Legislature(1997 - 1998)

04/30/1997 09:16 AM HES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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           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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