deterrent on the further expansion of what has already been so successfully done by private and other non-Federal means. In short, there did exist a real need to supplement National Defense Educa tion Act loans. That need has been met, and met well, by non-Federal guarantee programs. Clearly, it is not in the public interest now to set in motion what would essentially be a duplicate effort by the Federal Government—an effort which might well tend to drive others out of the field. RECENT DEVELOPMENTS IN COLLEGE STUDENT CREDIT The 5 years since passage of the National Defense Education Act have produced an abundance of evidence about student credit-evidence which was not available in any quantity when Congress established the present National Defense Education Act program in 1958. When the National Defense Education Act was considered in 1958, Congress was, of course, aware of certain cost advantages inherent in any loan guarantee program vis-a-vis other programs then considered. However, Congress did not know then whether private lending institutions would make long-term credit available to college students at reasonable terms. Events since 1958 have demon strated conclusively that they will. Also, in 1958, there was inadequate evidence to show Congress what part of the cost of such loans the students themselves would be able and willing to carry. Nor was there any appreciable data to indicate then the terms on which college graduates would be able and willing to repay private loans. The students' own answers to these questions are now available, and they amount to an emphatic: "Yes, college students will make and repay private loans on terms which, though necessarily not as generous as those under the Federal program, are nevertheless eminently reasonable and are especially tailored to student needs." Why has this answer been given by the college students of America? Because the same type youngsters borrow from Federal and private sources. (See Appendix C, attached, for a comparison on this point between National Defense Education Act borrowers and those who borrow under one of the principal nonFederal guaranty plans.) Whether they secure Federal or private loans, the college students' education programs are generally the same, their personal objectives after college are about the same, their family income levels are usually the same, and their responsibilities are very similar. In short, their overall needs are generally comparable. In setting forth these facts, we do not, of course, contend that all student situations are identical. They are not. Ac cordingly, the amendment we offer to improve the Federal program is couched not in rigid, but in flexible terms. However, the similarity between the two groups of borrowers is so great it may well reflect the most significant of all experiences gained in the student loan field over the past 5 years. SUGGESTED AMENDMENT TO IMPROVE THE NATIONAL DEFENSE EDUCATION ACT The amendment we propose would literally multiply the loan potential of the present Federal program-with no increase in its cost to the taxpayer. Under today's National Defense Education Act program, Federal funds are allotted to the college. (For every 9 Federal dollars, the college puts up $1.) The college then makes loans to its students from the total thus available. We recommend that each college be given an option, under which it may commit part of the loan fund to direct loans as it does today, and part to a nonFederal guarantee reserve for private loans. The manner in which this option would operate is best shown by the following illustration. Assume that college A receives $180.000 in Federal funds from the National Defense Education Act program. On the 1-to-9 matching basis, the college adds $2.000 This makes a total of $200,000. Under the existing National Defense Education Act program, this amount-$200,000-is the total sum available for National Defense Education Act student loans. Assume, however, that under the option proposal we offer, college A elected to commit one-half of its $200,000 loan fund to a private loan guarantee reserve, The remaining one-half (the second $100,000) would go to direct loans, as it does now. How much would this mean in total student loans? No longer just $200,000, It would mean $1,350,000. Why is this so? Because, for ever dollar placed in a loan guarantee reserve, private lending institutions all over America are today lending $12.50 to college and university students. In short, the loan dollars can thus be multiplied by 12.5-and at no additional cost to the taxpayers. To put this $200,000 loan fund illustration still another way: Under today's National Defense Education Act program, if the average loan were $500, college A could see that 400 students made loans, Under the proposed option, if college A made the illustrative 50-50 division between National Defense Education Act loans and a private guarantee reserve, $500 loans could be made to 2,700 students. These differences are indeed dramatic: $1,350,000 as against $200,000 and 2,700 loans against 400 loans. Under the proposal, no college would be required to exercise this option. And it may be that no college would want to channel all its available loan funds into a guarantee reserve. However, the option feature would give each college some choice. It would add desirable flexibility to the National Defense Education Act by building the guarantee principle into its existing loan program. Not only would this be preferable to establishing a separate Federal guarantee apparatus-it would very likely encourage even further expansion of the already extensive non-Federal contributions to the credit needs of college students. Further, it would enable each college to help control the size of its own loan activities. Colleges are close to their students, and they know their students' credit needs. Of all those having responsibilities in the student loan field, the colleges are obviously best equipped to advise students as to how those credit needs can be met most effectively. Under the proposed option, each