HOUSE BILL NO. 257 "An Act relating to student loan programs, interstate compacts for postsecondary education, and fees for review of postsecondary education institutions; and providing for an effective date." DR. JOE L. MCCORMICK, EXECUTIVE DIRECTOR, ALASKA COMMISSION ON POSTSECONDARY EDUCATION testified in support of HB 257. He asserted that the legislation will achieve three broad objectives: It will improve customer service, strengthen the financial stability and independence of the Alaska 6 Student Loan Program and improve overall program administration. Mr. McCormick elaborated on the objectives: * FIRST OBJECTIVE: IMPROVE CUSTOMER SERVICE Section 1: Section 1(1) raises graduate limits from $6,500 to $9,500 thousand dollars. Section 1(2) raises undergraduate loan limits from $5,500 to $8,500 thousand dollars. Section 1(3) would allow $5,500 thousand dollars for a full-time student attending a career education program of nine months or more. Section 1(4) would allow $3,000 thousand dollars for a full-time and $1.0 thousand dollars for a half-time student attending a career education program of less than nine months. Mr. McCormick noted that tuition at the University of Alaska has increased 250 percent since 1984. He pointed out that loan limits have not been raised since 1981. Section 3: Increases consumer protection by giving the Alaska Commission on Postsecondary Education the ability to insure the financial and administrative capability of schools using Alaska Student Loan Program funds. In addition, section 3 requires that Alaska Student Loan Program funds be used only for attending career education programs that are operating on a fiscally sound basis, have been in operation for two years before the borrower attends, have submitted an executed program participation agreement; or for attending colleges or universities that have operated for two years prior to the borrowers attendance and is accredited by a national or regional accreditation association. Section 4: Provides greater flexibility to both the borrower and the Commission by setting the maximum amount that can be borrowed at a dollar amount rather than on number of loan years. Section 6: Amends the terms of repayment. Extends the period of repayment from 10 to 15 years. Decreases the grace period from 12 to 6 months. Sets the monthly payment minimum at $50 dollars a month. Section 12: Extends the period before a loan goes into default from 120 to 180 days. This gives the borrower more of an opportunity to resolve short- term financial difficulties and avoid going into 7 default. Sections 16, 21, 27: These sections allow family members to borrow on behalf of a student at the same time a student borrows on his own behalf. This is meant to address the rising costs of education. The combined loans cannot exceed the cost of attendance. Mr. McCormick observed that the Family Education Loan Program (FEL) differs from the Alaska Student Loan Program in that the borrower must begin repayment after the loan is disbursed. He maintained that the rate of default on these loans is almost nonexistent. Loan maximums are the same for both the FEL and Alaska Student Loan programs. Section 26: Allows the Commission to establish fees for the review of institutions requesting approval for participation in the Alaska Student Loan Program. * SECOND OBJECTIVE: INCREASE THE FINANCIAL VIABILITY OF THE ALASKA STUDENT LOAN PROGRAM Section 5: Eliminates interest-free deferment periods. By eliminating the interest free grace period. The cost to a student with a loan of $5,000 thousand dollars at 8% interest will be approximately $450 hundred dollars. This could be paid off during the deferment period or added to the loan principle. Section 14: Allows the Alaska Commission on Postsecondary Education to set origination fees by regulation. The origination fee is currently at one percent. Under this legislation, the fee could not exceed five percent. This fee will cover loan losses due to death, disability, default, and bankruptcy. Section 18: Gives delinquent student loans priority, behind child support enforcement, for wage garnishment. * THIRD OBJECTIVE: IMPROVE OVERALL PROGRAM ADMINISTRATION Sections 8, 15, 20, 24, and 27 contain technical changes which decrease administrative costs and reduce duplication such as: Elimination of costly and unnecessary mailings to borrowers; requiring illegally obtained loans be paid on demand; and 8 removing arbitrary caps on loan volume. Mr. McCormick concluded that the goal is to ensure that the Alaska Student Loan Program is financially viable so that future generations of Alaskans can be assured access to postsecondary education opportunities. He maintained that