Now this is, as Mr. Simmons pointed out, we don't have statistical data on this but this is the feel we get.

The thing about it is these students are alive and they won't have the problem of putting them in the deep freeze for a year until this economic crisis is over, and indeed if it will be over at that time.

The students are caught in an inflationary spiral here. I am encouraged by the feeling of this committee that it is an urgency. September is only 3 weeks away and this is the very month of August in which most of these applications should be in process.

Senator DOMINICK. I thank you, Mr. Purdy, and your whole statement will, of course, be included in the record at this point.

(The prepared statement of Mr. Purdy follows:)

PREPARED STATEMENT OF ALLAN W. PURDY, PRESIDENT, NATIONAL STUDENT FINANCIAL AID COUNCIL; AND DIRECTOR OF STUDENT FINANCIAL AID, UNIVERSITY OF MISSOURI

Mr. Chairman and Members of the Committee:

I am Allan W. Purdy, President of the National Student Financial Aid Council and Director of Student Financial Aid at the University of Missouri-Columbia. We sincerely appreciate the invitation to our National Council to discuss with you the urgency of making certain legislative changes in the Federal Guaranteed Loan Program for students.

Our National Council represents some 1800 student financial aid administrators at the colleges and universities across the country who work directly with students and their parents. Hence, we have a good feel of the economic pulse of these families who are having problems in financing higher education.

A year ago we were in a position with this program where the interest rate needed to be raised to 7% in order to keep up with the rising money market. Now the market has continued to rise, and again the return to the lender needs to be adjusted to keep the program operative on a scale that will serve the students. All of us regret the high cost of borrowing money these days, but it is an economic fact that we have to live with until the market changes. I am sure that the purpose of this committee is to recommend whatever changes are needed so that worthy students can continue in higher education. These students are in school, or are wanting to be in school this year, but many of them can not be in school without the aid of a guaranteed loan. We don't have the privilege of putting these young people in the deep freeze and holding them until the economic situation improves. Any who cannot go to school next year will be relegated to the untrained labor market where we have an excess of workers already.

Along with the economic squeeze which has hit all families, there have been a number of special features in the economy in the past few months which increases the need for a workable guaranteed loan program. In my own state of Missouri, 43 counties have just been declared disaster areas because of a curious combination of floods and drought. Such conditions are prevalent in many areas throughout the country this year. We also have strikes in Kansas City and St. Louis which are cutting the income of many wage earners and has cut the opportunity for many students to earn money during the summer.

Many leaders are continuing to participate in the program but an increasing number every day are finding that they cannot continue to do so in the current financial market. I have heard considerable criticism leveled at the nation's lenders because they are not willing to participate whole heartedly in the student loan program, where the money earns 7%. But from an objective standpoint, I would like to point out that our society is not asking the nation's grocerymen to sell groceries to students at last year's prices. We are not asking the clothiers to clothe our students at last year's prices. Hence, we cannot logically request the nation's lenders to provide credit to students at last year's prices.

I feel that a flexible form of return to the lender such as is being discussed here today is the logical answer for this program at this time.

Last year the Guaranteed Loan Program provided some $640 million in credit to students. An additional $240 million was provided through the NDEA loan program. A comparison of these figures will show that it is impractical at this point to expect the credit needs to be met without a real vigorous guaranteed loan program in 69–70.

There are a lot of applications in process at this time. Some are being approved, and many are not being approved. Hence, students are telephoning back to the financial aid offices every day asking what they are to do next. With September only three weeks away the situation is critical indeed! Therefore, we sincerely hope that necessar adjustments in this program can be made which will encourage our nation's leaders to provide a volume of credit which would exceed last year's volume. We need to take care of an increase of seven or eight percent in enrollment, and rising college costs which could easily be estimated at another seven or eight percent.

We will sincerely appreciate your wise consideration of the needs of the Guaranteed Student Loan Program within the next few days.

Senator DOMINICK. The analysis you have made of the problem goes along with the feeling of most of the members of the committee here. I gathered that a lot of these loans are used not only for higher education, in the standard sense, but are also used for training and vocational schools.

Mr. PURDY. Right, sir. This is one program that is available to them. Senator DOMINICK. And you participate in this in your efforts; that is correct?

Mr. PURDY. Right.

Senator DOMINICK. About what percentage of your applications are for that type of education?

Mr. PURDY. I can't give you a figure on that. I happen to be at a university. More and more vocational schols are geetting into this program all the time.

I think Mr. Simmons could give you a much better figure on that than I as to how many of these are coming from vocational schools. I don't know whether you would want to refer that to Mr. Simmons

or not.

Mr. SIMMONS. We would estimate at this time-we don't have a firm figure-but I would estimate 25 to 30 percent.

Senator DOMINICK. Thank you very much.

The American Bankers Association indicated in its testimony, it feels that passage of the bill that we are considering here today, of which I am a cosponsor, would be helpful in trying to encourage more participation. Have you had any reaction to this type of bill in your area?

Mr. PURDY. Yes, sir. We are going through the same thing now that we went through about a year ago when the interest rate was 6 percent and subsequently moved to 7 percent.

