NAICU Washington Update

House Student Aid Bill Full of Surprises

July 23, 2009

President Obama's proposal to fund additional student aid by restructuring the federal student aid programs is now taking shape in the form of H.R. 3221, approved by the House Education and Labor Committee on July 21. The higher education community has been working with the committee staff on the administration's proposal. However, as introduced, the Student Aid and Fiscal Responsibility Act of 2009 (the bill's formal name) contains a number of unanticipated provisions that have dramatically changed the conversation in Washington in recent days. In addition, the bill as approved by the committee includes more than a dozen amendments - many relating to early childhood provisions. It's possible that the bill will go to the floor before Congress adjourns for its August recess.

First, the changes we saw coming: As expected, the bill requires all colleges to convert to direct lending by July 1, 2010, and calls for $40 billion of the projected $87 billion in savings to be invested in the Pell Grant program. This would put Pell on the path toward a $6,900 maximum grant by 2019. The bill also creates an expanded Perkins Loan program that is tightly linked to the Direct Loan Program and returns money to the Treasury. Furthermore, the bill simplifies the data required for the FAFSA student aid application, which has been seen as a barrier to college attendance by low-income students because of its complexity.

Now to what we didn't see coming: The biggest surprise was inclusion of the president's recently announced $10 billion community college initiative. Other surprises were the removal of the in-school interest subsidy on Stafford loans for graduate students (restored by the House committee), and the addition of $8 billion for the president's early childhood learning plan and $4 billion for K-12 construction (which had been stripped from the stimulus package in February).

We applaud the bill's significant new investment in the Pell Grant program. Still, we're concerned that allocations to new initiatives have reduced the possible level of support for the Pell Grant program by about $30 billion. We're also concerned that the bill contains elements that will ultimately lead to greater federal and state control of higher education - both public and private.

Here are more detailed descriptions of the major higher education provisions in the bill:

Eliminates FFELP

The Congressional Budget Office estimates a savings of $87 billion over 10 years by converting all federal student loans to the Direct Student Loan program. A limited number of private lenders will service the loans but can not originate them, as they had hoped. The guaranty agencies retain a role in outreach, financial literacy, and default prevention. State nonprofits also remain in the mix.

Adds to Pell

Of the $87 billion in savings, $40 billion is set aside for Pell Grants. These mandatory funds will be spent annually over a 10-year period to add a cost of living increase plus an additional 1 percent to the appropriated Pell grant maximum of $4860. This is projected to increase the Pell Grant maximum - currently $5,350 - to $6,900 by 2019.

Restructures Perkins

The bill restructures the Perkins Loan Program, making it essentially a second Direct Loan program that is campus-based, with the goal of providing an additional $5 billion in Perkins loans. Part of the funding comes from the elimination of the in-school interest subsidy, which is still a topic of debate.

In addition to adding hundreds of schools to the program, the bill would "hold harmless" those institutions participating in the current program and wishing to switch to the new program - that is, they will receive lending authority based on their average lending over the previous five years. Revolving funds will be discontinued. As monies are received through loan repayment, those funds will be apportioned to the institution and the Secretary of Education based on past contributions. Loans also may also be assigned to the Secretary.

The institutional allocation formula - or Perkins loan lending authority - is complex. Half of the funding is based on institutional need and funding for holding past participants harmless. The other half of the formula incorporates incentives, at one-quarter each, for low tuition and improved Pell recipient graduation rates.

A number of difficult issues remain to be resolved in the proposed restructuring of the Perkins Loan Program. While the bill allows institutions to continue packaging loans and servicing old loans, it's not yet clear just how the required institutional match would be structured. A group of association representatives, including NAICU, has been working with Hill staff to address these problems so that the loans will be provided equitably and smoothly.

Converts Stafford loan interest rates from fixed to variable

The bill provides $3.25 billion to change the fixed interest rates on subsidized loans to a variable rate. In recent years the interest rate on these loans, currently at 5.6 percent, has decreased and will ultimately drop to 3.4 percent. However, the rate is set to revert to 6.8 percent in 2012. This provision ensures that borrowers get the lowest current interest rate possible, not to exceed 6.8 percent. It leaves the interest rates for unsubsidized and PLUS loans at their current rates.

