Mr. Harrison Wadsworth, Washington Partners, LLC Speaking on Behalf of the Coalition of Higher Education Assistance Organizations
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Coalition of Higher Education Assistance Organizations
1101 Vermont Avenue N.W., Suite 400
Washington, D.C. 20005-3586
(202) 289-3910 Fax (202) 371-0197
Testimony Before the Department of Education
Public Hearing on Higher Education Act Reauthorization
Kansas City, Missouri
March 7, 2003
Testimony presented by: Harrison M. Wadsworth III
Consultant to COHEAO
Good afternoon. My name is Harrison Wadsworth. I am testifying on behalf of the Steering Committee and membership of the Coalition of Higher Education Assistance Agencies, or COHEAO, a membership organization that that is a partnership of over 300 educational institutions and commercial organizations from throughout the country that share an interest in promoting access to postsecondary education. COHEAO members support campus-based student financial assistance, and they are dedicated especially to the preservation and improvement of the Perkins Loan Program.
The Federal Perkins Loan Program began in 1958 after the Sputnik Launch by the Soviet Union as the National Defense Loan Program. It was re-named the National Direct Student Loan Program, then re-named again as the Perkins Loan Program. It is the oldest federally supported student loan program, a program that has helped many of our nation's leaders pay for college.
The Perkins Loan program remains one of the most cost-effective ways of providing student financial assistance. It is one of the best-targeted programs for accomplishing the mission of improving access to higher education. It represents an excellent use of federal funds since it targets the lowest-income students and includes an institutional match that makes it unique among federally supported loan programs.
The fact that institutions make and collect Perkins Loans from a revolving fund means that those who have benefited from the program are, by repaying their loans, helping their successors pay for college. Adding to the program's cost effectiveness is its requirement that institutions provide one dollar from their own resources for every three dollars of federal capital contributions, a requirement not present in other student financial assistance programs. In part because of inadequate federal capital contributions over the years, many participating institutions have contributed significantly more than the matching requirement to their Perkins funds.
Perkins loan borrowers are overwhelmingly from low-income families. These students are often the first from their family to attend college and usually have the greatest need. Families with dependent students represent some 63% of borrowers, and independent students represent another 24%. Some 40% of these families had an income under $30,000, and 83% made less than $60,000.
Since the Perkins program began in 1958, more than $21 billion in loans have been made to students. Thanks to the revolving fund concept and the institutional match, only one-third of these funds came from the federal capital contributions.
The central purpose of the Perkins loan program remains as relevant today as it did in 1958 - to lend very low-cost funds to the neediest borrowers and to assist those who wish to enter public service. Given the extremely high federal cost of Stafford Loan forgiveness programs, the Perkins Program provides a reasonable alternative to encourage public service. As those who dispense the funds in campus financial aid offices know well, Perkins Loans make the difference for low-income borrowers who do not otherwise receive enough funds to pay for college. This is in contrast to the federal tax benefits for higher education, which have been shown to benefit middle class families, not the neediest students who often are not eligible for benefits such as the Hope tax credit.
Critical to the accomplishment of these central purposes, however, is the need not only to continue, but to increase the small federal capital contribution to Perkins funds. In addition, the federal government should start fulfilling its obligation to fully reimburse Perkins funds for loan cancellations. This relatively small federal financial contribution targets those who need help in accessing higher education.
COHEAO's reauthorization recommendations also include suggestions for streamlining the administration of the Perkins program and for improving institutions' ability to manage their portfolios, collect loans and replenish their revolving funds for future borrowers. Institutions' substantial contributions to their Perkins funds gives them a direct financial stake in the funds' efficient administration that is greater and somewhat different than in other federally backed financial aid programs. We believe this fact should be recognized by the law and the regulations, and that the institutional Perkins fund manager should have greater flexibility in adjusting terms and conditions for their borrowers.
In addition, Perkins managers should have the additional collection tools. For example, COHEAO asks that defaulted Perkins loan borrowers be subject to the federal income tax offset that now applies to defaulted Stafford loan borrowers.
