February 24, 2006

• Congressional Update — FY 2007 Budget Priorities and Policy Choices
• Students' Costs May Be Manageable Even With Passage of S 1932

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Congressional Update — FY 2007 Budget Priorities and Policy Choices

"Over the long term…the greatest threat to our fiscal health comes from unsustainable growth in entitlement programs such as Social Security and Medicare. Toward the end of the next decade, deficits stemming largely from these programs will begin to rise indefinitely, and no plausible amount of spending cuts in discretionary accounts or tax increases could solve the problem," as stated in The Budget for Fiscal Year 2007 Overview of the President's 2007 Budget

The second Session of the 109th Congress will comprise only 125 days in session for the Senate and 66 days for the House. These are days when votes can occur. This is a shortened session because this is an election year for 435 House seats and 33 Senate seats.

Elections, a shortened session, the FY 2007 budget and appropriations process, and a fractious political environment that crosses traditional political party lines will be the primary obstacles this Congress will have to overcome to be productive in passing any substantive legislation other than the eleven appropriations bills.

And next year, the 110th Congress (with smaller majorities) will begin with another Congressional election cycle and the beginning of a presidential election season.

The unsettled political landscape in Washington is centered on several flashpoints — the war on terror, reauthorization of the PATRIOT Act, immigration, lobby and campaign finance reform, spending priorities (in particular, entitlements), and the 2006 November 8th mid term elections. And the differences do not break along strictly Democratic and Republican lines.

The debate about entitlement spending is a stark contrast between two camps — many in the majority controlling Congress and the administration blame "uncontrolled spending" on entitlement programs as the root cause of the increasing national deficits and debt, while the Democrats and a group of moderates called the Republican Main Street Partnership (eight Senators and 51 House members), who have sided with Democrats on some issues, view increased spending since 2003, tax cuts, and lack of sound planning by the Administration as among the primary causes of the record deficits and debt.

The national debt was $930 billion in 1981, increased to $5.8 trillion by 1992, decreased to $4.9 trillion by 2001, and now stands at $8.2 trillion, with the Administration requesting another increase to $8.6.

Since 2001, because of record tax cuts, 9/11, slow economy, the war on terror, and natural disasters, the choice of the last three Congresses has been to force the annual federal appropriations and budget process to focus on controlling the growth of entitlement programs, e.g., Social Security, Medicare, Medicaid, and several smaller programs, e.g., the FFELP and FDLP, and reducing annual spending through the appropriations process, i.e., freezing appropriations and reducing spending through across-the-board reductions in many non-defense programs funded through discretionary appropriations.

This will continue, at least for the short term, regardless of the outcome of the November elections.

The kick off for the FY 2007 budget/appropriations process began the first week of February with the Administration's submission of its FY 2007 budget proposal to the congress. And, while the student loan programs were left largely unscathed, the Congressional leadership, so far, seems intent on continuing last year's effort to freeze discretionary spending at 2001 levels or implement significant reductions for all programs except defense and homeland security through the appropriations process, along with further entitlement reform through the budget process, and a new round of tax reductions.

A separate set of emergency supplemental appropriations requests will total an additional $200 billion in new spending requests for the "war on terror".

The initial response from both the House and Senate Budget Committee chairs to the Administration's submission was that it is "good start". And both looked forward to developing a FY 2007 budget resolution that continued the work begun with the $39 billion estimated savings from entitlement programs included in the 2005 Deficit Reduction Act.

The priorities in the Administration's FY 2007 budget are to keep taxes low, increase spending and support for the military, and, control discretionary and mandatory (entitlement) spending (not related to defense or homeland security). However, chief among these is the continued push to bring entitlement spending under control by slowing the annual growth by changing eligibility requirements necessary to receive benefits under Medicare, Social Security, and Medicaid.

The $2.8 trillion budget is an increase of 1.3 percent over the current budget, with a 7 percent increases for the Defense Department ($411 billion to $439 billion) and Homeland Security ($54.9 billion to $58.3 billion). For non-defense, non-homeland security discretionary spending (which includes federal student financial aid and related programs), the Administration's FY 2007 budget requests a cut from FY 2006's $426 billion to $384 billion. 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 begun hearings beginning this week on the Administration's budget proposal to start the FY 2007 budget/appropriations process. To date, little interest in the Administration's budget submission has been shown by the Budget Committee Chairs. The Committees are scheduled to report a FY 2007 Budget Resolution (with, or without, reconciliation instructions to achieve further savings from entitlement programs) by April 15th.

