NASFAA President Among Those Testifying on Loan Consolidation Issues Before House Subcommittee

The federal loan consolidation program and its cost to students and taxpayers were discussed by lawmakers and representatives of the student aid community - including NASFAA President Dallas Martin - at a July 22 hearing of the House Subcommittee on 21st Century Competitiveness, chaired by Rep. Howard P. "Buck" McKeon (R-Calif). Consolidation loans--which allow former students to combine multiple student loans into one federally subsidized umbrella loan--have become a hot-button issue, to the delight of more-recent borrowers who are taking advantage of historically low rates, and to the anguish of borrowers who already have taken advantage of their one-time-only consolidation at rates significantly higher than those now available.

Speaking on the topic of "Consolidation Loans: What's Best for Past Borrowers, Future Students, and U.S. Taxpayers?" two panels of witnesses debated the potential implications of consolidation loan reforms proposed as part of the upcoming Higher Education Act reauthorization. In recent weeks, several bills have been introduced that would allow borrowers in repayment to reconsolidate (or refinance) their student loans to get a better interest rate - much as homeowners do on mortgages - and that would abolish the single lender rule.

Witnesses at the July 15 hearing (and links to their testimony) included:

Panel I

• Rep. Ralph Regula (R-Ohio), Chairman, Subcommittee on Labor, Health and Human Services, and Education, House Committee on Appropriations
  
• Rep. Rosa DeLauro (D-Conn.), Member, Subcommittee on Labor, Health and Human Services, and Education, House Committee on Appropriations

Panel II

• Dallas Martin, President, National Association of Student Financial Aid Administrators (NASFAA), Washington, D.C.
• June McCormack, Executive Vice President, Guarantor Services and Sales Marketing, Sallie Mae Corp., Fishers, Ind.
• Barry Marrow, President and CEO, Collegiate Funding Services (CFS), Fredericksburg, Va.
• Ms. Rebecca Wasserman, Vice President, United States Student Association, Washington
• Paul Wozniak, Managing Director and Manager, Education Loan Group, UBS PaineWebber Inc., New York, N.Y.

[Click here for photo of Dallas Martin (second from left) presenting his testimony.]

Reconsolidation Considered

Witnesses debated whether consolidation loans did or could function in a manner similar to other kinds of loans. In Regula and DeLauro's testimony, both House appropriators expressed a desire to make the student loan consolidation program function more like a home loan, in which mortgages can be repeatedly re-financed in order to bring the most financial benefit to the borrower or investor.

DeLauro on June 18 introduced H.R. 2505, the College Loan Assistance Act, which would allow out-of-school borrowers to reconsolidate student loans in order to take advantage of historically low rates. That bill would also strengthen federal benefits for low-income students by increasing the Pell Grant maximum from the current $4,050 to $7,000.

"Not only will increasing the Pell Grant maximum grant make the dream of college a reality for millions of low-income families, it will also mean students would not have to borrow as much--making reconsolidation and consolidation cheaper," she said.

But members of the higher education community emphasized that student consolidation loans are not comparable to mortgages or car loans.

"Our members are ... perplexed that some individuals suggest that federally subsidized consolidation loans are 'just like home mortgages,'" said NASFAA's Martin. "In one case the person has a tangible, physical asset and in the other an intangible one; an education cannot be repossessed." Martin also noted that "While most mortgages are not directly subsidized by the federal government, student loans are directly subsidized and that is the critical difference" between the two.

"Many NASFAA members are very concerned by the explosive growth in the number and dollar volume of consolidation loans," Martin testified. "Our members are also concerned that the focus of congressional discussions of student loan issues appears to be shifting from students to former students."

"Is it better economic policy," Martin asked, "to expend scarce tax dollars to help subsidize future needy students or to give even more subsidies to former students? This public policy issue, in my mind, is very clear. One is a good investment for our future and the other is a needless investment."

NASFAA has recommended that "lawmakers revert back to the first principles of consolidation: to reduce the confusion of writing checks to many holders and to curtail defaults by reducing monthly debt burden."

Rep. McKeon said, "The consolidation loan program was initially developed as "a way to address a specific issue--providing for an opportunity to consolidate debt with one holder. While the interest rate structure of the program has changed over time, it has always called for a somewhat higher rate than the underlying loan. It is only because of the recent variable interest rates that this program has now taken on the mantle of a home mortgage loan, even though it is totally dissimilar."

Single-Lender Rule Debated

In his testimony, Rep. Regula (R-OH) discussed H.R. 942, the Consolidation Student Loan Flexibility Act, a bill he introduced to eliminate the "single-lender rule." That rule 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.

The bill is opposed by many lenders, who say it creates a disincentive to lenders to make loans that could be whisked away later on by the lowest bidder.

"As with reconsolidation, if a loan provider's student loan asset is subject to poaching by another lender, there will be little incentive for loan providers to invest in the financial aid delivery systems that directly benefit schools or lower the cost of borrowing for students," said Sallie Mae's McCormack.

NASFAA's Martin agreed, noting that "if fewer lenders participate in the student loan market ... the industry will become more concentrated. Fewer competitors mean students have fewer choices in lenders."

UBS Financial Services Inc.'s Paul Wozniak added that "the ability of lenders to continue to raise capital ... should be one of the criteria included in this evaluation, because this has been one of the driving factors in providing borrowers the benefits and services that have so come to expect."

Due to technical difficulties, the committee is unable to offer a Webcast of this hearing.

By Elizabeth B. Guerard
NASFAA Assistant Director of Communications

Posted July 23, 2003 on www.NASFAA.org, the Web Site of the
National Association of Student Financial Aid Administrators (NASFAA).
Copyright 2003. Redistribution to non-NASFAA institutions is prohibited
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