There was an expectancy during the summer that the market is changing, we wonder if this program will change. We are going through the same thing on the part of the lenders right now, is there a possibility that the return to the lender will change, and if so, we would like to wait and see what it is going to be like to participate, but there is the squeeze on, all of us regret the high interest rates that we are caught in.

Senator DOMINICK. Do you feel that passage of this bill would be of assistance in resolving this problem?

Mr. PURDY. I am positive of it from the standpoint of the operating financial aid man and the word that we get from the parents and their contact with the banks and students.

Senator DOMINICK. Thank you very much.

Mr. Noel.

STATEMENT OF LEROY G. NOEL, PRESIDENT, NATIONAL COUNCIL OF HIGHER EDUCATION LOAN PROGRAMS, DEERFIELD, ILL.; ACCOMPANIED BY STAN C. BROADWAY, EXECUTIVE SECRETARY, NORTH CAROLINA STATE EDUCATION ASSISTANCE AUTHORITY; DON PAYTON, EXECUTIVE DIRECTOR, GEORGIA HIGHER EDUCATION ASSISTANCE CORP.; AND RICHARD W. PETRIE, EXECUTIVE DIRECTOR, LOUISIANA HIGHER EDUCATION ASSISTANCE COMMISSION, BATON ROUGE, LA.

Mr. NOEL. I would like to have three people join me at the table. Our statement will be very, very brief. We will submit the full text for the record, with your permission.

Senator DOMINICK. The text will be printed in the record as though given in full.

(The prepared statement of Mr. Noel follows:)

PREPARED STATEMENT OF DR. LEROY G. NOEL, PRESIDENT, NATIONAL COUNCIL OF HIGHER EDUCATION LOAN PROGRAMS; AND ASSOCIATE EXECUTIVE DIRECTOR, ILLINOIS STATE SCHOLARSHIP COMMISSION

Mister Chairman, members of the committee, today I have the pleasant task of representing the National Council of Higher Education Loan Programs in testimony before your committee. I have the privilege of serving as President of this organization, representing the executive heads of twenty-four state and private nonprofit guaranty agencies which have guaranteed over $1 billion in student loans or approximately 70% of all loans guaranteed since the enactment of the Higher Education Act of 1965. Members of the National Council are in a unique position to sense the gravity of the problem. They are in constant contact-8 hours a day, 5 days a week-with students, educational institutions and lenders. In the interest of your time, our statement is short and to the point! Hopefully, you will find it helpful to direct questions to members of the Executive Committee who are present. I will deal only with the crisis that is immediately before us-the lack of student loan funds, which are so desperately needed by students entering post-high school programs of study this fall.

The record to date ($1.4 billion extended) clearly shows that the private lending sector is community-minded and service-oriented. We have found them most reasonable. They do not expect the Guaranteed Student Loan Program to be placed on a full profit-making basis; but they do expect—and will insist-that a "break-even" return be provided.

From the inception of this program in 1965, it has been regarded as an illustration of how state and private nonprofit agencies and the federal government can utilize private capital and labor in removing economic barriers to higher education. Unless the return to the lender more nearly reflects the cost to the lender, we should be prepared to terminate this experiment in cooperative government. Members of our Executive Committee estimate that between 30% and 40% of the students (mostly freshmen) who seek loans for the first time this fall will be denied this opportunity. When converted to numbers of students across the nation, we estimate that approximately 150,000-200,000 students will fail in their efforts to obtain much needed guaranteed student loans this fall.

Why do we have this crisis? First and foremost, it relates to the increased cost of money. This item has provided the feature article of the financial pages

for the past many months. The prime rate has skyrocketed to an unprecedented level of 8-2%. Exhibit A of this testimony vividly demonstrates fourteen changes in the prime rate since November, 1965. During this period of time, the relative return to the lender has fallen a full three percentage points. In other words, at the inception of the program in 1965, lenders were getting 6% simple interest, or 1-2% of the prime rate. Today, lenders are getting 7% or 1-2% below the prime rate of 8-2%. The demand and need for guaranteed loans have increased for the following reasons:

1. The program is expected to pick up the slack caused by a cutback in the federal financial aid programs;

2. College costs have increased;

3. Greater numbers of students are seeking post-high school education, especially those from low income families;

4. Improved communication has caused more students to be aware of this type of opportunity.

For the above reasons, the volume comparisons of May, June and July, 1969, versus similar figures for May, June and July, 1968, cannot provide a valid measure of the problem. In other words, because more loans have been guaranteed in 1969 than one year earlier does not mean that we do not have a problem.

In addition to the increased demands as cited above, two other factors should be considered when making comparisons. First, loans guaranteed in May, June and July, 1969 probably were already promised by lenders prior to the prime rate increase to 82% in June, 1969. Second, volume a year ago was low because there was some tendency on the part of lenders to turn off the supply while Congress debated the wisdom of increasing the return. Lenders were reluctant to move ahead until final action was taken on August 3, 1968.

