Legislature(2009 - 2010)HOUSE FINANCE 519
02/25/2009 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB109 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 109 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 25, 2009
1:48 p.m.
1:48:21 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:48 p.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas, Jr., Vice-Chair
Representative Allan Austerman
Representative Harry Crawford
Representative Anna Fairclough
Representative Richard Foster
Representative Les Gara
Representative Reggie Joule
Representative Mike Kelly
Representative Woodie Salmon
MEMBERS ABSENT
None
ALSO PRESENT
Katie Koester, Staff, Representative Paul Seaton; Diane
Barrans, Executive Director, Postsecondary Education
Commission, Department of Education
PRESENT VIA TELECONFERENCE
None
SUMMARY
HB 109 "An Act relating to eligibility for the Alaska
supplemental education loan program and to the
interest rate for a loan made under the Alaska
family education loan program; and providing for
an effective date."
HB 109 was REPORTED out of Committee with a "do
pass" recommendation and with zero fiscal note #1
by the Department of Education and Early
Development.
1:48:55 PM
HOUSE BILL NO. 109
"An Act relating to eligibility for the Alaska
supplemental education loan program and to the interest
rate for a loan made under the Alaska family education
loan program; and providing for an effective date."
KATIE KOESTER, STAFF, REPRESENTATIVE PAUL SEATON, related
that HB 109 was brought to Representative Seaton by Diane
Barrans, the director of Postsecondary Education. HB 109
requires a borrower to have good credit or a co-signer in
order to apply for an Alaska Supplemental Education Loan
(ASEL). This provision only applies to state loans called
alternative education loans. It does not apply to federally
guaranteed loans such as the Stafford Loan. Currently, a
borrower can get an Alaska Student Loan as long as they do
not have bad credit. A borrower with no credit could obtain
a student loan. However, this has become problematic in the
current fiscal climate because investors are not willing to
back those loans. Alaska Commission on Postsecondary
Education (ACPE) cannot use loans as they are currently
structured as collateral. Without this change, the
Commission will be forced to stop lending to Alaska students
or the state would have to directly fund the program to the
tune of approximately $40 million to $50 million in general
fund. HB 109 also makes a small change to the Alaska Family
Education Loan (FEL), a program where family members can
borrow on behalf of another family member. Currently, the
FEL interest rate is set in statute at 5 percent, and (ACPE)
would like to allow that rate to be set by the Alaska
Student Loan Corporation (ASLC) not to exceed 8.25 percent,
which is the same as the ASEL.
Ms. Koester referred to informational items and articles in
the members' packets. Also included are explanations of the
two types of loans, the ASEL and FEL.
1:52:08 PM
DIANE BARRANS, EXECUTIVE DIRECTOR, POSTSECONDARY EDUCATION
COMMISSION, DEPARTMENT OF EDUCATION, offered to answer
questions related to the bill.
Representative Austerman noted that the current interest
rate set for the FEL is at 5 percent. He requested
information about how the bill would impact the interest
rate. Ms. Barrans reported that the current rate on the
ASEL is 7.3 percent. The Corporation looks each year at
what level of benefit can be provided to borrowers. On a
year to year basis, the Corporation approves a series of
benefits. Those are generally applied as credits to reduce
the effective rate of interest below 7.3 percent. For
example, there is a half percent reduction for Alaska
Presence. Automated payments are given a quarter percent
reduction. Timely payments reduce the interest rate another
2 percent.
1:54:32 PM
Representative Austerman asked how many students qualify for
the 2.75 percent benefit. Ms. Barrans replied, with respect
to the Alaska Presence benefit, about 74 percent receive the
benefit. About 30 percent qualify for the automatic payment
benefit. The on-time payments benefit is relatively new and
less than 5 percent take advantage of it.
Representative Austerman asked if there is a revolving loan
program. Ms. Barrans related that when ASLC was established
in 1988, the state transferred loan assets to it into a
revolving loan fund. That fund continues to exist.
Repayments from the loan go into that fund, which reduces
the amount of bonding needed from one year to the next.
