As the late Senator Bob Kerr said when we were debating some similar proposition on the floor of the Senate and I was pleading for scholarships, they had a proposal to make the GI bill a loan bill only and not grants, and Senator Bob Kerr said he didn't favor handing the three balls of a pawnshop over to the college student as he came out of college. I opposed that three balls of the pawnshop approach. The banks have to collect their money rapidly. I don't criticize them for commercial transactions. I want to point out it is inapplicable to the academic community, where it takes years to get degrees. Senator PELL. Thank you, Senator Yarborough. OPENING STATEMENT Senator JAVITS. This bill is the principal one before us. The bill is S. 2721, sponsored, aside from myself, by Senators Prouty, Dominick, Murphy, and Schweiker on this subcommittee. It is also sponsored by Senator Bellmon of the full committee, and by Senators Goldwater, Thurmond, Miller, and Percy. The measure would permit the Secretary of Health, Education, and Welfare, after consultation with the Secretary of the Treasury, to prescribe an incentive allowance to be paid by the Government to eligible lenders whenever the statutory interest limitation of 7 percent and current economic conditions deter eligible lenders from making student loans. The Federal incentive payment may not exceed 3 percent per annum. It is estmiated that 200.000 students may find themselves unable to obtain loans as the Nation's colleges and universities begin their fall terms within the next few weeks. The important thing, Mr. Chairman, is to act now; that is really what counts. I would like to conclude this very brief statement as to the administration's bill, which Commissioner Allen himself will test fiy to, with two points. One, I, too, favor student NDEA loans, but the great bulk of students are not eligible for these loans or in other cases even the expanded appropriation can't possibly supply the need. Thus, students have to look to the banking institutions. And I would like to point out that about three times as much is loaned that way for colleges and universities as would even be loaned under the $229 million for NDEA in the appropriation bill which has been provided by the other body. When the guaranteed student loan program was enacted in 1965 as part B of title IV of the Higher Education Act, it was the intent of Congress that this would be a student aid effort supplemental and complementary to the national defense student loan program authorized by title II of NDEA in 1958. The Congress recognized that just as students from lower-income families require loan assistance in order to attend college, so also do students from middle-income households which are hard put to meet the ever-rising tuition costs in higher education. I am heartened by the fact that the other body has now approved an appropriation of $229 million for NDEA student loans, an increase over last year's appropriation of $193.4 million and this year's budget of $161.9 million. Although this falls short of the $275 million authorized, it nevertheless is a step in the right direction. We must now also recognize the plight of the student ineligible for an NDEA loan and make it possible for him to take advantage of the guaranteed loan which is becoming increasingly difficult for him to obtain at the maximum 7-percent interest rate provided by law because of the tight money market. Finally, I would like to quote what the Washington Post said in an editorial yesterday about college disruption and about the bill we are considering that the administration favors: This is much more likely to bring sobriety to the campus than any amount of legislation designed to punish protest by withholding funds from needy students. Finally, I would like to acknowledge the generosity and statemanship of Senator Bayh in his proposals. I feel exactly the same waywe have to do this and do it quickly. What proposal we adopt I think our proposal is the best, speaking for the administration and ourselves of the minority, but the important thing, Mr. Chairman, is to get something done immediately. NEED FOR GUARANTEED LOAN PROGRAM Senator DOMINICK. Just before we start, and to back up the point that Senator Javits made about the need for a guaranteed program with private capital behind it, we have the figures here for of Colorado. In fiscal 1967, we had 2,444 loans at a total cost of $1,760,000. my State In fiscal 1969 we had 11,132 loans with a total cost of $10,757,000. It is estimated that in fiscal 1970 we will have 13,180 loans at a total cost of $12,736,000. As of July 18 we had 22,107 loans outstanding at a total cost of $20,367,000, in our State alone. Included in this there are 142 commercial banks participating, 12 savings and loans, 18 credit unions and three large high schools in the category of "Other." This doesn't mean that they are all making loans. It means they are eligible to participate in this program. At the present time, from letters that I have been getting, many of these banks simply are not making any loans unless the borrower happens to have an account in that bank or his family has an account or he has an "in" with some of the officers somewhere along the line. I think we have to take action rapidly. So I am happy to support Senator Javits' bill which I think is the quickest way to get moving on the problem. Senator JAVITS. Thank you, Senator. Senator PROUTY. I have a brief statement. I won't take the time to