October 9, 2007

• Congressional Update

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Congressional Update

In 1998 the congress passed the last comprehensive reauthorization of the Higher Education Act (HEA). Since 2003 (the last scheduled reauthorization of the Act), the HEA has been extended for periods ranging from a few months to one year through continuing resolutions and budget reconciliation bills.

Since 2003, budget considerations, rather than policy debates, have, more than ever, defined federal education and student financial aid policy.

Now, after ten years, the HEA reauthorization is nearing completion with the 110th Congress doing what was the responsibility of the 108th Congress and what the 109th Congress simply could not do — both because of other priorities. However, the 109th Congress did reauthorize the Federal Family Education Loan Program (FFELP) in 2006 through a budget reconciliation in order to achieve $13 billion in savings over a five year period to partially offset the cost of extending the 2001 and 2003 tax reductions.

While admittedly flawed, a mix of pending legislation that includes record mandatory increases in the Pell Grant program, after six years of stagnation, funded through another round of subsidy, insurance, and fee reductions to the FFELP providers (the flaw) is before the 110th Congress, which immediately after taking office in January 2007 passed legislation that increased the maximum annual Pell Grant from $4,050 to $4,310.

The landscape for the HEA reauthorization is now defined by several bills.

HR 2669 — The College Cost Reduction Act — signed into law last month, amends Part B of the HEA — the FFELP — in ways that achieve $21 billion in savings, with $750 million earmarked for deficit reduction and the remainder earmarked for increasing funding for Title IV, Title III, and Title V HEA programs, as well as funding for new programs. The bill includes most of HR 5 — The College Student Relief Act, HR 472 — The College Affordability and Transparency Act, HR 1608/S 939 — The College Aid made EZ Act and The Financial Aid Form Simplification and Access Act, S 359 — The Student Debt Relief Act, and S 938 — The Accessing College through Comprehensive early Outreach and State Partnerships (ACCESS).

Major provisions

• Reduce the lender Special Allowance for for-profit FFELP lenders to 1.19 percent, 1.79, and 2.09 and 1.34, 1.94, and 2.24 percent for non-profit FFELP lenders for Stafford and Consolidation loans (The reduction for PLUS and Grad PLUS loans is an additional .30 percent).
• Halve student loan interest rates for undergraduate subsidized Stafford loans over five years, beginning in 2008, from 6.8 percent to 3.4 percent, with the rate returning to 6.8 percent in 2012 (HR 5).
• Reduce the FFELP lender insurance to 95 percent beginning in 2012 (HR 5).
• Increase the FFELP lender fee from .5 percent to 1 percent.
• Repeal Exceptional Performer Program (HR 5).
• Reduce the collection retention for FFELP guarantors from 23 percent to 16 percent (S 511) and reduce the payment of the Account Maintenance Fee from .10 to .06 percent.
• Extend from 3 to 6 years the limit on student loans under the FFELP, FDLP, and Perkins loan programs.
• Provide income-based repayment plans for hardship cases in place of the income-sensitive (FFELP) and income-contingent (FDLP) plans which cap repayments at an amount equal to 15 percent of any amount by which a borrower's gross income exceeds 150 percent of the poverty line and forgives the amount not repaid after 25 years of repayment (S 359).
• Increase the annual Pell Grant to $5,440 over five years (2012), beginning with an increase to $4840 in 2008 (S 359).
• Restore funding to certain Upward Bound programs.
• Provide new tuition assistance for students who become teachers in public schools located in high-poverty areas.
• Provide FDLP student loan forgiveness for certain public service workers and professionals, and allows reconsolidation for eligible FFELP borrowers.
• Establish the College Access Challenge Grant Program (S.938).
• Eliminate the Pell Grant "tuition sensitivity" provision.
• Establish a nationwide pilot auction program for the FFELP Parent-PLUS program with two lenders per state.
• Provide increased mandatory funding for Title III and Title V institutions.

There are two HEA reauthorization bills before the congress — S 1642 — The Higher Education Amendments of 2007 — was passed by the Senate on July 24, and HR 3746 — The College Access and Opportunity Act, filed in the House by Republican members the first week of October.

