HB 272-STUDENT LOAN INTEREST REDUCTIONS  9:24:05 AM CHAIR DICK announced that the final order of business would be 2d SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 272, "An Act providing for a reduction in interest on postsecondary education loans for residents." REPRESENTATIVE PRUITT moved to adopt the proposed committee substitute (CS) for 2d SSHB 272, labeled 27-LS1162\R, Luckhaupt/Mischel, 3/2/12, as the working document. 9:24:38 AM REPRESENTATIVE SEATON objected for the purpose of discussion. 9:24:48 AM REPRESENTATIVE LES GARA, Alaska State Legislature, stated that he consulted with Diane Barrans, Executive Director, Postsecondary Education Commission and members of the committee to identify their concerns with HB 272. The proposed committee substitute (CS) incorporates changes to address the concerns. He stated that the intent of HB 272 is to limit the "brain drain" in Alaska by assisting to reduce the student loan burden. The most current version of the bill would clarify that the student loan reduction applies to students who attend school out of state and return home and to students who attend school in the state and remain here. It would clarify, pursuant to a comment by Representative Seaton, that the interest rate reduction would not apply until the course work was completed. Additionally, it would clarify an issue Representative Feige raised on the residency standard. The bill would impose the strictest allowable under the U.S. Constitution, essentially the permanent fund program's residency standard, so applicants must be in Alaska for one year before they are eligible to apply for the student loan reduction. Those items have been incorporated in the proposed committee substitute (CS), Version R of HB 272, as well as a recommendation by Diane Barrans to reduce the principal rather than the interest rate. This change has been incorporated in Version R for ease of administration and potential staff reduction. He described the details of the reduction, such that the interest rate would be eight percent and the principal would be reduced by three percent. REPRESENTATIVE P. WILSON said the school loans were in the red at one point and she asked whether this bill would jeopardize the current financial situation. 9:28:28 AM DIANE BARRANS, Executive Director, Postsecondary Education Commission, Department of Education and Early Development (EED), stated the approach taken in the revised bill has been handled cautiously. The benefit to residents who qualify is only available if the legislature appropriates the funds and removes the process from the corporation. Thus the corporation does not have any liability for the benefit. The bill contains a provision to indicate that if sufficient funds are not available to allocate the three percent reduction there will be a pro-rata distribution. This will help ensure the consequences of the old forgiveness program do not occur again. She described technical changes, such that the prior forgiveness led young people to borrow money with the assumption they only had to repay a portion of the loan; however, conditions applied, including that the borrower needed to complete his or her degree and live in the state. She pointed out that many borrowers failed to meet the requirements and were left with a much greater debt than they anticipated. 9:30:06 AM REPRESENTATIVE P. WILSON related her understanding that the legislature will approve the funding each year. MS. BARRANS answered that is correct. 9:30:56 AM REPRESENTATIVE SEATON asked whether Ms. Barrans had a copy of Version R. REPRESENTATIVE GARA highlighted the main change in Version R is that the benefit will not occur until a degree is completed by a student, which will reduce the fiscal note. REPRESENTATIVE SEATON directed attention to page 2, lines 2-3 and asked for clarification on how this language works in conjunction with lines 12 and 13, which states the reduction of the principal of the loan provided under this section is in addition to any other available reduction of the principal. MS. BARRANS referred to page 2, lines 2 and 3 and stated the sponsor developed the language as an attempt to ensure that if students qualify for loan reductions via another program - such as a Teacher Education Loan Program - or they qualify for loan forgiveness through another state program it disqualifies the students from the loan reduction. In other words, the borrowers would not be able to "double dip." She explained that lines 12- 13 permit borrowers who might qualify for other benefits to receive benefits from programs, such as the Alaska Student Loan Corporation's (ASLC) recurring automated payment discount of a quarter of a percent. She highlighted that if students qualify for another discount the applicants remain eligible for the proposed student loan reduction. 9:34:10 AM REPRESENTATIVE SEATON referred to the language on page 2, lines 2 and 3, "fully repaid" and related his understanding this means a loan would need to be completely paid off to qualify for the forgiveness. MS. BARRANS related that is her understanding, but deferred to the sponsor to clarify. REPRESENTATIVE GARA answered that two discounts are possible, including the WWAMI discount and Teacher Education Loan Program discount, in which the loan is fully repaid if the conditions are met. He explained that these students would not receive a three percent discount since their loans are fully repaid. He pointed out that minimal reductions occur when students pay their loans online, as previously stated. He indicated the reduction proposed in HB 272 will be in addition to those types of discounts. 9:35:38 AM REPRESENTATIVE SEATON referred to page 2, lines 4-5, which pertain to when borrowers complete their degrees in a timely manner. He asked whether a timely manner is a term of art or if it mean it is not prolonged for 20 years. MS. BARRANS answered that subsection (e) allows the commission to adopt by regulation a description of timely completion. She offered her belief the commission would likely adopt the national standard, which is within 150 percent of the degree length, so if a four-year degree is completed in six years it would be considered a timely completion. If the student took longer than that time period the student would not qualify for the reduction. Similarly, if a student finishes a two-year degree in three years it would be timely. She acknowledged that she is speculating since the commission would need to decide. 