Legislature(1995 - 1996)
04/21/1995 09:35 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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
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