December 13, 2005

• HEA Reauthorization/HHS, Labor, Education FY 2006 Budget Reconciliation/Appropriations Update
• FY 2006 Appropriations — Conference Committee Report Defeated
• Texas House Set to Begin Interim Studies

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

The House and Senate have reconvened for about two weeks. During this time, 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, and Defense, reauthorize the Patriot Act, border security legislation, and a pension reform bill.

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.

During this first session, 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 has been 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 has been a lack of time to complete the 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.

During the remainder of 2005 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, or to recess again for Christmas and reconvene at the call of the leadership to try to finish the appropriations bills and any other legislation not completed to date.

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, 2006 is an election year, and the House may not convene until February, or until the former majority leader's trial on money laundering is completed.

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 $56 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 5, 2005 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 17, 2005 by a 66-33 vote. The House passed its version of the spending bill on November 17, 2005 by a 217-215 vote, with 14 Republicans voting against the measure, and its tax cut bill by 234-197 on December 8, 2005.

The House passed version of the spending bill makes significantly larger spending reductions to the Medicaid, Food Stamp, higher education, child support enforcement, and the Temporary Assistance for Needy Families programs to meet its reconciliation targets than does the Senate passed version. These, along with oil drilling in the Arctic National Wildlife Reserve, will be the major issues the conference committee will have to work out in a short time.

The tax reconciliation bills also include major differences, chief among these is that the House version extends the tax reductions on capital gains and dividends and the Senate bill does not. It is not clear whether the leadership will allow either bill to pass without the other.

The House leadership has indicated that it is unwilling to take all of the Senate's comprehensive HEA reauthorization provisions included in its version of S. 1932, preferring its selected HEA provisions, which only target budget savings through changes to the FFELP. The House leadership's preference is to reauthorize only those portions of the HEA (FFELP) that generate budgetary savings through the reconciliation process and, then, address the entire HEA reauthorization as a stand alone bill next year.

However, the higher education differences are not expected to be difficult to resolve. It is those major differences in the large entitlement programs mentioned above that will make the spending bill difficult to pass.

Among proposed changes to the HEA included in the House and Senate HEA reauthorization bills (HR609 and S.1614), and budget reconciliation bills (House and senate passed versions of S.1932 — Deficit Reduction Act of 2005) are:

• 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 percent for PLUS loans). S.1614 sets all student loans at a 6.8 percent fixed interest rate (8.5 percent 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 percent borrower fee (2 percent origination fee and a 1 percent default fee) to be collected in the FFELP and a 1 percent 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 percent to 1 percent per loan, and increases the consolidation loan fee from 1.05 percent to 1.30 percent for holders whose loan portfolio is 90 percent, or above, consolidated loans. S 1614 reduces the lender rate to 97 percent, 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 percent to 20 percent on regular Stafford loans.
• Both bills repeal the "single holder rule".
• Both bills reduce the requirement for a defaulted loan to be rehabilitated to nine 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 percent 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 percent" 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 percent 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 17, 2005, 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 17, 2005. 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 thomas.loc.gov, appropriations.house.gov, www.appropriations.senate.gov/, www.budget.house.gov, www.budget.senate.gov.

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Texas House Set to Begin Interim Studies

Among the charges issued to the 36 committees by the Speaker of the Texas House of Representatives for studies to be conducted between the last Regular Session of the Texas Legislature and the 80th Regular Session, which convenes on January 9, 2007 are six charges issued to the Committee on Higher Education. Among those six are the following:

1. Evaluate state supported financial aid programs, and whether they are structured and administered in a manner that will most effectively allow the state to meet the goals set forth in Closing the Gaps.
2. Evaluate accessibility to higher education, and identify whether certain areas of the state are underserved with respect to bachelors and associate degrees.

The Committee will convene in an organizational meeting early in 2006 to plan its studies.

The entire list of interim charges can be accessed at www.house.state.tx.us.

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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