U.S. House Approves Combined Deficit-Reduction/Reauthorization Measure

The U.S. House early in the morning of Dec. 19, 2005, approved legislation that both cuts $40 billion from government entitlement programs during the next five years and reauthorizes portions of the Higher Education Act. By a 212-206 vote, the House approved a compromise deficit-reduction measure that would produce net savings of nearly $12.7 billion in mandatory spending on federal student-loan programs through 2010.

Highlights of the student-loan and student-aid provisions of the bill include the following items:

• Distance education. The measure removes distance-learning courses from a requirement that at least 50 percent of an institution’s courses be delivered on campus.
• New student-grant programs. The measure creates two new grant programs for students eligible for Pell Grants. First- and second-year undergraduates who have completed a rigorous high-school curriculum would be eligible for grants of up to $750 and $1,300 respectively under a new Academic Competitiveness Grant program. Third- and fourth-year undergraduates pursuing studies in physical, life or computer sciences, mathematics, technology, engineering or a foreign language deemed critical to national security could qualify for grants of up to $4,000 under the National Science and Mathematics Access to Retain Talent Grant, or National SMART Grant, program. The new programs are projected to cost the federal government more than $3.7 billion during the next five years.
• Stafford-loan limits. Annual loan limits rise to $3,500 for first-year students and to $4,500 for second-year students. Annual unsubsidized-loan limits for graduate and professional students would rise to $12,000.
• Interest rates. The scheduled July 1, 2006, change from variable- to fixed-rate Stafford and PLUS loans is preserved, but the fixed rate on PLUS loans is increased to 8.5 percent from the 7.9-percent rate in current law.
• PLUS-loan eligibility. Graduate and professional students would be eligible to take out PLUS loans.
• Special allowance. The measure requires lenders to rebate to the federal government special allowance when the borrower interest rate exceeds the special-allowance rate. The measure also would eliminate the “recycling” of loans that qualify for special-allowance rates of 9.5 percent, although smaller nonprofit secondary markets would have five additional years to comply.
• Deferment. A new deferment of up to three years is established for Federal Family Education Loan Program-, direct- and Perkins-loan borrowers while they serve on active duty or perform qualifying National Guard duty during a war or other military operation or national emergency.
• Loan fees. Origination fees on Stafford loans issued in the FFELP would be phased out in steps by July 1, 2010. Collection of a 1-percent federal default fee would be required, however. Origination fees on Direct Stafford loans are reduced to 1 percent during the same period.
• Consolidation loans. The measure eliminates eligibility of in-school borrowers for consolidation loans.
• Disbursement. The measure restores provisions waiving multiple- and delayed-disbursement requirements for low-default-rate schools.
• School as lender. The legislation places a moratorium on new schools acting as FFELP lenders, effective April 1, 2006, and imposes additional requirements on schools-as-lenders.
• Loan forgiveness. Provisions that permit certain teachers to qualify for up to $17,500 in loan forgiveness are extended, and teachers in private schools become eligible for the benefit.
• Default insurance. The rate of insurance to lenders for loan defaults is reduced to 97 percent from 98 percent.
• Consolidation of defaulted loans. To discourage guarantors from relying too heavily on loan consolidation to resolve loan defaults, the measure requires guarantors for which consolidation represents 45 percent or more of their default collections to remit to the federal government a portion of collection costs.
• Exceptional performers. Default insurance for lenders designated as “exceptional performers” is reduced to 99 percent from the current rate of 100 percent.
• Rehabilitation loans. Defaulted borrowers would be permitted to rehabilitate their loans by making nine on-time payments during a 10-month period, rather than the 12 consecutive on-time monthly payments now required.
• Need analysis. The legislation revises the calculation of the Cost of Attendance and family contribution. It would increase the income-protection allowance for students and reduce the percent of savings assessed. In addition, the measure provides for a shorter application form for families receiving means-tested assistance and raises to $20,000 the income level to qualify for an automatic-zero Expected Family Contribution.

The U.S. Senate is scheduled to act on the bill before Congress adjourns for the year.