Legislature(1995 - 1996)
01/31/1996 03:10 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HCR 24 - VOCATIONAL SCHOOL DEFAULT RATE REGULATION Number 091 CHAIRMAN PETE KOTT announced the first order of business would be HCR 24, Relating to student loan default rates at vocational education schools. He noted at a meeting the previous week the committee members were given a proposed draft of the resolution based on the work session the previous week. Changes were incorporated into the resolution as a result of discussions. GEORGE DOZIER, Committee Aide, House Labor and Commerce Committee Alaska State Legislature, said HCR 24 is a resolution which contains nothing that was not discussed at the previous meeting. It urges the Governor to request that the Alaska Postsecondary Education Commission (APEC) to immediately cease implementation of the 150 percent regulation. It also urges the Governor to take whatever steps are necessary to rescind this particular regulation, 20 AAC 15.925. The resolution also urges the Governor to request that the APEC work and consult with those individuals who are involved with the issue. Number 223 REPRESENTATIVE BEVERLY MASEK referred to the suggested amendments from the previous meeting on the measure and asked if they were added into the resolution. CHAIRMAN KOTT indicated they were. He asked Mr. Dozier to review the amendments. MR. DOZIER informed the committee he didn't have his notes from the last meeting, but from what he could remember, the major substantive change was to add verbiage to the second resolved section which is the last paragraph of the resolution. The words added were, "and to craft a more equitable loan default regulation." Mr. Dozier noted stylistic changes were made. The draft resolution that was circulated referred to the commissioner of Postsecondary Education. He said there isn't a commissioner. It is a commission. CHAIRMAN KOTT referred to the second "Resolved" section and said the way it was drafted and submitted by the subcommittee, it had a "Further Resolved" section that said, "The Governor is respectfully requested to request". It was changed to "urged". Number 335 REPRESENTATIVE MASEK referred to page 1, line 17, and said she believes a representative had brought up the issue about changing the wording, "has no authority to conduct credit checks on potential borrower;". She asked if this wasn't discussed at the previous meeting. CHAIRMAN KOTT said he believes that wording wasn't changed. Number 401 REPRESENTATIVE KIM ELTON said he believes the only question that come up was that the committee wanted to make sure that this wasn't encouraging the commission to establish a credit check. He said the only concern he has about the resolution is that he is assuming that this is just one element of the final solution to this problem. He said he would like a brief understanding of what is going to happen to SB 123. Representative Elton said he is somewhat concerned that the committee doesn't just say that we've dealt with the issue. This is done. That has done nothing to raising the loan limits or anything else. CHAIRMAN KOTT said he can't speak directly to that, but he said he would like to submit that what will happen with SB 123 once HCR 24 is passed, is there is no reason to believe the Governor will take any action. If in fact the Governor goes along with the resolution, he would suspect that SB 123 will then be a vehicle that could be used for change. Chairman Kott said if you recall from the previous session, a Free Conference Committee was appointed by the House for SB 123. There were no appointees made by the Senate President. He said he understands they are currently in that process or have already appointed members to that conference committee with free powers. His understanding of the rules, at that point, is that we have free liberty to do anything to that bill, including maybe incorporating some of the problem areas. If the details could be worked out in the conference committee, a large part of the problem could be solved. Number 555 REPRESENTATIVE NORMAN ROKEBERG referred to the fiscal note and said he finds it disturbing. It claims there is a $445 thousand potential loss because of the resolution. He again stated he finds that somewhat disturbing because he was under the impression that even the APEC was willing to suspend it if there were negotiations. REPRESENTATIVE KOTT said the passage of this resolution does not incur any fiscal obligation. We don't know what the Governor will or will not do, but there would be no fiscal obligation whatsoever. He said he is also curious there isn't a step too many as far as the fiscal impact. Number 665 DIANE BARRANS, Executive Director, Alaska Postsecondary Education Commission, Department of Education; and Executive Officer, Alaska Student Loan Corporation, came before the committee. She said she has some comments on HCR 24 that she would submit in writing. Ms. Barrans said she also has written comments from Eric Forrer, the current chair of the commission. Ms. Barrans stated there are issues of accuracy with the statements in the resolution. The members of the committee, having entertained testimony, will probably be considered the resident experts in the House on the resolution. She said she would offer the corrective data if the committee would like to incorporate it into the resolution. Specifically, she said she would like to reference page 1, lines 5 through 8. It indicates some percentages reflecting default activity at particular sectors of postsecondary education in Alaska. They are not reflective of what the