In summary, the Congressional environment, and the direction this Congress may go, is uncertain, impacted by a volatile political election year and highly sensitive and emotional issues. While the Title IV student financial aid programs will continue, Congressional support in the form of appropriations will, at best, continue to be frozen at 2001 levels. The student loan programs may continue to be targets for "reform" and budget savings if another round of budget reconciliation is attempted this year.

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, Upward Bound, and all federal K-16 vocational education 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 5 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, respectively, and allowing graduate students to receive PLUS loans. (Cost — $1.5 billion over 5 years)
• A reduction in Stafford loan fees to one per cent for the FFELP and FDLP, with the 3% 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 5 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 5 years)
• A reduction in the collection retention rate on consolidation loans for FFELP guarantors from 18.5 per cent to 10 per cent loans.
• A 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 5 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 one percent federal default fee mandated under Section 428(B)(1)(H) and deposit it 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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Students' Costs May Be Manageable Even With Passage of S 1932

Congress passed S 1932 — The Deficit Reduction Act of 2005 — which included the Higher Education Reconciliation Act of 2005. Included in the legislation are two student loan interest rate changes which have been reported as dramatically increasing the cost of federal student loans to borrowers. The Congressional Budget Office (CBO) has estimated that these changes in borrower interest rates, in combination with maintaining the variable interest rate formula for lenders, will result in a $15 billion savings to the federal government over a five-year period and $36.3 billion savings through 2015.

To get a better picture of how these changes will affect individual student loan borrowers, TG — a nonprofit student loan guarantor that assists more than 550,000 parent and student borrowers each year — conducted a preliminary analysis of the impact on TG FFELP borrowers.

"We wanted to examine the actual impact of this one policy change because of its potential impact to students and families," said George Torres, TG assistant vice president for congressional and legislative relations. "However, we certainly are not meaning to increase or diminish the impact of the policy choice of reducing borrower benefits as a method to control the cost of entitlement programs."

Stafford Loan Interest Rate
The first "change" that TG examined was actually placed in the Higher Education Act in 2001. Congress chose to leave this scheduled change in place with this reconciliation bill. In effect, the Stafford loan interest rate will change from a variable interest rate (indexed from the three-month Treasury bill rate plus 1.7 percent while the borrower is in school or in grace, and 2.3 percent when the borrower enters repayment), to a fixed 6.8 percent interest rate for the life of the loan.

Over the past few years, the Treasury bill rates have been at record lows, resulting in extremely low interest rates on Stafford loans. For the period of July 1, 2005, through June 30, 2006, the rate on these loans is 4.7 percent while a borrower is in school or in grace and 5.3 percent when the borrower enters repayment.

However, Treasury Bill interest rates have been going up since July 1, 2005. According to the CBO estimates, if the current rules remained in effect, and the rate stayed variable, it would increase to 6.2 percent while the borrower is in school and 6.8 percent when the borrower enters repayment on July 1, 2006. Also, this rate could continue in future years to increase up to the statutory cap of 8.25 percent.

The main difference between the old and new rules for student borrowers is the amount of interest that is capitalized into their loan value while they are in school. Under the old rules, this rate would be 6.2 percent during 2007, while it will be 6.8 percent under the new rules. For a student who enters a bachelor's degree program in the fall of 2006 and borrows the aggregate limit of Stafford loan funds (all unsubsidized) over a five-year period (for a total of $23,000), this will result in $436 dollars of additional debt when the student enters repayment. This translates into a $5 month increase in loan payments (from $255 to $260 month) and a total cost of $602 over the life of a 10-year loan.

PLUS Loan Interest Rate
The second interest rate change contained in the bill applies to PLUS loans (loans taken out by parents on behalf of their children). Under the current rules, this rate would have been fixed at 7.9 percent beginning July 1, 2006. With the enactment of S 1932, this rate changes to 8.5 percent. This translates into an additional cost of $382 for every $10,000 borrowed by parents under the PLUS Loan Program.

"It's important to note that while there may be some additional cost, funds are still available," said Torres. "The possible increase in cost should not act as a barrier to students enrolling in higher education."

TG's public service Web site, http://www.aie.org/, provides a loan repayment calculator that can help borrowers determine how their payments may be affected by the interest rate changes on July 1. In addition TG's financial aid experts are available by phone at (800) 845-6267 to address borrowers' concerns or answer specific questions about planning and paying for college.

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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