November 28, 2005

• HEA Reauthorization/HHS, Labor, Education FY 2006 Budget Reconciliation/Appropriations Update
• FY 2006 Appropriations

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HEA Reauthorization/HHS, Labor, Education FY 2006 Budget Reconciliation/Appropriations Update

"Politics makes strange bedfellows."
            Charles Dudley Warner (1829-1900)

"Politics is not an exact science."
            Otto Von Bismarck (1815-1878)

The House and Senate have recessed until December 5th and 12th, respectively. When the Congress reconvenes for about two weeks, a conference committee will attempt to adjust the differences between the four House and Senate spending and tax reconciliation bills and pass the FY 2006 appropriations bills for Health, Human Services, Education, and Labor, Defense, and the reauthorization of the patriot Act.

The First Session of this Congress is expected to adjourn for the year prior to Christmas, and pick up where it leaves off in January 2006.

The budget reconciliation and FY 2006 appropriations processes have been used by the leadership to seek spending reductions in domestic, non defense/homeland security/war on terrorism, programs. These targeted programs include those in the health and human services, education, and labor areas.

The choice to reduce spending in these areas is intended to offset dramatic increases in spending on the exempted areas mentioned, as well as, to pay for the 2001 and 2003 tax reductions, the damage caused by recent natural disasters, and, of course, $7 billion to fight the latest "threat", avian flu.

In the closing weeks of this Session, the mood in Congress is one of increasingly high inter and intra party disagreement and frustration over whether the Congress should continue to finance the increased spending through changes in law through the budget reconciliation process reducing FY 2006 spending for entitlement programs, through the budget rescissions process, reducing FY 2005 and FY 2006 spending through across-the-board appropriations reductions in popular domestic programs, and continued borrowing, or whether the Congress should reject this approach and pay for at least some of the mounting expenditures with a temporary tax increase as was done in the late 1960's to partially offset the cost of the Viet Nam War, or a permanent increase in revenues by allowing the 2001 and 2003 tax breaks to expire, or not take effect at all.

Further complicating the Congressional environment are a lack of time to complete all required work for the current Congressional Session, state and federal investigations of the House and Senate majority leaders and Administration staff, declining poll numbers for the Administration and Congress, a Supreme Court battle, 2006 Congressional elections and a dissatisfied electorate, a stagnant economy and high energy prices, a growing schism between moderate Republicans and the Administration on a variety of issues.

Upon its return next month, the Congressional leadership will choose to finish the FY 2006 appropriations bills and adjourn for the year, extending the HEA for a period of time into 2006. It can choose to recess again for Christmas and reconvene at the call of the Speaker to try to finish the appropriations bills and any other legislation not completed to date. This is the first session of the 109th Congress. So, whatever is left uncompleted this year is simply picked up next year at the same point in the process.

The major problem with allowing the HEA reauthorization or budget reconciliation to languish until next year is that the budget and political environment will probably be more severe than today and 2006 is an election year.

The House and Senate FY 2006 budget resolutions call for $2.6 trillion in spending (including $843 billion in discretionary spending). The HR calls for $70 billion in reconciled tax cuts and $49.5 billion in reconciliation savings over five years. The SR calls for $34 billion in savings and $59.6 billion in reconciled tax cuts over the same time period. The HR calls for $14.5 billion to come from the FFELP, while the SR calls for $18 billion to come from the FFELP. However, the SR reinvests $11 billion of its savings into student financial aid, including $8 billion in new spending for the Pell Grant program.

The Senate passed its version of the spending reconciliation bill on November 5th in largely a party line vote, 52-47 (five Democrats voted with the majority and two Republicans voted with the minority), and its tax cut reconciliation bill on November 17th by a 666-33 vote. The House passed its version of the appending bill on November 17th by a 217-215 vote, with 14 Republicans voting against the measure. The House will take up its tax reconciliation bill when it reconvenes next month.

The Administration has indicated that the President will veto both the House spending reconciliation bill and the Senate tax reconciliation bill in their current forms.

Among proposed changes to the HEA, HR609/HR 4241(Deficit Reduction Act of 2005) and S.1614/S.1932 (Deficit Reduction Omnibus Reconciliation Act of 2005) are the following.