commission has found in studying the period of 1986 through the end of last year, which showed that about 30 percent of the dollars in default were made to attend for profit schools in Alaska, whereas approximately 34 percent was from the loans made to the University of Alaska. She said there are several points that will be included in her testimony that the committee may want to consider. Ms. Barrans said she would like to add, to the record, that if there is any criticism of the regulation that has been promulgated, the members of the commission serve in very good faith. They have listened to public testimony and deliberated on the regulation at length. They did approve the implementation plan. If there is any criticism to be issued on this point, she believes it would be more appropriately directed to staff. She said she would not want to see public servants, serving without compensation, criticized on that point. CHAIRMAN KOTT said he thinks the accuracy of the resolution should be there. He indicated he doesn't want to suggest inaccurate information. Chairman Kott asked Ms. Barrans to comment on the numbers on page 1, lines 5 through 8. MS. BARRANS stated that has been addressed specifically in her written comments. The period that the commission looked at, which was fiscal year (FY) 87 through FY95, approximately $60 million was loaned to for profit schools. Almost $20 million of that is in default. Of the $130 million that was loaned to Alaska public postsecondary schools, approximately $21.7 million of that is in default. She noted she has the associated percentages. It doesn't jive quite with what is in the resolution. She indicated that the numbers were drawn from a document which compared some of the commission's loan data base files to the data base at the Department of Labor (DOL). The numbers have been taken somewhat out of context and don't accurately portray the percentages that the resolution reflects. CHAIRMAN KOTT asked Ms. Barrans if she had the percentages available. MS. BARRANS said she could get the percentages to the committee. Number 974 REPRESENTATIVE JERRY SANDERS asked Ms. Barrans if there is a possibility of tightening the time frame up as he understands there were a lot of abuses earlier in which some of them might have been cleared up. He asked if there was a chance of getting something for the last three years and if that would give a better picture. MS. BARRANS said it would give a better picture of the last three years. She said they attempted to create a situation where they could compare apples to apples. Since the Alaska Student Loan Program default rate is cumulative for the entire period of the loan, they tried, to some extent, duplicate that. What they found in looking at the data was loans made prior to 1986, had gone through two separate computer conversions and had been flattened over that process. In order to associate those borrowers with the schools they attended it would require someone sitting down and looking them up individually. What they did was they took it beginning the year that the statute went into place, 1987 and 1987 forward. Ms. Barrans explained the commission approved an implementation plan that could be reconsidered. That is probably getting to the meat of the issue, which is not the regulation which is simply setting out what is in the numerator and the denominator of the default rate calculation, but rather the time frame that the calculation will be applied to. She said the commission would revisit that. The short answer is, "Yes." Number 1246 REPRESENTATIVE GENE KUBINA asked Ms. Barrans if her goal is to do away with the schools receiving the funds. MS. BARRANS said absolutely not. There are two major issues. One is the financial strength of the loan program. When you can point to a particular sector, this is consistent with what has happened nationwide, which has a much higher default rate, that raises the issue of, "Is the consumer getting what they're paying for?" If they aren't, "Who is sharing in that risk?" Currently, the student and the loan program share in that risk. REPRESENTATIVE KUBINA referred to the work session where Gillian Hays testified and said he thought it was real clear how punitive that the regulation was at that time and how it doesn't give a one year grace period to bring it down. It doesn't do anything that is common sense. He said here we are spending hours during a short period of legislative time. Representative Kubina said he is real disappointed. It seems like the commission should have come to the legislature with a way to solve this problem without the committee having to write the resolution. He asked if it doesn't seem that the resolution, in retrospect, is not a very good way to deal with this problem. MS. BARRANS said she believes this whole conversation began when Dr. McCormick was the executive director of the commission. She said she thinks the way he would have chosen to deal with the high risk schools would be to reduce the risk through lower loan maximums. He worked to support SB 123 that would have done just that and would have made the current conversation, to some extent, go away. Ms. Barrans said the concern the commission has is that the money they loan to the borrowers no longer is just the money of the state of Alaska. It belongs to the private sector, the bond holders. She said they are truly obligated to repay them, even if means ceasing to make new loans. Ms. Barrans said the input they have had from their insurer, AMBACK who underwrites all but two of the bond issues of the corporation, has grown increasingly