February 7, 2006

• Congressional Update — FY 2007 Budget

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Congressional Update — FY 2007 Budget

The Administration has submitted its FY 2007 budget proposal to the Congress, and, while the student loan programs are left unscathed, it looks to be a repeat of last year's; with spending freezes or significant spending reductions for all programs except defense and homeland security, $120 billion in new spending requests for the "war of terror" and a new round of requested tax reductions.

The $2.7 trillion budget is an increase of $1.3 trillion over the current budget, with a 7 percent increase for the Defense Department and 9.8 percent for Homeland Security. The proposal assumes a $423 billion deficit for FY 2006, a reduction of $65 billion over five years in spending for Medicare, Medicaid, Children's Health Insurance, Food Stamps, and a handful of smaller Health and Human services programs, and termination of 141 programs saving $14.5 billion.

The House and Senate Budget Committees have scheduled hearings beginning this week on the Administration's budget proposal to start the FY 2007 budget/appropriations process.

For programs designed to promote and provide access to postsecondary education, the Administration's FY 2007 budget proposal:

• States that during 2006, the Administration will develop a "comprehensive national strategy for postsecondary education that addresses the Nation's economic and workforce needs". The Commission on the Future of Higher Education will serve as the Administration's "blueprint" for identifying and recommending ways to improve postsecondary education — including access.
• Continues all of the changes made to the federal student loan programs in the recently passed Higher Education Reconciliation Act of 2005.
• Continues the Academic Competitiveness Grant program established as a part of the Higher Education Reconciliation Act of 2005. The program is now a part of the Administration's proposed American Competitiveness Initiative.
• States that, according to the Office of Management and Budget's Program Assessment Rating Tool (PART), the effectiveness of all Title IV programs (except the FFELP, FDLP, and Pell Grants), Title III and Title V programs are either "Ineffective" or "Not Demonstrated".

Therefore, the budget submission:

• Continues to effectively freeze funding for all Title IV, Title III, and Title V at current levels.
• Terminates the Perkins GEAR UP, TALENT SEARCH, LEAP, and Upward Bound programs.

Among the changes to the HEA included in the 2005 Higher Education Reconciliation Act portion of the Deficit Reduction Act of 2005), which are proposed by the Administration to continue are:

• Two new supplemental Pell Grant programs (Academic Competitiveness Grant and National Science and Mathematics Access to Retain Talent (SMART) Grant programs) for certain Pell recipients with 3.0 GPAs. The programs are repealed in 2011. (Cost — $3.7 billion over five years).
• A 6.8 percent fixed interest rate (8.5 percent for PLUS loans in the FFELP and 8.25 percent in the FDLP) for all Stafford student loans. Lenders' return is still variable with any excess interest above the amount guaranteed by the government to be rebated to the Treasury. (Savings — $15 billion over five years).
• A student loan annual maximum increase to $3,500 and $4,500 for first year and second year borrowers. (Cost — $1.5 billion over five years).
• A reduction in Stafford loan fees to one per cent for the FFELP and FDLP, with the 3 percent origination fee phased down to zero by 2010, and mandates its collection from borrower loan proceeds or from non federal funds. (Cost — $2.5 billion over five years).
• A reduction in loan reinsurance for lenders from 98 per cent to 96 per cent (exceptional performer-99 per cent). (Savings — $.5 billion over five years)
• A reduction in the collection retention rate on consolidation loans for FFELP guarantors from 18.5 per cent to 10 per cent loans.
• Reduction in the requirement for a defaulted loan to be rehabilitated to nine consecutive monthly payments.
• Repeal of Section 438(b)(2)(B) concerning recycling and refinancing by certain FFELP secondary markets of pre-1993 "9.5 percent" interest loans. (Savings — $1.8 billion over five years).
• Make administrative funding (except the account maintenance fee) for the FFELP and FDLP under Section 458 of the HEA discretionary. (Savings — $2.2 billion over five years).
• Increase percentage of wages subject to wage garnishment for borrowers in default of federal student loans from 10 percent to 15 percent of income.
• A requirement that FFELP guarantors operating under a Voluntary Flexible Agreement to collect the proposed one percent federal default fee (guaranty fee) mandated under Section 428(B)(1)(H) and deposit it in the Federal Fund.
• A requirement that a school lender of student loans to use the FFELP criteria for eligibility and excess funds to supplement existing need based grant programs.
• A new College Access Initiative which directs each guaranty agency to coordinate with state agencies and ED to collect information necessary to develop internet web links on postsecondary education information.

Other provisions in the bill include limiting eligibility for Pell Grants to 18 semesters/27 quarters, a simplified needs test and automatic zero improvements recommended by the Federal Advisory Committee on Student Financial Assistance, reinstating the student loan disbursement provisions for low default rate schools, and repeal of the "50 percent" rule for distance education courses.

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For more information, contact:

TG Congressional and Legislative Relations
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Round Rock, TX 78683-3100