03/08/1995 09:00 AM Senate FIN

                                                                               
       HOUSE BILL NO. 135                                                      
              "An Act relating to student loans; and providing                 
  for             an effective date."                                          
                                                                               
  Co-chair Halford announced that SB  59 is the companion bill                 
  to HB 135 which passed out of  the House.  Joe McCormick was                 
  invited to speak to  the committee.  Mr. McCormick  spoke to                 
  HB 135.   He  stated it is  a technical  bill that  requires                 
  transition language be enacted by the legislature before the                 
  commission can  pass regulations regarding  legislation that                 
  passed this  legislative body  last year  in HB  506.   Most                 
  specifically, he  said, the transition language  would allow                 
  the commission to pass regulation  setting the interest rate                 
  on student loans beginning July 1, 1995.  If the regulations                 
  are not in  place legally, funds  cannot be disbursed  after                 
  July 1.                                                                      
                                                                               
                                                                               
  Senator Rieger stated he has  a reservation on the servicing                 
  of the student loans.  He said that this bill would  make it                 
  more possible to set an interest  rate which covers not only                 
  the  interest  cost  of the  borrowed  funds,  but  also the                 
  servicing  costs.   His concern  comes from  a Pete  Marwick                 
  Study  that  the   commission  on  postsecondary   education                 
  commissioned.  Discussion followed regarding out-sourcing.                   
                                                                               
                                                                               
  Mr.   McCormick  responded   that  the   adoption   of  this                 
  legislation has  nothing  to do  with  that  recommendation.                 
  This legislation, if adopted, would  allow the commission to                 
  set the interest rate on the loans that will be disbursed on                 
  July 1  and thereafter.   Neglecting  to pass  HB 135  would                 
  impact 13,000  Alaskan students  for an  approximate sum  of                 
  disbursement   of   $50   million.     The   issue   of  the                 
  recommendation to the Pete Marwick Study says that  while it                 
  is  the most attractive  offer from a  cost benefit analysis                 
  standpoint, it is  probably not a  practical offer.  With  a                 
  very small  loan program  located in  a remote  part of  the                 
  United States,  and the  likelihood of  obtaining good  out-                 
  sourcing service  at a  reasonable  cost is  unlikely.   The                 
  recommendation  is  to  fix  the   problem  in-house.    Mr.                 
  McCormick reiterated that this is another issue, but that he                 
  would be happy to discuss it further.                                        
  Senator Rieger testified  that the bill enables  adoption of                 
  regulations to implement 1443120F, which includes charging a                 
  fee which is sufficient to cover  the cost of servicing. Mr.                 
  McCormick responded  that  in  his  professional  experience                 
  there is a loan  program that has historically never  been a                 
  part  of,  or close  to, the  way  the general  student loan                 
  programs in the lower 48 operate. In order to out-source the                 
  servicing  of   loans,  there   would  have   to  be   major                 
  modifications  in  order  to  service  Alaska  student loans                 
  according to Alaska law.  The problem is further complicated                 
  by the  fact that  it is  a small  loan program.   Servicers                 
  would be asked  to serve a  portfolio of approximately  $500                 
  million.  Most of the  out-sourcing companies, that would be                 
  considered and  who  are experienced  in  servicing  student                 
  loans,  serve federal  student  loans  which have  different                 
  requirements.  The  servicers  maintain  portfolios  in  the                 
  billions  of  dollars. The  Pete  Marwick reports  that this                 
  would be a major  problem to finding an  out-sourcing entity                 
  that could perform the service on a cost-benefit basis.  Mr.                 
  McCormick  supports the  opportunity  to  build  a  software                 
  system that the  committee thought it  was getting in  1991.                 
  He stated  that it didn't  happen because it  was contracted                 
  with a company in Anchorage  Alaska, that had no  experience                 
  in  the  student  loan  industry.    The  company  purchased                 
  software  that was  not related  to the proper  servicing of                 
  student loans.  To  make matters worse, six months  into the                 
  development of that  project, the company  went broke.   Mr.                 
  McCormick stated that when he started with the commission in                 
  December of  1993, there  was not even  one data  processing                 
  employee on the staff of the commission.  There are now four                 
  data  processors,  which he  recruited  from a  student loan                 
  servicing operation in Denver, Colorado.  The commission now                 
  has  the  infrastructure, experience  and  expertise  on the                 
  payroll   in-house    to   implement   the    Pete   Marwick                 
  recommendation successfully.   The commission  projected for                 
  the LB&A committee in December that  upon completion of that                 
  installation, within 5 years, the staff would be reduced  by                 
  9.  Total cost would be paid for in lower cost of servicing.                 
                                                                               
                                                                               
  Senator Donley questioned if local people are being trained.                 
  Mr.  McCormick stated there  are no  open positions  at this                 
  time.   There  is existing staff  who will  receive training                 
  within the commission to support the new system.                             
                                                                               
  Senator Rieger asked  what the  interest rate  on the  loans                 
  will be  when the regulations  are adopted?   Mr.  McCormick                 
  responded  that the  interest rate  based  on the  1994 bond                 
  issue which was 5.83%,  will be in the range of  8 to 8-1/2%                 
  interest rate.  The administrative portion of that amount is                 
  2.5%.   He  stated that  there is  legislation pending  that                 
  would help  defray losses  to the  fund, especially  default                 
  costs. Senator Rieger asked  when the last bond was  issued?                 
  Mr. McCormick stated it was in July  1994.  He said it was a                 
  $50 million bond issue fully insured, based on changes being                 
  made in servicing loans.  The  1993 issue of $43 million was                 
  uninsured  because of the  lack of confidence  that New York                 
  had  in  the ability  of  the commission  to  service loans.                 
  Based on the management plan which includes the upgrading of                 
  the  servicing  system, they  issued  the $50  million fully                 
  insured.  If  the  loan  defaults,  it  is  not  covered  by                 
  insurance  and  is a  loss.    The State  of  Alaska  is not                 
  responsible for any of these loans, the collateral for these                 
  bonds are the assets of the fund itself.                                     
                                                                               
  Co-chair  Halford  called for  additional  testimony on  the                 
  bill.   None was  forthcoming.   Senator Phillips MOVED  for                 
  passage  of  HB  135 with  individual  recommendations.   No                 
  objection  having been raised,  HB 135  was REPORTED  OUT of                 
  committee  with a  zero fiscal note  from the  Department of                 
  Education. Co-chairs  Halford and Frank  along with Senators                 
  Phillips and  Sharp signed the  committee report with  a "do                 
  pass" recommendation.   Senators Rieger, Donley  and Zharoff                 
  signed "no recommendation."