college could readily adjust its own total loan resources to the emerging level of loan demands among its own students. It could correlate Federal and private lending at the college, where the knowledge of credit needs is greatest. DIFFERENCES IN FEDERAL AND NON-FEDERAL LOAN PLANS At this juncture, we want to emphasize that although they have many similarities, we are also aware there are differences between the National Defense Education Act loan program and the non-Federal guarantee programs. In assessing differences, however, we should not overlook the special features inherent in the private loan guarantee programs. First of all, they are successful going concerns. They are already supplementing direct Federal loans in a most effective manner. They have been enthusiastically received by students and colleges alike. Their coverage is remarkably enhanced by the multiplication factor referred to earlier (in the long-established Massachusetts plan, this multiplier is 20 rather than 12.5). And with an approximately 5-year repayment schedule, funds remain available in quantity for continuing loans to successive generations of college students. The private loan repayment schedule has additional advantages to the borrower, referred to at more length later on. With respect to such factors as interest and the period of repayment, private guaranteed loans differ from National Defense Education Act loans. So also would private loans made under a Federal guarantee differ from the National Defense Education Act loans, whose interest rate is fixed at 3 percent. We believe that in any loan, whether from private or tax-supported sources, the borrower should pay at least the cost of the loan. On National Defense Education Act loans, studies show 26 percent of costs borne by the borrowers, 16 percent by the Federal Government, and the remaining 58 percent by the colleges. Under the non-Federal guarantee programs, it is fully established that the 6-percent simple interest charged by most private lenders (some charge less) covers only the banks' own minimum costs in processing the loans. (See appendix A, attached, for observations regarding costs to the average bank participating under a typical guarantee program.) It is a fact of economic life today that a 6-percent simple interest rate for loans to college students is reasonable. Also, graduates by the thousands each year are showing themselves able and willing to pay it. And it might be pointed out that private guarantee programs almost universally resist the use of funds to underwrite an artificially low interest rate for two persuasive reasons: First, they have found no need to offer college student borrowers an unrealistic rate of interest; students are able and willing, indeed eager, to make and repay their loans at what it cost the banks to process them. Second, they feel that subsidizing an artificially low rate would not be a prudent use of available dollars. It makes much more sense to put those dollars into guarantee reserves-where every $1 triggers $12.50 in new loans for more students. Generally, private loans are repaid within up to 5 years after graduation. However, where this imposes a hardship, the borrower may negotiate a different repayment schedule to suit his own circumstances. Federal loans are repaid over a 10-year period. On the general subject of repayment, we would make two further observations here. First the private-loan repayment schedules are reasonable. That they are in no sense onerous is underscored by the fact many thousands of students are repaying those loans today, on or ahead of schedule. Second, in our judgment, any student loan program makes sense only if it supplements traditional methods of paying college bills. It should not discourage family savings. Nor should it discourage student earnings or contributions from family earnings. It should neither unnecessarily increase the burden of debt a graduate carries into later life, nor project that burden over an unnecessarily long period. If it does, it will only compound other burdens the graduate normally assumes in the years immediately following college. It has been our experience that a graduate's own interests are served best if he repays as promptly as he can after graduation any loans he made to get through college. For the college graduate who can do it-and the vast majority can do it-he is well rid of all scholastic obligations within 4 or 5 years after graduation. For a young person, newly out of college, and looking ahead to such adult responsibility as marriage, a home, family, etc., an overly long repayment schedule on a college loan is at best a doubtful blessing. SOME IMPORTANT SIMILARITIES As we pointed out earlier (and as will be seen from appendix C, attached) Federal and non-Federal loan programs have much in common. In addition to the similarities already referred to, we find that the loan amounts are almost identical. Also, National Defense Education Act loans and private loans alike are made to needy students. In a Business Week article (April 20, 1963, page 192) a spokesman for United Student Aid Funds, Inc., is quoted on this point as saying: "One rule is that the student has to show a need for the money and an inability to get it from conventional sources *** the vast majority of *** loans we have so far guaranteed have been made to students whose parents' family income was $6,000 a year or less * * *.' Obviously, college students making and repaying these private loans are in circumstances very similar to those making and repaying the Federal loans. It should also be observed that until recently, private loans were not made to freshmen under some guarantee programs. However, this is changing. For example, beginning with the coming school year, United Students Aid Funds, Inc., has liberalized its program to underwrite loans to students in all 4 undergraduate years as well as to graduate students. It should also be added that no distinction is made by these guarantors because of race, creed, sex, or other discriminatory considerations with respect