S. 1642 includes provisions from HR 5/S 282 — College Student Relief Act, S 359 — The Student Debt Relief Act (Pell Grant increase to $5,400 in 2008), HR 990/S 707 — Pell Grant Equity Act of 2007, expands eligibility for the ACG and SMART programs to less than full-time students, establishes the Promise Grant Program, prohibits the creation of a national student academic records database, eases the "90 percent-10 percent rule" impacting primarily proprietary schools, increases the lender fee on consolidation loans from .5 percent to one percent, repeals the FFELP Exceptional Performer program, repeals the "school as lender" program, increases in the authorized levels for all Title IV student aid programs, GEAR UP LEAP, S 938 — The Accessing College through Comprehensive Early Outreach and State Partnership (ACCESS Act, HR 1608/S 939 — College Aid Made EZ Act and the Financial Aid Form Simplification and Access Act, HR 472 — College Affordability and Transparency Act of 2007, HR 1994 — Financial Aid Accountability and Transparency Act of 2007, S 486/HR 890 — Student Loan Sunshine Act, S 1262 — Student Information means a positive Loan Experience (SIMPLE) Act, S 1401 — Student Financial Aid Data Privacy Protection Act, S 1561 — Discharge in Bankruptcy for Certain Educational Loans. The bill also establishes a national student loan (federal and private) information clearinghouse, funding for MSIs to advanced technology education, increases the authorized annual Pell Grant to $6,300 in 2008, expands student loan forgiveness programs, and establishes the Higher Education Cost Watch List.

House Republicans have introduced their version of the HEA reauthorization bill, HR 3746 — The College Access and Opportunity Act. This bill is similar in several respects to S 1642, with notable differences, including repeal of the PLUS loan auction enacted in HR 2669, alignment of the FFELP and FDLP PLUS loan interest rate at 7.9 percent, expansion of the new student loan forgiveness program enacted in HR 2669 to borrowers in the FFELP, increases in the maximum annual Pell Grant to $6,000 for 2008-2012, increases in the maximum annual authorized appropriation for the SEOG program from $675 million to $779 million.

There are two primary bills concerning relationships between lenders and schools. They are HR 890 — The Student Loan Sunshine Act and the, as yet unnumbered, Private Student Loan Transparency and Improvement Act.

HR 890 — The Student Loan Sunshine Act — (which has largely been incorporated into S 1642 and HR 3746) amends Title I of the HEA to create a new part E (Lender and Institution Requirements Relating to Educational Loans), which requires each lender entering into a preferred lender arrangement with an institution (schools that provide postsecondary studies and receive federal funds) to: (1) certify annually to the Secretary of Education that all of the preferred lender arrangements in which it participates are in compliance with the requirements of this Act; (2) inform borrowers of their loan options under title IV (Student Assistance), including information on more favorable loans under such title, before extending private educational loans for attendance at such institution; and (3) be barred by such school from marketing such loans in a manner implying the institution's endorsement.

The bill proposes to:

• direct the Secretary to report to the congress on the adequacy of educational loan information provided to borrowers, to include a model disclosure form for lender use in providing annual loan information to the Secretary and institutions with which they have a preferred lender arrangement, and requires such lenders to disclose, in addition to specified loan information, any philanthropic contributions made to such institutions, and to provide the Secretary, prospective borrowers, and the public with the disclosure form information as well as a detailed explanation of why such loans are beneficial to borrowers;
• require institutions to disclose on their websites and in their informational materials: (1) that they cannot limit students to recommended lenders and must process the loan documents of any eligible lender; (2) the information provided on the model disclosure form with regard to recommended lenders; (3) the maximum federal grant and loan aid available; and (4) the cost of attendance;
• require covered institutions that provide prospective borrowers with private educational loan information to: (1) include information on their title IV assistance eligibility; and (2) compare and distinguish private loans from title IV loans;
• require institutions to develop, publicize, and enforce codes of conduct for their officers, employees, and agents prohibiting actual or apparent conflicts of interest with their financial aid duties, including, at a minimum, compliance with the following requirements of this section, and prohibits an institution's officers, employees and agents that have financial aid duties from accepting certain financial benefits or fees from, or participating on the advisory councils of, student loan providers or their affiliates;
• bar lenders, guarantors, or servicers of educational loans from offering gifts to officers, employees, or agents of institutions. Directs the Inspector General of the Department of Education to investigate and report annually to Congress on gift ban violations, and bans institutions from: (1) entering into educational loan arrangements that involve lender payments for recommended lender status; (2) requesting or accepting lender assistance with call center or financial aid office staffing; or (3) requesting, accepting, or considering any lender's offer of funds for private educational student loans in exchange for concessions or promises;
• condition the receipt of federal funds and assistance by schools and lenders on their compliance with part E, and establishes penalties for noncompliant schools and lenders, including: (1) a ban from participating in title VI programs; and (2) a $25,000 civil penalty (which may also be imposed on lenders not participating in such programs);
• require an institution with a preferred lender list to: (1) fully disclose on such list the reason for each lender's inclusion and students' right to choose other lenders; (2) include at least three unaffiliated lenders; and (3) establish and disclose a process to ensure that lenders are listed on the basis of the benefits they provide borrowers;
• amend the Truth in Lending Act to require private educational loan providers to inform consumers, in applications and solicitations for such loans, that they may qualify for federal educational assistance, that federal student loans may have more beneficial terms than private loans, and that they may obtain additional information concerning such assistance from their institutions and the Department of Education's website;
• require such lenders to: (1) obtain written confirmation that a consumer understands such information and any other information the Board of Governors of the Federal Reserve System may require them to disclose; (2) make its model disclosure form information available; and (3) notify the relevant school of the proposed loan if the loan equals or exceeds $1,000;
• direct the Secretary to display a link to the Department's federal student financial aid website in a prominent place on the homepage of the Department's website. Authorizes the Secretary to use administrative funds available for the Department's operations and expenses to promote the availability of the financial aid website;
• requires the Secretary to collect and provide parents and students with easy access via the federal student financial aid website to detailed information concerning student financial aid options provided by other federal departments and agencies.
• require such other departments and agencies to respond promptly to the Secretary's requests for student financial aid information.