The Perkins Loan program represents a key piece of the financial aid picture that should be supported, streamlined and expanded by Congress and the Administration. It answers key questions put forth in the Department's higher education act request for proposals; the program provides access to those most in need of assistance, and it has a high level of accountability for institutions, who have a direct financial stake in positive outcomes for their borrower-students.
Thank you again for the opportunity to testify. I would be pleased to answer questions. COHEAO looks forward to working with the Department in the reauthorization process.
Coalition of Higher Education Assistance Agencies
Higher Education Act Reauthorization Proposals
February 28, 2003
The Federal Perkins Loan annual maximum should be increased to $5,500 for undergraduate students and $10,000 for graduate/professional students. In addition, the cumulative limit should be increased to $27,500 for undergraduate students and to $67,500 for graduate professional students.
Raising the annual and aggregate limits would allow participating schools additional flexibility in matching need-based programs to the specific needs of their students.
Statutory Language: Section 464(a)(2) is amended as follows:
In subparagraph (A)(i), strike "$4,000" and insert "$5,500".
In subparagraph (A)(ii), strike "$6,000" and insert "$10,000".
In subparagraph (B)(i), strike "$40,000" and insert "$67,500".
In subparagraph (B)(ii), strike "$20,000" and insert "$27,500".
In subparagraph (B)(iii), strike "$8,000" and insert "$11,000".
Loan cancellation provides a way to recruit students into public service professions that often are low paying. At least equally important, cancellation allows graduates to work in a public service profession without having to seek a higher paying or second job simply to be able to repay their student loan debt. Perkins loans, by definition, are provided to borrowers from lower-income families who are more likely to have difficulty with student loan debt because they may not have family resources to draw on when necessary. Given the federal budget constraints that are expected to limit Reauthorization initiatives that can be undertaken in the next Congress, the Perkins program is a logical means to encourage public service with loan forgiveness at a relatively low federal cost. The administrative burden of additional Perkins forgiveness should be low, since several programs are already in place.
This particular cancellation is listed in the law as Section 465 (a)(2)(I) and reads as follows - "as a full time employee of a public or private nonprofit child or family service agency who is providing, or supervising the provision of, services to high risk children who are from low-income communities and the families of such children."
In Section 674.56 (b) the regulations read as follows - "Cancellation for full-time employment in a public or private nonprofit child or family service agency. (1) An institution must cancel up to 100 percent of the outstanding balance on a borrower's Federal Perkins or Direct Loan made on or after July 23, 1992, for service as a full-time employee in a public or private nonprofit child or family service agency who is providing, or supervising the provision of, services to high-risk children who are from low-income communities and the families of these children."
There has been much controversy regarding exactly which borrowers are eligible for this cancellation and exactly what type of agency meets the defined standard. The controversy appears to come from the Student Financial Aid Handbook which states,- "The Department has determined that an elementary or secondary school system or a hospital is not an eligible employing agency." This is puzzling as it is increasingly common for community outreach programs geared specifically for these type of high risk children in urban areas to be part of these very agencies. There also has been record of the Department rejecting applications from supervisory personnel in offices of child and family services.
It is very clear that this should be an inclusive benefit on behalf of social workers and others who have devoted their careers to these high-risk children and their families.
Section 465(a)(2)(I) is amended by striking: "and the families of such children." and inserting at the end the following: "and/or services to the families of high risk children who are from low income communities. Services to these children and families would include services provided by public or private non-profit hospitals, schools, shelters, and family service agencies."
Cancellation should be permitted for all branches of the military for a maximum of 5 years of up to 100% of the original amount of the loan. This cancellation would remove the language pertaining to the borrower serving in areas of hostility and open the benefit to all full time military personnel. This benefit would not apply to any borrower receiving payments from the military for the purpose of repayment of their Title IV loans.
Section 465(a)(2)(D) is amended by striking: "for service that qualifies for special pay under section 310 of title 37, United States Code, as an area of hostilities"
Although the Vista cancellation benefit still exists, confusion has arisen due to the managing of the program with the Americorps program under the single entity now known as the Corporation for National Service. The statute needs to reflect the benefits clearly under the new program name (Corporation for National Service) incorporating the original names (Domestic Volunteer Service Act of 1973 and the National Service Act of 1990) for these individual programs
Section 465(a)(2)(E) is amended by inserting before the semi-colon at the end: "or the National Service Act of 1990, serviced through the agency known as the Corporation for National Service".