If the impending crisis is to be solved in the most economical way, the program to increase the lenders' return should possess the following characteristics: First and foremost, it must be free of additional paperwork and expense to the lender. To put it bluntly, we cannot afford another technique such as that of last fall when the rate was increased from 6% to 7%. That technique caused lenders to set up two additional categories within their student loan portfolio. These categories, in addition to the varying interest obligations during the repayment period, probably offset or cancelled-out the entire effect of the rate increase by increasing administrative overhead. This must be avoided in the future. Exhibit B clearly shows the magnitude of the problem. It must be remembered that educational loans are, perhaps, the only class of credit that, by their nature, permit creditors to borrow several times within a span of a few months. While lenders are accustomed to fluctuating interest rates within their installment loan departments, they are not well equipped to handle fluctuating rates within one borrower's portfolio. Truthin-lending regulations, which are applicable to all repayment procedures, became effective July 1, 1969. This further adds to the administrative burden of a multi-rate, long-term, low-yield student loan.

Second, the program must provide for a break-even level of return to lenders. If the return was adequate at the start of the program in November, 1965, it means, as demonstrated in Exhibit A, that an increase of a minimum of 3% simple interest or its equivalent is needed immediately. It is equally clear from looking at Exhibit A that some technique other than varying the interest rate should be employed to increase the lender return.

Third, the increase must be adjustable to the money market, within guidelines established by Congress. Specifically, it should be relatively free of adverse psychological effects when lender return can be appropriately reduced. Reducing an administrative allowance is psychologically less painful than reducing an interest rate which suggests permanency.

The National Council of Higher Education Loan Programs makes the following recommendations to this Committee:

1. That Congress not change existing federal law regarding payment on a maximum rate of 7% simple interest on guaranteed student loans, provided;

2. That Congress amend existing federal law to authorize the Secretary of Health, Education and Welfare to pay to lenders, based upon money market con

ditions as they may exist from time to time, a "market cost adjustment" of the minimum of 3% additional interest or its equivalent on loans made after June 30, 1969, that such adjustment be payable over the life of such loans, and that the Secretary be authorized to prescribe the procedures and manner by which such adjustments shall be paid.

The Council, therefore, favors retention of the present 7% interest rate with the provision for a minimum 3% "market cost adjustment" in lieu of varying the interest rate payable on student loans, for the following reasons:

1. If Congress increases the interest rate payable on student loans to 10% per annum, such action will necessarily conflict with existing state usury laws and/ or state laws governing the guaranty agency in practically all of the states. Overriding state laws raises serious constitutional questions, and perhaps unnecessarily impairs federal-state relationships. To solve state statutory limitation problems, a cumbersome and expensive method of providing an administrative cost allowance would be placed on the lender.

2. Lenders have had to contend with a substantial amount of paper work in the student loan program, and have been faced with constant changes in the law dealing with interest rates on student loans and other program changes. This program must be stabilized. To provide the lender with an increased net rate of return at this time necessarily means some additional change. It is desirable that this change be effected in the easiest possible way. We feel that a provision for payment of some flexible “market cost adjustment" or fee to the lender would be more desirable than changing the interest rate payable on new loans at this time, bearing in mind that current outstanding loans at 6% and 7% will have further varying rates during the payout period and must be consolidated into a single payout note at some future date.

3. Under existing federal law, the student is required to pay interest accruing on student loans during the repayment period following his graduation or withdrawal from school. If Congress now increases the interest rate payable on such loans to 10% per annum, the student will necessarily incur the burden of paying this increased and rather high rate of interest during the repayment period. We do not feel that it is desirable to place an additional burden on the student just as he is beginning to establish himself.

4. If Congress amends federal law in such manner as to increase the maximum interest rate on student loans to 10% per annum, then the Council is of the opinion that this will likely become a fixed, locked-in, permanent rate of interest that will always be payable on student loans, and that Congress will find it exceedingly difficult to reduce this rate at some future date. By authorizing payment of a minimum 3% "market cost adjustment” based upon market conditions existing from time to time, the Secretary will be able to reduce the federal outlay payable on student loans at the appropriate time, or Congress can, with ease, reduce it in its annual appropriations.

5. Authorization to the Secretary of Health, Education and Welfare to prescribe the procedures by which such increased return will be payable to lenders within a state will enable the Office of Education to adopt perhaps two or three different procedures, and thereby enable state guaranty agencies to select the most desirable procedure for effecting this change with the least degree of administrative difficulty within the individual states.

Before concluding, I would like to emphasize once again that the members of the National Council, because of their day-to-day working relationship with guaranteed student loans, are in a unique position to sense the gravity of the problem. The gentlemen who have accompanied me today, along with other National Council members, met in an emergency meeting in this city on July 16 and 17 to carefully consider every possible alternative available to us in facing this crisis. The consequences of each alternative were weighed and examined closely before our final recommendation was formulated. Further support was added to our convictions when we learned that other authorities had reached similar conclusions, as reflected in the contents of House bill 13194 and Senate bill 2721. It is for the reasons previously stated in this testimony that we are able to give unqualified support to these bills. We believe immediate action is necessary to insure that no qualified student is denied the opportunity to pursue his educational plans this fall because he lacks the dollars necessary.