September 1, 1964
Page 21221
STUDENT FINANCIAL ASSISTANCE
Mr. MUSKIE. Mr. President, on February 4 this year the senior Senator from Indiana [Mr. HARTKE] introduced S. 2490, which provides a "multipurpose program for student financial assistance, flexible enough to meet the diverse requirements of the Nation's post-secondary institutions, and balanced between loans, fellowships, and student employment activities." Other Senators and I subsequently joined in cosponsoring this much-needed college assistance bill.
Like most Americans, I am deeply concerned about the estimated 150,000 young men and young women who each year graduate from our high schools, possessing both the ability and the desire to continue their education, but are unable to do so because they lack the necessary financial resources. This and other important problems are clearly met by Senator HARTKE'S proposed legislation. I believe this bill is in the best interest of Maine and the Nation. But the bill's provisions are already being attacked in some mass-circulation newspapers and periodicals.
An editorial entitled "Where Federal Action Is Not Needed," published on June 6 in the Saturday Evening Post, for example, contained a distorted interpretation of the long-term student loan provision of S. 2490. In a commendable effort to set the record straight, Dr. Walter H. Boyce, dean of men at Bates College, at Lewiston, Maine, wrote a letter to the magazine's editorial board, in the hope that it would be included in their "Speaking Out" column. This the editors refused to do.
Dr. Boyce is an able official of my alma mater and has had considerable experience in administering the national defense student loan program. I ask unanimous consent that his reactions to the editorial be printed at this point in the CONGRESSIONAL RECORD.
There being no objection, the letter was ordered to be printed in the RECORD, as follows:
Letter by Walter H. Boyce
A recent editorial in the Saturday Evening Post ("Where Federal Action Is Not Needed," June 6, 1964) combined with the editorial comment consistently appended to the "Speaking Out" column ("One measure of a democracy's strength is the freedom of its citizens to speak out -- to dissent from the popular view. Although the editors often disagree with the opinions expressed in Speaking Out, they dedicate the series to that freedom") have inspired me to comment on the loan programs now available for students in our institutions of higher education.
This editorial, "Where Federal Action Is Not Needed," is, in my judgment , a classic example of a slanted, distorted, biased editorial of half-truths. In the event that the June 6th issue of the Saturday Evening Post is not easily available, let me quote rather liberally from this editorial. It begins: "When should the Federal Government enter an area where the public interest is involved? When private enterprise, State and local governments are unable to do the job, we believe. All too often the question is argued in a vacuum, because no agency except the Federal Government is prepared to act. But the converse of this principle is that when private enterprise or State and local government is doing an effective job, the Federal Government should stay out . Three years ago a private enterprise called United Student Aid Funds went into the business of guaranteeing low-cost loans to needy college students. A nonprofit, tax-exempt corporation, United Student Aid Funds, established a contributed fund to guarantee bank loans to students."
Let us pause for a moment. What facts have now been established by the writer of the editorial?
As a starter, it seems that a private enterprise group has been active for 3 years in the field of low-cost loans to college students. There is also the implied conclusion that this is an organization which does not have profit in mind (note the "nonprofit, tax-exempt corporation").
Let's set the record straight on these two points. In the first place, it is quite true that the U.S.A.F. has been active with loans to college students for the past 3 years. It is also equally true that this organization was by no means the first to break into the field. Prior to 1961 several privately financed State loan plans were already in operation and others were being organized -- Massachusetts and New York higher education loan plans, for example and all of these plans operated with basically the same terms for loans as are advertised by the U.S.A.F. It should also be noted that a tremendous boost to the idea of loans for college students, and in this case the qualifying adjective, "low-cost," is appropriate, came from the passage of the National
Defense Education Act, title II -- national defense student loan program. The date of passage of this legislation is a matter of record in the full title of the act, National Defense Education Act, 1958.
So it turns out that the national defense student loan program, with substantial annual increases in amounts available after an initial small allotment reached participating colleges in the spring term of the 1958-59 academic year, has been operating for 5 academic years, beginning in the fall of 1959. The U.S.A.F. is thus in the position of being the Johnny-come-lately, waiting until 1961 to hop on the bandwagon.
Let us next examine the statement "low-cost loans to college students." Although this is not specifically stated, the reader of this editorial is left with the feeling that the U.S.A.F. and the N.D.S.L.P. (the proposed Federal program, which, it turns out, has been a thriving operation since 1959) are basically the same kind of service for college students. Both, it is implied, are dealing with low-cost loans for college students.
