SB 195-POSTSECONDARY EDUCATION LOANS/GRANTS  9:11:35 AM CHAIR GATTIS announced that the final order of business would be CS FOR SENATE BILL NO. 195(FIN), "An Act relating to the membership and authority of the Alaska Commission on Postsecondary Education; relating to the Alaska Student Loan Corporation; relating to teacher education loans; relating to interest on and consolidation of postsecondary education loans; relating to Alaska supplemental education loans; relating to AlaskAdvantage grants; relating to the Alaska family education loan program; relating to postsecondary educational institutions; and providing for an effective date." KRISTEN PRATT, Staff, Senator Anna Fairclough, Alaska State Legislature, on behalf of the sponsor, stated that the sponsor has been working with Alaska Commission on Postsecondary Education and the Alaska Student Loan Corporation (ASLC) to reduce the burden of student debt for Alaskans. This bill would broaden commission membership. It would allow the ASLC to offer below market loan terms. It would also increase loan limits, which haven't been increased since 1995. Further, it would change post-enrollment deferment period to up to six months and amend the general definitions for "on-time" enrollment status. CHAIR GATTIS viewed this as a "clean-up" bill to update statutes. 9:13:23 AM REPRESENTATIVE DRUMMOND asked for further clarification deferred payment for up to six months. MS. PRATT explained that currently students have a grace period and must make student loan payments six months after graduation or terminate their enrollment. This bill would change that to "up to six months" to provide borrowers more flexibility. 9:14:21 AM DIANE BARRANS, Executive Director, Postsecondary Education Commission, Department of Education and Early Development (EED), stated she also serves as the Executive Officer for the Alaska Student Loan Corporation (ASLC). She concurred with the staff's explanation and directed attention to proposed Sec. 27 on page 13 of SB 195. This language would change the standard deferment period to up to six months to allow borrowers an opportunity to make payments sooner since interest is accruing. 9:15:27 AM REPRESENTATIVE LEDOUX asked whether borrowers could begin repayment of their student loans without this statutory change. MS. BARRANS agreed; however, she said it rarely happens. This section provides the commission an opportunity to advise students to begin repayment in a timely manner and avoid interest. She clarified that the language doesn't set up a mandatory repayment prior to the six-month deferment. 9:16:14 AM CHAIR GATTIS related her understanding that it relates to the mindset for repayment. MS. BARRANS clarified that the commission would begin communications with the borrower sooner. 9:17:02 AM REPRESENTATIVE LEDOUX suggested that if the commission felt it was important to communicate the benefits on beginning repayment earlier to just do so. MS. BARRANS acknowledged the commission could certainly do so. CHAIR GATTIS suggested it is human nature for people to make their payments when the payments are due and not before then. 9:17:42 AM REPRESENTATIVE SADDLER pointed out some college graduates may not understand the importance of making payments earlier to reduce the overall cost of their loans. He asked for further clarification on the commissions' dunning notices. MS. BARRANS explained that under the bill the commission would contact students when their graduation date occurs, and set up payments if the students wanted to begin making them. REPRESENTATIVE SADDLER encouraged the commission to let students know they can make payments earlier and the benefits of doing so. 9:18:27 AM REPRESENTATIVE DRUMMOND asked about the authority to offer consolidation to state residents. MS. BARRANS answered that the ASLC has the ability to consolidate loans, but the loans that the corporation can currently consolidate are ones that originated with the [corporation]. The proposed language would allow borrowers who are state residents to consolidate loans made by other education lenders. She elaborated that if it is beneficial to the borrowers and they want to consolidate their student loans with a single lender, the corporation could consolidate them. 9:19:25 AM REPRESENTATIVE DRUMMOND asked for further clarification that this would apply to previously made loans by the ASLC or others; however, the borrowers would need to be state residents. MS. BARRANS agreed that is correct. REPRESENTATIVE DRUMMOND recapped that no matter where the students obtained their education, the students would need to return to Alaska and be residents in order to qualify for the consolidation aspect. 9:20:07 AM REPRESENTATIVE LEDOUX recalled that the student loans were once taken out at a lower rate than a commercial source. She asked whether this bill will allow the rate to be obtained at a lower rate once more. MS. BARRANS answered that the markets control the rate for student loans. Thus, the way the ASLC finances student loans is to issue debt in the financial market. The market materially changed after the collapse in 2008 of the asset-backed market, but it is slowly coming back. In response to a question, she clarified that asset-backed debt represents bonds backed by revenue from the loans financed from the bond proceeds. The ASLC goes to the market, issues bonds, and the bonds are structures so the interest on the loans repays the bond interest and principal, similar to a mortgage-backed bond. REPRESENTATIVE LEDOUX suggested that the only advantage of the Alaska Student Loan Program is that an 18-year-old without credit history can obtain financial aid, but it won't be at a better rate. MS. BARRANS explained that typically financial institutions take a risk-based pricing and review the applicant's credit and set the interest rate. The ASLC has a single interest rate and criteria and applicants who meet the criteria or whose co- signers meet the criteria receive the rate. REPRESENTATIVE LEDOUX asked how a parent's poor credit rating affects the student loan. MS. BARRANS answered that either the student or a co-signer must meet the minimum credit standard or the student is declined. REPRESENTATIVE LEDOUX questioned the relevance of having the student loan program. MS. BARRANS answered that the student loan program is based on the students' best interest but the ASLC does not operate to make a profit. She explained that the loans are serviced in Alaska and the corporation offers deferments and repayment options with the corporation that are typically not offered via other financial institutions. For example, students who are unemployed for up to a year can obtain a deferment or if a long- term disability exists some additional considerations are available. She agreed the state doesn't fund or guarantee the loans and the revenue generated pays for loan servicing. 