The recommendations recently released by the Department of Health, Education, and Welfare come at a time when actions taken by the subcommittee in the development of the Middle Income Student Assistance Act are only on the threshold of truly being tested.

The education amendments of 1976 provided what are considered by many to be monumental steps toward working out the inequities that existed between State and Federal programs and generated renewed vigor and support for the GSL program as a whole. Perhaps even more significant is the fact that such actions by the Congress gave lenders some encouragement about program stability.

That is why I implore this subcommittee not to perform major surgery in its reauthorization activity. What is required, above all else, is program stability, time for already enacted program modifications to take hold. A major overhaul at this juncture would be both shortsighted and wasteful. Please, and this statement has not been made in collusion with Mr. Fox, but I have it in here-"if it's not broken, don't fix it."

Mr. Chairman, I believe that such recommendations as the administration has proposed, appear to run counter to past history; the NDSL and FISL programs have been fraught with problems since their inception, while the GSL program has strived towards truly meeting the needs of those students requiring financial assist

ance.

As a lender, I cannot help but question the logic behind the restructuring of the NDSL as the basic loan program. I am especially concerned over the proposal that financial aid officers be given the authority for disbursing funds without having responsibility for their documentation and collection. This is an area that financial institutions are historically more qualified in, with trained lending officers experienced in all facets of credit granting as well as collection.

Finally, I would like to remind the members of this subcommittee that we are now approaching the peak period as it relates to student loan demand. We should be encouraging lender participation by instilling confidence that the program will continue, not suggesting a major upheaval that places lenders in the precarious position of being forced to question the making of loans with the likelihood that the GSL program will be abolished or radically changed. Such a dilemma is neither appropriate or warranted. Thank you for the opportunity to present my views, and I will be very happy to answer any questions that you may have regarding my experience with, and perceptions of, the GSL program, as well as the administration's proposal.

I would like to supplement the official stance of the American Bankers Association, if I may, with some personal observations and I stress these are my own.

I hope they don't sound very presumptive, but I would like to underscore the fact that our particular bank in Massachusetts has a former president and chairman who was one of the guiding lights in establishing the first guaranteed student loan program in this Nation, that first one being in Massachusetts which goes back to 1956.

So, our bank has fully supported the scope and intent of student lending.

Over the years, by trial and error, we have found certain things work and certain things don't. Unfortunately, these things are now showing up in different aspects throughout the various programs that have evolved.

I might also add that we have over 15 percent of our consumer loan portfolio in student loans. This is not an insignificant figure. I am not referring to a bank that is unusually large or unusually small. We are about a $550 million bank. That would put us about average in this country, I would say, maybe slightly above average size.

Here are some of the observations I have made, and these are sort of off-the-cuff, one-liners. The best way to cut fraud is to separate the product sale-which in this case is education-from the financing. If the schools would be making the NDSL loans, as suggested by the administration, and they are also selling the product, I wonder if they would be obligated by the Federal Trade Commission rule which we, as lenders, have to abide by when we buy, for example, indirect paper or when a sales finance company such as GMAC buys automobile paper. The Federal Trade Commission statement is

that any holder of contract is subject to all claims and defenses which the seller may assert against the seller of goods and services obtained with the proceeds hereof, recovery hereunder by the debtor shall not exceed the amount paid by the debtor hereunder.

Some students might look to the schools for recourse.

I would also point out that Equal Credit Opportunity Act, as it exists, compels any lender who turns down an applicant to issue a credit denial notice. I state this because there are so many people who keep bringing up that old chestnut about kids being turned down left and right. You already have this regulation on the books, and lenders are obligated to physically give student applicants a credit denial. Also, discouraging applications without taking them under section 202.5(A) of regulation B-which is the Equal Credit Opportunity Act-will result in insistence by the regulatory authorities who examine all financial institutions that the lending institutions have affirmative advertising to correct such a violation.

I also stress the fact that we have the Community Reinvestment Act which requires acknowledgement of loan types available in the lending institution. You certainly can utilize that in any State where you are not getting cooperation amongst the banks and lending institutions.

I also wanted to underscore that when we use the common term "banks" let us realize there are thrift institutions and credit unions.

