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Costs have increased four times since we built our first residence hall at Purdue University. The time during which I financed them has been increased from 18 years to 30 years. This means a much lower annual cost of amortization. Our first interest rate was 412 percent, and now it is just under 3 percent. So I have reduced the interest cost.
When I reduce the amount needed for amortization and the amount needed for interest on an annual basis, I am not charging the student very much more. This, then, is the problem, and this is what Senator Fulbright's bill does.
I am going to testify this morning on behalf of the Land-Grant College Association, and I am going to direct my testimony to the interest rate and the spread of a half a percent at the present time as compared with a quarter percent as provided in your bill, and then after I have presented this statement, I have some personal observations on the matter I would like to make them without reference to my job with the land-grant college. My testimony is presented on behalf
of the Association of LandGrant Colleges and Universities, composed of 70 colleges and universities located in each of the States, Alaksa, Hawaii, and Puerto Rico. Our association has supported the college housing loan program from its inception, and at its most recent annual meeting in November 1954, urged action along the general lines provided in S. 1744. The executive committee of the association, meeting on May 5, reviewed the proposed changes in the present law and suggested that pending a more detailed study, the proposed expansion to cover other than housing facilities be limited to food-service facilities for students and faculty, which are, of course, closely related to housing.
Others have stated the general need for this program and the proposed revisions. I would like to confine myself chiefly to the question of whether or not the proposed spread of one-fourth of 1 percent between the rate paid the Treasury by the Housing Agency and the rate charged the colleges will be adequate to cover administrative costs of the program.
Administrator Albert M. Cole, in testimony on this subject, suggested that one-fourth of 1 percent would be inadequate at least during the early years of the program when administrative expenses are higher than income. He suggested that the present differential, onehalf of 1 percent or more, makes the program not initially self-supporting but that it will eventually become so after a sufficiently large volume of loans are outstanding. I believe that it can be shown beyond any reasonable doubt that one-fourth of 1 percent will, over a period of years, not only care for all costs of the program but provide a substantial margin above those costs. This is the real issue.
For the current fiscal year, Mr. Chairman, the administrative costs for this program are $375,000, as fixed in the appropriation bill. According to the statement made in budget estimates of the Housing and Home Finance Agency, the net margin accruing to the Government this year on interest charged the colleges in excess of the rate paid the Treasury will be $52,300 more than administrative costs. By establishing a reserve for operating losses, however, of one-fourth of 1 percent, which would amount to about $75,000 during the current year, i he budget estimates make it appear that there will be a loss of $23,000 on the program this year. You see, if you are going to assume loss all the time, why, of course, you can make your administrative costs as high as you want to make your assumption. This is purely a bookkeeping operation. There have not been any operating losses under this program. During the depression of the 1930's there were 440 college housing loans outstanding in the hands of private lenders. Only 10 of these went into default under extreme depression conditions, and on one of these was there any loss in principal. My study for 50 years verifies the same thing, that there has never been a loss of principal in any of these although there have been times when the loans were in default.
As to the future, Mr. Chairman, let me point out that one-fourth of 1 percent on $300 millions, which is the full amount of loans authorized at the present time, is $750,000 a year. As I said, administrative expenses for the current year are $375,000, and the House has allowed $425,000 for fiscal 1956. On the $500 millions proposed under Senate
$ bill 1744, the annual return to the Government at one-fourth of 1 percent would be $1,250,000. Administrative costs may go up beyond the $425,000 contemplated for fiscal 1956 during the period of greatest activity in making loans, but it is unreasonable to assume that they will ever in any one year reach the $750,000 available annually when the present authorized fund is fully on loan, or the $1,250,000 available if the program is expanded. After the authorized loan total is reached, administrative expenses should drop sharply, as loans could then be made only from the return of principal to the revolving fund. The years in which administrative costs will be low exceed in number by far those in which they will be high, if this program is implemented as rapidly as it needs to be. In short, Mr. Chairman, one-fourth of 1 percent is fully adequate over the life of the program to cover all administrative expenses and return a substantial sum above them to the Treasury, which may be described as a profit or as a reserve for operating losses, according to which bookkeeping terminology you prefer.