passage of this legislation will go a long way toward achieving this important objective. In response to a question by Co-Chair Hanley, Mr. McCormick stated that the Commission could not issue bonds within three years if the loan servicing problems are not addressed. The Commission issues between $40.0 and $50.0 million dollars a year in bonds. Representative Brown questioned if the Fund would be self sustaining with the passage of HB 257. Mr. McCormick stated that the legislation alone would not make the program 100% whole. He noted that students do not pay interest on the loans while they are attending school. He stated that until interest is charged on the period students are in school the program will not be financially sound. Representative Brown asked the effect of the legislation on the typical borrower. Mr. McCormick noted that 70% of the loans pertain to students at the University of Alaska. Those students would have an undergraduate loan limit of $8.5 thousand dollars and a graduate limit of $9.5 thousand dollars. The current loan limit is $5.5 thousand dollars. He estimated a 10 to 20 percent increase in loan volume. The bond issue would have to be increased to cover the demand. Representative Brown noted concern regarding page 2, item 4, line 3 regarding the limit on career education programs to $3.0 thousand dollars for a full time student. Mr. McCormick stressed that the $3.0 thousand dollar limit was the result of staff recommendations. He noted the that the default rate for programs for less than 9 months range from 24 to 56 percent. He stated that the average cost is $4.8 thousand dollars. He emphasized the high risk of vocational education programs. Representative Brown maintained that there is a public interest in making it possible for people to obtain vocational education. She pointed out that university students are being treated differently. Mr. McCormick stated that the University of Alaska has budgets ranging from $9.0 to $18.0 thousand dollars a year. He pointed out that a $8.5 thousand dollar loan does not finance an entire year. He added that university students attend an entire academic year, while vocational programs may be as short as 9 20 weeks. Representative Brown noted that the accompanying fiscal note is zero. Mr. McCormick stated that costs will be absorbed in the capital and operating budget requests. In response to a question by Representative Brown, Mr. McCormick explained that page 10 of the legislation attempts to bring the WITCHIE participation up to date. The new language asks the Commission in cooperation with the Department of Labor and Department of Commerce and Economic Development to prioritize programs. He noted that funding for WITCHIE has been reduced. He added that this will be the second year without funding for new students. (Tape Change, HFC 95-97, Side 1) Representative Grussendorf referred to section 4 on page 3. Mr. McCormick noted that students attend school on an intermittent basis. He stressed the difficulty of tracking years in attendance. He stated that it is easier to track the amount lent. Representative Grussendorf noted that the default period is being extended by 60 days. Mr. McCormick stressed that another 60 days is helpful in settling accounts. He stated that the addition allows students additional time to make arrangements for payments. Representative Martin spoke in support of the legislation. He expressed concern that academic progress be required. Mr. McCormick stated that students must demonstrate academic progress. JENNIFER DEITZ, TRAVEL ACADEMY, ANCHORAGE testified via the teleconference network. She provided members with a letter stating her position, dated April 24, 1995 (Attachment 1). She testified in support of HB 257. She expressed concern with the provision of limiting eligibility for students participating in educational programs of less than nine months. She urged that section 1(4) be revised. Section 1(4) would allow $3,000 thousand dollars for a full-time and $1.0 thousand dollars for a half-time student attending a career education program of less than nine months. BONNIE SMITH, PEOPLE COUNT, ANCHORAGE testified via the teleconference network. She spoke in opposition to section 1(4), page 2. MARIE BECKER, FAIRBANKS testified via the teleconference network. She expressed concern with section 1(4). She stressed that proprietary schools help persons that would 10 not otherwise attend a university. Representative Mulder asked the statute of limitation on debt collection. Mr. McCormick stated that there is no statute of limitation in regards to debt collection. He emphasized that the federal limit for short term programs is $4.2 thousand dollars. The federal