SENATE JOINT RESOLUTION NO. 23 Proposing an amendment to the Constitution of the State of Alaska relating to contracting state debt for postsecondary student loans. 9:32:44 AM Vice-Chair Fairclough related that SJR 23 would add to the constitution the authorization to issue the full faith and credit for student postsecondary loans. She related that Alaska's forefathers could not have contemplated the debt load or the cost of postsecondary education that currently existed in the United States. She reported that currently, the Alaska State Constitution only allowed for the full faith and credit of the state for capital improvements or housing loans for veterans. She stated that if the resolution was passed by a two-thirds majority by both the House and the Senate, the Alaska Student Loan Corporation would be able to utilize the best possible financing to benefit students who accessed loan services from the State of Alaska. She pointed out that regarding process, if the resolution passed in the current session and was put on the 2014 ballot, a loan could not be issued until the student loan corporation made that recommendation and brought it back to the legislature; if the legislature approved the resolution at this time, it would be advanced to the people of Alaska again on. She believed that the issue needed to be put before voters during the general election of 2014 because waiting until the next legislative session would disadvantage students even further. She stated that the current student loan rate for students who accessed loans in Alaska was 7.3 percent and noted that the federal rate on loans was 3.86 percent. She thought that if the full faith and credit of the State of Alaska could be used and the loans were still repaid, students who took loans through the state could save 1 percent or greater in the bond market. 9:35:29 AM Co-Chair Meyer OPENED public testimony. 9:36:15 AM ROBERT DOTSON, SELF, CORDOVA (via teleconference), spoke in support of the resolution. He wondered why the State of Alaska found it necessary to have a 7.3 percent interest rate on student loans when a less than .5 percent interest passbook saving could be issued at a bank. He thought that the high interest rate made it difficult to pay off student loans. He stressed that Alaska's young people were unable to buy a home, rent an apartment, or buy a vehicle while also paying student loans. Co-Chair Meyer CLOSED public testimony. 9:38:38 AM Co-Chair Meyer noted that a letter of support from the Alaska Student Loan Corporation was located in member files. DIANE BARRANS, EXECUTIVE DIRECTOR, ALASKA COMMISSION ON POSTSECONDARY EDUCATION, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, EXECUTIVE OFFICER, ALASKA STUDENT LOAN CORPORATION, replied in the affirmative. She said that the corporation had been working with its financial advisor over the last year in order to identify way in which the rates that Alaska residents paid on the loans could be reduced, as well as possible ways to make the loan more accessible to Alaska students. 9:39:51 AM Co-Chair Meyer requested an explanation of why the state's interest on student loans was 7.3 percent. Ms. Barrans replied that since the establishment of the Alaska Student Corporation in 1987, the way the loans had been financed was that debt was issued in the financial markets that was backed by the assets of the loans. She reported that the markets had taken a substantial turn for the worse regarding the pricing of the state's loans as well as the underwriting criteria that was expected to be applied to the loans. She related in the current bond market, the cost of the funds alone for the state using bonds was around the high 4 percent low 5 percent, without consideration of the cost of servicing the loans. She stated that the underwriting criteria had been changed in 2009 because the rating agencies and bond buyers were exhibiting increased scrutiny of the underlying assets. She said that borrowers currently had to establish good credit or have a co-signer with established good credit. 9:41:45 AM Co-Chair Meyer inquired whether the default rate among students had contributed to the high interest rate. Ms. Barrans replied that the default rate was not a factor in the cost of funds. She explained that the bond was asset backed and that the rates had risen in recent years. She furthered that the default rate came into consideration when the state was structuring the bond deals themselves. She said that when examining the amount of assets to the bonds that were issued, the higher the fault rate in a portfolio would require an increase in the amount of collateral necessary. 9:43:00 AM Co-Chair Meyer inquired what type of collateral was needed and whether the parents were required to co-sign. Ms. Barrans replied that if the applicant did not meet the credit test, a co-signer would be necessary. 9:43:21 AM Co-Chair Meyer queried what the default rate was for student loans. Ms. Barrans replied that the last published annual rate was 6.4 percent; the rate had been lower in the past but had risen due to the economic climate on a national level. 9:43:52 AM Co-Chair Meyer asked how Alaska's rate compared on the national level. Ms. Barrans responded that the rate was average. She said that rates varied as to whether or not a co-signer was required; many alternative education loan providers required a co-signer. 9:44:32 AM Co-Chair Meyer understood that the corporation was required to make money off the loan program and then give a dividend back to the state. He thought that instead of giving a dividend to the state the rates for students could be reduced. Ms. Barrans replied that in 2001-2002 there had been an expectation that corporations return funds to the state for other uses. She said that the corporation's statutes were amended to indicate that any year that there was net income a dividend would be provided back to the state. 