Karla Albert Manager of School Services Missouri Higher Education Loan Authority (MOHELA)
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Manager of School Services
on behalf of the Missouri Higher Education Loan Authority (MOHELA)
U.S. Department of Education Public Hearing on the Reauthorization of the Higher Education Act
Kansas City, MO
March 7, 2003
Statement on the Reauthorization of the Higher Education Act
Karla Albert, Manager of School Services
Missouri Higher Education Loan Authority (MOHELA)
Thank you for the opportunity to present some ideas on the important task of reauthorizing the Higher Education Act. I am here representing the Missouri Higher Education Loan Authority (MOHELA). More than 20 years ago, MOHELA was established by the state of Missouri as a non-profit, public purpose student loan secondary market. As such, MOHELA exists for one purpose; to make sure students and families can get the money they need to go to college.
MOHELA applauds and supports the emphasis President Bush has placed on education. The Administration's efforts on K-12 education reform and its commitment to student aid programs that are working well to provide access and opportunity to higher education will improve the lives of millions of Americans. Despite competing priorities like homeland security needs, the President's budget request provides $53.1 billion for the Department of Education, an increase of $2.8 billion or 5.6 percent above his 2003 spending plan and the largest dollar increase of any domestic agency. The President's 2004 request would expand overall student aid available for postsecondary education to more than $62 billion (excluding consolidation loans), an increase of $3.1 billion, or 5 percent, over the President's 2003 request. The number of recipients of grant, loan, and work-study assistance would grow by 386,000 to 9.2 million students and parents, reflecting both increased aid levels and growth in postsecondary enrollment, which is expected to jump some 20 percent between 1998 and 2010.
As the Department of Education works with the Congress to reauthorize the Higher Education Act, concentrated efforts should be made to ensure that the significant levels of Federal funding already provided for the HEA programs are effectively helping to further the goals of expanding access and ensuring affordability. MOHELA, and other student loan secondary markets across the country, focus exclusively on these very issues by ensuring the availability of funding for student loans and by making it easier and less expensive to pay for college.
MOHELA raises private capital by selling both taxable and tax-exempt bonds to investors, and uses that capital to acquire student loans from commercial banks, savings and loans and credit unions. By selling their loans, these financial institutions raise capital to make more student loans. In acquiring loans from originating lenders, or in some cases making loans directly, MOHELA assumes the long-term servicing and collection responsibilities of these loans and share in the risk of defaults.
MOHELA is proud to be part of the Federal Family Education Loan Program (FFELP), a public-private partnership that has helped over 60 million students gain access to higher education. In the 2001-2002 academic year, over $41 billion in federal loans were made to students, parents, and other borrowers, constituting just over 46 percent of the almost $90 billion in total aid provided for postsecondary education. The annual net cash cost to the Federal government of carrying these new loans and a portfolio of more than $150 billion in outstanding loans is less than $2 billion, the bulk of which represents the costs of borrower subsidies and defaults. In other words, the federal government pays about one cent per year for every dollar in outstanding FFELP loans. These figures highlight the substantial leverage that FFELP provides in raising private capital from around the globe to provide low-cost loans to America's students.
Every day, MOHELA works directly with students and schools to provide student loans, financial counseling, college planning, repayment assistance, and default prevention services. From the predominately poor areas of Missouri and across the nation where many families are struggling to break a cycle of deprivation, to the vastly more affluent neighborhoods where families regularly reap the benefits of the financial aid system, MOHELA works with every single eligible individual seeking to improve his or her circumstances through postsecondary education.
Experience tells us that the expansive web of financial aid available to individuals is working well in many areas. In other areas the system is failing. The failures are most dramatic amongst the individuals who are the most needy. This year's reauthorization efforts provide a remarkable opportunity to more effectively direct scarce Federal resources to those who need the most help.
This must be done by focusing on grant aid, especially for students in their first two years of college. Although loans are subsidized by the Federal government and efficiently financed and delivered, making them relatively inexpensive, they should not form the principal source of aid for low-income students and their families. Congress should make every effort to fund the Pell Grant program at the levels authorized in the law. We recognize the strong commitment of the Bush Administration to the Pell Grant program, and commend the Administration for working to make the program available to millions of more students.