Again, a little air clearing is in order. Interest rates on all U.S.A.F. loans are made on at least a 5-percent annual rate and of even more concern and cost to the borrower is the provision that interest is charged from the date of the loan. Compare this, if you will, with the N.D.S.L.P. provision that interest is to be charged at the rate of 3 percent (a true 3 percent), computed on the principal at the end of a payment year rather than being charged in advance -- a common and strictly legitimate banking practice which virtually doubles the stated interest rate – and is charged only after the expiration of a number of possible deferment periods. For example, no interest, not even a true 3 percent, is charged on N.D.S.L.P. loans while the student borrower is maintaining normal progress as a full-time student (on either undergraduate or graduate level) in an accredited institution of higher education. The N.D.S.L.P. further provides for an interest-free, no-repayment period of a maximum 3-year period while the ex-student is in military service. The well advertised "year of grace" (12 consecutive months of interest-free, no repayments status following interruption of full-time studies) is a further advantage, in terms of cost cutting, to the student who borrows his funds from the national defense student loan program rather than the united student aid fund.
As a specific example, let us compute the interest costs for two hypothetical students, each borrowing $1,000 a year (the maximum per academic year in either program) in the 1961-62, 1962-63, and 1963-64 academic years. (We will assume that both students were sophomores in the fall of 1961 since the U.S.A.F. generally provides for loans only to those who have completed their first year in college while the N.D.S.L.P. permits the participating colleges to grant loans to needy first-year students.)
I shall simplify the computation by assuming that those computing the interest for the U.S.A.F. program (and they are profit making bankers, for it is the private enterprise bankers who actually execute the loans under the U.S.A.F. -- the U.S.A.F. simply serves as the guarantor in the cue of defaults) do so on the basis of interest on the actual amount of principal rather than interest upon interest.
And so to student Roger Macielowicz of Kenmore University. He has borrowed $1,000 from the N.D.S.L.P. in the past 3 academic years and has maintained normal progress, two terms a year, toward his degree. This June he received his degree from Kenmore and at the time of his graduation had a total obligation of $3,000, with not a penny of interest charges. His twin brother, Ralph Macielowicz attended the State University during the same period and because of limitations on the amount of funds available in the N.D.S.L.P. he had to rely on the U.S.A.F. He too had a total obligation of $3,000 (in principal) on his graduation day, but note that his low-cost loan benefactors have already charged $50 in interest for 1961-62 (5 percent of $1,000), $100 in interest for 1962-63 (5 percent of $2,000) and $150 in interest for 1963-64 (5 percent of $3,000). The same amount ($3,000) has been borrowed in the same period (3 academic years) but Roger of the N.D.S.L.P. has no interest accumulated and Ralph is already $300 in the hole.
At this point I am willing to concede that it would indeed be a load off Ralph's back if he could manage to swing the whole repayment procedure within the 4-year post-graduation period provided by the U.S.A.F. Even without getting too exact about the arithmetic and assuming that he will reduce the amount of the outstanding balance ($3,300) in equal amounts during this period, he will still have substantial interest charges (5 percent of $3,300 for the first payment year, 5 percent of $2,475 for the second year, 5 percent of $1,650 for the third year, and 5 percent of $825 for the fourth year). This works out to $412.50 in additional interest charges, or a total of $712.50 from the date of the first loan in his sophomore year to that day 4 years after graduation when he receives a delightful "paid in full" notice from his banker. This repayment schedule assumes a minimum payment on principal of $825 per year, plus the interest charges, or a total of well over $70 a month, hardly a small, easy payment program for a student just out of college.
And woe to the college graduate who wants to continue his program on a graduate level or who wants to take a low paying but socially useful job, or who finds that his draft board has 2 years of Army service in mind for him. I am told that in such cases the low-cost bankers in this program are willing to defer the start of the payment period, but naturally the 5-percent interest rate goes right on adding to the total cost.
Now let us switch back to brother Roger who received his loan funds from the national defense student loan program. We already know that on his graduation date (June 1964) he still owed only the amount that he had borrowed while an undergraduate ($3,000). To keep things simple, let's assume that he does not enter service (he is 4-F-trick knee) and he does not wish to enter graduate school. He simply goes to work and lets his year of grace expire on June 1, 1965. At that point he still owes exactly $3,000 and if he is a frugal lad he may even have been able to make some payments on the principal in 1964-65 to reduce the amount on which he will actually have to pay interest.
I do not wish to load the dice so I will not make him out to be especially careful with his money. He waits until the repayment period begins in 1965-66. If he has elected the lowest cost repayment plan (there are five options available) his first annual payment on June 1, 1966 will be for $390 and this includes payment on principal as well as the interest for 1965-66. The next year it will be $381, then $372, then $363 and so on down the scale at a reduction of $9 a year until the 10th year payment is made for $309. interestingly enough, even though poor Roger is saddled with repayments for 11 years after graduation (1 year of grace and 10 payment years) he still ends up paying a maximum of $495 in interest charges as compared to the very conservatively figured $712.50 for happy Ralph with the private enterprise U.S.A.F. Ralph also has a minimum of $825 in annual payments on principal (4 years) as compared to Roger's $300 a year for 10 years.
