked for clarification regarding the loan and                 
  if  the  student  is  out-of-state  versus  in-state.    Mr.                 
  Mccormick responded that the program could be  out-of-state,                 
  and the student  is physically present  in this state.   For                 
  example,   there  are  programs  available  to  students  on                 
  military  bases  in Fairbanks  and  in Anchorage  offered by                 
  Wayland Baptist University.  That is  a program that is out-                 
  of-state, but the student is physically present in the state                 
  of Alaska. He also stated that there are  programs available                 
  outside  the  state  of Alaska.  The  program  excludes non-                 
  residents.   Alaskan students can  go to school anywhere and                 
  receive the Alaska Student Loan.                                             
                                                                               
  Senator Zharoff asked  how this  would effect existing  loan                 
  programs  with  an effective  date  of  July 1,  1995.   Mr.                 
  McCormick responded that it will  effect those funds not yet                 
  disbursed, but on prior loans there would be no effect.  For                 
  those students who have borrowed money and are in repayment,                 
  as their loans go into deferment,  there will be no interest                 
  added.  By changing this law  to read, "interest on the loan                 
  during deferments," it would have  no impact on prior loans,                 
  only loans made  on or after  July 1, 1995.   The promissory                 
  notes and their preexisting conditions must be honored.                      
                                                                               
  Senator Zharoff referred to total disability.  Mr. McCormick                 
  noted that for those students who  do not medically meet the                 
  definition of total disability, they will not be exempt from                 
  making payments on the  loans taken out after July  1, 1995.                 
  For those  who are  50% disabled  and have  taken out  their                 
  loans prior to July 1, 1995,  they would qualify for medical                 
  deferments.   It  is  felt  that this  is  a  misuse of  the                 
  program,  and  Mr.  McCormick  indicated  that it  would  be                 
  advantageous to discontinue this deferment.                                  
                                                                               
  Co-chair Frank spoke  to Amendment  #1, which  is a  product                 
  produced  by  the  budget subcommittee  within  the  Dept of                 
  Education.  The WAMI program has a contractual obligation to                 
  the  University of  Washington  which requires  an increased                 
  payment for  overhead.   The commission  said they  were not                 
  able  to charge the  students who benefit  from the program,                 
  and this amendment would  allow for that. He  felt it was  a                 
  responsible approach to enable the  WAMI program to survive.                 
  Senator Frank MOVED for adoption  of the amendment.  Senator                 
  Phillips OBJECTED. He asked if Mr. McCormick had a position,                 
  which  he did not.   Senator Rieger has  an amendment to the                 
  amendment. Senator Sharp  OBJECTED.  He stated that  for the                 
                                                                               
                                                                               
  number of students  that benefit  from all the  universities                 
  compared to the  number of students that  benefit from WAMI,                 
  there  is  no comparison.   He  stated  that the  program is                 
  supporting 6-8 students and costing hundreds to thousands of                 
  dollars.  The least they can  do is absorb some of the  cost                 
  from the special  education.  Senator Frank  stated that his                 
  amendment was not intended to harm  WAMI.  There was further                 
  discussion regarding this issue.                                             
                                                                               
  It was agreed  to hold  the bill and  come back to  it at  a                 
  later time.                                                                  
                                                                               
  End    Tape #40, Side 1                                                      
  Begin  Tape #40, Side 2                                                      
                                                                               

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