News from the
Committee on Education and the Workforce
John Boehner, Chairman

FOR IMMEDIATE RELEASE
July 22, 2003

WASHINGTON, D.C. - Witnesses before the U.S. House 21st Century Competitiveness Subcommittee, chaired by Rep. Howard P. "Buck" McKeon (R-CA), today testified on the pros and cons of the consolidation loan program, which allows former college students to consolidate their federal student loans with a subsidy drawn from the limited pool of federal resources devoted to higher education. Today's hearing, which comes as committee Republicans are seeking ways to ensure that priority in federal higher education aid is focused on access, is part of an ongoing series being held by the Education & the Workforce Committee to explore the wide range of issues as part of the Higher Education Act (HEA) reauthorization this year.

"When the Higher Education Act was authorized in 1965, its intention was to expand access and provide opportunities to low-income students. Yet today, I believe some higher education programs have lost sight of that original mission - and the crisis of skyrocketing college costs makes it more important than ever to ensure that higher education programs are reaching their full potential to expand access to higher education in America," said Rep. McKeon.

McKeon joined Education & the Workforce Committee Chairman John Boehner (R-OH) earlier today in declaring a college cost crisis in higher education, and outlining principles to guide the Committee's reform efforts to address this crisis. "I believe the principles we have outlined will help us address this crisis, and realign programs under the Higher Education Act to more fully meet the goal of expanding access to a college education. The principles include: (1) holding colleges accountable for cost increases without over-burdensome federal intrusion; (2) removing barriers, particularly those that disproportionately harm non-traditional students; (3) improving quality and innovation by empowering consumers; and (4) realigning student aid programs to ensure fairness for America's neediest students and families. These principles will guide reforms to all areas in the Higher Education Act, including the consolidation loan program which is the topic of today's hearing," said McKeon.

"There is no question that I, and my colleague, Mr. Kildee, support the availability of low, variable interest rates for students. As you know, the changes we made in the last reauthorization put in place the very variable rate formulas that have provided for the lowest rates in the loan program's history," continued McKeon. "With the ever rising costs of postsecondary education in this country, we want to continue to do all that we can to increase affordability and access to postsecondary education for low- and moderate-income students. However I believe achieving that goal will require us to look carefully at where federal resources and federal support are being allocated."

The consolidation loan program was implemented as part of the 1986 HEA reauthorization. The intent of the consolidation program was to provide an opportunity for borrowers with multiple loan holders and a high debt level to consolidate that debt with one holder and allow for a single monthly payment. However, with recent interest rate drops, the number and volume of consolidation loans has increased dramatically in the last few years, and as a result, an ever-increasing amount of the federal subsidy for higher education is directed toward college graduates who have already achieved their educational goals.

Rep. Ralph Regula (R-OH), chairman of the U.S. House Appropriations Subcommittee on Labor, Health and Human Services, and Education, testified before the Subcommittee on legislation he has introduced to eliminate the so-called single holder rule, which requires borrowers with multiple loans held by a single lender to seek consolidation with that lender before other financial institutions. "This exception makes no sense and is unfair to this one group of student loan recipients," said Regula.

A number of Members of Congress have introduced legislation surrounding provisions within the consolidation loan program, in addition to the bill authored by Rep. Regula. Witnesses testified on the potential implications of such proposals, including the three bills so far introduced in the House that would allow borrowers to "reconsolidate" their student loans, something that cannot be done under current law.

Dallas Martin, president of the National Association of Student Financial Aid Administrators (NASFAA), used his testimony to explain what he described as the potentially unavoidable negative consequences of focusing federal resources on allowing reconsolidation of student loans. "Some possible solutions being considered in this area will certainly help former students who are federal loan borrowers, but NASFAA strongly believes that some of those solutions will consume scarce federal monies that are better expended assisting current and future students. Further, some solutions actually will disadvantage borrowers and have unintended consequences," said Martin.

"You all know that in making changes to the [HEA] Title IV student aid programs, you need to make choices," continued Martin. "And, it is true that in making choices, especially in an era of scarce resources, certain decisions will enhance educational opportunities for our citizens and other choices, however well-meaning, will benefit some individuals, but not extend other benefits that are more important to the greater population of students."

June McCormack, executive vice president at Sallie Mae, noted that "The capacity of our nation's financial aid system to ensure postsecondary access to all of the projected incoming low-income and minority students in coming years is jeopardized by such proposals [to allow for reconsolidation of student loans] which would shift taxpayer subsidies from students in school to borrowers in repayment."

"Never before has the federal government retroactively changed the contract terms of student loans in a significant way after they have been made," continued McCormack. "This type of retroactive change creates new and real risk that increases the cost of financing and makes the prospect of investor-driven litigation likely."

Paul Wozniak, managing director and group manager of UBS Financial Services Inc.'s Education Loan Group, testified on the implications of consolidation loans, and reconsolidation proposals, for the financial services industry. "There is one thing that lenders and investors value most and that is predictability. The greater predictability, the more efficient the pricing of the debt will be. The more efficient the pricing of the debt, the better able the lender will be to offer borrowers the most beneficial terms," said Wozniak.

"A loan refinancing option that gives some borrowers a second bite at the apple is something that most investors could have not contemplated in assessing the average life of their investment," Wozniak added. "It is safe to say that as a result, investors in all types of student loan backed securities will be unambiguously less secure than they would have been absent a reconsolidation option."

A bipartisan group of Committee members have expressed support for the idea of allowing borrowers to refinance loans under the current historically-low rates, but are concerned that such proposals would result in increased costs to the taxpayers. Rep. Max Burns (R-GA), explained that he supports proposals that would improve financial options for borrowers, but not if they come at the expense of taxpayer dollars that would be better spent on helping increase access for students.

In addition to increased taxpayer costs that would be associated with some refinancing proposals, the lenders themselves would also face increased costs. "If the law were changed to permit reconsolidation, it would be costly to our company - and to all student loan lenders - because we'd be turning high interest rate loans into lower rate loans," said Barry Morrow, CEO of Collegiate Funding Services.

"But student loan borrowers clearly want the ability to reconsolidate, and if Congress can work out the budget-scoring challenges of reconsolidation, we support whatever is best for student loan borrowers - even if our revenues take a hit in the process," continued Morrow.

The reauthorization of the Higher Education Act provides Congress with an opportunity to thoroughly evaluate, and if necessary realign, the roughly $90 billion annual federal investment in higher education to more directly meet its purpose of expanding access and opportunities for low-income students striving to achieve the dream of a college education, noted McKeon. Consolidation loans are but one of the broad variety of issues that will be addressed and reformed as the Education & the Workforce Committee works to complete the HEA reauthorization this year.

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