I have already agreed that it would be nice to be able to pay off this $3,000 debt in 4 years and if this can be managed without an impossible strain on the budget, the N.D.S.L.P. provides that the borrower may elect to pay up his loan in advance of the 10-year schedule. If he does so, he will receive a full proportionate reduction in the amount of his interest payments. To be specific, if Roger is able to pay his national defense loan off at the rate of $750 a year for 4 years following graduation, the financial aid officer of Roger's college will be delighted to have such payments since all payments on this fund go back into the participating college's account for reuse with students enrolled during the academic year when payments are made.
A quick computation reveals that in the first year Roger will pay $750. The entire amount is applied toward reduction of principal (this is the "year of grace"), the second year he pays $750 plus $67.60 in interest (3 percent on $2,250); the third year he pays $750 plus $45 interest, and the fourth year a final $750 plus $22.50 in interest. Add up these interest charges (and bear in mind that this is the equivalent in time years after graduation that is provided by the U.S.A.F. program) and we find that $0, $67.50, $45 and $22.50 add up to exactly $135. Compare this, if you will, with the absolute minimum figure of $712.50 in interest charges which U.S.A.F. Ralph Macielowicz paid during the life of his $3,000 note.
The conclusion is obvious. The Federal program is a low-cost program while the U.S.A.F. is simply a commercial banking loan program which isn't about to fold up and lose money because there is substantial backing in the U.S.A.F. to cover the small number of defaults anticipated. I will concede that the U.S.A.F. is preferable to borrowing from the local financial loan shark (get your money now, take months to pay) but it is not exactly a benevolent organization when compared to the terms offered under the N.D.S.L.P.
I can make things even more interesting, and I hope not too complicated, by going into the cancellation privileges extended to national defense loan recipients who enter the public school teaching profession at the high school level or below. Such recipients have an opportunity to cancel up to 60 percent of their total principal, at the rate of 10 percent of the principal canceled each year for up to 5 years of full time, full academic year teaching service. All interest charges during the cancellation year (both on the amount canceled and on the balance of the principal) are also canceled. It is at this point that the critics of the N.D.S.L.P. – and I have been in the college administrative end of this program long enough to know that there are many such opponents – throw up their collective hands and cry "giveaway." Certainly, the cancellation privileges do take on the color of a partial giveaway (50 percent of the loan must be repaid regardless of the length of teaching service) but an examination of the salary scales of many of our public school systems show that this program is giving it away in cases of many who have precious little to give back anyway. How, for example, would a public school teacher just starting out manage the "easy" $800 plus annual repayments of the U.S.A.F. which would be in effect if Ralph Macielowicz decided that his bent was for such service? On the other hand, if he were under the N.D.S.L.P. he would be canceling his obligation at the rate of $300 a year and would have no interest charges to meet for the first 5 years of his teaching career. If he could manage to build up a savings account at the rate of $300 a year and thus have $1,500 ready for a single repayment at the end of his 5th and final cancellation year, he could then send that amount to his college loan officer and discharge his debt in full. He would have accomplished this objective at the manageable rate of $300 a year, without payment of any interest charges whatsoever.
I repeat, the N.D.S.L.P. does have some aspects of a giveaway, but it should be kept in mind that those who wrote this particular piece of legislation in 1958 (the student loan program is only one part of a comprehensive bill -- the National Defense Education Act, an act frequently compared favorably in significance to higher education with the Land-Grant Act in the mid-19th century – intended to give encouragement to those who have limited means, who want to obtain a college education and who plan to enter teaching. I submit that the provisions of cancellation credits are certainly going to serve that purpose.
Let me now turn back to the editorial. It continues:
"The Senate Subcommittee on Education, however, is considering a bill (S. 2490) introduced by Senator VANCE HARTKE, of Indiana, that, among other things, would bring the Federal Government into the business of guaranteeing student loans. Under Senator HARTKE's bill, the Federal Government would underwrite loans of up to $2,000 a year with a maximum total of $10,000 a student. The Federal plan gives a student a year's grace after graduation, plus 10 years to repay the loan."
Unless I have missed something very significant about this bill, it is my understanding that this simply is an increase in the maximum amounts that a student may borrow under the existing 6-year-old national defense student loan program, an increase from the current limits of $1,000 per year and a total maximum of $5,000. 1 agree that it is debatable whether or not college costs and potential salaries (ability to repay is vital in any loan program) have risen since 1959-60 to the point where Congress should give favorable consideration to a doubling of the limits. Obviously, some increase is in order, but perhaps the 100-percent increase is going too far at this time.
This, however, is not the point. The editorial implies that this entire program ($2,000 a year, $10,000 total maximum) is an invasion of a private enterprise function already on the scene.