to any student. ADDITIONAL PRIVATE LOAN ACTIVITY To this point, we have commented on private loans generated through nonFederal loan guarantee agencies. The accomplishments of these groups have indeed been notable. Their potential is virtually unlimited. In the years ahead such guarantee plans can meet the total credit needs of all the students in every college and university across the Nation. However, as we have said before, we do not propose here that the Federal Government disband its National Defense Education Act loan program, leaving the field entirely to others. Not at all. What we do urge is that non-Federal efforts be encouraged, not unnecessarily duplicated-and that the present Federal program be amended to multiply its effect without increasing its cost to the taxpayers. We have cited the coverage and potential of private college lending to shownot alone that it is reasonable but also that it has been fully accepted by student borrowers, borrowers who are in no way different from those who now make the In placing college student loans in full perspective, there is an additional area of private credit to be considered. This is the area of college lending which through the years has appeared on credit records under a wide variety of other labels-and for which no accurate measurement is possible. For want of a better name, this area of credit actively might well be called "indirect" college lending. How many parents borrowed on insurance to pay a son's tuition? How many are doing so today? How many mortgaged their homes for the same reason? How many chose to buy a new car, make major property repairs, etc., on credit so they might put ready cash into tuition payments? How many are doing this today? This list of illustrative questions could go on at length. There is no way, however, to measure accurately the full range of such private credit sources which have been used-and are being used today-to underwrite college training. But these sources are a significant part of the total picture. They demonstrate further the public's full acceptance of private lending as a means to finance a college education, CONCLUSIONS Several conclusions follow logically from the information set forth above. They reflect up-to-date experience in the student credit field, including experience acquired since passage of the National Defense Education Act in 1958: First. Private lending institutions will extend long-term credit to students at reasonable terms; Second. Students are willing to make private loans at reasonable terms, and are able to repay on schedule; Third. Large and expanding non-Federal, nonprofit loan guarantee programs accommodate students whose circumstances are exactly similar to those of borrowers under the National Defense Education Act loan program; Fourth. Non-Federal, nonprofit loan guarantee plans (State and private) are underwriting private student loans today in 48 of the 50 States; Fifth. The potential of these non-Federal guarantee plans is virtually unlimited. For every $1 maintained in a guarantee reserve, banks will lend $1.50 and up to student borrowers; Sixth. Private loan guarantee programs have already supplied the necessary supplement to National Defense Education Act loans. Any Federal guarantee program would unnecessarily duplicate and deter the further growth of these established, accepted private plans; Seventh. The existing National Defense Education Act loan program should be improved so that it may take advantage of the built-in expansion features of non-Federal guarantee plans. RECOMMENDATIONS In view of the foregoing, the council of Private Lending Institutions, Inc., recommends: First. That the proposal for Federal guarantee of private loans to college students be not enacted; and Second. That the National Defense Education Act be amended to give participating colleges the option to commit some portion of their National Defense Education Act loan funds to non-Federal guarantee programs, so that greater numbers of college students may thus obtain loans-at reasonable terms to themselves, and at no additional cost to the taxpayers. APPENDIX A THE COUNCIL OF PRIVATE LENDING INSTITUTIONS, INC. AN AVERAGE BANK'S EXPENSES OF PROVIDING COLLEGE STUDENT CREDIT UNDER A TYPICAL NONPROFIT GUARANTEE PROGRAM Since it is exceedingly difficult for banks to allocate costs with precision to various loan programs, there is very little available in the way of comprehensive studies on this matter. One authoritative study, The Cost of Providing Consumer Credit, was produced in 1962 by the National Bureau of Economic Research. Prof. Paul Smith, Table I of Smith's study lists the following bank costs of providing consumer credit (derived from a commercial bank sample consisting of nine banks of varying sizes from different parts of the country; together the nine banks held 7 percent of consumer credit outstanding in 1959). Components of gross finance charges on consumer credit, 1959 (dollars per $100 of average outstanding credit per annum) Item Gross finance charges. Dealers' share of gross finance charges. Lenders' gross revenue... Operating expenses--- Salaries Occupancy costs--.. Advertising.. Provision for losses.... (Actual losses). Other-- Nonoperating expenses- Cost of nonequity funds.. Income taxes---. Lenders' profit (cost of equity funds). Dividends. Retained 9 commercial banks 10.04 .62 9.42 4.17 2.33 .23 .34 .28 (.15) .99 5.25 1.50 1.33 2.42 1.49 .93 Some of the above cost components, which refer to all types of consumer loans, would not be applicable to student loans. Thus, it appears reasonable to exclude some of the advertising and provision for losses, as well as lenders' profit and income tax charges. On the other hand, the cost of money to banks has increased since 1959 (the year of the study). A cost table for nonprofit bank loans, corrected as above: 1 Banks would want to make some provisions for losses despite the presence of a strong cosigner. On 64 percent simple. New England Higher Education Assistance Foundation (Maine). 64 46 85 56 373 190 96 296 78 2.850 213 357 |