Legislature(1993 - 1994)
03/03/1994 03:00 PM House HES
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 506 - STUDENT LOAN PROGRAM CHAIR BUNDE then brought HB 506 to the table and turned the gavel over to Rep. Toohey to preside over the remainder of the meeting. CHAIR TOOHEY took a brief at-ease from 4:08 p.m. to 4:20 p.m. Number 795 REP. BUNDE addressed HB 506. He stated that Joe McCormick would further address the bill. REP. BRICE stated for the record that he presently has an active student loan, and indicated that there might be a conflict of interest. CHAIR TOOHEY thanked Rep. Brice and said his comment was so noted. REP. BUNDE stated that the legislation would attempt to make the student loan "a little more business-like." He said administratively progress has been made, but he would like to see even more progress to maintain the student loan program, and indicated that as it exists, it costs more money to bond the program than is being received. He said under those circumstances, the program would eventually run out of money. He indicated that the bill addresses seven items within the loan program: 1. It would change the interest rate from a fixed rate to a variable rate. 2. It would allow for restrictions for eligibility of a loan if an individual has had a prior loan written off as a bad debt. 3. It would allow wages to be garnished. 4. It would deny state licensure if an individual is in default of a student loan. 5. It would also deny state warrants. 6. It would allow for the refinancing of student loans. 7. It would allow for an expanded family education loan eligibility. Number 870 REP. BUNDE asked if there were any questions. TAPE 94-36, SIDE A Number 000 REP. OLBERG asked if the interest rate would have a floor or could it go down to 1%. Number 050 JAMES MCCORMICK, Executive Director, Alaska Commission on Postsecondary Education, testified in Juneau in support of HB 506. He stated that it does not have a floor, but would be tied to the cost of the money that is secured in the bond market. He said it would be unrealistic to assume that the cost of money would go down to 1% or less. REP. OLBERG asked if the rate would have a cap. MR. MCCORMICK said no. REP. OLBERG asked what the interest rate is based on. MR. MCCORMICK replied that it is based on the cost of money when bonds are issued to replace the capital of the loan fund. He said the interest rate from loans disbursed from the bond proceeds would be tied to the cost of the bond proceeds. REP. OLBERG asked if the rate could be annually adjusted. MR. MCCORMICK said it could be a possibility. He said the problem would be that a greater administrative burden would be put upon the entity that would administer the loan fund, because the interest rate would change from year to year. Number 076 REP. OLBERG said he felt that the software required for that process would not be a difficult transition. He then asked if teaching certificates would be included under denial of licensure. Number 085 MR. MCCORMICK answered that he had a friendly amendment to restrict the impact of Section 1 to only persons licensed for professional or occupational licenses only. He then stated that he was unsure if teaching certificates would fall under the provision. REP. BUNDE stated that he currently sits on a committee that is rewriting the provisions for granting a teacher's license. He felt that a teaching certificate would fall under that section, and he would encourage the amendment. Number 121 REP. OLBERG agreed with the amendment. REP. BUNDE maintained that there are many other student loan programs that offer a lower interest rate and that students should be encouraged to shop around. REP. VEZEY asked what the average maturity date of a student loan is. MR. MCCORMICK responded by saying the average student is in school 2-1/2 years with one year grace and a standard ten year repayment. He said that many students qualify for extended repayment plans of 15 years. He stated that the average is 12 to 13 years. REP. VEZEY said, "paying on the loan or have the loan out." MR. MCCORMICK said, "paying on the loan." REP. VEZEY clarified that the average loan has a 15 year life. MR. MCCORMICK added that there is no stated forgiveness on the loan, so it could be an outstanding balance for an indefinite amount of time. Number 188 REP. VEZEY asked what kind of maturity was on the bonds that are issued. MR. MCCORMICK stated that the bonds have approximately a 10 year maturity. REP. VEZEY questioned whether it would be prudent to take out a long term, variable rate loan. MR. MCCORMICK maintained that the legislation provides for a fixed rate loan, fixed to the cost of that money for that bond issue. The rate would not change for the bond issue. REP. VEZEY clarified that money would be available one year at one rate and at another rate the next year, but the rate would be fixed for the life of each individual loan. MR. MCCORMICK agreed. He also said that it is possible to have a variable rate bond and a variable rate interest on the loan. He indicated that it would require more sophisticated software. REP. VEZEY suggested that if the loans went to a variable rate, investments would need to be accessed to ensure that there would be no exposure to an arbitrage situation. MR. MCCORMICK agreed and said language within the bill