Examine the Operations of the Hinson-Hazlewood Program

The Legislature and the Texas Higher Education Coordinating Board should review the practices of the Hinson-Hazlewood College Student Loan Program and make improvements as may be appropriate.


Background
The Hinson-Hazlewood College Student Loan Program (HHCSLP), administered by the Texas Higher Education Coordinating Board (THECB), was created to provide low-interest loans to undergraduate, graduate and professional resident students attending post-second ary schools in Texas. The HHCSLP provisions of the Texas Education Code stipulate that the loan program is intended for students with insufficient resources to finance [their] college education. 1

Hinson-Hazlewood loans are funded by state bond proceeds and student loan repayments. General revenue has never been used to repay the bonds. Borrowers apply for all HHCSLP loans through their institution s financial aid office, but THECB processes and services the loans. This process, in which a state agency lends, processes and services student loans, is unique and is administered by 113 full-time equivalent employee positions.

HHCSLP was created subsequent to the 1965 federal Higher Education Act, which established the federally guaranteed student loan program. At that time, HHCSLP began providing loans becaus e few student loans were available for Texas students. However, since that time, federally guaranteed student loans have become available through a number of private lenders.

HHCSLP provides three types of federally guaranteed loans: Stafford loans, which are available only for financially needy students; Supplemental Loans to Students (SLS), for graduate and self-supporting undergraduate students attending post-second ary institutions; and Health Education Assistance Loans (HEAL), for students pursuing a degree in veterinary medicine or a variety of health-related programs. SLS and HEAL loans are not need-based.

THECB also administers two state non-insured loan programs College Access Loans (CAL) and the Health Education Loan Program (HELP). The CAL program was created to assist families inel igible for Stafford or SLS loans due to a sufficient lack of financial need or an unacceptable credit rating. About 21 percent of the loans offered through HHCSLP during fiscal 1992 were CAL loans. These loans are not federally guaranteed, and THECB does not receive a federal-interest subsidy for them. The state-supported CAL program competes with the federal Parent Loan for Undergraduate Students (PLUS) program, which offers education loans to parents.

The state-funded HELP program provides loans similar to HEAL whenever the state s loan demand is greater than the federal dollars available through HEAL. The HELP program also is not federally guaranteed and receives no federal interest subsidy.

Currently, more than 200 private lenders, such as commercial banks and savings and loan institutions, participate in federal student loan programs. More than 90 percent of all federally guaranteed student loans made in Texas are provided by private lenders.

As of November 1992, the interest rate on Stafford loans offered by private lenders and THECB was 6.9 percent. The interest rate offered for SLS loans by private lenders was 7.4 percent, while THECB offered a 7.3-percent rate. The rates offered by private financial institutions have been competitive with those o ffered by the THECB.

A review of HHCSLP s portfolio of federally guaranteed loans shows that most loans are provided to graduate students and students attending health-related institutions.

A comparison of HHCSLP and all other loans guaranteed by the TGSLC reveals that other lenders across the state have more diverse portfolios of loans than does THECB. Table 1 shows a comparison of the loan dollar amounts, number of loans and percent of total dollar amounts of loans by school classification for TGSLC and HHCSLP. 2


Table 1 - Number and Dollar Amounts of Guaranteed Loans by School Classification

Fiscal 1992 Cumulative*
School Classification TGSLC HHCSLP TGSLC HHCSLP

Medical Schools
Loan Amount $44,333,072 $15,674,861 $334,820,123 $79,571,605
Number of Loans 8,229 2,913 67,653 16,917
Percent of Total 6.9% 35.3% 7.3% 28.5%

Historically Black Schools
Loan Amount $24,542,327 $46,761 $156,468,963 $6,963,370
Number of Loans 9,085 15 62,339 4,566
Percent of Total 3.8% 0.1% 3.4% 2.5%

Texas State Technical Schools
Loan Amount $5,114,064 $0 $56,658,752 $1,100,474
Number of Loans 2,499 0 27,809 596
Percent of Total 0.8% 0.0% 1.2% 0.4%

All Other Schools
Loan Amount $566,484,210 $28,719,855 $4,058,461,025 $191,350,573
Number of Loans 215,150 10,082 1,698,853 91,783
Percent of Total 88.5% 64.6% 88.1% 68.6%

* Cumulative as of October 31, 1992.
Source: Texas Guaranteed Student Loan Corporation .