Such, as has already been pointed out, is not the case. Incidentally, much was also made of the fact that under the U.S.A.F. student borrowers were not burying themselves in debt at the maximum annual rate. Any investigation of college figures on N.D.S.L.P. loans would reveal the same thing. By no means are all students in colleges participating in the Federal program applying for and receiving the maximum amount of $1,000 per academic year. In the first place, many are keeping their request at far more modest figures, and in the second place, each college has only a specific allotment of funds for each academic year and once these funds are exhausted, that is the end of the national defense loan activity on that campus for the year, unless additional accelerated payments arrive from students who wish to save something on their interest charges.
Much was also made of the success of the U.S.A.F. in its first years of operation in terms of the total amount of loans made. Figures given were $26,083,662 in endorsed notes. Shortly thereafter the comment is made that "if there were a demonstrable need for Federal activity in this area, we would favor it. But the experience of the U.S. student aid funds indicate that this need does not exist."
In my opinion, the preceding statement is the epitome of distortion. I believe we are entitled to ask what the $47,500,000 authorized for N.D.S.L.P. loans in 1959-60, $75 million in 1960-61, $82,500,000 in 1961-62, $90 million in 1962-63, and $90 million plus in 1963-64 represent? Are we to believe that all who have borrowed from this program, a minimum total of $385 million did not need such assistance? This conclusion implies a blanket condemnation of the competence of all financial aid officers, either titled or untitled, in the colleges and universities in the 50 States. I will return to the subject of the competence of college officers in administering this program, but before I do, I would like to comment briefly on the final paragraph of this editorial.
It reads: "If the Federal Government moves into this area, the U.S.A.F people believe that they will not be able to compete with loans that are backed by the credit of the Government. Clearly, this is an area where private enterprise has shown its efficacy, and Federal action is unwarranted."
It is perhaps repetitious, but it still needs saying -- just what is the complaint of the U.S.A.F. officials? Their growth in endorsed loans from 1961 to 1964 has been achieved at a time when the preexisting Federal program has also been growing rapidly. The growth of the U.S.A.F. has apparently not been impeded by coexistence with the N.D.S.L.P. in 1961-64. Why are we to think that this coexistence is now sounding the death knell of the U.S.A.F.? Is it perhaps that students as a group, along with their parents, are becoming more conscious of the rather significant differences in costs between the two programs and are doing their best to make sure that they exhaust the possibilities of obtaining N.D.S.L.P. funds before they turn to the U.S.A.F.?
I cannot answer this question, nor do I feel that it would serve any purpose for me to attempt to do so. The point, I believe, in amply made. Both of these loan programs are serving; a purpose and the complaint of the editorial that the Federal Government is moving into a field where private enterprise has "shown its efficacy" simply is not justified. The Federal Government was in this area 3 years before the U.S.A.F. began operations.
Although the editorial does not specifically say that loans under the national defense student loan program are showing a high delinquency rate (how could this point be made when there is no admission of the existence of a program prior to Senate bill 2490?) a bouquet was tossed in the direction of the U.S.A.F. in the statement "there have been very few defaults on loans under the private plan."
In this area -- that of collection procedure on national defense student loans -- I can speak from the experience of administering this part of the program for all graduates and non-graduates of a small liberal arts college in Maine. In the early years the total amount of loan activity on our campus was relatively small, but it has grown year by year and at this writing our total of original loan accounts comes to nearly $300,000. A substantial number of students have either graduated or completed their educational program and their accounts have moved into the collection phase.
Many, of course, have had their payments deferred as a result of military service, Peace Corps service or full-time graduate study, and a number have had cancellations for teaching service, but the number of those having payments coming due, either on an annual, semiannual, quarterly, or monthly basis is growing rapidly, with big jumps occurring each June as another class graduates.
Although I know that a number of colleges are having some difficulty in keeping up with their student accounts once the recipients have left college, and the college administrative officers in this program do not have the advantage of long developed and effective tracing means for those who, in banker's parlance, skip, or default on their notes, I also know that a number of colleges are maintaining an excellent record in their collection activities. Since this is a bit off the original subject of criticism of the points made in the "Where Federal Action Is Not Needed" editorial, I will not carry on with a lengthy analysis of the most effective way for a college to run a loan program. I know from experience, however, that it can be done, and it is being done. Two things seem to be involved wherever such success in loan administration is found -- first, a systematic approach to all collection procedure, and second, a belief on the part of the financial aid officer involved in the fundamental honesty of the loan recipients. After all, this should come as no surprise to faithful readers of the Saturday Evening Post. It was not too long ago that we were informed that Lloyd's of London had managed to carry on a highly successful business operation for a number of years with the basic belief in the fundamental honesty of people, even though at times they may be a bit careless or even forgetful.