Representative Austerman asked how large that fund was. Ms.
Barrans reported that it was quite low at this point. Last
year all new loans were financed out of cash coming in. By
the end of this fiscal year, about $95 million in new loans
will have been funded. She speculated that by June 30 there
would probably be less than $15 million in the fund.
1:57:19 PM
Co-Chair Hawker pointed out that the transition language in
the bill indicates an urgent situation. He asked for
clarification as to why emergency regulations are necessary.
Ms. Barrans stressed that timing was critical in order to
secure financing for loans for 2009-2010, and to make a
bright line between the loans that were issued under current
credit standards and loans issued under an improved credit
standard for 2009-2010 loans. Applications for future loans
can not be accepted until the matters impacting ASLC
finances are resolved.
Co-Chair Hawker rephrased that the ordinary cycle of loan
processing is on hold. Ms. Barrans agreed.
1:59:18 PM
Representative Joule understood the need for the
legislation; however, he spoke of a concern for students who
could not qualify for loans because of a lack of credit or
credit history, and without a co-signer, such as those who
come from small communities. Ms. Barrans shared
Representative Joule's concern. The impact is somewhat
mitigated by the raising of eligibility limits on the
federal Stafford Loan. There was also an increase in the
base Pell Grant, and a small state grant program. There are
options for the very poor. She agreed that there would be
an impact on those who have poor credit and no co-signer.
Representative Joule said it would affect both those who
wish to go to vocational schools and to academic programs.
Ms. Barrans pointed out that all accredited vocational
schools have access to federal aid.
2:03:21 PM
Representative Crawford asked what alternative loans were.
He also requested information about how a credit score is
determined. Ms. Barrans explained that the term
"alternative loan" is any loan that is not a federally
guaranteed student loan. What used to be called the Alaska
Student Loan is now called the Alaska Supplemental Education
Loan, which is viewed as supplemental for gap funding.
Because of lower rates, the federal guarantee, and extensive
forbearance deferments repayment options under the federally
guaranteed program, every student's first loan choice should
be the Stafford Loan. After that, the ASEL loan would be
the appropriate choice. She shared requirements of loan
programs in New Jersey.
2:06:54 PM
Ms. Barrans reported that the FICO score is derived based on
the consumer's history of incurring and repaying debt. She
shared statistics from a sampling of 5,100 ASEL borrowers.
Only a small portion had an acceptable FICO score of 680 or
greater. She predicted that a great portion of new
applicants would have to have co-signers. She stated a
preference to not have to make the changes required in the
bill. She added that some alternative loan providers have
produced a risk-based scoring business model for varying
interest rates. She found that method to be contrary to a
program that is designed to be broadly available to Alaskan
students. She explained the varying interest rate business
model.
2:09:53 PM
Representative Austerman inquired about default percentages
and the time period before default is declared. Ms. Barrans
said that default is considered when a student is six months
in arrears. The default rates have been lower in recent
years. Currently, there is an 11 percent default rate. The
ASLC aggressively pursues those in default.
Representative Austerman asked about costs associated with
pursuing collection. Ms. Barrans described collection costs
as about $300,000 per year. Collection is cost effective
because no court order is needed for garnishment.
2:12:50 PM
Co-Chair Stoltze concluded that higher default rates
occurred at times where there were generous interest and
forgiveness provisions. Ms. Barrans agreed. Co-Chair
Stoltze said that the default rate has decreased due to "pay
as you go" provisions. Ms. Barrans agreed.
Representative Austerman asked if there were any incentive
programs to encourage students to stay in Alaska and work.
Ms. Barrans described two modest incentives: specialized
loans for teacher education and the "Winn" Brindle Memorial
Scholarship Loan for fisheries-related occupations. She
mentioned the Alaska Presence reduced interest rate
incentive.
2:14:33 PM
Representative Gara referred to a change on page 2 of the
bill, and asked if the student is required to have a good
credit history now. Ms. Barrans said that is correct.
