Letter to Senate and House Committee Chairmen Recommending Measures To Expand the Guaranteed Loan Program for College Students

Dear___________:

The Guaranteed Loan Program authorized under Tide IV-B of the Higher Education Act of 1965 is now entering its second full year of operation. During the past 12 months about $400 million in loans to 480,000 students have been made and guaranteed by a State or a nonprofit private loan guarantee agency in each of the 50 States and the District of Columbia and Puerto Rico. More than 13,000 lenders, including commercial banks, savings and loan, and credit unions are participating.

The program is designed primarily to ease the burden of increasing college costs for middle-income families by providing long-term credit assistance. It should be distinguished from NDEA Title II, College Work Study, and Educational Opportunity Grants .which are directed toward students from lowincome families who must have assistance if they are to get a college education.

During the first year of activity, a number of problem areas were identified which seemed to restrict accessibility to these guaranteed loans on the part of all the students and their families who desired them. Our review and analysis of these problems has led us to recommend the following changes for strengthening and improving the program:

A. Extension of State guarantee capability

As originally enacted, Title IV-B contained two plans for underwriting commercial loans to students. The first of these provided for an allocation to the several States of directly appropriated "seed money" deposits to be used to help establish or strengthen existing State guarantee funds. In 1966, $17.5 million was appropriated for this purpose to be allocated over a 3-year period. Additionally, in 1967, 14 States have appropriated in excess of $20 million to augment their own guarantee funds.

The second plan contains authority for the U.S. Commissioner of Education to issue certificates of insurance backed by credit of the United States to underwrite loans if and when he determines that eligible students are denied access to a loan guarantee.

The existence of separate parallel authorities, one grounded in State administration and the other in Federal administration, has led to a lack of a clear definition of the role and responsibility of each State in this broad program. For this reason, and to obtain maximum use of guarantee funds already on deposit from whatever source derived, we are proposing to weld the State guarantee-fund concept and the credit of the Federal Government into a single re-insurance authority. In this way, existing loan guarantee funds (totaling nearly $60 million in State and Federal funds) could be, in effect, re-insured 4 times to create a new reserve capacity of $240 million which in turn will provide guarantee capability for $2.4 billion in new loans. This expansion has the added advantage of providing immediate additional guarantee capability, since a guarantee fund now exists in or for every State.

Also, we propose to continue State administration of the program through an amended agreement with each State government or loan agency. Income from investment of Federal "seed money" plus a portion of the insurance premium, to be set at ½ percent per annum, would be turned over to the State administrative agency to help cover administrative expenses. The State, at its own option, may elect to subcontract administration of the program to a public or private nonprofit agency equipped to do the job.

B. Future authorization of "seed money"

To further enhance the expansion of the program, we propose extension of authority for appropriation of "seed money". This authority would be limited to $12.5 million in FY 1969 and would require an equal matching deposit by each State. Such matched funds, totaling $25 million would also be subject to the 4:1 multiplier effect of the reinsurance program, creating a maximum of $100 million in guarantee reserve which in turn could support an additional $1 billion in loans.

Effective operation of these two authorities depends, in the long run, upon State appropriation of guarantee funds. Those States which have already made heavy appropriations would not need to provide additional funds for some years. States which have provided minimal or no appropriations would need to provide additional State funds in possibly two or three years.

C. Placement and conversion fees

On June 15, Secretary Gardner transmitted to the Speaker of the House and to the President of the Senate a series of recommendations for improvement of the Guaranteed Loan Program which were based on the work of a committee headed by Under Secretary of the Treasury, Joseph W. Burr.

In order to extend more equitably the benefits of the loan guarantee, we are proposing that the loan placement and conversion fees be paid by the Federal Government for services rendered by the lender whether or not the student also qualifies for the interest subsidy.

D. Interim use of Federal insurance

Traditionally, the period from late July to early September--immediately preceding the beginning of the college year--has been the peak demand period. In a few States, the original allocation of Federal advance funds has been totally encumbered, and there are no additional guarantee funds available. For the weeks immediately ahead, the only means available to underwrite loans in these States, is that of the Federal insurance certificate. Immediately upon enactment and State implementation of the re-insurance authority recommended above, the need for direct Federal insurance will have disappeared. Notes insured by the Federal Government will be turned back to the State agency for servicing so that lenders in the State will only be dealing with a single program.

In conclusion, I would point out that the next few weeks are critical insofar as both lenders and student borrowers are concerned. Several hundred thousand students and their families are looking toward these guaranteed bank loans as a source of meeting fall semester expenses. For this reason, early consideration of these recommendations by your committee is of great importance.

Sincerely,

LYNDON B. JOHNSON