concerned over the last two or three years because the commission has resisted to make large loans to students where their data shows that they are less likely to succeed and be able to repay their loan. Within that context, she thinks the commission and Dr. McCormick felt that some action that had an immediate benefit to loan fund was called for. That is the position that the commission took when they adopted the regulation. REPRESENTATIVE KUBINA pointed out Dr. McCormick was no longer with the commission and asked how long he has been gone. MS. BARRANS said he left in August. REPRESENTATIVE KUBINA asked if the commission members and staff have talked amongst themselves and thought if this is still the best way to address that issue. MS. BARRANS said they have had that conversation on the staff level. The commission heard testimony, in December, on this and didn't change the implementation plan at that point. There was an open invitation by the chairman at that point that is on the record soliciting input from the schools asking them to advise the commission on what might be reasonable cause to exempt certain students from the calculation and what might be issues having to do with the appeal process for a school that wished to appeal a high institutional default rate. She said to date, they have received nothing in writing in response to Commissioner Forrer's request. She again noted that is on record. Number 1313 CHAIRMAN KOTT said he can appreciate the work Dr. McCormick did on SB 123, but it seems like we've somewhat gone in opposite directions. We do have an obligation to the bonding authorities. Put aside percentages of students and look at just total dollars. He asked if it isn't a fact that 80 percent, or better, of the total dollars in default are represented by students attending universities and colleges. He asked if that doesn't come into play. Because of the liberal mechanism that we have, that essentially transfers a check to a student through the registrar's office or however they do it, the person has cash in hand. Representative Kott said he remembers two years his son said, "Dad, I'm gonna get a student loan because I need a new car." Chairman Kott responded to his son, "No, you're not." MS. BARRANS said she believes that number is inflated. It is not 80 percent of the loans in default. She said in the period between 1986 and 1995, of the $40 some million in default, $20 million went to for profit schools and $21.7 went to the public universities. She said she would have to defer an absolute answer to the question and get that information to him. She said she doesn't believe it is an 80/20 split. CHAIRMAN KOTT said he recalls an earlier discussion he had with someone and it may have been that it went back to FY85 or FY86 and worked forward, but it seems like if our whole intent is to reduce default rates and reduce that pool of money that is in default, SB 123 basically increases the amount available to those traditional students attending universities and colleges, while at the same time, it reduces the money that is available to the vocational and technical students. MS. BARRANS said it is actually somewhat consistent with how they administer loans for traditional colleges and universities. A student who signs up for a loan program for single semester does not qualify for a maximum loan amount. They qualify for a prorata amount. They can receive only $2,750 rather than $5,500. That is for a 3 1/2 month period. So, to some extent, SB 123 approach is quite consistent with what they are already doing with traditional college or university students. Number 1460 CHAIRMAN KOTT asked if it is also true that for profit schools can also include private universities. MS. BARRANS said it absolutely can. She noted one of the clarifications in her written testimony is that this is not targeted at vocational educational institutions. It is targeted at for profit institutions. She said when the commission releases data next month, there are some schools that are junior colleges that offer associate degrees generally, but there are some baccalaureate that are included in the for profit pool. It is just that overwhelmingly, that sector is vocational education. Number 1506 JENNIFER DEITZ, Owner, Career Academy; and President, State Association of Private Career Schools, testified via teleconference from Anchorage. She said she is encouraged because she has been trying to encourage the legislature and the commission to bring proprietary to the table to find resolution. Ms. Deitz referred to attending a number of meetings since she was in Juneau the previous week and said she sees some progress being made towards finding a resolution and making a good default manager program. She stated she supports the resolution and is very interested in receiving comments on her response to the technical changes to HCR 24. Number 1574 MILTON BIRD, President, Charter College; and Member, Alaska Postsecondary Education Commission, testified via teleconference from Anchorage. He noted Charter College is a two year degree granting private institution. Mr. Bird said he would like to share, with the committee, the sense that he detected when the commission took the action addressed in the resolution. The commission was told that they were dealing with a statute that had been adopted eight years earlier. The commission felt they had no choice but to develop regulations to accommodate the statute. Mr. Bird said he didn't know how many of the commission members were displeased with what they had to take action on, but he certainly was. The commission