House Panel Recommends Additional Savings From Student-Loan Programs

The U.S. House Committee on Education and the Workforce has approved a measure calling for nearly $15 billion in savings in federal student-loan programs during the next five years. The proposals are designed to meet budget-deficit-reduction targets and provide additional funds for hurricane relief. The savings recommended by the committee come largely from cuts to lenders and education-loan guarantors.

In addition to student-loan-cost savings proposed by the committee in the bill that it approved in July to reauthorize the Higher Education Act, the Higher Education Reconciliation Act of 2005 includes the following additional provisions:

• Borrowers who seek to consolidate their student loans would be charged a 1-percent “offset” fee, regardless of whether they are seeking fixed- or variable-rate consolidation loans. The committee’s reauthorization bill proposed a 0.5-percent offset fee only for borrowers seeking fixed-rate consolidation loans.
• Lenders would pay a 1-percent origination fee, rather than the current 0.5-percent charge, for loans disbursed beginning July 1, 2006.
• Loan holders for which consolidation loans constitute 90 percent or more of their portfolios would pay a higher annual consolidation-loan rebate fee of 1.3 percent for consolidation loans on which applications are received beginning July 1, 2006.
• Guarantors would be permitted to retain only 20 percent, rather than 23 percent, of the amount of their regular collections on defaulted loans beginning Oct. 1, 2006.
• Federal reinsurance of guarantors would remain at the current maximum of 95 percent. The reauthorization bill passed by the committee proposed reducing the maximum reinsurance rate to 93 percent, but that change would have generated no budget savings.
• The funds authorized under section 458 of the Higher Education Act to administer the William D. Ford Direct Loan Program and other student-aid programs would become subject to annual congressional appropriations effective Oct. 1, 2006. These funds currently are mandatory and not subject to the annual appropriations process. Funds to pay Account Maintenance Fees to guarantors would continue to be mandatory.

The panel’s recommendations are part of the fiscal-2006 budget-reconciliation process, which seeks to reduce spending on government entitlement programs.

For detailed information regarding reauthorization of the Higher Education Act, visit “2005 Reauthorization” on the USA Funds Web site.