Representative Gara described a scenario of a student with
no credit history. Ms. Barrans explained the options that
student would have: the federal Stafford loan, or obtaining
a co-signer.
2:16:48 PM
Representative Gara said he was sympathetic to a concern
raised in a UAA editorial and requested time to get this
information to the committee.
Ms. Koester said she spoke to the reporter and maintained
that the bill is a result of the current financial
situation. She stressed that the legislation is time
critical.
2:19:18 PM
Co-Chair Hawker said the information provided today points
out a previous attitude of liberal underwriting for student
loans. That, plus a national financial crisis, has led to a
need for this bill. He summed up that the state must
support stronger underwriting standards due to changes in
international economics. The entire student loan program
would end due to lack of access to capital.
Co-Chair Stoltze agreed that the bill needs to move out of
committee.
Representative Gara opined that two categories of students
might be affected; those without a credit history and those
with bad credit. He wanted assurance that those with no
credit history would not be affected.
2:22:31 PM
Ms. Barrans reiterated the results of a sampling of
borrowers. For those under 21, over 81 percent had some
credit history. About 22 percent had credit at or above the
proposed standard. The rest would require co-signers. An
acceptable FICA score is 680, which is slightly below the
average credit score in Alaska.
Ms. Barrans said that she has spoken to the reporter of the
UAA publication, The Northern Light, and shares a concern
that some students might not be able to get a co-signer.
The trade off is having a credit standard that keeps the
door open for many student loan applicants and allows the
program to continue to operate.
Representative Crawford understood that certain types of
credit cards lower one's credit score. He spoke of his
children's experience with not qualifying for student loans.
He suggested that ASLC consider credit history rather than
credit score. Ms. Barrans pointed out that manual reviews
were problematic and not a nationally accepted review. She
described the review process, which has changed in light of
the recent economic crisis.
2:27:26 PM
Ms. Barrans added that one provision ensured in the
regulatory process is if someone's history is impacted by a
disaster or illness, there would be an appeal option.
Representative Crawford thought the situation was "between a
rock and a hard place".
Co-Chair Stoltze thought the agency was only using a tool
necessitated by the economic crisis.
Ms. Barrans agreed that the situation is not pleasant. It
would have been preferable to continue with the present
model. The rating agencies are raising standards.
Co-Chair Stoltze summarized that the choices are no loans
for anyone or limitations on students with no credit
history. Ms. Barrans agreed, with respect to the ASEL. The
exception is the Stafford loan. Co-Chair Stoltze questioned
if ASLC is committed to showing students alternative
financial aid opportunities. Ms. Barrans assured that ASLC
is committed to working with partner institutions to try to
find financial aid for Alaskan students.
2:31:17 PM
Representative Gara asked if there was a way to include in
the bill those students with no credit score who are not a
credit risk as eligible for student loans. Ms. Barrens said
that was the policy since 1998, but it can't continue. A
demonstration of a pattern to be able to incur and repay
debt is now required. Representative Gara agreed it was a
difficult situation. He shared that he would not have
qualified for student loans under this proposed legislation.
2:32:52 PM
Co-Chair Hawker noted a zero fiscal note by the Department
of Education and Early Development.
Representative Austerman MOVED to REPORT HB 109 out of
Committee with individual recommendations and the
accompanying fiscal note.
HB 109 was REPORTED out of Committee with a "do pass"
recommendation and with zero fiscal note #1 by the
Department of Education and Early Development.
There being NO OBJECTION, it was so ordered.
2:33:56 PM
ADJOURNMENT
The meeting was adjourned at 2:33 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| articles and back-up.pdf |
HFIN 2/25/2009 1:30:00 PM |
HB 109 |
| Briefing on ASLC Liquidity Issues and Proposed Paln of Action.pdf |
HFIN 2/25/2009 1:30:00 PM |
HB 109 |
| Chart from ACPE website explaining loans that are affected by Hb 109.pdf |
HFIN 2/25/2009 1:30:00 PM |
HB 109 |
| HB 109 sponsor statment.pdf |
HFIN 2/25/2009 1:30:00 PM |
HB 109 |