states that the commission will ensure that the rate covers the administrative cost of the loan. He asserted that the thrust of the bill is to recognize the actuarial soundness of the loan fund and specified that an interest rate must be actuarially sound given the terms of the loan. Number 321 REP. VEZEY stated that the student loan program did not have a loan forgiveness program. MR. MCCORMICK explained that there is no loan forgiveness on loans that are currently being granted, but there is loan forgiveness for loans that have been made in the past that will continue into the future for which there is no offset. He said currently no fees are charged and no premiums are collected to cover the loan forgiveness, and he anticipated there would be a depletion in the fund annually as students qualify for forgiveness. REP. VEZEY asked if there is a significant depletion in the loan reserve. MR. MCCORMICK said historically there has been a significant depletion, but it has slowed. He further stated that money is lost in three areas -- interest not charged to a borrower (in school plus one year of grace), loans that default, and loans that have forgiveness provisions. REP. OLBERG suggested that the term of the loan be tied to the source of the funds, and explained that if there are ten year bonds, there should be ten year term loans. MR. MCCORMICK stated that the term of the loan is dealt with in the section pertaining to refinancing. He also said that in current statute there is a provision that allows up to 15 years if the student has an extremely high debt. He felt the terms of the loan will be much more flexible when there is a consolidation provision that would allow students to collapse various loans into one new promissory note at a new interest rate which would be tied to the bond issue. REP. BUNDE stated that the current interest rate is 8%, but if all the interest free time that a student has is considered, it is actually closer to 5%. The loan was bonded at 6%, indicating a loss. CHAIR TOOHEY said that forgiveness loans are dying out as the practice stopped in 1987. REP. VEZEY suggested that the student loan program showed a positive cash flow. MR. MCCORMICK agreed, but he indicated that when he used the term "actuarially sound," he was talking in terms of the total life of the loans and total life of the bonds, not just what the balance sheet reflects for one particular year. REP. VEZEY asked if, at the current fixed rate of 8% with forgiveness periods and the cost of funds, is the program operating in the black? MR. MCCORMICK said yes. REP. BRICE asked Mr. McCormick what constitutes a defaulted loan. He also asked if he knew of the University of Alaska Coalition of Student Leaders (UACSL) and of their position on the bill. CHAIR TOOHEY asked if Rep. Brice would hold his questions to allow for teleconference testimony. Number 500 BRIAN BRUBAKER, Coordinator, University of Alaska Coalition of Student Leaders, testified via teleconference on HB 506. He stated that the coalition favors a cap to be put on the variable rate, as well as provisions for exceptions on a case by case basis. He also said that the withholding of licensure should also be dealt with on a case by case basis. He stated that the coalition has become involved as a result of past problems with the time frame that loans were being delivered in. He also said that the student loan program does need to move ahead to a more business like approach, citing that as being one reason they support the variable rate with a ceiling. He further stated that a major portion of university money comes from student loans, and indicated that next year the cost of a credit will be $67. He then asked how the Alaska Commission on Postsecondary Education (ACPE) would ensure that the lowest interest rates would be offered. Number 618 NICHOLAS ABRAMCZYK, Member, Associated Students of the University of Alaska, Fairbanks, testified via teleconference on HB 506. He stated that a student must fill out the same application year after year. He felt that some type of consolidation process should be used to avoid redundancy, and suggested that it would steer the program toward a more business like program. He said he supported a cap on a variable rate. Number 669 ANDREA PAIGE ADAMS, Vice-President, United Students of University of Southeast, Sitka, testified via teleconference on HB 506. She stated that she has been working with Mr. McCormick to keep him informed of the students' ideas. She said that on February 20, 1994, the students passed a resolution in support of ACPE's recommendations for HB 506. She said she would like to see the recommendations go through. Number 692 CHAIR TOOHEY closed teleconference testimony and asked that Rep. Brice's questions be addressed. REP. BUNDE asked that someone address the fiscal note. MR. MCCORMICK said he understood the student's concern for capping the interest rate, but it would defeat the purpose of going to a variable rate in the context of not having to come before a legislative body to change the rate again. He said, because the program is audited by the state and private firms, and financial advisors are hired to advise administration on the cost of money and the issuance of bonds, the public can be assured that students are receiving the lowest possible interest rate. He