Legislature(1997 - 1998)
04/30/1997 09:16 AM Senate HES
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
SB 189 EDUC.LOAN REPAYMNT\ELIG.; OCC. LIC.
Number 508
CHAIRMAN WILKEN announced that SB 189 was the next order of
business before the committee. Chairman Wilken recalled that
during the first few days of session there was a briefing about the
student loan program. During that briefing Chairman Wilken was
struck by the losses to the student loan program which are
unacceptable. Chairman Wilken then had discussions with Ms.
Barrans which determined that the student loan program should not
be a give away program. Ms. Barrans worked on SB 189. Chairman
Wilken informed the committee of a 1994 student loan program study
which found that corresponding with late borrower's is the most
significant cost to the program.
DIANE BARRANS , Executive Director of the Postsecondary Education
Commission (PSEC), noted that the committee packet contains
pertinent statistics. At the December 1996 meeting, the PSEC did
approve a legislative agenda of which a portion is included in
SB 189. Ms. Barrans informed the committee that for the past six
years, the PSEC's annual financial statements have reflected
operational losses which have not been offset by general fund
appropriations. The cumulative effect has gradually threatened the
corporation's ability to continue to issue additional debt. Both
the corporation and the commission have sought ways in which to
reverse this effect. Ms. Barrans acknowledged that the Legislature
has provided the program with some collection methods such as the
confiscation of permanent fund dividends and license revocation.
These tools have proven effective in reducing the programs default
rate by 8 percent since FY92, however the default rate remains
around 18 percent which is unsustainable. Ms. Barrans pointed out
that the 18 percent default rate represents about $115 million in
loans. SB 189 includes mechanisms that will be effective in
reducing defaults and dollars lost to the loan programs.
Ms. Barrans informed the committee that the program experienced a
$2.6 million deficit in FY96 which eroded the asset base of the
corporation. Ms. Barrans expected that loss to increase to about
$4 million in FY97 because of the increased borrowing volume due to
higher loan limits. SB 189 is timely. Ms. Barrans provided the
committee with articles regarding the beneficial effects of
alternative student loan program collections and federal student
loan program collections.
CHAIRMAN WILKEN asked Ms. Barrans to discuss the letter from Smith
Barney which is included in the committee packet.
DIANE BARRANS informed the committee that Smith Barney is the
senior underwriter for the corporation. The letter suggests that
applicants be pre-screened and that credit underwriting standards
be implemented. Ms. Barrans stated that the commission has
discussed a broad screening that would not screen out those with
minor credit issues. Smith Barney indicated that pre-screening of
applicants could reduce the default rate by 3 percent. Smith Barney
discussed enhanced collection tools such as license renewal
intervention, commercially diligent loan collection, wage
garnishment, and the continued use of PFD garnishment. All those
tools should increase the recovery rate on defaulted loans. Ms.
Barrans explained that although 18 percent of the loans are in
default, collection on those defaulted loans occurs and the actual
loss to nonpayment is about 12 percent.
TAPE 97-46, SIDE B
Number 591
Ms. Barrans noted that the Smith Barney letter discusses increasing
interest rates. There are two ways to improve the return rate on
loans: increase the interest rate for the repayment period; have
interest begin accruing when the student receives the funds. Ms.
Barrans pointed out that there are substantial interest free
periods while a student continues his/her education. However, the
corporation pays interest on the loan during the entire time which
results in a loss to the corporation. Ms. Barrans stated that the
most benefit to the corporation would be to allow interest to
accrue throughout the life of the loan. SB 189 is a compromise
that would increase the repayment stream from interest income,
therefore the cap is increased from 2.5 percent to 3 percent. In
1997 and 1998, Ms. Barrans anticipated an 8.6 percent interest rate
on loans. Therefore the additional .5 percent would result in a
9.1 percent interest rate. Ms. Barrans pointed out that the
interest rate that the student actually pays is a little less than
9.1 percent due to the interest free periods on the loan. The
Smith Barney letter does mention that Tile 4 loans are an option.
If the corporation were to offer both state funded and federally
funded loans, this would offer loans that would be almost fully
insured by the federal government.
SENATOR GREEN said that SB 189 takes a new avenue. Currently, the
loan has been available upon request. SB 189 would require a
credit check and worthiness. Senator Green inquired as to what the
fiscal note covered. DIANE BARRANS explained that the fiscal note
covers the cost of electronically running a tape of the
corporation's applicant pool against a credit bureau.