May I further point out that the present reserve for operating losses as established by Mr. Cole at one-fourth of 1 percent annually on outstanding bonds would come to $750,000 a year when the full $300 million presently authorized is loaned, and that over the 40-year period for which loans are authorized it would build up to $30 million, or 10 percent of the total loans authorized at any one time. This seems an excessive reserve fund for a type of security for which there was no record during the 1930's of any loss of principal.
In this connection, Mr. Chairman, I should like to point out further that according to the budget statement of the Housing and Home Finance Agency on this program for fiscal 1956, 40 percent of the present administrative costs go to servicing loan applications which eventually are handled by private investors—I underscore that statement—under the present practice of
maintaining an artificially high spread between the interest paid the Treasury and the interest charged the colleges, and adding on top of that one-fourth of 1 percent under the present comparable-rate provisions of the law. This comparablerate provision is currently interpreted to mean that if any private bidder bids up to one-fourth of 1 percent higher than the Govenment loan rate the college must accept the private bid or get no loan. Effort to get private participation is certainly desirable, but the committee should understand in examining the question of administrative costs of the program that 40 percent of these costs are due to this acivity, and not to the cost of loans actually made.
Mr. Chairman, one-fourth of 1 percent is, in my opinion, adequate in the long run to cover the administrative costs of the program, including those for getting private participation, and will further provide either a net margin to the governor or a reserve for operating losses under any foreseeable conditions.
I think as a personal thing, as a finance officer who has been in this business for 30 years that your top after 3 percent with a quarter percent spread is equitable to the Government, should cover all the administrative costs and should permit many schools to get private loans.
I don't want to belittle dealing with the Federal Government because I come in about as often as anybody else, I guess, to Washington to get money, but we would rather pay an eighth of a percent to somebody else than even file an application; and since I know our Credit warrants it, we have never filed an application.
Senator FULBRIGHT. Do you agree with the previous witness, Mr. Solterer, that the real effect of it is the average cost ?
Mr. STEWART. You mean on the interest?
Mr. STEWART. I think your formula there is about as good as you can get at the time. At the moment, our debt is loaded with shorttime low interest, and we should get some benefit of it. If the economy of the Nation, the money supply, and other factors makes money high, then the people who support the Government also support the other, and the interest rate should bear some relation.
Senator FULBRIGHT. Is it fair to say that under Mr. Cole's conception of a proper interest rate that the Government is actually making a profit out of these colleges, the loan to colleges ?
Mr. STEWART. I think that is right. May I say that I think the agency has done one thing which I happened to discuss with them before it was done, making split loans where they are able to sell to private lenders the shorter-term maturities at lower interest rates and the Government taking only the long ones. I think that should be explored and developed further.
You men are not as old as I am, but you are mature, and you remember in the standard way of financing real property was 1 percent a month, a 10-year program. Then after the depression they allowed banks and others to have the loans run up to 14 or 15 years. Everybody thought this was terrible. Now it is up to 20. Now we have extended it to 30, and through this program to 40. You are bringing it to 50. If maintenance is carried on properly, the building will be there indefinitely. Some parts of it will have to be renewed. That is maintenance.
Senator FULBRIGHT. As I understand your testimony on page 3, in view of experience with regard to losses, this profit to the Government over the period would be some $30 million.
Mr. STEWART. If you run it through for this length of time, that is what it would be, or 10 percent of the $300 million that is authorized.
Senator FULBRIGHT. It was not the intention of Congress to set this up as a profitmaking program, was it?
Mr. STEWART. No; and I don't think it should be.
Senator FULBRIGHT. The defect was in the calculations of the Housing Authority; is that not correct?
Mr. STEWART. I think it has been too conservative, and our study, you see, indicates our whole experience, while we have had some difficulty, the very nature of the college operation is that eventually it will pay off the principal.
Senator FULBRIGHT. Doesn't that error arise on failure to discriminate between college financing and experience in other types of financing, that is, home building or some other type of building?
Mr. STEWART. I would think so.
Senator FULBRIGHT. Will you agree that the rate of interest is a limiting factor on the rate of applications for these loans ?
