Legislature(2009 - 2010)SENATE FINANCE 532
04/01/2009 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB57 | |
| HB109 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 57 | TELECONFERENCED | |
| + | HB 109 | TELECONFERENCED | |
| + | HB 172 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 109
"An Act relating to eligibility for the Alaska
supplemental education loan program and to the interest
rate for a loan made under the Alaska family education
loan program; and providing for an effective date."
9:22:36 AM
KATIE KOESTER, STAFF, REPRESENTATIVE PAUL SEATON, SPONSOR,
explained that the legislation would allow the Alaska
Commission on Postsecondary Education (ACPE) to sell bonds
to generate money for student loans in the current fiscal
climate. House Bill 109 was brought to Representative Seaton
and the House Education Committee by Diane Barrans, the
director of ACPE. The legislation requires a borrower to
have either good credit or a co-signer with good credit in
order to get a student loan from the state of Alaska.
Ms. Koester noted that the requirement only applies to state
loans called alternative education loans. The restrictions
would not apply to federally guaranteed loans such as
Stafford loans. Currently, a borrower can get an Alaska
student loan as long as they do not have bad credit, which
means they can get a loan with no credit. In the current
fiscal climate, investors are not willing to back the loans.
The commission cannot use loans as currently structured for
collateral. Without the change, ACPE will either be forced
to stop lending to Alaska borrowers or the state will have
to directly fund the program with $40 to $50 million in
general funds.
Ms. Koester added that HB 109 makes a change to the Family
Education Loan (FEL). Through the FEL program a family
member can borrow on behalf of other members. The current
interest rate for the loan is set in statute at 5 percent;
HB 109 would allow the student loan corporation to set the
rate to not exceed 8.25 percent. She explained that the FEL
rate would be set in the same manner as the Alaska student
loan is currently set.
Senator Ellis queried the feedback the legislation was
receiving from students and student organizations across
Alaska. Ms. Koester reported that there have been some phone
calls from the student community. She explained that in the
current fiscal climate, the loans are viewed as sub-prime.
The state will have to address the issue if it wants to
continue borrowing.
Senator Ellis asked if the legislation would self-correct
when the economy got better. Ms. Koester replied the change
would be permanent until the legislature addressed the issue
again.
9:27:24 AM
Senator Olson asked how many students would not be able to
go to college if the bill did not go through. Ms. Koester
replied that there has never been an assessment of the
credit standard of loan applicants. She believed
hypothetical scenarios had been run.
Senator Olson asked when the funds would be available for
eligible students if the legislation were to pass. Ms.
Koester replied that it would take a fiscal year for the
changes to take effect. She referred to HB 172, which would
provide for a bridge loan from the state to the Alaska
Student Loan Corporation and enable the commission to offer
loans during the upcoming academic year.
Co-Chair Stedman asked if young citizens from families
without good credit would be excluded from the program. Ms.
Koester acknowledged the possibility of exclusion of some
people. She stated that statistical analysis of the 2008-
2009 academic year reveals that the only 24 percent of
Alaska student loan applicants are under 21 years of age.
Older applicants usually have had other ways to establish
credit. An applicant would be limited if they were too young
to establish credit, did not have a family with good credit,
and were unable to find someone else to sign. However, the
federal loan would still be available to those individuals
and had been increased.
9:30:59 AM
Senator Ellis commented that students he had spoken to
thought the loan would make life more difficult, especially
for students with low-income families. He asked that the
sponsor be informed of the Alaska Achievers Incentive
Program [SB 33], legislation designed to make college more
affordable for Alaskan students. He acknowledged that loans
outlined by HB 109 may be necessary, but noted that Alaska
ranks poorly regarding college affordability. Graduation
rates are not great and the state lacks a strong needs-based
financial aid system. Ms. Koester replied that she would
give the information to the sponsor and added that Senator
Seaton was looking at legislation to help students.
Senator Thomas stated concerns about credit for older
students, since people tended to go back to school when the
economy is struggling.
