HB 272-STUDENT LOAN INTEREST REDUCTIONS  9:28:19 AM REPRESENTATIVE SEATON announced that the final order of business would be SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 272, "An Act providing for a reduction in interest on postsecondary education loans for residents." [Before the committee was CS 2d SSHB 272, Version 27-LS1162\R, Luckhaupt/Mischel, 3/2/12, adopted 3/5/12.] 9:29:13 AM REPRESENTATIVE LES GARA, Alaska State Legislature, reminded the committee that SSHB 272 provides a principal reduction for students who stay in state or return to Alaska after completing their degree. 9:29:49 AM The committee took a brief at-ease. 9:30:01 AM REPRESENTATIVE SEATON reviewed the materials that should be included in the committee packet. 9:32:37 AM REPRESENTATIVE GARA, referring to a question from Representative Cissna, explained that the statutes referenced in SSHB 272 are regarding the rules for default, consolidating loans, and eligibility. Those statutes weren't changed but had to be referenced in the legislation. 9:33:11 AM REPRESENTATIVE GARA reminded the committee that the original intention of the legislation was to reduce the interest rates for those students who, upon completion of a degree, stayed in Alaska or returned to Alaska. To reduce the cost, the discount isn't given until the student completes his/her degree. The commission has the authority to determine what a timely completion of a degree/certificate is. It is much easier to administer the program by reducing the principal versus the interest rate as it would save on staffing. Therefore, the legislation currently specifies that for those students who, after completing their degree, remain in or return to the state would receive a 3 percent reduction in the principal annually. The program has residency requirements that reflect those that are in the permanent fund dividend qualification. He reported that currently roughly 40 percent of the students who leave the state [for education] do not return. The existing student loan rates are between 6.2 percent and 7 percent for new loans and higher for older loans. He compared student loan rates to car loan rates, which can sometimes be as low as 3 percent. 9:37:08 AM DIANE BARRANS, Executive Director, Alaska Commission on Postsecondary Education (ACPE), Department of Education and Early Development (EED), directed attention to the memorandum dated March 14, 2012, that she provided to the committee. The memorandum addresses information requested by the committee in regard to default rates, expectation of the effect of a principal reduction program on the default rate, and timely completion of the degree in Alaska. 9:37:53 AM REPRESENTATIVE P. WILSON noted that the out-of-state default rates are much lower than the in-state default rates. MS. BARRANS said that has historically been the case. Although ACPE hasn't performed a study regarding the reasons for the higher default rate for in-state students, she pointed out that the types of schools students attend out-of-state tend to be more highly selective. Therefore, one can assume that the students [attending out-of-state schools] are more prepared and are succeeding at a higher rate, and thus have the wherewithal to earn wages that allow them to repay the loans. 9:38:59 AM REPRESENTATIVE SEATON, upon reviewing the first page of the memorandum, surmised that in-state default rates in Alaska have been consistently 2 percent higher than the default rate for out-of-state schools. He asked if [Alaska's] out-of-state default rate is comparable to other states and other loan programs. MS. BARRANS answered that hasn't been reviewed. Comparing state alternative loan programs is difficult because often the terms and conditions vary from state to state. For instance, the alternative program in New Jersey has a very high underwriting standard for students to qualify, including having a credit worthy co-signer. Therefore, the default rate is substantially lower than those in Alaska. The practice, at least until the last two to three years, in Alaska basically has been to offer a loan that's available to anyone, regardless of their credit history or lack thereof. Only in recent years would Alaska expect to have rates that are comparable to other state programs. 9:40:21 AM REPRESENTATIVE SEATON pointed out that Alaska required a credit worthy co-signer in 2009, but the 2010 default rate increased significantly. He asked if there is any correlation between those two. MS. BARRANS clarified that the [2010 default rate is the rate] for loans that went into repayment and were in repayment for at least a year in 2010. She told the committee that as the students who took loans in 2009 and 2010 complete their education and begin repayment, ACPE expects there to be substantial improvements in those rates. REPRESENTATIVE SEATON surmised then that [the 2010 default rate] includes all of the previous loans that were being paid back, and thus would likely not include credit worthy co-signer loans. MS. BARRANS agreed, and also noted that the default rate has been affected by the state of the economy. For example, the default rates for the federal loan program have increased substantially. REPRESENTATIVE SEATON noted that student loan debt now exceeds credit card debt, nationwide. 