9:47:02 AM Co-Chair Meyer inquired whether the program would be available for out-of-state students. Ms. Barrans replied in the affirmative. Co-Chair Meyer surmised that the loans could be used a recruiting tool for the university. Ms. Barrans agreed. 9:48:05 AM Co-Chair Meyer wondered if the program could result in additional risk to the state. Ms. Barrans responded that the objective would be to structure the loans and bond issues in a way that would mitigate the risk to the state. Ultimately, the bonds were general obligation bonds, but the Texas model, used in the development of the proposal, was based on general obligation debt and had never resulted in the State of Texas making repayments. 9:49:37 AM Co-Chair Meyer inquired //. Ms. Barrans replied that the commission promoted the federal loans if the rate was better///. Co-Chair Meyer realled that some were income based and inquired//. Ms. Barrans responded that//. 9:50:39 AM Co-Chair Meyer inquired if Department of Education and Early Development required//. Ms. Barrans responded that that it was not a requirement, but that///.//. 9:50:58 AM Co-Chair Meyer queried the amount that the student could receive from the state versus the amount they could receive from the federal government. Ms. Barrans said that the commission promoted use of the federal loans, provided it was a better deal for the student. She furthered that the commission urged students to view the loans from the state as supplemental loan used to fill any gap in tuition payment. She explained that the annual maximum for an undergraduate student was $8500 per year. Co-Chair Meyer understood that the loans on the federal level were based on income but that the state's loans were not. Ms. Barrans responded that the state loans were not income based. She said that the federal subsidy available to borrowers was income based. She stated that the federal loan was an entitlement, anyone could borrow it and certain benefits were available based on family income. Co-Chair Meyer asked if the Free Application for Federal Student Aid (FAFSA) was required for the state loan. Ms. Barrans relayed that if the FAFSA was required by the school the student would need to complete it; however, it was not a requirement of the student loan program. Co-Chair Meyer asked the University of Alaska required the FAFSA. Ms. Barrans said that they either required or strongly encouraged the FAFSA. She suggested that the online form had become easier to fill out and that completing the application would help students access all the aid available to them. 9:51:49 AM Senator Olson wonders why a student would take out a loan at 7.3 percent interest when they could receive a loan from another institution at a lesser rate. Ms. Barrans thought that if a student could pay for their education using only the lower rate federal loans then they should do so. 9:52:41 AM Senator Olson highlighted the default rate of 6.4 percent. He wondered how the state would continue to manage the default rate during unstable economic climates. Ms. Barrans replied that the bond deals were structured with overcollateralization; one of the factors the state considered was what was expected not to be collected on the loans, either from default or permanent disability. She asserted that it would not be expected that the state would, in any way, subsidize the program. 9:53:31 AM Senator Olson assumed that there would be no dividend paid to the state as a result of the program. Ms. Barrans responded that it had never been the corporation's objective to be able to pay a dividend to the state. 9:54:22 AM Senator Hoffman wondered if there would be opposition to changing the constitution to include the loans. Ms. Barrans replied that one of the benefits was that there did not seem to be any opposition other than people not wanting to alter the state constitution. 9:55:27 AM Co-Chair Meyer inquired if the loans could be limited only to students enrolled in schools within the state. Ms. Barrans replied that it would be a policy call. She thought a reduction in loan volume could be an unexpected consequence. She said that the number of students already receiving loans was small. She added that when trying to scale a program to achieve efficiencies in terms of cost of servicing, the smaller the program is the more expensive is for those participating. If the size of the borrowing population can be expanded then the cost is spread over a greater number of individuals thereby reducing the cost for all. 9:56:52 AM Co-Chair Meyer asked the denial rate percentage Ms. Barrans responded that it was approximately 40 percent. 9:57:14 AM Vice-Chair Fairclough noted that allowing the percentage rates to drop would allow for the possibility for the commission to reduce the required credit score. Ms. Barrans replied that the credit criteria could probably be moderated. She stated that one of the advantages to having a general obligation back bond was that rating agencies looked to the credit of the state that was backing the bond. She did not think that the credit criteria could be eliminated, but it could be moderated to be more readily available to students. 9:58:43 AM Vice-Chair Fairclough believed that the resolution would benefit the people of Alaska and the state's student loan program. 9:59:42 AM Co-Chair Kelly MOVED to REPORT SJR 23 out of committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. SJR 23 was REPORTED out of committee with a "do pass" recommendation and with a new fiscal impact note from the Office of the Governor and a new fiscal impact note from the Legislature. 10:00:05 AM AT EASE 10:03:08 AM RECONVENED