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.