9:42:29 AM REPRESENTATIVE SEATON directed attention to page 2 of the memorandum, and asked why there was such an increase in the Alaska Student Loan default rate for 2010. MS. BARRANS informed the committee that the Alaska Student Loan program is the predecessor to the Alaska Advantage loan, which was initiated in 2002. In 2008 and 2009, ACPE instituted some alternative repayment options that provided borrowers with relief. However, it was determined that the relief merely postponed the delinquency, and thus some of the options were eliminated. She explained that the interest costs for the borrowers was increasing when the costs were added back to their debt after the periods of relief and the borrowers still weren't able to address their delinquency. REPRESENTATIVE SEATON pointed out that the default rate for Alternative Loan Consolidation is extremely low, nearly non- existent for 2007-2010. Therefore, he inquired as to why. MS. BARRANS explained that in 2004 an Alternative Consolidation Loan was instituted such that a discounted loan rate was offered. Because borrowers had loans over a period of years and the terms of those loans were all different, there was an advantage to offering a lower rate to consolidate all the loans under a single note. In the new promissory note, many of the forbearances and deferments that existed in the underlying original notes were eliminated. The goal was to incent borrowers to consolidate. Therefore, a lower rate was offered in exchange for borrowers to meet a minimum FICO score or have made full and timely payments for two years on the underlying loans. Ms. Barrans said the quality of those loans were some of the best of the old Alaska Student Loan program, which resulted in a very low default rate. REPRESENTATIVE SEATON inquired as to how much of the Alternative Loan Consolidation is taking place. MS. BARRANS recalled that in the first two to three years of operation there was $40 million worth of loan volume in the Alternative Loan Consolidation program. At this point, she estimated that there are close to $100 million in consolidated loans at a 7.5 interest rate. She explained that many students who borrowed in the early 2000s have an interest rate that's lower than 7.5 percent, and therefore they're not motivated to consolidate. 9:47:07 AM REPRESENTATIVE SEATON, referring to the chart entitled "Institutional Cohort Default Rates" on page 2 of the memorandum, related his understanding that the top line is the Alaska Institution rate. He also related his understanding that ACPE doesn't believe the program proposed in SSHB 272 wouldn't materially change the default rate on the loans. MS. BARRANS replied yes to both. The majority of students who default do so because they fail to complete a degree program and are unable to be gainfully employed. A smaller proportion of the default rate is those students who over borrowed and have very high levels of debt. Therefore, a 3 percent principal reduction wouldn't really impact that. REPRESENTATIVE SEATON remarked that if the lower principal rate motivates students to complete their degree, the default rate of those students would be a lesser rate than other students. Therefore, the additional earning capacity may have some impact. MS. BARRANS agreed. 9:48:54 AM REPRESENTATIVE FEIGE directed attention to the language on page 3 of the memorandum that read as follows: Generally, regardless of the underlying reasons for the lack of capacity to pay as agreed, borrowers fail to be influenced or motivated by the consequences of delinquency or default, so it seems reasonable to conclude that the default rate would not be materially impacted by this new potential benefit. REPRESENTATIVE FEIGE then inquired as to the consequences of delinquency. MS. BARRANS answered that the consequences of delinquency include ACPE's ability to garnish permanent fund dividends (PFDs), wages, and suspend professional licenses. The ACPE also reports a student's delinquent loans such that they are reflected on their credit reports. REPRESENTATIVE FEIGE surmised then that the consequences of default are severe, and therefore he pondered what other measures could be taken. 9:50:45 AM MS. BARRANS, in response to Representative Seaton, explained that the loans in question are assets of the Alaska Student Loan Corporation. In financing the loans in the bond market and through other types of debt for which the corporation is liable, the corporation commits to certain income streams from those loans. Therefore, any time the legislature creates a program to relieve debt, such as SSHB 272, there needs to be an associated compensation to ensure the corporation is held harmless and can continue to make its debt payments. The fiscal note that will be prepared for the new CS will reflect both the cost of the interest reduction as well as a component for the interest lost to the corporation. A principal reduction, she further explained, will accelerate the rate at which the loans are paid down. 9:52:35 AM REPRESENTATIVE SEATON asked whether the Alaska Student Loan Corporation has been constrained by the amount of principal available to offer as loans or has that been relatively unlimited. MS. BARRANS told the committee that since 2008 the corporation has been funding new loans with the assistance of the state. The corporation entered into a relatively short-term loan from the state in order to continue to finance. Therefore, the corporation uses both recycled payments and the state loan to finance new loans. The aforementioned has been the case through the current year, but in 2013 the corporation intends to reenter the bond market in order to issue new debt for new alternative loans. She noted, however, that the loan volume has substantially decreased over the last two years. Currently, the corporation makes less than $15 million in alternative loans annually, which she mainly attributed to changes in the federal rules that prohibit institutions in Alaska from packaging loans for students. REPRESENTATIVE SEATON returned the gavel to Chair Dick. 9:53:58 AM REPRESENTATIVE SEATON inquired as to why the state providing principal for loan purposes is viewed as a detriment of early payment of debt when it's being paid to the corporation and can be used to re-loan. MS. BARRANS announced that Version R addresses the concerns expressed relative to the initial versions of SSHB 272, and thus she didn't believe the negative perceptions carry through. Version R ensures the Alaska Student Loan Corporation is held harmless. In further response to Representative Seaton, Ms. Barrans confirmed that under Version R the prepayment of the principal through an appropriation by the state isn't viewed as a significant negative so long as the corporation is held harmless. She noted that the fiscal note will reflect the aforementioned. 9:56:46 AM CHAIR DICK announced that SSHB 272 would be held over.