House Panel Approves Measure Making Dramatic Cuts in FFELP

The U.S. House Committee on Education and Labor has approved legislation that would make an additional $19 billion in cuts to the Federal Family Education Loan Program, the largest federal student-aid program. The College Cost Reduction Act of 2007, approved by the committee June 13 on a vote of 30-16, would make the following additional cuts in the FFELP, which incurred approximately $15 billion in cuts in a previous budget-reconciliation bill adopted just 18 months ago:

• Reductions in lender special-allowance payments on Federal Stafford and Consolidation loans of 0.55 percentage points and on PLUS loans of 0.85 percentage points.
• Reduction in the rate of lender insurance in the event of loan default to 95 percent from the current 97 percent (99 percent for lenders designated exceptional performers).
• Elimination of the exceptional-performer designation, which provides lenders that meet certain performance standards higher rates of insurance on their loans.
• A doubling to a full 1 percent of the lender-paid origination fee. Fees would be eliminated for nonprofit lenders and the smallest education lenders.
• A decrease in the amount that guarantors may retain on direct collections of defaulted loans to 16 percent from the current 23 percent.
• A change in the calculation of the account-maintenance fee paid to guarantors to base the fee on the number of loans in a guarantor’s portfolio, rather than the outstanding balance of those loans.

The legislation would direct the projected savings to the following items:

• A $500 increase in the maximum Pell Grant during the next five years.
• A reduction in the interest on subsidized Federal Stafford loans to undergraduate students to 3.4 percent by the 2012-2013 academic year.
• A $2,000 increase in the annual Stafford-loan limit for third and subsequent years of undergraduate study. Aggregate loan limits also would be increased to $30,500 for dependent undergraduates and to $73,000 for graduate and professional students.
• An expansion of federal loan-forgiveness programs to early childhood educators, nurses, foreign-language interpreters, librarians, highly qualified teachers in bilingual education or low-income communities, child-welfare workers, speech language pathologists, public-safety workers and those in public-interest legal services, after five years of employment in those areas.
• An income-based repayment option that ensures borrower loan payments never exceed 15 percent of the borrower’s discretionary income and forgives outstanding balances after 20 years for borrowers with economic hardships.

The legislation also contains the following provisions designed to curb the growth in college costs and penalize state governments that cut funding for higher-education support:

• Schools whose “sticker prices” increase at twice the rate of the Consumer Price Index during any three-year period would be required to file an explanation of the increases with the U.S. Department of Education. Schools with the highest increases would be required to establish quality-efficiency task forces to explore cost-reduction options. Schools whose costs continued to increase at more than twice the rate of inflation for two subsequent years would be placed on “affordability-alert” status by the Education Department. On the other hand, schools that constrain their tuition increases to levels at or below a higher-education price index could receive preferential Pell-Grant funding.
• States that reduce support for higher education below that state’s average levels for the five previous years could lose federal Leveraging Educational Assistance Partnership funding.

The legislation also includes new grant programs to promote teacher training and enhance college access for underserved populations.

Rep. George Miller, D-Calif., who chairs the committee, hailed the bill as “the largest single investment in college financial aid since the 1944 GI Bill.”

Rep. Howard “Buck” McKeon, of California, the committee’s ranking Republican, criticized the measure for making “overreaching cuts” in the FFELP, abusing the budget-reconciliation process and establishing several new federal entitlement-spending programs. The committee voted down a substitute version of the bill, offered by McKeon, that would have reduced the cuts in lender special allowance but would have directed greater funding toward Pell Grants.

The panel approved two amendments offered by Rep. Thomas Petri, R-Wis., a leading proponent of the William D. Ford Direct Loan Program. One amendment would require a study of the collection of student-loan payments by the Internal Revenue Service. The second would require a pilot program to test the concept of auctioning student-loan-origination rights.

The measure now moves to the House floor. The U.S. Senate Committee on Health, Education, Labor, and Pensions is scheduled to act on its version of budget-reconciliation legislation June 20.