9:33:38 AM
DIANE BARRANS, EXECUTIVE DIRECTOR, ALASKA COMMISSION ON
POSTSECONDARY EDUCATION COMMISSION, DEPARTMENT OF EDUCATION
AND EARLY DEVELOPMENT, and EXECUTIVE OFFICER, ALASKA STUDENT
LOAN CORPORATION, echoed the urgency of the situation.
Co-Chair Stedman queried other possible solutions that would
not exclude low-income families. Ms. Barrans replied that
the federal guaranteed education loan is available for low-
income families without credit. Parents can borrow on behalf
of students through the Stafford and Federal PLUS loan
programs, which have a very modest adverse credit review.
Federally guaranteed loan limits have been increased. An
independent student can borrow $9,500 in their freshman
year. The amount increases up to graduate level, when over
$20,000 per year can be borrowed.
Ms. Barrans added that another way to serve low-income
families would be for Alaska to create a state guaranteed
loan program. Following the federal model, Alaska would
guarantee repayment of any loan the borrower did not repay.
She stated a proposal could be made to the legislature if
there was interest.
9:36:38 AM
Senator Ellis asked how interest rates were determined. He
reported that students he had spoken to had many questions
about interest rates compared to other financing mechanisms.
He also wondered if there should be a self-correcting
mechanism imbedded in the [FEL] program.
Ms. Barrans explained that historically the rate was set by
statute at 5 percent. The current rate is tied to the state
alternative loan rate, which is capped at 8.25 percent. The
rate is set by factoring in the cost of funds and of
administering the program. The base rate is the federal rate
plus 50 basis points or 0.5 percent. Currently the interest
rate is 7.3 percent, the lowest rate in the country for an
alternative loan. The only loan rate lower would be an
equity loan.
Senator Ellis asked if the Alaska Student Loan Corporation
could be available on various campuses to discuss financial
issues affecting students. Ms. Barrans replied that the
commission had met with students regarding the legislation.
She agreed that a forum would be helpful. She expressed
dissatisfaction with the change that was needed.
9:40:26 AM
Co-Chair Stedman asked what other states were facing
regarding student loans and how other states had responsed.
Ms. Barrans replied that every state is facing the
situation. In some states the non-profit entity stopped
making education loans. In other states, the state has
stepped in and purchased the bonds sold by the issuer at a
negotiated rate that was beneficial to the issuer. Some
states, such as New York, are creating a new alternative
loan program, a pre-funded guaranteed loan. She added that
in each case, good credit criteria are in place. States are
intervening to assist with the current lack of liquidity and
with the ability to finance things in the market, not to put
a program in place that is widely available. Alaska's
program, even with the modest credit criteria in place since
1998, is an anomaly in terms of how widely available the
loan is. She estimated that 13 to 15 other states have taken
some sort of action.
9:42:37 AM
Senator Thomas requested the default rate on the student
loans in Alaska. Ms. Barrans responded that the seasoned
rate after aging the loans into repayment for several years
is over of 11 percent.
Co-Chair Stedman asked if the default rate was changing. Ms.
Barrans answered that the default rate has vastly improved
since the first decade of lending; one of the things that
prompted the 1998 credit review was default rates
approaching 30 percent. The commission hoped that adding
credit criteria would be sufficient. She opined that the
program would have gone forward if it had not been for the
meltdown in the credit markets and the change in posture by
rating agencies and investors with respect to the underlying
loans. However, the effect of the economy in the past year
and a half has permanently changed the ways rating agencies,
banks, and investors view underlying assets for loans.
Senator Olson commended the commission for bringing the
default rate down and asked what kind of losses the state
has had to cover.
9:45:02 AM
Ms. Barrans responded that the commission continues to
aggressively collect on default loans. She noted that
students at smaller debt levels usually default, especially
students who did not complete school. The average default
debt is less than $20,000.
CHARLENE MORRISON, CHIEF FINANCIAL OFFICER, ALASKA
COMMISSION ON POSTSECONDARY EDUCATION, DEPARTMENT OF
EDUCATION AND EARLY DEVELOPMENT, reported that the dollar
value of the commission's loans in default is $46 million in
principal.
Co-Chair Stedman asked for the definition of default status.
