Legislature(1995 - 1996)
03/08/1995 09:00 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE BILL NO. 135 "An Act relating to student loans; and providing for an effective date." Co-chair Halford announced that SB 59 is the companion bill to HB 135 which passed out of the House. Joe McCormick was invited to speak to the committee. Mr. McCormick spoke to HB 135. He stated it is a technical bill that requires transition language be enacted by the legislature before the commission can pass regulations regarding legislation that passed this legislative body last year in HB 506. Most specifically, he said, the transition language would allow the commission to pass regulation setting the interest rate on student loans beginning July 1, 1995. If the regulations are not in place legally, funds cannot be disbursed after July 1. Senator Rieger stated he has a reservation on the servicing of the student loans. He said that this bill would make it more possible to set an interest rate which covers not only the interest cost of the borrowed funds, but also the servicing costs. His concern comes from a Pete Marwick Study that the commission on postsecondary education commissioned. Discussion followed regarding out-sourcing. Mr. McCormick responded that the adoption of this legislation has nothing to do with that recommendation. This legislation, if adopted, would allow the commission to set the interest rate on the loans that will be disbursed on July 1 and thereafter. Neglecting to pass HB 135 would impact 13,000 Alaskan students for an approximate sum of disbursement of $50 million. The issue of the recommendation to the Pete Marwick Study says that while it is the most attractive offer from a cost benefit analysis standpoint, it is probably not a practical offer. With a very small loan program located in a remote part of the United States, and the likelihood of obtaining good out- sourcing service at a reasonable cost is unlikely. The recommendation is to fix the problem in-house. Mr. McCormick reiterated that this is another issue, but that he would be happy to discuss it further. Senator Rieger testified that the bill enables adoption of regulations to implement 1443120F, which includes charging a fee which is sufficient to cover the cost of servicing. Mr. McCormick responded that in his professional experience there is a loan program that has historically never been a part of, or close to, the way the general student loan programs in the lower 48 operate. In order to out-source the servicing of loans, there would have to be major modifications in order to service Alaska student loans according to Alaska law. The problem is further complicated by the fact that it is a small loan program. Servicers would be asked to serve a portfolio of approximately $500 million. Most of the out-sourcing companies, that would be considered and who are experienced in servicing student loans, serve federal student loans which have different requirements. The servicers maintain portfolios in the billions of dollars. The Pete Marwick reports that this would be a major problem to finding an out-sourcing entity that could perform the service on a cost-benefit basis. Mr. McCormick supports the opportunity to build a software system that the committee thought it was getting in 1991. He stated that it didn't happen because it was contracted with a company in Anchorage Alaska, that had no experience in the student loan industry. The company purchased software that was not related to the proper servicing of student loans. To make matters worse, six months into the development of that project, the company went broke. Mr. McCormick stated that when he started with the commission in December of 1993, there was not even one data processing employee on the staff of the commission. There are now four data processors, which he recruited from a student loan servicing operation in Denver, Colorado. The commission now has the infrastructure, experience and expertise on the payroll in-house to implement the Pete Marwick recommendation successfully. The commission projected for the LB&A committee in December that upon completion of that installation, within 5 years, the staff would be reduced by 9. Total cost would be paid for in lower cost of servicing. Senator Donley questioned if local people are being trained. Mr. McCormick stated there are no open positions at this time. There is existing staff who will receive training within the commission to support the new system. Senator Rieger asked what the interest rate on the loans will be when the regulations are adopted? Mr. McCormick responded that the interest rate based on the 1994 bond issue which was 5.83%, will be in the range of 8 to 8-1/2% interest rate. The administrative portion of that amount is 2.5%. He stated that there is legislation pending that would help defray losses to the fund, especially default costs. Senator Rieger asked when the last bond was issued? Mr. McCormick stated it was in July 1994. He said it was a $50 million bond issue fully insured, based on changes being made in servicing loans. The 1993 issue of $43 million was uninsured because of the lack of confidence that New York had in the ability of the commission to service loans. Based on the management plan which includes the upgrading of the servicing system, they issued the $50 million fully insured. If the loan defaults, it is not covered by insurance and is a loss. The State of Alaska is not responsible for any of these loans, the collateral for these bonds are the assets of the fund itself. Co-chair Halford called for additional testimony on the bill. None was forthcoming. Senator Phillips MOVED for passage of HB 135 with individual recommendations. No objection having been raised, HB 135 was REPORTED OUT of committee with a zero fiscal note from the Department of Education. Co-chairs Halford and Frank along with Senators Phillips and Sharp signed the committee report with a "do pass" recommendation. Senators Rieger, Donley and Zharoff signed "no recommendation."