Table 2 shows a breakdown of dollar amounts, number of loans and percent of total dollar amounts of guaranteed loans by grade level. 3
Table 2 - Number and Dollar Amount of Guaranteed Loans by Student Classification

Fiscal 1992 Cumulative*
Student Classification TGSLC HHCSLP TGSLC HHCSLP

Freshman
Loan Amount $183,428,050 $3,338,768 $1,770,088,682 $33,326,534
Number of Loans 80,718 1,585 808,899 21,859 Percent of Total 28.6% 7.5% 38.4% 12.0%

Sophomore
Loan Amount $90,709,171 $2,994,498 $608,735,322 $26,298,198
Number of Loans 40,933 1,4192 94,699 16,540
Percent of Total 14.2% 6.7% 13.2% 9.4%

Junior
Loan Amount $94,716,635 $6,069,585 $539,359,757 $36,475,068 Number of Loans 33,147 2,294 232,128 19,295
Percent of Total 14.8% 13.7% 11.7% 13.1%

Senior
Loan Amount $113,468,714 $7,338,682 $620,221,816 $42,518,397
Number of Loans 43,970 2,850 273,315 22,486 Percent of Total 17.7% 16.5% 13.5% 15.2%

Graduate
Loan Amount $158,151,102 $24,699,944 $1,068,003,285 $140,367,825
Number of Loans 34,195 4,862 47,613 33,682 Percent of Total 24.7% 55.6% 23.2% 50.3%


* Cumulative as of October 31, 1992.
Source: Texas Guaranteed Student Loan Corporation.


The HHCSLP provides a disproportionate share of its loans to students that are generally considered good risks by the lending community. Tables 3 a nd 4 provide breakdowns by amounts and number of loans awarded in each loan program according to school classification. 4 This comparison shows that the largest portion of HHCSLP financial aid is provided to students at health-related institutions and private colleges . Private lenders consider these loans the most desirable. 5

Table 3 - Hinson-Hazlewood College Student Loan Program
Amounts and Number of Loans Awarded, Fiscal 1992

Public Public Public Other Private
Loan Type Senior Health-Related Junior Schools* Colleges Totals

SLS
Loan Amount $1,742,012 $2,840,521 $107,883 $12,108 $2,244,269 $6,946,793
Number of Loans 639 981 41 5 779 2,445

Stafford
Loan Amount $11,542,100 $12,289,254 $697,707 $17,735 $11,978,967 $36,525,763
Number of Loans 3,850 2,194 380 9 3,609 10,042

HEAL/HELP
Loan Amount $315,213 $20,325,592 $0 $0 $ 0 $20,640,805
Number of Loans 54 2,895 0 0 0 2,949

CAL
Loan Amount $7,184,312 $369,279 $70,922 $16,303 $12,928,616 $20,569,432
Number of Loans 3,251 107 46 11 4,220 7,635

Totals
Loan Amount $20,783,637 $35,824,646 $876,512 $46,146 $27,151,852 $84,682,793
Number of Loans 7,794 6,177 467 25 8,608 23,071
*San Antonio Art Institute closed in August 1992.
Source: Texas Higher Education Coordinating Board, Summary of Student Financial Aid in Fiscal Year 1992.


Table 4 - Hinson-Hazlewood College Student Loan Program
Percentages of Amounts, Loans and Students, Fiscal 1992

Public Public Public Other Private
Senior Health-Related Junior Schools** Colleges Totals

Percent of Dollars 24.5 42.3 1.0 * 32.1 100
Percent of Loans 33.8 26.8 2.0 * 37.3 100
Percent of Students Enrolled 47.7 1.6 39.9 * 10.2 100

* Less than one percent.
** San Antonio Art Institute closed in August 1992.
Totals may not add due to rounding.
Source: Texas Higher Education Coordinating Board, Summary of Student Financial Aid in Fiscal Year 1992.


Students at private institutions received 32 percent of HHCSLP funds awa rded, while private enrollment represented only 10 percent of all students entering post-secondary education. In contrast, students at public senior institutions received 25 percent of the dollar value of all loans, while these institutions accounted for 4 8 percent of enrollments. Students attending public health-related institutions received 42 percent of HHCSLP loan dollars and yet represented less than 2 percent of the total state student body. Public community college students, 40 percent of the total, received just 1 percent of HHCSLP loan dollars. 6 While many of the loans for health-related institutions may be a result of the HEAL and HELP loan programs, the statistics suggest a policy preference for students in these fields.
The HHCSLP has been the subject of several previous reviews. In November 1988, the Texas Sunset Commission recommended eliminating HHCSLP, with the rationale that state government should not compete with private lenders. Texas Performance Review s Breaking The Mold recommended tha t Hinson-Hazlewood become self-supporting and that uninsured loan programs be eliminated. Based on this recommendation, the 1991 Legislature passed a law requiring that the HHCSLP become self-supporting beginning in fiscal 1993. 7

Federal subsidies paid to THECB for administering Stafford and SLS loans recently have permitted HHCSLP to become self-supporting. The federal subsidies include a lender s allowance and federal interest, which are determined by the lender s loan volume. The lender s allowance is a payment to lenders and holders of student loans by the federal government that ensures a competitive yield for the lender on their student loans. An interest subsidy is paid to lenders by the federal government on behalf of a Stafford Loan borrower while the student is in school, in grace status or in an authorized deferment period. THECB collected $10.8 million from this subsidy in fiscal 1992.