Over the past decade, while grant aid has doubled in real terms, its share of total aid has dropped from 50 percent to 39 percent. Taking into consideration the constraints of a Federal budget that faces significant deficits over the near term, Congress should allocate more funds to first year Pell Grant recipients. Front loading the Pell Grant program would help limit or in some cases completely eliminate the need for low-income first year students to take out student loans. This would not only make higher education more attainable, but it would also help reduce student loan defaults. First-year students who fail to advance in their schooling are the most likely to default on their student loans.
Increased grant aid and lower defaults coupled with low-cost loans will greatly improve access and promote additional educational opportunity. Students and other borrowers have been the beneficiaries of dramatically reduced loan costs. The cost of borrowing $18,000 today is the same as the cost of borrowing $8,000 fifteen years ago. Today, an eighteen-year-old student, with no collateral or credit history, can often find a loan with an after-tax cost as low as 2 percent.
In fact, MOHELA does even better with its Rate Relief program, which currently offers up to a 2.0 percent decrease in interest rates of both Stafford and PLUS loans from day one of repayment, simply for having payments made by auto-debit. In Missouri, the Mel Carnahan Public Service Award also offers great opportunity for those borrowers who choose a public service career. MOHELA's program currently offers a cap of 3.75 percent on PLUS and Stafford loans for qualified borrowers in Missouri serving as teachers, police officers, social workers, nurses, or in the Missouri National Guard. The benefits offered by MOHELA combine to achieve a before-tax interest rate as low as 1.25 percent.
These attractive benefits are provided because of MOHELA's structure as a nonprofit entity. There is only one way MOHELA and its fellow non-profit secondary markets can use the net revenue it makes on loans made with tax-exempt funds. It can cut costs on student loans for borrowers, making higher education more affordable by offering borrower benefit programs to reduce the actual cost of student loans. Or it must rebate any earnings above 2 percent directly to the Federal Treasury via arbitrage rebate. Section 150 (d)(2) of the Internal Revenue Code states that organizations that issue tax-exempt student loan bonds must "devote any income (after payment of expenses, debt service, and the creation of reserves for the same) to the purchase of additional loan notes or to pay over any income to the United States."
MOHELA would rather not rebate funds to the Treasury. It works to re-invest those funds into the financial aid system by providing handsome borrower benefit programs. However, MOHELA and other secondary markets want to do more. Currently, secondary markets devote substantial private resources to the development and delivery of effective and innovative college awareness and access programs. This is accomplished by providing services and programs such as college planning centers, early awareness campaigns, and financial literacy classes to needy families and students. These programs have a tremendous impact.
As study after study has found, low-income students face multiple hurdles in securing postsecondary education, not the least of which is lack of information on the resources available to them. We want to work with the Department of Education to see if even more can be done to reach students who are low-income, minority, disabled, or whose parents did not attend college.
In addition to information and adequate funding for programs that work, accountability is also vital in a system that provides $90 billion in total aid for postsecondary education. Congress should facilitate a careful examination of why many students fail to matriculate from the freshman to the sophomore year - or even beyond the first semester of college. Congress should also set up a way to measure what students are prepared and what students are not prepared for postsecondary education. This would be helpful data in determining if adequate information and counseling is being provided to prospective students.
One way to help students prepare for college would be to increase the opportunity for high school juniors and seniors to participate in Advanced Placement (AP) courses and obtain college credit prior to graduation from high school. This could be accomplished by extending PLUS loan opportunities to the parents of high school Junior and Seniors participating in the dual enrollment/college cooperative programs through their high school. Significant savings could be realized for states (that subsidize the costs for college dormitories and other costs) if students completed several hours of college credit before moving out of the home and onto a college campus. A four-year degree should not take five and one-half years to complete. The more AP and college credit hours the students bring with them, the less expense and time they will have to spend on a campus in pursuit of a degree. As a significant bonus, students who do enroll in the AP/college credit courses in high school are more likely to continue their education at the collegiate level as they have already committed to and made an investment into higher education.