limit for programs of less than six months is $2,375 thousand dollars. In response to a question by Representative Mulder, Ms. Deitz noted that the average tuition at the Travel Academy is $3.6 thousand dollars for a 10 to 20 week program. She added that there is a federal grant aid program that is not available to Alaskan students. Mr. McCormick noted that under current law a program can be as short as 6 weeks and receive the full $5.5 thousand dollars. He stressed that the average cost is $4.8 thousand dollars. Representative Navarre noted that students that attend proprietary schools are higher risks by their nature. He emphasized that there have been a number of students of proprietary schools that have made successful transitions from a welfare lifestyle. Ms. Becker gave examples of students that have been successful in obtaining jobs after attending People Count. Representative Brown referred to section 18, regarding attachments of permanent fund dividends. Mr. McCormick explained that the legislation would place the Commission as second in line behind child support attachments. He noted that the entire dividend can be attached. In response to a question by Representative Brown, Mr. McCormick clarified that interest will accrue during a borrower's deferment. He expressed support for allowing the interest to be paid during the deferment payment. He stressed that a deferment of six years for military service is too long. Representative noted that the legislation requires a person to be 100 percent disabled. Mr. McCormick stated that the legislation acknowledges that there are abuses in the program. He noted that a person that is 50 percent disabled is typically able to earn income. Representative Brown expressed concern that someone who is 90 percent disabled and unable to work would loose their permanent fund dividend. Mr. McCormick clarified that such a person could receive a hardship deferment. He stated that the portion of loans affected would be minimal. He noted that the only 11 time a permanent fund dividend is garnished is if the borrower is in default. The right to defer a loan due to disability is given up when the loan goes into default. Hardship cases that have not defaulted would receive their dividends. WENDY REDMAN, VICE PRESIDENT, UNIVERSITY OF ALASKA spoke in support of HB 257. She stated that the University of Alaska offers shorter certificated programs. She noted that the University does support the reduction level of short term programs. She noted that the only way the Masters of Social Work Program will be instituted is to double the cost of graduate tuition. She stressed that graduate programs are becoming market driven. Representative Navarre MOVED to delete "$3.0" and insert "$4.5" and delete "1.0" and insert "1.5" on page 2, line 2. He spoke in support of increasing the limit on loans for short term programs. Representative Mulder OBJECTED. He stressed that some of the programs do not result in jobs that can support the repayment of the loan. Representative Navarre suggested that language be added that would allow up to $4.5 thousand dollars but not more than 90 percent of the program cost. Mr. McCormick stated that the administrative cost of the program would be increased by allowing up to 90 percent of the program cost. He stressed that the risk should be limited based on the high default rates of short term programs. A roll call vote was taken on the MOTION. IN FAVOR: Brown, Grussendorf, Navarre, Hanley OPPOSED: Kelly, Kohring, Martin, Mulder, Therriault Representatives Foster and Parnell were absent for the vote. The MOTION FAILED (4-5). Representative Navarre MOVED to delete "$3.0" and insert "$4.0" and delete "1.0" and insert "1.5" on page 2, line 2. There being NO OBJECTION, it was so ordered. Representative Brown noted that hardship cases can be extended for up to five years in increments of no longer than 12 months each. Mr. McCormick stated that some hardship loans due to disability are written off. Representative Martin MOVED to report CSHB 2357 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. 12 Representative Brown suggested that the Commission revise its fiscal note to reflect the cost of the legislation. She stressed that the fate of the capital request is uncertain. (Tape Change, HFC 95-97, Side 2) Mr. McCormick clarified that the revenue derived from the Fund would be used to run the Commission. Representative Brown summarized that the funding source is not the General Fund. There being NO OBJECTION, CSHB 257 was moved from Committee. CSHB 257 (FIN) was reported out of Committee with a "do pass" recommendation and with two zero fiscal notes by the Department of Education, one dated 3/22/95.