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THURSDAY, APRIL 25, 1985.
GUARANTEED STUDENT LOANS
EDWARD M. ELMENDORF, ASSISTANT SECRETARY FOR POSTSECONDARY EDUCATION
SALLY K. KIRKGASLER, DIRECTOR, OFFICE OF POLICY DEVELOPMENT WILLIAM DINGELDEIN, DEPUTY DIRECTOR, BUDGET SERVICE, OFFICE OF PLANNING, BUDGET AND EVALUATION
JOHN S. HAINES, DIRECTOR, POSTSECONDARY ANALYSIS DIVISION, OFFICE OF PLANNING, BUDGET AND EVALUATION
Mr. NATCHER. We take up next the budget request for the fiscal year 1986 for Guaranteed Student Loans.
Doctor, who do you have with you there at the table?
Dr. ELMENDORF. Sally Kirkgasler, Director, Office of Policy Development; Mr. William Dingeldein, Deputy Director, Budget Service, Office of Planning, Budget and Evaluation; and Mr. John S. Haines, Director, Postsecondary Analysis Division, Office of Planning, Budget and Evaluation.
Mr. NATCHER. We are pleased to hear from you at this time.
Dr. ELMENDORF. Mr. Chairman, if you would accept my statement, I will try to summarize it.
For the Guaranteed Student Loan account we have requested for fiscal year 1985 an amount of $3.7 billion; for fiscal year 1986, $2.7 billion. Much of that difference is the requested supplemental of $664.8 million needed to offset the cost of the program. In 1984 we were over $513 million short and we anticipate in 1985 a shortfall of $151 million.
The savings we would get from the proposed reforms to be implemented in 1985 would be carried over into 1986. And for 1986 we expect, through some reasonable reform measures, we could save $481 million.
The general obligations in this program from 1980 to 1984, even with the restraints in the economy, have grown from a Federal cost of about $1.6 billion to $3.1 billion.
We believe subsidies can be provided and should only be provided to assure access to postsecondary education; and we also believe that capping these programs would exert downward pressure on college costs. We think that the integrity of this particular program is especially threatened in the eyes of the public and the taxpayer because of the rising costs, unnecessary borrowing, excessive bank profits, rising default costs and program abuse.
Our strategy in terms of reforms is to control the excessive costs and reduce the cost exposure to the Federal Government without reducing access to postsecondary education. Borrower cost and lender yield ought not to be greater than the market rate; the lender subsidies ought not to be such that they make a profit at the expense of the student; and administrative costs and default risk ought to be shared by the State agencies-not absorbed 100 percent by the Federal Government.
And in terms of the four areas where we address borrower eligibility, we have talked earlier about a $32,500 income eligibility cap. That, as you know, in the Senate Republican compromise measure, has been adjusted upwards to $60,000. We had a $4,000 award cap. That has been eliminated and replaced by an $8,000 cap on the cost of attendance.
We have asked for a full needs analysis so that no one would have access to this program who has not demonstrated that they need the funding to meet educational costs. We have also included the $800 self-help component and ask under both the original proposal and the compromise proposal for the Congress to urgently address themselves to the error resulting from students having access to funds for which they are not eligible by incorrectly claiming independent student status.
We would also ask Congress to consider the ability to benefit provision which says that we need to look carefully at the eligibility requirements for college and assure ourselves that a GED or high school diploma has been received before a student receives Title IV aid.
We also have proposed changes in the PLUS loan program adding $1,000 to the loan limit and asking that the program be retained without a needs test to provide Federal guaranteed loans for students who wish to borrow the parental contribution, or add on to that contribution and reach higher cost institutions.
Our major borrower cost-related proposal is to replace the fixed interest rate with a rate tied to the 91-day Treasury bill rate as measured for the quarter ending the March before the academic year.
We also would ask on the PLUS program that that rate be capped at the T-bill rate for the quarter ending the March before the academic year plus three percent-and that the program be selffinancing.
In terms of lenders in this program, we would ask that multiple disbursement be implemented in 1985. This is one of those things which makes good sense. It reduces default, saves considerable sums of money to the Government, and does not do damage to the student.
We would also ask that the special allowance be reduced from the current 3.5 percent level. We ask that there be no special allowance paid on the PLUS program after 1986-87.
With respect to guarantee agencies I would hope you would go along in asking them to give back to us the $177 million in reserves that they have been holding as funds to start up the agency reserves. It is now time to give those funds back and help reduce the deficit. And we also would ask that you change the reinsurance for
mula. We have proposed that the agency share with the Federal Government some of the risk of default. We would reduce the reinsurance money sent to those States with good default records, to 90 percent. 70 or 50 percent would be sent to those States that have worse default rates.
Finally, we would ask that you consider a 1985 supplemental request for $664.8 million. We think that several legislative changes can be made this year. We ask you to consider implementation of the new interest rate and the new lender subsidy payments-11⁄2 percent for in-school subsidy, and 3 percent thereafter, or as in the compromise a significant reduction of special allowance.
We also would ask that you implement the multiple disbursements provision and reduce the reinsurance rate for the guarantee agencies. These changes would result in about $134 million in savings in 1985 that would be carried over to 1986, and $481 million in savings would be realized in 1986.
The impact on that program would be an approximate reduction of $394 million in loan volume, and only 116,000 loan recipients would be eliminated from the program.
That concludes my statement.
[The statement of Mr. Elmendorf follows:]