had done some very good work over the years. The commission has also done some work that might be called negligent with reference to collections. Mr. Bird said the commission has provided some excellent framework for regulating institutions and protecting students. He said the commission's staff, for whatever reason, has not done a good job of collections. Over the past few years, actions are being taken to improve that condition. The computer programs are being upgraded, good additional staff has been added. Mr. Bird said he believes there is a record, during the resent past, of improvement in collections. Part of the problem is attributable to the inadequacy of the commission in its collection activities. Mr. Bird said that ends his testimony. CHAIRMAN KOTT said it is his understanding that in recent months, there has been a stepped up effort to go after those students who aren't paying their debt. Number 1700 SARA EDDINGS, Owner, New Concepts Beauty School, testified via teleconference from Fairbanks. Ms. Eddings said she believes that the commission is certainly trying to do their best at resolving this problem. She said she believes that many of the private vocational school sectors are asking to be included in the default management program and not to eliminate them, at this point in time, by eliminating their process or participation in the loan program. She thanked the committee for listening to her. MR. BIRD said he would like to make one additional comment. He said the reality is that the people who don't pay loans don't have the money to pay loans. Poor people don't repay their loans. Mr. Bird said we know there are some people who can afford to repay their loans at all levels and don't. He referred to vocational schools and said they serve those who come from the lower socio economic sector of the society. Many of them are (indisc.) who had difficulty with education in the past. Many of them face hardships. They come to vocational education as a way to solve their problem. Many do, many succeed, some don't. Some, for whatever reason, drop out before they complete programs. It is also true that students from that segment of society attend universities and many of them fail and don't pay their loans. Mr. Bird referred to those who don't repay loans, no matter if they go to vocational, for profit, non for profit, universities or junior colleges, the people who have difficulty, the people who drop out, the people who come from lower socio economic sectors of the society do not repay loans. Mr. Bird said he thinks the committee would find that those who go the universities, who don't repay loans, come from that same sector. He stated that issue needs to be addressed by the society. The vocational schools, he believes, do an excellent job. He said he gives credit to the commission for its regulatory procedures. They do an excellent job in serving many students. Many of those institutions have high placement rates for their graduates. He thanked the committee. Number 1845 ANN ADASIAK ANDREW, SST Travel Schools of Alaska, was next to testify via teleconference from Anchorage. She referred to the Alaska Postsecondary Education Commission meeting held in December, 1995, and said she doesn't feel that organizations like hers, as members of the public, were allowed adequate time for giving testimony. As she recalls, the resolution was discussed and passed by the members of the commission before several organizations had the opportunity to give public comment. Ms. Andrew said she believes that at other meetings, members of the public weren't allowed to give their input before a decision was made. She said she is now looking forward to the opportunity to work with the new subcommittee, continue communications and to participate in some sort of solution. Ms. Andrew said she doesn't feel that the default rate or whether or not students default is an adequate way of measuring the success of a school and their quality of training. There are people who graduate and have jobs, but for whatever reason, they don't feel obligated to pay back the loan. Ms. Andrew said despite programs in relation to loan counseling, entrance and exiting interviews, if a student decides not to pay a loan, it is very difficult to understand why a school should be penalized for a students negligence. The school has done their part in adequately training and placing individuals. She thanked the committee for listening to her. Number 1938 MITCH GRAVO, Lobbyist, came before the committee to testify. He stated he represents the private career school educators. Mr. Gravo said on behalf of the association, he has had several conversations with the new chairman of the corporation and at least one meeting with the new chairman and executive director of the corporation. He noted he has also had at least one conversation with the Governor. Mr. Gravo said it is clear to him that there is a new focus by the staff and commission. This focus is that, "We have a problem, we have a default rate problem. We're gonna solve that problem. We're gonna put together a global solution and you, the private school sector, have to part of that solution, but we're also gonna make everyone else part of that solution. And we're gonna put a, with 123 and with the passage of this resolution, a default management program together. And we're all gonna work together to solve this program. We're not just gonna put the burden on the private school sector to solve itself." Mr. Gravo said he believes the resolution is necessary and it sends a strong message. He said he thinks it will be well received