read it but I would ask unanimous consent to have it appear in the record. Senator PELL. It will appear in the record as read. STATEMENT OF HON. WINSTON L. PROUTY, A U.S. SENATOR FROM THE STATE OF VERMONT Mr. Chairman, I am pleased to be present for these special hearings on bills that will affect the guaranteed student loan program. This program has been most beneficial to many students in the lower- and especially middle-income categories. One budget estimate for 1969 estimated that nearly $650 million worth of these loans would be made for the year. This is indeed a significant figure. In recent months, however, the operation of this program has been seriously impaired. Economic conditions and rising interest rates have made it ever more difficult to issue as many of these loans at the 7-percent maximum interest rate as are desired. Mail from my home State of Vermont attests to this fact. Many students have written to explain the difficulties they have encountered when banks have found them eligible for loans but are unable to fund them. The banks are not unsympathetic, but it is beyond good business reason to issue too many of these loans when the rate of return is so low. Indeed the problem has become so acute that the Vermont Association of Student Financial Aid Administrators was formed so that these people could work together in attacking the problem. The bills before us today present two methods of easing this money squeeze. I know there are those who say we must review and reorganize the full range of programs that now give financial aid to students. While I agree that there is much merit in this view, I believe that on an interim basis at least we must seek a solution that will help those students who wish to enter college this fall. Therefore, I am pleased to see that these special hearings have been convened. I further hope that the testimony received from our distinguished visitors today will help us reach an early and equitable solution. Senator PROUTY. I certainly agree with Senators Javits and Dominick that we must act and act in a hurry if we are going to resolve this problem in any degree. Senator PELL. Our next witness is the Honorable James E. Allen Jr., U.S. Commissioner of Education, who will make the presentation for the administration. STATEMENT OF HON. JAMES E. ALLEN, JR., COMMISSIONER OF EDUCATION, AND ASSISTANT SECRETARY, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE; ACCOMPANIED BY WILLIAM SIMMONS, CHIEF, INSURED LOANS BRANCH, DIVISION OF STUDENT FINANCIAL AID, BUREAU OF HIGHER EDUCATION; DR. ALBERT L. ALFORD, ASSISTANT COMMISSIONER FOR LEGISLATION; AND PETER P. MUIRHEAD, BUREAU OF HIGHER EDUCATION Mr. ALLEN. Thank you very much. I am delighted to get the sense of urgency that has been expressed here this morning by the members of the committee. Secretary Finch and I feel equally a sense of urgency about this and we hope the committee will give immediate consideration to this proposal in order that the guaranteed loan program may continue to serve the million of youths who will be attending college this fall. I would like to say that at this point we in the administration do not consider the guaranteed loan program as a substitute for the NDEA loan program in any form. It has always been considered supplemental and complementary and we all strongly support the NDEA program and hope before long it can be substantially expanded. Mr. Chairman, for the sake of time I will not read all parts of my statement. I will skip over to the second page of my testimony. Senator PELL. The statement will appear in full in the record. (The prepared statement of Mr. Allen follows:) PREPARED STATEMENT OF HON. JAMES E. ALLEN, JR., ASSISTANT SECRETARY FOR EDUCATION AND U.S. COMMISSIONER OF EDUCATION Mr. Chairman and Members of the Subcommittee: It is a real pleasure to appear in support of S. 2721, emergency legislation amending the Guaranteed Student Loan Program established in Title IV-B of the Higher Education Act of 1965. I urge the Committee's immediate consideration of the proposal, in order that the Guaranteed Loan Program may continue to serve the millions of youth who will be attending college this fall. In the light of the urgency surrounding this situation, I would also urge that the Committee adopt the changes in the proposal made by the House Committee on Education and Labor, as it reported the companion measure H.R. 13194. Since its inception in the fall of 1965, the Guaranteed Loan Program has very quickly become an important element in the series of student aid programs supported by the Federal Government. In Fiscal Year 1966, as the program was being established, the total volume of loans reached $77 million. This figure quickly increased during Fiscal Year 1967 to $248 million, and increased again in Fiscal Year 1968 to $435 million. For the fiscal year which just ended on June 30, 1969, volume was $670 million, with approximately 19,000 lenders participating. These figures, however, do not accurately reflect the reason for our appearance here today. Rather, we are again confronted with the same problem which caused this Committee in 1968 to recommend an increase in the maximum statutory interest rate from 6 percent to 7 percent. You will recall, in testimony from the educational and lending communities a year ago, the commonly expressed need for some increase in the rate of return to the lender in order to provide incentive for the lender to make loan funds available to all qualified