Latest HEA Extension Includes Substantive Changes

President Bush has signed into law another extension of the Higher Education Act to give Congress more time to reauthorize remaining provisions of the law that supports major federal student-aid programs. In addition to extending the existing authority for federal financial-aid programs through June 30, 2007, the legislation makes several substantive changes, including the following items:

Eligible Lender-Trustees. The measure limits the ability of schools to establish relationships with eligible lender-trustees. Only ELT arrangements established with schools prior to the date of enactment of the legislation are permitted. Bipartisan concern in Congress that ELT relationships were being formed to circumvent the moratorium on new schools-as-lenders that was enacted as part of the Higher Education Reconciliation Act of 2005 led to this provision’s inclusion in the legislation. The legislation also places the following additional requirements on schools and lenders participating in an ELT relationship:

• School-only requirements. A school that is making loans under an ELT agreement on or after Jan. 1, 2007, must comply with the following school-as-lender provisions:
  • The school must employ at least one person whose full-time responsibilities are limited to the administration of programs of financial aid for students attending that school.
  • The school may not be a home-study school.
  • The school may not have a cohort-default rate greater than 10 percent.
  • The school must use the proceeds from special-allowance payments, interest payments from borrowers, interest subsidies received from the U.S. Department of Education, and any proceeds from the sale or other disposition of the loans for need-based-grant programs.
• Lender and school requirements. Both the lender-trustee and the school working as partners in an ELT on or after Jan. 1, 2007, must comply with the following school-as-lender provisions:
  • The school and lender-trustee both must make loans only to graduate students enrolled at or attending that school.
  • The school and lender-trustee must both make only Stafford loans, subsidized or unsubsidized. Neither the school nor lender may make any other Federal Family Education Loan Program loan, such as a PLUS loan to a parent or graduate student or a consolidation loan under the ELT agreement.
  • The school and lender-trustee must offer loans that carry an origination fee or an interest rate, or both, that are less than the statutory maximum permitted for those fees or rates.
  • The school and lender-trustee both must provide for an annual compliance audit and submit the audit to the Education Department.
  • The school and lender both are permitted to use some of the earnings derived from the loan portfolio to pay reasonable and direct administrative expenses for the school-as-lender program itself.
  • The school and lender must both ensure that the loan proceeds that are directed toward need-based-grant aid are used to supplement not supplant existing sources of grant-aid funding at the school.

Hispanic-Serving Institutions. The legislation removes a requirement that, to qualify as an HSI, a postsecondary institution must demonstrate that at least 50 percent of its Hispanic enrollment is made up of low-income students. The measure also removes a required two-year waiting period for HSIs to qualify for federal Developing Institutions grants.

Guarantor Account-Maintenance Fees. The legislation restores the HEA requirement that guarantors are paid by the federal government for outstanding loan guarantees at a rate of 0.1 percent of the original principal amount of the outstanding loan guarantees.

Student-Loan Cancellation for Survivors of 9/11 Victims. The legislation provides for the cancellation of federal student-loan debt of spouses or parents of eligible public servants who were killed or permanently and totally disabled as a result of the terrorist attacks on Sept. 11, 2001. The eligible public servants include police, firefighters, other safety or rescue personnel or members of the armed forces. Within 90 days of enactment of the legislation, the secretary of education is required to publish regulations outlining procedures for applying for this loan-cancellation provision.

The latest extension of the HEA was necessary because a previous extension expired Sept. 30. Although the U.S. House has passed legislation to reauthorize the remaining programs in the HEA, the Senate has yet to act on its version of reauthorization legislation.