further stated that the program must be operated in such a way that students will want to borrow from the program. The rate will have to be competitive with that of other loans. He also indicated that the process must competitive and indicated that a new application would be coming out in the following weeks that would simplify the application process. He maintained that the bill would allow for the simplification of repayment of a loan and urged that there be appropriate administrative funds to make the process work. Number 779 CHAIR TOOHEY complimented Mr. McCormick on being a fine caretaker of the state's money. REP. BUNDE, referring to the students asking for a cap on the interest rate, said that they can't take advantage of low interest rates when they are available and not pay their fair share when they are higher. He further stated that Alaskan students are paying only 23% of the actual cost of their education. Number 816 REP. BRICE asserted that the government's role is to help students along. He felt there should be a cap, especially if the prime rate does go up to 21% again. He felt the cap should be at 15% and explained that the state must make the loans attractive to students. He suggested an amendment to Section 2 that would establish a ceiling at 15%. REP. BUNDE said that he sympathized with the student's plight, but indicated that there is a provision within the bill for refinancing. Number 885 REP. BRICE asked if the provisions for refinancing were only for certain circumstances. REP. BUNDE observed that if the cost of money went over 15%, money to operate the program would come out of general funds. He then reminded the committee that the "sympathy for running this program in the legislature under general funds is waning." He indicated that there are legislators that would like to eliminate or privatize the program. MR. MCCORMICK asserted that there has been no general fund expenditures for the loan program since 1993. Number 908 REP. BRICE asked under what circumstances can a person refinance, and what is the limit to the amount of times a person can refinance? MR. MCCORMICK replied that there would be no limitations specified in the language of the bill. He said that typically when a student wants to refinance, there is a cash flow problem. The student would then collapse the loans into one, and the individual payment would be less than the total amount of payments of the individual loans. He further stated that the refinancing terms should not be dictated by the bill itself. He felt that the language was flexible enough as to have a viable refinancing structure. He asserted that there are appeal mechanisms in place that would be implemented when a student challenges the denial of a license. MR. MCCORMICK made reference to a friendly amendment that would be submitted to Rep. Bunde at a later time. He suggested that the Department of Commerce would need the authority to require applicants for professional licenses to disclose their social security numbers so computer matches could be done between the two departments. REP. BUNDE asked if there was someone from Occupational Licensing to address the fiscal note. He then made a suggestion to continue discussions of HB 506 the following day. Number 965 BARBARA GABIER, Program Coordinator, Division of Occupational Licensing, Department of Commerce and Economic Development, testified in Juneau on HB 506. She stated that there would be 1800 matches of professional licenses for matches on loans. Of that 1800, there is a potential for 10% default. Hence, she said that there would be possibly 180 persons that would be sought after for revocation of license. She anticipated that 90 of those persons would ask to have a hearing, and a hearing costs $3,000. She further stated that through streamlining procedures the cost could be cut down to approximately $500 per hearing and related that cost to the fiscal note. REP. BUNDE asked what would be the net gain or loss for tracking down those who are in default. MR. MCCORMICK maintained that to break even he would have to collect 20 loans. He said that if the average loan is $5000 per person, 20 people would figure to $100,000. He further stated that any loans collected beyond the 20 students would be above a break even figure. He felt the thrust of the revocation provision is not the actual seizure of a license, but is the psychology of the threat of denial or revocation of licensure if a loan is in default. MS. GABIER said, "We have built into the fiscal note... reviewing it annually and recovering only the costs that... are actually incurred by the division." Number 068 REP. VEZEY asked if the Department of Commerce requires people to disclose their social security number. MS. GABIER said no. REP. BUNDE suggested that if disclosure of the social security number is refused, perhaps licensure could be refused. CHAIR TOOHEY asked for further testimony. There was none. She then asked the pleasure of the committee. REP. VEZEY asked if he could propose an amendment. CHAIR TOOHEY asked if it was an involved amendment. REP. VEZEY said yes. CHAIR TOOHEY asked that the amendment be proposed at the next hearing of HB 506. Seeing no further business before the committee, CHAIR TOOHEY ADJOURNED the meeting at 5:02 p.m.
| Document Name | Date/Time | Subjects |
|---|