by the Governor as he is very interested in this issue. Mr. Gravo said he sees some positive progress being made in conversations he had with the commission, the staff and the Administration. Number 2070 CHAIRMAN KOTT called Ms. Barrans to the table. He said there was a comment made by Mr. Bird where he said we ought to look at the social economics of the issues. Chairman Kott said he doesn't believe Mr. Bird was advocating that we don't provide loans for poor people. CHAIRMAN KOTT asked Ms. Barrans if there is a study that looks at the socio economic condition of students. He said it would appear to him that those who attend vocational schools would be typically be those that if they did not succeed or find a job in that vocation, would probably remain in the state of Alaska. Therefore, because we're doing things with permanent fund dividends, it seems it would seemingly be easier to make collections against those people. Representative Porter arrived at 3:45 p.m. MS. BARRANS said over the past year, they collected about $6 million in permanent fund dividend garnishment. It is a tool and is one way the defaulted loan balance, short of having people begin to repay their loans, is being eaten away at as far as the older defaulted loans. Of course, there are new people going into default on a daily basis. CHAIRMAN KOTT asked how those default rates are affected by those students who end up having their permanent fund or wages garnished. He also asked if those are still reflected in the percentages. MS. BARRANS said as long as they're in default, which means they have a payment that is 120 days or more past due, the defaulted balance continues to be calculated in the program default rate. CHAIRMAN KOTT said if someone is in default in June, and the permanent fund dividend check is released in October, at which point the state gets their hands on their portion of it, are they still part of that default percentage or since they are now paid in full, they're taken out of that pool. MS. BARRANS informed the committee that any account that is either paid current, as in no payments currently due, or an account that is paid in full, leaves the default calculation. It is no longer considered to be in default if it has been zeroed out or there are no payments outstanding. CHAIRMAN KOTT referred to page 1, lines 5 through 8, which talks about percentages and said it seems like those numbers would be ever shifting. He said he would think that on a daily basis, there are students going into default and students coming out of default. MS. BARRANS said that is correct. She referred to the snapshot they did in order to implement the calculation in regulation and said it was done December 31, 1995. Ms. Barrans said they issue a program default rate once a year that is published in the official statement of the corporation. She said when we look at trends of the default rate over years, that is generally the number they take. An official statement from three or four years ago showed a program default rate of close to 27 percent. Today, after the commission has finished reviewing numbers, they expect to see a program default rate that is less than 18 percent. She said what we're seeing is the effect of the commission aggressively using the tools that the legislature has made available to them and increased collection activities on the part of staff. CHAIRMAN KOTT said he would suggest that the latter is probably having a greater effect in increased collection activities. Number 2190 REPRESENTATIVE ELTON said a lot of the fixes that are being talking about, whether it is revisiting the number of weeks that a school has to teach before they're eligible for the program, whether it's the 150 percent formula or whether it's a profile of risky students that would help the lenders, he doesn't believe anything would be fixed through HCR 24. That is the fixed through the vehicle of SB 123, for example. Another observation is that he is glad to hear, perhaps as a result of what the House Labor and Commerce Committee has done, there now seems to be a dialogue where there wasn't before. He said he thinks part of the problem was that somebody had one position and somebody else had another position and they were defining each other as winners and losers. Representative Elton suggested that the problem may not be the 150 percent regulation. He believes part of the problem is the commission didn't ever define how they were going to implement the regulation and how it was going to affect individuals with different cases. He said you could have had a new owner two years ago that had a loan default rate of 10 percent that would be out of the program, whereas you would have an existing school that might have a default rate of 28 percent, fall under the 150 percent rate, and they'd stay in the program. That just doesn't make sense. He said he believes part of the problem is how the 150 percent rule is implemented. Representative Kott said he would rather have the proprietary schools, the for profit schools, not for profit schools and the universities work with the commission on coming up with something that works for everybody. He said we need to figure out how it will be done before we start moving on SB 123. CHAIRMAN KOTT said he believes Representative Elton is correct in his assessment. He said HCR 24 will provide perhaps a stay of execution for those vocational schools. Number 2293 REPRESENTATIVE SANDERS said he doesn't believe that there is any question by any of the committee members that there are problems and there needs to be some regulations to fix these