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