9:26:06 AM REPRESENTATIVE SEATON referred to proposed Sec. 41, page 16 lines 24-31, of SB 195 and asked whether this is the new standard for credit hours for an "on-time student." He recalled the prior standard was 12 credit hours and this lists 15 or more semester hours each semester. He indicated some students may take 18 credits one semester and 12 or 14 in another semester due to class schedules. MS. BARRANS answered no; that the "on-time student" definition creates an additional enrollment level. It does not remove the half-time student status or the regular full-time student status of 12 credits. In each of these situations a student may qualify for a grant or loan and it will simply affect the amount of loan a student can borrow for that particular semester. She said it wouldn't surprise her to see a student qualify for an on-time loan amount for one semester and a full-time loan for the next semester. This language would simply associate the intensity of the student's enrollment with the amount of the loan for that period. 9:28:19 AM REPRESENTATIVE SADDLER referred to page 1, line 13 and page 2, line 23 of SB 195, which references private, nonprofit institutions of higher learning. He asked how many colleges in Alaska currently meet that standard besides Alaska Pacific University and Wayland Baptist University. MS. BARRANS answered by listing the colleges as Alaska Bible College, Embry-Riddle Aeronautical University, and Alaska Christian College. In further response to a question, she agreed those are in addition to Alaska Pacific University and Wayland Baptist University. 9:29:24 AM REPRESENTATIVE SADDLER referred to proposed Sec. 5 on pages 5 [lines 11-12 and 17-18] and asked for further clarification on what is achieved by the change related to the obligation of the corporation is not a debt of the state. MS. BARRANS answered that the bond council advises that this is a correction to place language where it more appropriately should be placed in paragraph (6) instead of paragraph (5). REPRESENTATIVE SADDLER asked whether bonds that the [corporation] issues are not a debt of the state. MS. BARRANS answered that is correct. REPRESENTATIVE SADDLER recalled a letter of support for SB 195 and also one for SJR 23. He asked whether there was any linkage between SB 195 and SJR 23, which proposes an amendment to the Constitution of the State of Alaska relating to contracting state debt for postsecondary student loans. MS. BARRANS answered that it has to do with the capacity to do certain things that the bill suggests. For example, SB 195 would suggest that the [Alaska Commission on Postsecondary Education and ASLC] can provide enhanced rates to borrowers if the [corporation] has the capacity to do so. The resolution, SJR 23, would create that capacity; however, there are many things in this bill that are unrelated to the resolution. REPRESENTATIVE SADDLER understood that SB 195 would allow the commission to take advantage of increased capacity. He asked for further clarification on which section provides the permission. MS. BARRANS directed attention to page 9, lines 2-5, to proposed Sec. 11, of SB 195. She pointed out that this language already exists. The Alaska Student Loan Corporation currently has the capacity to do this, but this bill would move it to a more general provision. She explained that the language currently exists but it only applies to the Alaska Supplemental Education Loan. Proposed Sec. 11 would move it to general powers so it can apply to any of the loans the corporation makes, including the Alaska supplemental Education Loan or the Family Education Loan. 9:32:12 AM REPRESENTATIVE LEDOUX asked whether the intent is to provide loans at a lower interest rate than currently available at commercial institutions. MS. BARRANS answered that the objective of the corporation to make the cost of student loans as low as possible. The capacity for lower financing costs varies depending on the interest earnings and corporate revenues. To the extent that the corporation has financial capacity to do so, the ASLC reviews borrower benefits. These are benefits that are applied as direct credits to student accounts when available. She explained how some benefits and reductions can occur, which could not be realized through a commercial facility. For example, one benefit the ASLC offers is a .0025 percent discount for borrowers who use an automated on-line payment. Additionally, the corporation offers an additional .005 percent reduction for borrowers who live in the state. Thus, the corporation reduces interest rates by .0075 percent, which brings down the interest rate to an effective interest rate of 6.55 percent. However, the corporation can't set interest rates in a speculative way since that would commit the corporation to reduced income on the loans over the ten to fifteen year span of time for repayment. She reported that the borrow benefits amounts to about $1 million per year. 9:34:18 AM REPRESENTATIVE LEDOUX indicated surprise that even with the credits the interest rate is at 6.5 percent which is higher than some commercial facilities. MS. BARRANS disagreed, estimating that the rates would be in excess of 10 or 11 percent for loans issued under these standards. She related that many lenders are issuing variable rate debts that for very high-grade borrowers are lower than ASLC's rates, but for borrowers with less outstanding credits are in excess of 10 or 11 percent. REPRESENTATIVE REINBOLD stated support for the Alaska Student Loan Program (ASLP). She credited the ASLP for bringing people back to Alaska. 9:35:46 AM CHAIR GATTIS, after first determining no one else wished to testify, closed public testimony on SB 195. 9:36:04 AM REPRESENTATIVE REINBOLD moved to report SB 195 out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSSB 195(FIN) was reported from the House Education Standing Committee.