The Private Student Loan Transparency and Improvement Act proposes to extend similar provisions as proposed in HR 890 to all private student loans.

The bill proposes to:

• prohibit lenders from engaging in revenue-sharing and loan co-branding arrangements that use the name or logo of an institution;
• prohibit lenders from offering inducements, or any item of value, in exchange for preferential consideration of their private loan products or services;
• prohibit lenders from using any data in their underwriting that may have disparate impact on the loan products, terms, or conditions available to student borrowers based on race, age, and other personal factors, or the institution they attend;
• require all private student loan solicitations to include a disclosure box that includes the loan's APR, other information regarding the terms and conditions of the loan, whether the rate is introductory or promotional, and if so, its duration;
• require lenders to provide a clear and concise disclosure of the rate, terms and conditions of a private loan that has been approved for a student borrower prior to their signing the promissory note; and provides borrowers with a "cooling off" period;
• require lenders to provide prominent disclosure to applicants of their eligibility for lower-cost federal loans through the federal financial aid program and requires the borrower, and co-signor, to certify that they have received, and read, the disclosure;
• apply Truth in Lending Act provisions to all private student loans;
• authorize the Federal Reserve to implement rules requiring private lenders to collect and report data regarding their student loan applications, originations and denials, including the terms and conditions of the loans they make, aggregated by the race, gender, and age of the borrower as well as by type of institution;
• authorize federal banking regulators to give financial institutions credit under the Community Reinvestment Act (CRA) for making "low-cost" private loans (i.e. loans with costs and fees similar to federally guaranteed loans) to low-income student borrowers.

With respect to FY 2008 appropriations for student financial aid, the House has passed its version of the FY 2008 appropriations act for Labor, Health and Human Services, and Education with increases for most Title IV, III, and V programs. The Senate is about to pass its version this month.

House

• Pell Grants — annual maximum increased from $4,310 to $4,700
• SEOG — level funded at $770,933,000
• College Work-Study — increased from $980,354,000 to $980,492,000
• LEAP — level funded at $64,987,000
• TRIO — increased from $828,178,000 to $868,178,000
• GEAR UP — increased from $303,423,000 to $323,423,000
• HSIs — increased from $94,914,000 to $99,500,000
• HBCUs — increased from $238,095,000 to $249,500,000

Senate

• Pell Grants — same as current law
• SEOG — same as current law
• College Work-Study — same as current law
• LEAP — same as current law
• TRIO — $858,178,000
• GEAR UP — $313,423,000
• HSIs — same as current law
• HBCUs — same as current law

Both the House and Senate appropriations bills exceed the Administration's proposed budget submission for Labor, HHS and Education and therefore, have generated a veto threat from the White House. The Secretary has issued a warning of a veto on S 1642 as well.

House/Senate conference committees will be required to adjust the differences between these bills before being sent to the president for his veto. Two-thirds (291 in the House and 67 in the Senate) are needed to override a presidential veto. The target adjournment date for this 1st session of the 110th Congress is November 16th, but most observers see the congress staying in Session into December to complete their work, including merging these disparate bills and passing an HEA reauthorization bill.

Copies of bills and background information can be accessed at thomas.loc.gov.

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TG Congressional and Legislative Relations
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