CHAIRMAN WILKEN clarified that SB 189 would not require that every
applicant be screened, but only those with prior credit history.
DIANE BARRANS informed the committee that the commission had
discussed screening those applicants 21 or older due to the lack of
credit of applicants under the age 21. No credit is good credit;
an applicant will not be turned away because of the lack of credit.
Ms. Barrans noted that policy is not stipulated in SB 189, but this
is the approach the commission would put in place.
CHAIRMAN WILKEN stated that he did not intend to narrow the window
for applicants to begin a college career, but once the education is
completed the person is responsible for repayment.
Number 550
SENATOR ELLIS requested Ms. Barrans inform the committee about
credit worthy cosigners. DIANE BARRANS stated that any entity with
a credit screening can establish parameters. A credit bureau
assigns points to certain types of repayment behavior. Ms. Barrans
said that by regulation, the commission would decide what is
egregious bad debt. If an applicant failed to meet that test, the
applicant could apply with a co-signer that would have to meet that
test.
CHAIRMAN WILKEN inquired as to the .5 percent ceiling on profit.
Can the corporation make a profit of up to .5 percent on the loan
portfolio? DIANE BARRANS said that it was about a two percent
spread. Ms. Barrans stated that Bond counsel would have to provide
an opinion as to what can be earned without endangering the
corporation's tax exempt status. CHAIRMAN WILKEN asked if the
corporation's goal is to profit or break even. DIANE BARRANS
replied that the goal is to break even with SB 189. Ms. Barrans
said that if the corporation's goal was profit, that would require
a thorough public policy decision from the Legislature and the
public. CHAIRMAN WILKEN noted the request for the board to provide
a resolution in support of SB 189. DIANE BARRANS noted that the
commission is on record as supporting everything except the .5
percent which was not before the commission at the December
meeting. Ms. Barrans said that the resolution could be requested
at the board's June meeting.
SENATOR GREEN discussed the ability to revoke occupational license
which in other legislation has come to include recreational
licenses as well. Senator Green recommended that sports fishing
licenses be exempted from those licenses that can be revoked under
SB 189. Senator Green asked if all the appeals come through Ms.
Barrans' office and has that always been the case; is there another
method of recourse? DIANE BARRANS said that all appeals come
through her office. Ms. Barrans explained that certain appeals do
go to a hearing officer and the commission has stipulated that
appeal process by regulation. Those appeals going to a hearing
officer occur when a person requests a write off of his/her loan
due to medical circumstances. If a person's PFD is garnished, a
hearing officer process would occur. SB 189 would use the
administrative appeal process with the executive director, with the
exception of the PFD garnishment.
In response to Senator Green, DIANE BARRANS explained that in the
last six months the loan program has increased the level of
correspondence to the borrower. The number of written notices sent
out has doubled. This process is still being reviewed. Ms.
Barrans acknowledged that the process can be improved so that
before a loan goes to a collection agency, all internal measures
have been exhausted. Ms. Barrans emphasized that people are
learning that an Alaska student loan is a real debt.
Number 473
With regard to licenses, Ms. Barrans pointed out that the
commission only reviews licenses that were funded with the
education for which the loan paid. The commission is not reviewing
the revocation of any recreational licenses. Furthermore, some of
the occupational licenses have been excluded if the license is not
centrally administered.
CHAIRMAN WILKEN noted that in conversations in the past, he
requested that there be methods by which to measure the success of
SB 189 which is discussed in the packet. Chairman Wilken requested
that Ms. Barrans develop that more using 1998 as the base year and
comparing today to 1998 and where the program would be in 2002.
TERESA WILLIAMS said that she was available for any questions.
CHAIRMAN WILKEN inquired as to the importance of SB 189 getting
through this year. DIANE BARRANS emphasized that getting SB 189
through this year would be extremely helpful. Ms. Barrans informed
the committee that the commission is well into the application
process for the 1997-98 year. All of the contracts are written and
prepared by early February. Ms. Barrans pointed out that the
collection tools would be available immediately upon receipt, but
the interest rate would not effect borrowers until the 1998-99
year. If SB 189 is passed before the end of this session, then all
the terms could be incorporated in concrete language in next year's
promissory notes.
SENATOR LEMAN moved to report SB 189 out of committee with
individual recommendations and accompanying fiscal notes. Without
objection, it was so ordered.
There being no further business before the committee, the meeting
was adjourned at 10:15 a.m.
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