Ms. Morrison replied that a loan is in default when a
borrower is over 270 days past due on their current
repayment plan.
Co-Chair Stedman wondered if the statistics included anyone
who was outside their original repayment schedule, which
would include restructuring.
9:48:28 AM
Senator Olson asked how much borrowers were in default. Ms.
Morrison answered approximately $40 million as of 12/31/2008
[Note: Ms. Morrison changed the default number to $82
million at the end of the meeting].
Senator Olson asked how many borrowers in default have been
written off completely. Ms. Morrison replied that the
commission writes off loans after a student has been
delinquent for seven years. Prior to that time the
collection process can be used. The total principal plus
interest to be written off is approximately $5 million.
Senator Olson queried the forecasted default rate for
students who will be impacted because of the proposed credit
rating. Ms. Morrison replied that they expect the rate to be
less because of more co-signers. She could not give a dollar
amount.
Senator Thomas wondered how many individuals are represented
in the $40 million default total and asked the process of
collections. Ms. Morrison answered that she did not know how
many individual borrowers were in default, but said she
would get the information.
9:51:29 AM
Ms. Barrans explained the collection process, which begins
at 15 days past due and includes reminder notices on monthly
statements, phone calls, and counseling borrowers on ways to
avoid being delinquent or in default. Once a borrower is 180
or more days past due, there are collection levers that can
be used, including garnishment of wages or the permanent
fund dividend and liens on Alaskan property. After a year,
the commission will transfer the borrower to a collection
agency.
Co-Chair Stedman opened public testimony.
LEE DONNER, MANAGING DIRECTOR, FIRST SOUTHWEST COMPANY and
ADVISOR, ALASKA STUDENT LOAN CORPORATION (testified via
teleconference), explained that the market for securities,
the proceeds of which are used for alternative student
loans, has changed dramatically in the last year and a half.
A recent review of current market conditions and the status
of alternative loan programs around the country revealed
that there have only been three tax-exempt fixed-rate
alternative loan financings executed by state agencies, or
tax exempt issuers in the category of the student loan
corporation. Most of the programs require a FICO (or credit
quality) score for the borrower or co-signer of 670 to 720.
The current standard for up-front fees to offset losses
ranges from 4 to 7 percent of the face amount of the loan,
depending on whether there is a co-signer. For alternative
loan programs with very good default history and a
significant duration of good history, the rate ranges from
7.5 to 8 percent. For programs with bad default history or
new start-up programs, the rate ranges from 8 to over 9
percent.
Mr. Donner referred to a recent comparable example in the
market place: Sallie Mae, or the Student Loan Corporation,
did a $1.5 billion financing. To obtain an investment-grade
rating, Sallie Mae had to over-collateralize the transaction
by almost 50 percent. The average FICO score for the loans
involved was 726 and the interest rate on the debt they sold
ranged over three months from 425 to 750 basis points
because it was for alternative loans.
Mr. Donner stated that the provisions in HB 109 were prudent
and necessary, and as restrained as realistically possible
for refinancing in current market conditions.
9:56:58 AM
Mr. Donner strongly recommended passage of the bill as
advisor to the state and to a number of other student loan
entities struggling with the same market conditions.
Ms. Morrison corrected her earlier total of loans in default
from $40 million to $82 million.
9:58:15 AM RECESSED
3:09:28 PM RECONVENED
| Document Name | Date/Time | Subjects |
|---|---|---|
| Amendment 1 Version E 2.pdf |
SFIN 4/1/2009 9:00:00 AM |
SB 57 |
| articles and back-up.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 109 |
| Letters of Support SB57.pdf |
SFIN 4/1/2009 9:00:00 AM |
SB 57 |
| SB57-EED-ESS-amendment_3-31-09Fiscal NoteDraft.pdf |
SFIN 4/1/2009 9:00:00 AM |
SB 57 |
| HB172 DOR GeFONSI.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 172 |
| Briefing on ASLC Liquidity Issues and Proposed Paln of Action.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 109 |
| Chart from ACPE website explaining loans that are affected by Hb 109.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 109 |
| HB 109 sponsor statment.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 109 |