Prior to consolidating a Federal Perkins Loan, consolidation lenders should be required to provide easy-to-understand and conspicuous disclosures to Federal Perkins Loan borrowers about the loss of benefits that would result if a Federal Perkins Loan were consolidated, including the fact that there is no interest rate benefit from consolidating Perkins. Borrowers currently are consolidating their loans without being fully informed about lost benefits.
Section 428C(b) is amended by re-designating paragraph (F) as paragraph (G) and inserting the following paragraph before paragraph (G):
"(F) that the lender will disclose, in a clear and conspicuous manner, to borrowers who consolidate loans made under part E of this title that:
(i) The interest rate on the portion of the Consolidation Loan attributed to Federal Perkins Loans will remain 5 percent and will not be affected by the consolidation;
(ii) Once the borrower adds his/her Federal Perkins Loan to a Federal Consolidation Loan, the borrower will lose all interest-free periods that would have been available, such as those when no interest accrues on the Federal Perkins Loan while the borrower is enrolled in school at least half-time, during the grace period, and during periods when the borrower's student loan repayments are deferred;
(iii) The borrower will no longer be eligible for loan forgiveness of Federal Perkins Loans under any provision of Section 465. Such disclosure shall specify individually in detail the occupations listed in Section 465 for which the borrower will lose eligibility for Federal Perkins Loan forgiveness;"
Federal Perkins Loan borrowers should not be penalized by losing their interest subsidy while in school and during grace and deferment periods if they consolidate their loans. These are the same financially needy borrowers who also receive subsidized Stafford loans, yet only their subsidized Stafford loans receive this benefit.
Section 428C(b)(4)(C)(ii)(II) is amended by inserting before the semi-colon at the end: "or Federal Perkins Loans".
Sometimes borrowers who are consolidating do not realize they can include Perkins Loans with their FFELP or Direct loans in a Consolidation Loan. In some cases, it is in the borrower's interest to include Perkins Loans with their other loans in Consolidation. This decision should be an informed one, not one based on a lack of knowledge. Therefore, the 180-day limit on adding loans to a Consolidation Loan should not apply to Perkins Loans.
Section 428C(a)(3)(B)(i) is amended by adding at the end - "(V) Notwithstanding subparagraphs (II), (III) and (IV), Federal Perkins Loans may be added beyond the 180-day period following the making of the consolidation loan."
The Perkins Loan Program should not be eliminated. The expiration dates for the Perkins Program and for the authorization for appropriations need to be extended to reflect the period covered by this Higher Education Act reauthorization. The provision for the wind-down of the loan funds should be eliminated, since it is not necessary because the program is not being eliminated. (Section 461(b) and Section 466).
Section 461(b)(1) is amended by striking "1999" and inserting "2004".
Section 461(b)(2) is amended by striking "October 1, 2003" and inserting "October 1, 2008".
Section 466 is amended by striking paragraphs (a) and (b), and by re-designating paragraph (c)(1) as paragraph (a) and paragraph (c)(2) as paragraph (b).
It has become clear that the Economic Hardship and Unemployment deferments do not allow schools the flexibility to provide the borrower with a remedy that defers both principal and interest. This has caused an additional workload for institutions and has led some temporarily disabled borrowers to attempt to have their loans cancelled for total and permanent disability. The temporary, total disability deferment should be reinstated with a 3-year limit.
The 3-year deferment for medical doctors who are in their period of internship or residency should be re-instated. These people often have very high amounts of debt, and most are in residency/internship for at least three years, many for longer.
