NAICU Washington Update

. . . And you thought reauthorization was over . . .

March 02, 2009

President Barack Obama's proposed budget for Fiscal Year 2010, entitled "A New Era of Responsibility Renewing America's Promise," is consistent with his campaign theme of change. Released in summary form on February 26, the ambitious spending plan has many moving parts relating to higher education (see the summary below) with the potential to basically change many of the ways in which federal student aid programs  operate. 

The Obama budget proposes major restructuring of the student aid programs. It would move the Pell Grant and Perkins Loan program to the entitlement side of the budget.  The budget also calls for all federal student loans to be made through the Direct Loan program.  Both of these changes could have far-reaching impact.

The same day the proposed budget was released, Department of Education officials (Secretary of Education Arne Duncan and his staff )  held a conference call with the education community.  The student aid restructuring proposals were the hot topics on the call, especially given that details on other appropriated K-12 and higher education programs (e.g., SEOG, Work Study, TRIO and LEAP) won't be available until sometime in April.

It's clear that the administration considers the budget proposals a "package" -- they are interconnected in how they work and are paid for.  This means that getting this complex and controversial a package through Congress this year will be like taking on another major reauthorization of the Higher Education Act. 

Members of Congress start the FY 2010 budget process this week with Budget Committee hearings, leading to a Congressional Budget Resolution that will set parameters for their work.  Should Congress embrace the Obama proposal for student aid, the restructuring of these programs would most likely happen as part of the budget reconciliation process -- with the budget and education committees writing the legislation, and filibuster-proof rules for Senate floor votes.

As the process unfolds, NAICU will be asking its members for their input and action as we advocate for our positions on the various proposals.  Central to our position will be to ensure that any changes help students, while maintaining private colleges' independence and their ability to carry out our individual missions.  We plan to explore these issues in depth the NAICU Board Spring Retreat in April, and will keep the association and its members engaged in the unfolding budget developments over the coming months.

A Quick Tour of the Obama Budget

While many details of the full budget are not yet available, the parameters have been set at $3.6 billion in spending on appropriations and entitlement programs, and $2.4 trillion in revenues, leaving a $1.2 trillion deficit projection for FY 2010.  Here is a summary of major elements of the proposed budget relating to higher education.

Pell Grant Entitlement.  The budget proposes to make the Pell Grant program a full entitlement, with a maximum grant of $5,550 for the 2010-11 academic year (as set in last week's stimulus legislation) serving as the baseline.  Each subsequent year would see an increase in the maximum grant of CPI plus one-percent.  The current $17 billion in appropriated funds would be moved to the mandatory side of the ledger. 

Direct Loans.  Making the Pell Grant an entitlement would be paid for partially by moving all federal student loans to the Direct Loan Program by July 1, 2010 (a savings of $24 billion over five years). Private, competitive loan providers would have a role as outside high-quality servicers, similar to their role under the current Direct Loan Program. 

Restructuring of Perkins Loan Program.  The Perkins Loan program will also be moved to the entitlement side of the ledger. Perkins collections would be managed at the federal, rather than campus, level. 

While details are not yet available, it is our understanding that the in-school interest subsidy would be eliminated, but that loans would stay at a five percent fixed interest rate.  The lengthy list of Perkins loan forgiveness provisions would be reduced to those provided in the Stafford Student Loan Program, but existing loan forgiveness obligations would be met by the federal government. 

The savings from these changes would be redirected to make Perkins loans available to more students (from the current 500,000 students to 2.7 million) at more colleges.  Funds would be distributed to reward colleges that provide more need-based aid to students, and would reward colleges with the lowest tuition by sector.  The potential increase is significant, with a targeted expansion of annual borrowing availability from $1 billion to $6 billion. One of the intentions of this proposal is to provide students a low-cost alternative to private label loans.

Access and Completion Incentive Fund.  The budget outline also includes a new fund that would provide $2.5 billion over five years in mandatory funds to support state efforts to help low-income students graduate from college.  While details are not yet available, it is our understanding that this would fund research-supported programs that promote college completion. Some existing state scholarship and guaranty agencies' programs could also be supported by these funds.

Permanent Extension of the American Opportunity Tax Credit.  Makes permanent the recently enacted $2,500 tax credit for postsecondary expenses, which is 40 percent refundable.

LEAP and SEOG.  While not mentioned in the budget summary, we understand that LEAP state grants and Supplemental Educational Opportunity Grants are maintained in the budget.  In fact, Department of Education officials on the conference call said "there are no cuts to student aid."

If this proves to be so when we see the details in April, this would mean that the administration has rejected the call for a "one-grant, one-loan, one-work" approach promoted by many under the guise of simplification.  This is critical, given that LEAP funds require governors to maintain their year-to-year commitment to their state's need-based aid programs - an essential incentive in these tough economic times. The maintenance of SEOG would allow financial aid officers to continue to direct additional grant funds to the neediest Pell Grant recipients.

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