Legislature(1997 - 1998)
04/30/1997 09:16 AM HES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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.