• All Title III, Title IV, and Title V programs are reauthorized.
• S 1614 increases the maximum annual grant to $6,300, and appropriates $8 billion in additional funding to new Pell Grant programs.
• The HR establishes a new enhanced Pell Grant program for State Scholars.
• The HR establishes a new "dual enrollment" and job training program for community colleges at a cost of $125 million.
• The HR moves all regular Stafford loans to a variable interest rate capped at 8.25 per cent (9 per cent for PLUS loans). S 1614 sets all student loans at a 6.8 per cent fixed interest rate (8.5 per cent for PLUS loans). Both bills maintain a variable interest rate to calculate the lender yield that requires a rebate to the federal government when the lender rate is higher than the borrower rate.
• The HR recalls the federal portion of the Perkins Loan Program.
• Both bills increase student loan annual maximums to $3,500 and $4,500 for first year and second year borrowers.
• The HR reduces Stafford loan fees to one per cent for the FFELP and FDLP by 2010 and mandates its collection. S 1614 requires a 3 per cent borrower fee (2 per cent origination fee and a 1 per cent default fee) to be collected in the FFELP and a 1 per cent borrower origination fee in the FDLP beginning in 2007. S 1614 repeals the origination fee in both programs in 2011.
• The HR reduces loan reinsurance for lenders from 98 per cent to 96 per cent (exceptional performer — 98 per cent), increases the lender origination fee from .5 per cent to 1 per cent per loan, and increases the consolidation loan fee from 1.05 per cent to 1.30 per cent for holders whose loan portfolio is 90 per cent, or above, consolidated loans. S 1614 reduces the lender rate to 97 per cent, includes the loan origination fee increase, and repeals the exceptional performer program.
• Both bills reduce the collection retention rate on consolidation loans for FFELP guarantors from 18.5 per cent to 10 per cent and S 1614 from 23 per cent to 20 per cent on regular Stafford loans.
• Both bills repeal the "single holder rule".
• Both bills reduce the requirement for a defaulted loan to be rehabilitated to 9 consecutive monthly payments.
• S 1614 extends student loan forgiveness and the income contingent repayment option to public sector employees who have made 120 monthly payments on their loan debt.
• Both bills include recommendations submitted to the Congress by its Advisory Committee on Student Financial Aid concerning a simplified needs test and an automatic zero family contribution for low income students and families receiving federal benefits.
• The HR restructures the loan consolidation program by applying a variable interest rate (three month T-Bill + 2.3 per cent) vs. fixed rate (three month T-Bill + 3.3 per cent) with a 1 per cent origination fee option for borrowers who have graduated. S. 1614 maintains the weighted fixed rate.
• The HR repeals Section 438(b) (2) (B) concerning recycling and refinancing by certain FFELP secondary markets of pre-1993 "9.5 per cent" interest loans. S. 1614 makes permanent current law on this issue adopted by the 108th Congress through passage of the Taxpayer/Teacher Protection Act of 2004.
• S 1614 makes administrative funding for the FFELP and FDLP under Section 458 of the HEA subject to appropriations by the Congress.
• The HR establishes a government watch list for institutions that increase tuition and fees by more than twice the CPI for three consecutive years and require those that do to submit a detailed report to ED explaining the reasons for the increases and how costs to the student will be lowered.
• Both bills establish a College Access Initiative whereby FFELP guarantors will coordinate data collection activities within their states to provide information concerning postsecondary education to students and families.
• The HR expands the "90-10" rule to all institutions.
• The HR requires FFELP guarantors operating under a Voluntary Flexible Agreement to charge the proposed 1 per cent federal default fee (guaranty fee) mandated under Section 428(B)(1)(H).
• The HR requires a school lender of student loans to use the FFELP criteria for eligibility and excess funds to supplement existing need based grant programs. S. 1614 places a moratorium on the school as lender program.
• The HR directs the Education Department to conduct a study on fraud and abuse prevention in Title IV programs and report its findings to Congress by December 31, 2007.

Other proposals in both bills include limiting eligibility for Pell Grants to 18 semesters/27 quarters, restructuring the campus-based allocation formula, reinstating the student loan disbursement provisions for low default rate schools.

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FY 2006 Appropriations — Conference Committee Report Defeated

The House version of the Labor, Health and Human Services, and Education appropriation bill (HR 3010) was passed by the House in early July. The bill, while proposing to eliminate funding for 57 programs (estimated to save $2.8 billion), rejects the Administration's proposals to de-fund the Perkins Loan, LEAP, GEAR UP, TRIO Upward Bound and Talent Search programs. The bill proposes a $1 billion increase for FY 2006 Pell Grant funding to achieve a $4,100 maximum annual grant and earmarks $4.3 billion to permanently retire the program's accumulated shortfall. However, the bill continues the trend of funding most programs at 2001 levels.

The bill proposes to fund for FY 2006:

• SEOG — $778.7 million (no increase over FY 2005);
• Work-Study — $990.3 million (no increase over FY 2005);
• Perkins Loan — $66.1 for loan cancellations(no increase over 2005);
• LEAP — $65.6 million (no increase over FY 2005);
• Title III and Title V — $394 million (an increase of $3.1 million over FY 2005);
• TRIO — $836.5 million (no increase over FY 2005);
• GEAR UP — $306.5 million (no increase over FY 2005);
• Student aid administrative funding — $124.8 million discretionary appropriations ($5 million increase over FY 2005).

The bill also extends the repeal of Section 438(b) (2) (B) of the HEA and extends the repeal to the recycling of previous bond issues.

The Senate version of HR 3010 was passed by the Senate in late October. The bill funds a $4,050 maximum annual Pell Grant and pays for the $4.3 billion shortfall. Budget reconciliation prohibited the Appropriations Committee from keeping its original proposal to increase the appropriation to fund an annual grant of $4,550. The bill continues the trend of funding most programs at 2001 levels.

The bill also proposes to fund:

• SEOG — $804.8 million
• Work-Study — $990.3 million
• Perkins Loan — $66.1 million for loan cancellations
• LEAP — $65.6 million
• Title III and Title V — $510.9 million
• TRIO — $836.5 million
• GEAR UP — $306.5 million
• Student aid administrative funding — $120 million discretionary appropriations.

On November 17th, the House and Senate conference committee report on this bill was defeated by the House by a 224-209 vote, and, reportedly, would have been defeated by the Senate. A continuing resolution was adopted by the Congress to keep the programs covered by the bill funded through December 17th. The bill was defeated largely in response to the conference committee's stripping $1 billion in funding earmarks from the bill.

These bills and comprehensive information about each can be accessed at http://thomas.loc.gov, http://appropriations.house.gov, http://www.appropriations.senate.gov/, www.budget.house.gov, and www.budget.senate.gov.

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For more information, contact:

TG Congressional and Legislative Relations
(512) 219-4503
P.O. Box 83100
Round Rock, TX 78683-3100