9:37:31 AM REPRESENTATIVE FEIGE suggested the intent of HB 272 is to pay off loans for students who live in Alaska and attend school or attend school outside and have returned to Alaska. He related a scenario in which a pilot attends a university in the Lower 48 obtains an aviation degree. He has a student loan to repay, but Alaska has plenty of pilots. He questioned the benefit to the state to offer reductions on student loans for pilots and whether the bill should be restricted to particular skills, and if so, it would also reduce the fiscal note. 9:39:09 AM REPRESENTATIVE GARA proceeded to a full bill presentation. He stated that the intent of HB 272 is to assist residents who leave for educational purposes to return to the state to ensure Alaska has a strong work force. He acknowledged that it is too costly to forgive everyone's student loans. He explained the bill came about when he discovered he could get a car loan at his credit union at a 2.5 percent interest rate. However, students pay eight percent interest rate on their student loans, or triple the amount of the current rate of inflation. He suggested that when students return to Alaska they often have a student loan, a mortgage, and start families. The impetus of the student loan reduction is to value education. He stated that the state has a 38-40 percent departure rate, which means 38-40 percent of students who leave Alaska for higher educational purposes do not return to Alaska. He offered his belief that the state would rather encourage Alaskans to come home and fill the jobs. He stated this is good for families, will keep the state cohesive, and will help keep Alaska's jobs for Alaskans. As the sponsor of HB 272, he has tried to address concerns and limit the fiscal note. He acknowledged that people outside Alaska can fill some jobs, but the state should encourage Alaskans to fill many jobs. The state invests approximately $5,000 to $15,000 per student each year in grade school alone. The investment is paid off when these students grow up and take jobs in Alaska. He would like to avoid what happens in the oil industry, which is that employees come to Alaska for two weeks and leave to go home to the Lower 48; instead, Alaskans should be working on the North Slope and returning to their homes in Fairbanks, Stony River, or elsewhere in the state. He related that the bill indicates anyone in default is eliminated during loan defaults. He mentioned the letters of support received in order to help alleviate testimony time on the record. He emphasized that given the economy in which wages are not rising college graduates cannot afford a loan rate triple or quadruple the rate of inflation. Additionally, the ASLC can restrict benefits if the proposed reduction will bring a student loan rate to under a three percent interest rate. Thus the bill sets a floor that the minimum rate should be three percent unless by regulation the ASLC determines a lower rate is justified. 9:44:02 AM REPRESENTATIVE GARA reiterated that the student loan rate should be in line with mortgage rates, used-car interest rates, or the rate of inflation. He cautioned that he did not blame the ASLC for the current rate since the legislature covers some costs. He acknowledged the ASLC cannot pay for this benefit. He explained that the bill is modeled after the WWAMI Program and the Teacher Education Loan Program (TELP) and the constitution allows the state to require a one-year residency. Further, the bill avoids the pitfalls the ASLC faced by making students pay the discount; however, if the ASLC has funds it could also decide to pay a dividend to the state. The goal is to ensure that Alaskans have jobs in the state and avoid any impediments to move back to the state. He said, "It's good for the economy. It's good for families to help keep them together and we think it is a modest approach instead of going the old approach, which was talking about loan forgiveness every year that the state cannot afford." He concluded that the proposed CS was drafted to meet concerns raised. 9:46:11 AM REPRESENTATIVE SEATON withdrew objection to Version R. There being no further objections, Version R was before the committee. 9:46:33 AM MOIRA SMITH, Attorney, stated she would give a quick background, identify some of the perverse economic incentives, and give her view on the value of having Alaskans return to the state. She provided a brief history, including that she was raised in Juneau, attended Georgetown University, received her undergraduate degree in 1998, and graduated from law school in 2007. She said she took out student loans for each law school year. She reported that at this point she has one undergraduate student loan left, which is her Alaska Student Loan. Prior to consolidating her loans she had four separate loans with interest rates ranging from eight to nine percent. She consolidated her loans, which reduced the interest rate to 6.25 percent. This interest rate is still higher than all but one of her student loans. She thought it was important to identify loans other than her Alaska student loan to put things in context. She indicated she currently has about $170,000 in student loans, except for her Alaska student loan, which has a balance of $17,000 for law school expenses. She stated that the interest rate on her loans range from 2.75 percent to 6.55 percent. The Alaska student loan is the second highest among all her loans and the average interest rate on her loans is 4.38 percent. MS. SMITH continued by discussing incentives. She acknowledged that she made the choice to attend law school, but she attended a state school. She could have taken up residency and paid in- state tuition - which would have saved her thousands of dollars per year - but she chose out-of-state tuition since she wanted to return to Alaska. Further, she also had an opportunity to join her friends at large law firms, but she did not interview for those jobs since the jobs were in major cities outside Alaska. She highlighted that the first-year salaries in Alaska are less than half of the $160,000 that San Francisco and other major cities pay their first-year lawyers. She emphasized that these are the very real economic incentives that can lead Alaskans to stay