students who desired to borrow. Prompt action by the Congress in raising the rate to 7 percent as of August 3, 1968, was the single most critical factor in providing a loan volume in excess of two-thirds of a billion dollars for the 1968-69 college year. However, in the past 6 months, the prime rate-that is, the rate charged by major lenders to their most important customers-has increased three times. The rate went to 7 percent in January 1969, 71⁄2 percent in March, and finally to 8% percent in June. As you know, the prime rate of 81⁄2 percent is the highest in the economic history of this Nation, and all other installment loan interest rates are scaled upward from the prime rate. Therefore, even though the student loan is guaranteed by a State or private nonprofit agency, or insured by the Federal government, at a fixed 7 percent simple interest rate, it is not competitive with other kinds of personal loans for which the rate of return is fixed by factors in the money market. We have been advised by many lenders who participated heavily in the 1968-69 program that their activity at the 7 percent rate must either be halted entirely or restricted to children of favored customers, on the grounds that they are unable to "break even" in the current market. 32-928-69 The major portion of lending activity under the Guaranteed Loan Program occurs during August, September, and October, when students and their families make financial plans for the college year. Accordingly, we support the provisions of S. 2721, as modified by the action of the House Committee on Education and Labor. The modification are four in number: (1) The payments, which S. 2721 terms "incentive payments," are called "market adjustment allowances" in the House-reported bill. (2) Rates would be set by the Secretary every three months, as contrasted with the 6-month period in S. 2721. (3) Payments to lenders would be based on an average of all loans in the lender's portfolio, rather than on the amount of loans held at the end of the period. This would prevent any abuse by a lender in failing to make any loans during the 3-month period, then lending money to students at the period's end, to take advantage of a favorable incentive rate. (4) H.R. 13194 would authorize the Secretary to determine the market adjustment allowance at the end of the period involved; S. 2721 would authorize him to set the rate at the beginning of such period. We feel that the first three amendments listed probably improve the proposal, and we accept them without difficulty. The requirement that the adjustment allowance not be determined until the close of the 3 month period gives rise to some question of its function as an incentive to lending, but it is my understanding that the banking community does not feel that this change will unduly hamper the operation of the program. In view of the urgency of the situation, I would urge the Committee to accept all four modifications. As modified, S. 2721 will permit the Secretary to prescribe a market adjustment allowance to be paid in addition to the 7 percent simple interest rate permitted by present law. The market adjustment allowance would be paid to eligible lenders whenever the Secretary determines that statutory interest limitations or other current economic conditions deter eligible lenders from making student loans. The amount of the market adjustment allowance is a percentage of the average principal balance of all outstanding student loans made and disbursed by the lender on or after July 1, 1969, and in the portfolio of the lender at the close of a given 3 month period to which the allowance applies. This, of course, includes an average of all such loans in the portfolio, regardless of whether the repayment period thereon has begun, made after June 30, 1969. The percentage (if any) may not exceed 3 percent per annum, must be prescribed each 3 months by regulation, and the amount determined thereby is payable after each such period. When making a determination of the percentage, the Secretary may, at his discretion, establish differing rates on an appropriate geographical basis or according to the classification of the lender. The percentage rate will be announced after each period in order to arrive at an accurate adjustment payment for that particular 3 months. Looking at market conditions as they have affected lenders and their participation takes the guess work out of the evaluation, but also provides an incentive to greater participation because banks know what previous payments have been. An exception will be made for the period of July 1-September 30, 1969. The percentage for this period will be announced upon the enactment of the legis lation. This provision helps establish rapport between the Federal Government and lenders in indicating what rates in reality will be. Good faith is, of course, an important factor, but at this critical time lenders need to know what return to expect from loans they disburse next month for the 1969-1970 school year. Legislation to this effect was reported out of the House Committee on Education and Labor yesterday, and the chairman of that committee has indicated his intention of bringing the bill to the floor as soon as possible. This measure is vitally important to thousands of students, and needs to be considered before the August 13 recess. Therefore, we must again request your support and immediate action. Projections by the Office of Education show approximately 920,000 loans for $800 |