Although there are some targeted, effective ways to use the tax code to increase college access, well-documented research has shown that the Hope and Lifelong Learning tax credits are not as effective as traditional student aid programs in promoting access to higher education. The Internal Revenue Code has its own targeted income cut-offs for various provisions, which bear no relation to the various income strata within the HEA for Pell Grants, subsidized loans and other programs. In addition, there is a time lag in the benefits received from tax credits. When the two laws operate in conjunction with one another, both the timing and the targeting of the subsidies are hit-or-miss, as opposed to the seamless net of support Congress should strive for.
In addition, MOHELA suggests that parents who share in the cost of education of their child be allowed to claim the deduction of educational expenses regardless of which parent claims the child as an exemption when filing the Federal income taxes. The high rate of divorce and joint custody in the United States often leaves an assigned parent as the designated person to claim the dependent thus allowing that parent the right to also claim a deduction for educational expenses. The other parent, while often sharing equally in the educational expense, is not allowed to claim a deduction for their own contribution.
While the focus should be on college access, the operation of the FFEL Program today is moving in the opposite direction. Congress and the Department of Education should work to revise the student loan consolidation loan program so as to reduce the liability to taxpayers and refocus limited Federal resources on helping students and improving access. In many cases today, loan terms in the Stafford loan program are less favorable than those for consolidation loans. It does not make sense to provide substantial subsidies to borrowers well into their careers while continuing to tax college freshmen when they take out a student loan in the form of origination fees. In the fiscal year that ended in September, some $32 billion in consolidation loans were made within the FFELP and Direct Loan programs. That is only slightly less than the loan volume of the entire Stafford program the year before, and represents almost a tenfold increase since fiscal year 1995.
The borrowers who took out these consolidation loans - some in-school, some just out, and some in mid-career - for the most part made sound decisions to lock in an interest rate as low as 3.5 percent for as long as 30 years. But their collective decisions will result in substantial Federal costs for an equally long period; costs that do nothing to improve access and that in some respects may be inversely related to need. Every dollar spent subsidizing consolidation loans is a dollar that cannot be spent on improving access. The Administration and Congress should give strong consideration to promoting access by realigning Federal policy and resources towards the next generation of needy students. In addition, in-school consolidation should be eliminated, as we believe that future career options of most borrowers are too unpredictable at this time to risk the loss of possible loan forgiveness options. MOHELA also supports entrance loan counseling requirements for consolidation loans to ensure the borrower has a thorough understanding of the consolidation program.
The consolidation program was originally intended as a program to simplify and assist borrowers during repayment. It should be returned to that purpose. It has been MOHELA's experience that despite the increased amount of student loan borrowing in recent years in response to increased college costs, the vast majority of borrowers are able to manage their student loan obligations. For the minority of borrowers who have difficulty managing their student loan obligations, there are a vast array of programs and repayment options available to them. However, some borrowers choose loan consolidation to extend repayment when this option is not always the best option for them. Repayment flexibility should be available without needless complication of the terms or requiring borrowers to take out new loans. In the 1998 reauthorization, Congress made extended repayment available to borrowers with loan balances above $30,000. This concept should be expanded to all borrowers, with tiered repayment term levels modeled on those contained in current law for consolidation loans. Not only would this enable borrowers to more easily and effectively manage their loan obligations, it would ensure borrowers maintain the generous benefits provided by MOHELA and other FFELP providers on their underlying loans. When borrowers opt to consolidate their loans, these benefits are lost.
Considering these suggestions in the context of the entire student aid system, MOHELA recognizes that in today's economy with the availability of low interest rates, borrowing is often the most likely option for funding higher education. MOHELA supports increased levels of Stafford loans for borrowers beyond the first year of college. We do not recommend an increase in the Stafford loan limits for first-year students, but rather would focus on additional grant funding for this group.