There are thousands of local existing banking offices in place throughout this county. Centralization of student lending to the schools and the Office of Education would eliminate access to those lending institutions. I can't see how you would do away with that. For example, we talk about difficulties that students have in repaying their loans at various times which is understandable. Under the present act there is a possibility to get up to 3 years in exten

sions. Who is going to negotiate these extensions after students graduate? Are they going to go back to the school or are they going to come to Washington, or are you going to set up all sorts of bureaucratic regional offices? I would think if they go back to the existing lenders in 14,000 commercial banks, plus the credit unions and thrift institutions, why not utilize them?

I would also like to emphasize the fact that the State agencies are expanding, they are improving in their processing all the time, they are automating, they are guiding the lenders, they are responding to lenders. I note that while I am on the opposite side of the country that the California situation seems to dramatize this point. The major California banks got out of the program a few years ago. They wrote far more loans than any other section in this Nation, but I would stress that all of those loans were in the FISL program. And, in fact, one of the reasons at that time for the California banks' ending their participations was that the students stated later they thought they were receiving grants and not loans under that particular program. The California banks are now back in the program under GSL and they expect to make at least $100 million in 1979 in student loans.

I would also say that we should tighten up so that not only well qualified schools, but also well qualified lenders, can participate through intermediary State agencies. The State agencies, among the things that they are doing, can help in developing jointly software enhancements. Let us not forget that administration of these loan programs is one of the problems for lenders.

I would also suggest for liquidity that we expand the outlets through Sallie Mae with a buying price to the lender geared to the quality of the documentation and the communications that the lender has had with the student, not necessarily the credit of the student.

I also have a strong feeling that students should borrow in their home State and it should be made mandatory that no State agency or lender should limit GSL loans to students attending in-State schools only. In other words, if I grant a loan in Massachusetts, I should not insist that that student use those proceeds to attend a school in Massachusetts only. I have reason to believe that this is not universally so. I suggest to you, for minor changes to be made, that you consider an administrative fee for loans in repayment. It obviously costs more to administer loans once they are in repayment than when they are in school.

Representative Fenwick mentioned in New Jersey the use of credit bureaus. Our own State agency, I know, reports student loans to the local credit bureaus, being TRW and Chilton in our area. In our bank we report every student loan that is made to the credit bureau on each and every month. It is part of the file. This is a double-edge sword. It helps a student to establish a credit. rating and in those instances where a student decides to default, unless there are mitigating circumstances, it will show up in the bureau file.

Very recently we had one instance of a mortgage request from a student who now is a graduate with a very responsible job. Under the TRW system there appeared a charge off of a student loan in the State of New York. We very frankly told the applicant that we

thought that was a not very responsible attitude for him to take and we were not about to accept a mortgage from him.

I think if that were done universally it would help tighten up the program and the abuses.

I also firmly believe that we should request cosignatures of parents or spouse. Before there are any groans, I heard Mr. Bohen mention today about the extension of the administration's recommendation which would require parents as makers for the supplemental plan. After all, if I don't want to take care of my offspring, why should society?

If I am not in a position as a comaker to my child's loan later to pay, fine. I am sure this great Government of ours will forgive me. But if I am in a position to pay, I should pay. I advocate cosignatures also because families will not want children to default on their student loans when they obtain them locally. I do suggest that the GSL be expanded from a maximum of $7,500 to $10,000, which would at least permit $2,500 per year for 4 years.

I also suggest that you mandate a fixed guarantee fee rather than saying that the agency can charge up to 1 percent. This has caused an awful consternation over a very minor point. I would say that Sallie Mae has done a complete job, but I would recommend that they get more regional servicers because obviously if the servicer is in Massachusetts dealing with Massachusetts students, it can handle them far better than they can be handled from North Carolina and vice versa.

I would also point out that lending institutions are more apt to support this program during a recessionary period because this is a countercyclical situation and there will be more funds available. There should be more funds available when we have a slight downturn.

In essence, what I am stressing is that in addition to rights I think we need to start stressing responsibility for the success of this program. The responsibilities I have tried to point out rest with the school, with the lender, with the State agency, with the Office of Education, with the parent, with the student, and also with the graduate.