Section 464(c)(2)(A) is amended by re-designating subparagraph (iv) as subparagraph (vi) and inserting after subparagraph (iii) the following -- "(iv) not in excess of 3 years during which the borrower is temporarily totally disabled or unable to work while caring for a spouse who is temporarily totally disabled;
(v) not in excess of 3 years during which the borrower is serving in an internship/residency program for physicians;"
1) Schools participating in the Federal Perkins Loan Program should be allowed to obtain information from the New Hires Database to assist in the recovery of delinquent amounts owed on defaulted Federal campus-based student loans. This collection tool is not currently available to schools, but it could facilitate the recovery of loans on which borrowers are not currently repaying or help to identify defaulted borrowers for whom litigation action might be appropriate.
2) The U. S. Department of Education (ED) should be allowed to access the New Hires Database to monitor borrowers who have requested cancellation due to total and permanent disability. Such access is intended to eliminate the requirement that totally and permanently disabled borrowers submit documentation throughout the three-year monitoring period to demonstrate their inability to be gainfully employed.
1) "Section 453(j)(6)(E)(i) of the Social Security Act (42 U.S.C. 653(j)) is amended by adding at the end the following:
'(V) an institution of higher education holding a loan made under part E of title IV of the Higher Education Act of 1965 on which the individual is obligated;
`(VI) a contractor or agent of the institution of higher education described in subclause (V);'"
2) "Section 435(j)(6)(A) of the Social Security Act (42 U.S.C. 653(j)) is amended by re-designating subparagraph (ii) as subparagraph (iii) and inserting after subparagraph (i) the following - "(ii) are borrowers of loans made under title IV of the Higher Education Act of 1965 that have been forgiven due to the total and permanent disability of such borrowers, except that the Secretary of Education shall only provide information on such borrowers for three years, or;"
Schools participating in the Federal Perkins Loan Program should be allowed to utilize the IRS offset program to recover defaulted Federal Perkins loans. This collection tool is not currently available to schools, but those schools that participate in state income tax refund offset programs find such programs to be a very effective collection recovery program. Furthermore, since defaulted amounts can be recovered directly through such programs, more funds can be recycled to new students more quickly.
Section 463(a) is amended by re-designating paragraphs (7), (8) and (9) as paragraphs (8), (9) and (10) respectively and inserting after paragraph (6) - "(7) provide that the Secretary shall act to obtain offsets under Section 6402(c) of Title 26 of the U.S. Code for loans made under this part that are in default;"
The 36-month cap on forbearance should be eliminated, thus providing schools a variety of options to assist borrowers in a wide range of circumstances. With the elimination of the 36-month cap, the stage would be set for a complete overhaul and streamlining of the implementing regulations that deal with the numerous and overly prescriptive reasons under which extensions of the repayment period can be granted. The recommendation to eliminate the 36-month cap would not also eliminate any of the mandatory borrower benefits but, rather, would allow schools to be much more generous and capable of assisting borrowers who are faced with financial difficulties. Furthermore, schools would be better able to grant forbearance in times when an official disaster has been declared without concern for whether the cap has been or will be exceeded.
It should be made clear that schools can grant a forbearance for a short period of time, e.g., one or two months, to prevent a loan from going into "technical default" while the documentation required by the school is being submitted by the borrower. Although there is nothing in the statute that would prevent a school from granting forbearance for this reason, it is unclear whether the implementing regulations as currently worded intended this to be an "acceptable reason."
The requirements for 1) a written request for forbearance and 2) a written agreement by the borrower and the school to the terms of the forbearance should be eliminated. The written request and agreement could be replaced by a requirement that the school send written confirmation to the student of the terms of the forbearance, giving the borrower an opportunity to decline the forbearance. These changes would allow schools to be more responsive to borrower needs, particularly in cases when borrowers live in areas (e.g., as determined by zip code) that have been declared an official disaster area. Schools would be able to unilaterally forbear payments when mail delivery or other forms of communication from the borrower may be inoperable. Furthermore, in situations when the school already has sufficient information on file, it can expedite the processing of the forbearance rather than unnecessarily delay the application of the forbearance until a written request is received.
It should be made clear that the school has discretion to determine the appropriate terms of the forbearance, not the borrower. Since interest continues to accrue during the period of forbearance and since accrued interest is not capitalized in the Federal Perkins Loan Program, borrowers should not be given the option to receive a forbearance of principal and interest if, in the opinion of the school, the borrower can make interest-only or reduced payments during the period covered by the forbearance.