away. Unfortunately, there are not any countervailing economic incentives to return to Alaska. She acknowledged there are other reasons to want to live in Alaska, but just not any economic reasons. Finally, she offered her belief that it is worthwhile to have students return to the state. She acknowledged that Alaska absolutely benefits from having transplants live in Alaska, but other reasons exist for having students return home to Alaska. She acknowledged her daughter's time with her grandparents is invaluable and would happen less frequently if she had chosen to live in San Francisco. She thought it was a good idea to reverse some of the "brain drain." Additionally, she noted that many Alaskan students have to leave the state to attain some higher degrees and HB 272 is a way to provide an incentive to bring these students home. 9:51:15 AM REPRESENTATIVE FEIGE asked whether she freely made decisions. MS. SMITH agreed her decisions were all freely made. She said she did not want to whine. She said she repays her loans in good faith and is not complaining about her economic burden; instead, she is reiterating there is a means to incentivize students to return to Alaska, even for lawyers. REPRESENTATIVE FEIGE asked what type of law she practices. MS. SMITH answered primarily oil and gas. 9:52:44 AM CHAIR DICK, after first determining no one else wished to testify, closed public testimony on HB 272. 9:52:52 AM REPRESENTATIVE SEATON indicated that he serves as the legislative member of the Western Interstate Commission on Higher Education (WICHE), which includes all western states. He reported that the level of education in Alaska has deteriorated. Alaska previously was one of the highest-educated states in the nation with the most number of graduates. Alaska has now fallen way down on the list and it makes the state unattractive for many industries. He explained that industries often consider the level of education of residents when they are considering a location. He offered to provide statistics to the committee. He said the bill will help to reverse this situation. He pointed out that a highly educated citizenry is very important to the state. He reiterated this is data that is considered when a company considers expanding to a new area. The purpose of the bill should be to look at retaining and bring back highly educated people who can contribute to our communities, whether they are taking a particular job or not. 9:56:09 AM REPRESENTATIVE GARA added that Alaska ranks last among college attendance and completion. He suggested that the marginal benefits in terms of salary may not make it worth it to remain or return to Alaska. He said the bill may help those statistics improve. Also, it is important to encourage students to return home from school in the Lower 48 since the money circulates and stays in the economy, which is good for other businesses since it provides a ripple effect. Further, it would help make Alaska a stronger state. He pointed out the UA spends twice as much on a resident student than a student who pays full tuition. Therefore, it costs the state money to send a student through the UA system. He concluded that the bill will save money by allowing students to attend the school of their choice and give them a three-percent reduction on their return. 9:58:07 AM REPRESENTATIVE FEIGE took issue with the analogy of an 8 percent student loan versus a 2-3 percent car loan, which is not necessarily applicable because of the difference in the risk involved. He stated that interest rates are set commensurate with the risk on the loan. Higher rate loans are typically riskier for banks to offer. He explained that banks can repossess a car, but a student taking out a college loan who later defaults on the loan does not provide the bank with anything to collect; thus the reason for the higher interest rate on a student loan versus a car loan. 9:59:22 AM REPRESENTATIVE SEATON requested a graph regarding the current default rate and an opinion from the department regarding whether this bill will have an effect. Additionally, he asked whether the department views the three-percent reduction as unprofitable for the ASLC. REPRESENTATIVE P. WILSON referred to the six statutes cited in the bill and asked for further information. REPRESENTATIVE GARA agreed to provide the information to the committee. In further response to Representative Seaton, he answered that the ASLC does not pay for the discount from its assets since the funds are subject to appropriation by the legislature. 10:01:17 AM REPRESENTATIVE P. WILSON referred to page 2, line 6, which states that the reduction is subject to appropriation by the legislature. She asked for clarification on the process and whether the legislature will receive a report. REPRESENTATIVE GARA answered that is the current process for WWAMI, and the TELP. He explained they know how much these programs will cost and if the estimates are wrong supplemental funding is requested. The legislature has never chosen not to fund those programs so the funding has been continuous. He anticipated if HB 272 passes that the legislature will provide funding. 10:02:50 AM MS. BARRANS clarified how the WWAMI program is funded. The WWAMI program is front loaded by a general fund appropriation to support the cost of the program. All of the funds are provided when the students begin to participate in the program so essentially funds are not collected back from WWAMI graduates if they practice in the state. Thus the structure is quite different than what is being proposed in HB 272. Further, she indicated the Teacher Education Loan Program (TELP) is a small program. It is not supported by general funds and there are not any appropriations associated with it. The program existed and was disclosed in bond documents when the corporation that originally began the program issued bonds. The TELP is funded by the ASLC. It is such a small program with fewer than 90 students per year who qualify for the TELP. Further, the success rate is relatively low for the number of teachers who complete the degrees in qualifying schools. Therefore, the cost is absorbed by the ASLC, but it is minimal. She emphasized that HB 272 takes a very different approach and will be contingent on legislative appropriations each year based on the number of applicants eligible. [HB 272, Version R, was held over.]