problems. There has been a lot of progress made. He said he would like to encourage those kinds of improvements. Representative Sanders said he believes that the committee has found that the action by the APEC was kind of discriminatory against certain schools and certain students. He said he didn't feel that was the right thing to do. We're making a lot of progress and this thing is beginning to roll together. Representative Sanders said he believes HCR 24 should be passed. REPRESENTATIVE SANDERS referred to the numbers on page 1, lines 5 through 8, and said the way he understood this was the commission has about $40 million worth of bad loans. MS. BARRANS said the time frame they are looking at to apply the regulation for the period of 1986 through the present. She said she believes the numbers in the resolution were extracted from a "white paper" that the commission produced called, "Long-Term Debt for Short-Term Training." Those numbers were for a different single period and didn't reflect the entire life of the program. She said if she had been aware that the committee was looking for these numbers, she could have produced them. Ms. Barrans informed the committee she believes the numbers used were loans advanced and not dollars in default. She said she believes the numbers were the principal loan advance and not the amount of loans currently in default. That would skew the numbers because often people don't default on their entire loan. They actually repay some portion of it then default. It is only the amount that is in default that the commission is concerned with. If a portion of the money has been paid back, they don't consider the entire amount to be in default. REPRESENTATIVE SANDERS said if the numbers are wrong in the resolution, he would be open to inserting the correct numbers. MS. BARRANS noted there are more dollars in default from students that went to the college and university sectors. The main point is that if you want to address the default problem with the loan program, it has to be across the board. If the statute that the regulation implements allowed them to apply it across the board, they would be doing just that. She said SB 123 may be a vehicle that resolves the issue of discriminating against one sector of schools, but it is not being applied across all sectors that participate in the program. Number 2459 REPRESENTATIVE SANDERS moved to delete the second "Whereas" clause. CHAIRMAN KOTT said there is a motion to delete the wording on page 1, lines 5 through 8. He said it would be a conceptual amendment, Amendment 1. He asked if there was any discussion. TAPE 96-4, SIDE B Number 001 CHAIRMAN KOTT asked if there was an objection to Representative Sanders' amendment. Hearing none, the amendment was adopted. Number 021 REPRESENTATIVE BRIAN PORTER informed the committee he had the opportunity to speak with Ms. Barrans on the issue. He said, for the record, he really appreciates the attitude Ms. Barrans and the rest of the division has about the resolution. Representative Porter said his intent, within the resolution, is to just point out that the legislature thinks there should be a timeout in the implementation of a particular regulation and to see if a few things could be done for the group of affected institutions. Namely, provide the institutions with some assistance in setting up how the commission is going to be holding them accountable for these rates. Give them some assistance in dealing with the ability to have an influence on their rates and some time to deal with that. He said he is wondering if the committee is spending more time on this, at this point, then they need to. CHAIRMAN KOTT asked Ms. Barrans to explain the fiscal note. MS. BARRANS informed the committee the fiscal note shows a loss to the corporation's financial statement in FY97 of $445,000. This number was arrived at by looking at the initial institutional default rate calculations that have been made. They looked at those that would be above the 150 percent threshold and determined what level of borrowing those schools typically experience in a fiscal year. She said assuming that rescinding the regulation and putting something else in place would take six to nine months, during that period $3.7 million in new loans will be made to those schools that are currently above the 150 percent threshold. Based on their historical default rate of that collective group, 33 percent of that would go in default. That is approximately $1.2 million. General accepted accounting principles (GAAP) require that the corporation reserve as actual losses about 12 percent of the entire amount made which is the $3.7 million. Ms. Barrans said even though a higher number goes into default, they continue to collect on those loans, but ultimately lose about 12 percent over all. The 12 percent of that amount is the $443,000, reflected in the fiscal note that they would have to report on their financial statement for FY97. MS. BARRANS said as a committee member indicated, this is just a resolution. All of the assumptions in the fiscal note are that the resolution is received well by the Governor, who then directs the commission to rescind the regulation. They would then start another period of dialogue that within six to nine months would replace this with another implementation plan. Number 195 There being no further testimony, REPRESENTATIVE KUBINA moved that HCR 24, as amended, be passed out of committee with a zero fiscal note. CHAIRMAN KOTT asked if there was an objection. Hearing none, CSHCR 24(L&C) was passed out of the House Labor and Commerce Committee.