Simplifies the FAFSA

The bill would eliminate assets from the need calculation for federal student aid, relying on data used in filing federal tax returns, since a recent Department of Education study indicated that income level was sufficient to determine eligibility.

Curiously, though, the bill also includes a family asset cap of $150,000. It's not clear from the legislation how this number would be determined, but students with family assets of more than $150,000 would be ineligible for any need-based federal aid. The value of a family's house, farm, business, or employee pension benefit plan would not be included in calculating whether a family's assets exceed the cap.  NAICU has expressed concerns about this cap to the committee staff.

Provides for HBCUs and HSIs

The bill includes $2.5 billion in mandatory funding increases until 2019 for student support services and persistence efforts at minority-serving institutions.

Establishes New Community College Programs

Provisions in the bill would implement the new $7 billion community college initiative announced by President Obama on July 14. The initiative provides support for community college, state, and national activities focused on persistence, completion, and workforce preparation. Community college and state grant recipients must establish quantifiable benchmarks in these areas.

Funds will also be available for statewide longitudinal data systems. National activities will include development of free on-line courses, and the establishment of a community college research center. For the most part, private colleges are excluded from participation in these programs.

The bill also includes $2.5 billion for community colleges to leverage $10 billion for renovation, repair and construction of a wide variety of facilities.

Weakens 90/10 Provisions

An amendment offered by Rep. Rob Andrews (D-N.J.) would further ease the requirement that proprietary schools have no more than 90 percent of their income from federal funds. The amendment passed with bipartisan support when it was considered by the committee.

Creates Access, Completion, and Persistence Grant Programs

Included is $3 billion for the College Access Challenge Grant program. These funds would be allocated to the three parts of the program as follows:

  • 25 percent for formula/matching grants to states and philanthropic organizations for access and persistence activities under the current College Access Challenge Grant Program.
  • 50 percent for new competitive matching grants for states to develop innovative plans for college completion, including state plans that embrace all higher education sectors and longitudinal data systems.
  • 23 percent for federal discretionary grants - open to a wide range of organizations - for innovative access and persistence activities. Individual grants would be no less than $1 million, and could be more if matched by philanthropies.
  • 2 percent for evaluation.

Beyond Higher Education

Beyond higher education, the bill includes construction funding for K-12. There is $4 billion for green school construction that was stripped from the stimulus package in February, and $70 million in additional funds for public K-12 schools in Alabama, Mississippi, and Louisiana that were damaged by Hurricanes Katrina and Rita.

Also beyond higher education, the bill includes $8 billion for the administration's Early Learning Challenge Grant proposal. The initiative would reform state standards for early learning programs serving children from birth through age 5, provide state grants to implement new learning systems, improve training of providers, and broaden access to programs.

In summary, this bill is truly a mixed bag. On the one hand, it provides a significant new investment in the Pell Grant program, and could bring low-cost Perkins Loans to millions of new students, reducing the need for private label loans. Through one of the amendments, it would correct California's zero-tuition problem under the VA's Yellow Ribbon program. And the bill simplifies the FAFSA - no small thing.

On the other hand, the bill gives an enormous and worrisome boost to state oversight of higher education - both public and private.  The effect of this expanded authority will be felt most keenly by public institutions, given that private institutions are explicitly excluded from some of the more onerous provisions.  Nevertheless, this is a trend that bears careful watching.

The bill also shifts the relationship with the federal government from student-based toward institution-based. The bill establishes construction funding for a single sector in higher education, sets out a framework for a national set of courses in higher education, and has the potential to make the first year of college more like high school than higher education.

Collectively, the changes in the bill are much more dramatic than those enacted through the six-year Higher Education Act reauthorization process completed last fall.

NAICU is working with the education leadership in Congress with the hope of crafting compromises to direct more of the savings to student aid, improve the design of the Perkins Loan Program, clarify the need formula - and either remove or minimize the potential for excessive, inappropriate government involvement in academic decisions.

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