Operating costs to run the HHCSLP program are paid by revenue generated from late charges on loans and litigation fees, loan-origination fees and the federal lender s allowance. Other expenses or allocations used by revenue generated through the HHCSLP program include $282,000 used for scholarships for educationally disadvantaged students and the recruitment of m inority staff and faculty. However, THECB has initiated a legislative change for fiscal 1994 and 1995 requesting that the $282,000 used for scholarships and recruitment purposes be taken from general revenue rather than from HHCSLP. 8 The General Appropriations Act has also authorized that the THECB commissioner s salary be supplemented by earned funds. All other revenues are restricted for student loans and bond repayment or retirement .

THECB issues bonds to finance HHCSLP. Texas voters must approve each general obligation bond request. 9 Since the program began in 1965, THECB has issued $441 million in general obligation bonds to support it. THECB also had a one-time $75 million emergency issue of revenue bonds in August 1991. The last bond authorization w as in November 1991, when voters approved $300 million in bonds for HHCSLP. During fiscal 1992, THECB issued $100 million in bonds and plans to issue an additional $75 million in January 1993. As of August 1992, the program had issued $313 million in gener al obligation bonds, and $67.4 million of the revenue bonds remained outstanding. 10


Recommendations
A. The State of Texas, through its Hinson-Hazlewood College Student Loan Program (HHCSLP), should not hold student loans for the life of the loan. The ass ets of the HHCSLP should be evaluated by the Legislature before the 1996-97 biennium to determine whether it is still necessary to issue state-backed tax-exempt bonds to provide principal for new loans.

Bonds issued by the Texas Higher Education Coordinating Board (THECB) should not be prohibited from sale to secondary markets. THECB could continue to maintain funds sufficient to provide loans to students through the sale of loans to the secondary markets instead of continuing to issue bonds.

B. The Texas Higher Education Coordinating Board (THECB) should study the feasibility of contracting out the loan-servicing required for student loans and report its findings to the Legislature.

THECB should compare their costs of servicing the loans to those of private servicers and determine whether contracting would be more cost-effective.

C. THECB should review the rules and regulations governing HHCSLP and determine whether the population that was intended to benefit from it actually participates in the program in sufficient numbers.

THECB should examine the mix of students receiving HHCSLP to determine whether THECB s historical trend toward lending to private rather than public school students is appropriate and whether minority students are receiving an appropriate and representative proportion of the loans available through this state program.

Implications
THECB could continue to provide student loans without continuing to hold and service them. Selling the HHCSLP loan portfolio to the secondary loan markets would remove the state from direct competition with the private sector and could potentially eliminate the need for state-backed tax-exempt bonds to support the program. Eliminating the state-backed bond issuances would enable the program to becom e truly self-supporting.

Privatizing the servicing of student loans could result in lower costs to the state.

Finally, a review of HHCSLP borrowers could reveal valuable information about whether students that were intended to participate in the program actually do participate in sufficient numbers. The profile of HHCSLP borrowers could be compared to borrowers of private banking institutions to see whether charges of creaming the pool of student borrowers are accurate. If these charges are valid, THECB should revise their operations to encourage more diverse student participation.


Fiscal Impact
No substantial fiscal impact is associated with these recommendations.



Endnotes
1 Tex. Ed. Code Ann. ch. 52, sec. 52.32 (Vernon Supp. 1992), p. 150.
2 Texas Guaranteed Student Loan Corporation, Governmental Affairs and Policy Analysis, cumulative and fiscal 1992 statistical reports (Austin, Texas, November 30, 1992).
3 Ibid.
4 Texas Higher Education Coordinating Board, Division of Student Services, Summary of Student Financial Aid in Texas, Fiscal Year 1992 (Austin, Texas, January 1992)
5 Telephone interview with Gordon Allen, Association of Texas Lenders for Education (Irving, Texas, December 15, 1992).
6 Texas Higher Education Coordinating Board, Division of Student Services, Summary of Student Financial Aid in Texas, Fiscal Year 1986 - Fiscal Year 1991 (Austin, Texas, November 1992).
7 State of Texas, General Appropriations Act, p. III-33.
8 Texas Higher Education Coordinating Board, Request for Legislative Appropriations for Fiscal Years 1992 and 1993, p. 2.
9 Tex. Ed. Code Ann. ch. 52, sec. 52.11 (Vernon 1987).
10 Telephone interview with Tom Pollard, former Executive Director, Texas Bond Review Board (Austin, Texas, November 11, 1992).