Section 464(e) is amended by striking -- "upon written request" and "for a period not to exceed 3 years".
Institutions should be fully reimbursed for interest that would otherwise accrue while borrowers are in deferment on loans that will qualify for loan cancellation (Section 464). The proposed change corrects an inadvertent consequence of providing deferment eligibility to borrowers who perform service that is eligible for loan cancellation.
Currently, institutions that defer payments for borrowers who are performing public service that qualifies for loan cancellation are only reimbursed for the amount of principal cancelled. This results in a loss of interest income to the Perkins Loan Fund, and depletes the capital available for future borrowers.
Prior to extending deferment benefits to these borrowers, Department of Education policy allowed institutions to "postpone" borrower payments while interest continued to accrue on the loan. When the loan was ultimately canceled in exchange for the public service, the Perkins Loan Fund was reimbursed for both the unpaid principal and the interest that accrued during the "postponement" period. When "deferment" eligibility was extended to borrowers performing eligible public service, the Department changed this policy allowing no interest to accrue on the loan and allowing the Perkins Loan Fund to be reimbursed only for the amount of principal cancelled.
The proposed technical change only seeks to restore the long-standing policy that existed prior to the extension of deferment eligibility to borrowers performing eligible public service.
This issue adversely affects institutions which train large numbers of teachers who work in low-income schools, and it ultimately results in a reduction in Perkins Loan funds which are available to assist current students who are studying to become teachers. Thus, when Perkins borrowers teach in low-income areas, and their Perkins Loans are deferred and ultimately cancelled, the institution's Perkins Loan Fund now is no longer reimbursed for the interest accrued on the loans. Instead, future students are penalized when borrowers take advantage of their deferment and cancellation benefits. Such a result appears contrary to bipartisan efforts to encourage the recruitment of quality teachers to serve the Nation's most disadvantaged students.
Section 465(b) is amended to read as follows:
"REIMBURSEMENT FOR CANCELLATION - The Secretary shall pay to each institution for each fiscal year an amount equal to the aggregate of the amount of loans from its student loan fund which are cancelled pursuant to this section for such year, minus an amount equal to the aggregate of the amounts of any such loans so canceled which were made from Federal capital contributions to its student loan fund provided by the Secretary under section 468. In addition, the secretary shall pay to each institution for each fiscal year an amount equal to the aggregate of the amounts of interest deferred that would otherwise have been cancelled. None of the funds appropriated pursuant to section 461(b) shall be available for payments pursuant to this subsection. To the extent feasible, the Secretary shall apply the amounts for which any institution qualifies under this subsection not later than 3 months after the institution files an institutional application for campus-based funds."
Section 464(f)(2) limits the ability of an institution to compromise on repayment of a defaulted loan only to borrowers who pay 90 percent of the loan, the interest due and any collection fees in a lump sum payment. There are numerous cases where it is in the best financial interest of the Perkins program to accept a compromise that does not meet the conditions of this section. Examples include borrowers who are no longer living in the United States or who are claiming undue hardship through bankruptcy. In these cases it is very difficult or costly for the institution to pursue litigation, and the risk of not receiving any payment on the loan is great. The institution should be permitted to use professional judgment to determine if it is in the best interest of the Perkins program to accept a compromise agreed to by the borrower or to pursue litigation without the arbitrary constraint in 464(f)(2).
Also, institutions of higher education should have discretion whether or not to charge a borrower a late fee when the borrower fails to meet the deadline for submitting a deferment request. The process of charging a late fee, as well as the process and cost associated with collecting the fee is burdensome for institutions. Institutions should be given the discretion to determine what situations warrant a late fee charge.
Section 464(f)(2) is repealed.
Section 464(c)(H) is amended to read as follows - "pursuant to regulations of the Secretary, may provide for an assessment of a charge with respect to the loan for failure of the borrower to pay all or part of an installment when due, which may include the expenses reasonably incurred in attempting collection of the loan, to the extent permitted by the Secretary, except that no charge imposed under this subparagraph shall exceed 20 percent of the amount of the monthly payment of the borrower; and".