Thank you very much.

[Statement of the American Bankers Association follows:]

STATEMENT OF THE AMERICAN BANKERS ASSOCIATION

Mr. Chairman and Members of the Subcommittee, I am Edward Piana, Executive Vice President of BayBanks Norfolk County Trust Company. I appreciate the opportunity to participate in this morning's panel on behalf of the American Bankers Association.

Mr. Chairman, due to the relatively short period of time in which the Administration's proposals have been available for review and comment, the American Bankers Association has elected to forego the preparation and presentation of formal testimony relative today's hearing. The purpose of my presence here this morning is to participate in a meaningful exchange that will provide Subcommittee members with the necessary information that I hope will result in a legislative proposal that continues to truly benefit the needs of those students requiring financial assistance. The American Bankers Association does, however, wish to state for the record the support of its membership for the present Guaranteed Student Loan Program with only those amendments as are necessary to provide for its reauthorization.

The recommendations recently released by the Department of Health, Education, and Welfare come at a time when actions taken by this Subcommittee in the development of the Middle Income Student Assistance Act are only on the threshold of truly being tested. The Education Amendments of 1976 provided what are consid

ered by many to be monumental steps toward working out the inequities that existed between state and federal programs and generated renewed vigor and support for the GSL Program as a whole. Perhaps even more significant is the fact that such actions by the Congress gave lenders some encouragement about program stability. That is why I implore this Subcommittee not to perform major surgery in its reauthorization activity. What is required above all else, is program stabilitytime for already enacted program modifications to take hold. A major overhaul at this juncture would be both shortsighted and wasteful. Please, if it's not broken, don't fix it.

Mr. Chairman, I believe that such recommendations as the Administration has proposed appear to run counter to past history-the NDSL and FISL Programs have been fraught with problems since their inception-while the GSL Program has strived towards truly meeting the needs of those students requiring financial assistance. As a lender, I cannot help but question the logic behind the restructuring of the NDSL as the Basic Loan Program. I am especially concerned over the proposal that financial aid officers be given the authority for disbursing funds without having responsibility for their documentation and collection. This is an area that financial institutions are historically more qualified in with trained lending officers experienced in all facets of credit granting as well as collection.

Finally, I would like to remind the members of this Subcommittee that we are now approaching the peak period as it relates to student loan demand. We should be encouraging lender participation by instilling confidence that the program will continue-not suggesting a major upheaval that places lenders in the precarious position of being forced to question the making of loans with the likelihood that the GSL Program will be abolished or radically changed. Such a dilemma is neither appropriate or warranted.

Thank you for the opportunity to present my views and I will be happy to answer any questions that you may have regarding my experience with, and perceptions of, the GSL Program, as well as the Administration's proposal.

Mr. FORD. Thank you. I just noted that the panel has greeted the administration's proposals with something short of wild enthusiasm. However, Jerry Gibson has an interesting approach: Let us take the whipped cream off the top and throw the rest of it away. He's the only friend that you have as I can detect this morning. I want to see if we can focus on a couple of themes that have recurred here.

It occurred to me this morning that in the past we have not questioned the assertion made repeatedly by representatives of the administration that GSL programs have not been available to needy students. That is not a new assertion with regard to GSL. We find here in your statement today, Mr. Bohen, on page 3

One of the major weaknesses of the current program is that only about 3,300 of the 6,000 eligible institutions choose to, or are able to, participate-both because of the burden of loan collection and the requirement of institutional capital investment. This excludes many students and forces them into the guaranteed student loan program-where we believe the poor minorities and women have not been adequately served.

Do we know that?

Mr. BOHEN. Mr. Chairman

Mr. FORD. Are you saying it because we have an assumption that bankers are a lousy crew that do not respond? But aside from that kind of generalization, which is really kind of a prejudice against the banking industry, what evidence do we have that our experience until now with the guaranteed student loan shows any relevant pattern that treats these people differently than others, especially when one recognizes until very recently you could not use GSL for any but people I would regard as middle and lower income people?

Mr. BOHEN. I am going to ask my colleagues who have been closer to GSL over the years to bring forth such specific data. I