Mr. STEWART. Yes; and the limiting factor on the usefulness to the program.
Senator FULBRIGHT. Usefulness to the program?
Senator FULBRIGHT. You believe that if the interest rate is reduced to 2.75, the full $500 million will be used! There is a need for that?
Mr. STEWART. Well, there is certainly a need. I just made a quick calculation while some of the people were talking, and if the full $500 million is loaned and there are 1,700 higher educational institutions, that would be $300,000 each if they all borrowed or 100 students each at the assumed $3,000 per capita rate. The best I can do at Purdue is not $3,000, as they are doing at Florida. We are now planning a $10 million program, and if I can get the $3,250, then I will feel I have got the lowest cost.
Senator FULBRIGHT. Your weather conditions will account for some of that difference?
Mr. STEWART. The weather conditions, the heating plant. Conditions are easily 10 percent different.
Senator FULBRIGHT. That is what I meant. That is the only reason I wanted to call attention to the fact it was Florida when we were talking about it. It doesn't mean they have inferior conditions, just different conditions.
Mr. STEWART. That is right.
Senator CAPEHART. I don't believe so. I was brought up as a businessman that if you make the sale you don't have to talk. You have made the sale.
Mr. STEWART. I don't believe this bill or the program needs further justification. I think the point we are talking about under the terms you have put-you haven't provided them too liberally. I think you have just about, under present conditions, hit the nail on the head.
Senator CAPEHART. We have had the program for some time. It is just a matter of extending it with some liberalization.
Mr. STEWART. That is right.
Senator CAPEHART. That is correct; but those minor matters of quarter or half percent are all important.
Mr. STEWART. There is a critical item.
Senator FULBRIGHT. There is a critical item. We must emphasize, of course, that.
Thank you very much, Mr. Stewart.
Mr. STEWART. Might I just make one observation as an educator? Senator FULBRIGHT. Certainly.
Mr. STEWART. That if something of this sort in this form of stable encouragement to the colleges isn't done, in a crisis you may be faced with making grants for this purpose. My own individual Americanism, coming from Indiana, we believe people should help themselves when they get a chance, and I think this is the means of doing it.
Senator CAPEHART. You don't think we could do this, maybe be able to do more of it, if we handle it on the basis of FHA guaranteeing the loan?
Mr. STEWART. I would like to study and discuss that perhaps with the staff. It seems to me that a limitation on the interest rate is necessary.
Senator CAPEHART. Well, I mean you think if FHA guarantees them, private industry would take them at the lower interest rate ?
Mr. STEWART. It might.
Senator CAPEHART. I think that is the problem. That is the question.
Mr. STEWART. But I point out in private financing the FHA guaranty hasn't necessarily reduced the interest rate, at least not too significantly. It has made loans more liberal, but it hasn't necessarily decreased the interest rate.
Senator FULBRIGHT. That is, I think, the point. There is no way of making private people take these 2.75 even with the guaranty.
Mr. STEWART. That is right.
Senator FULBRIGHT. The only sanction for the 2.75 interest is that the Government stands ready to take it direct. It doesn't matter what that interest rate is if it is not equivalent to what they could get in the regular market. We can't make them take a low interest rate loan.
Senator CAPEHART. Would they use the combination of both direct loans of 2.75 and our guaranty at 2.75—combination of loans?
Mr. STEWART. That is what I am thinking.
Senator, both Indiana University and Purdue University under our authority to borrow money to provide student housing in the State have guaranteed some fraternity loans, and my insurance company has financed them on the basis of 50 years, 314 percent. We would like to get 312 percent, but with the universities' guaranty, I think they are perfectly safe.
Senator FULBRIGHT. Is that interest tax exempt? Is that under a State authority?
Mr. STEWART. It would be tax exempt.
Senator FULBRIGHT. Much more desirable than the Federal Government.
Mr. STEWART. Well, if the fraternities borrowed directly, that would be taxable, but if the university borrowed, that is tax exempt.
Senator FULBRIGHT. But see how much more desirable that taxexempt bond is from Indiana than the Federal bonds. The fact of the matter is, under the present, the tax is not desirable compared to a State bond, is that not right?
Mr. STEWART. That is true.