Senate Panel Approves Reauthorization, Reconciliation Legislation

The U.S. Senate Committee on Health, Education, Labor, and Pensions has approved two measures reauthorizing federal student-aid programs and shifting billions of dollars from the Federal Family Education Loan Program to enhance Pell Grants and fund other programs.

The panel reported out the Higher Education Access Act of 2007, which would cut more than $18 billion from the FFELP during the next five years, use $1 billion of the savings for deficit reduction, and allocate the rest to other financial-aid and college-access programs.

The measure would make the following FFELP cuts:

• Exceptional-performer status, which entitles certain lenders to a 99-percent rate of insurance on loan defaults, would be eliminated.
• The rate of special-allowance payments to lenders would be reduced by 0.5-percentage points for for-profit lenders and 0.35-percentage points for nonprofit lenders.
• The lender-paid origination fee would be doubled to 1 percent.
• The percentage of direct collections on defaulted loans that guarantors would be permitted to retain would be reduced to 16 percent from the current 23 percent.
• The account-maintenance fee paid to guarantors would be calculated on a per-loan rather than an outstanding-balance basis.

The measure also calls for an auction of the right to make parent PLUS loans in the FFELP beginning in 2009. In each state, the lenders submitting the two lowest rates of special allowance would win the exclusive right to make PLUS loans for two years.

The cuts in the FFELP would be directed to the following initiatives:

• A new Promise Grant program to supplement Pell Grants to students with the greatest financial need.
• Elimination of tuition sensitivity, which can prevent students attending lower-cost schools from receiving the maximum Pell-Grant award.
• An extension of the maximum period for economic-hardship deferment to six years from the current three, and the elimination of the three-year maximum period of deferment for active-duty members of the Armed Forces or National Guard. The measure also provides an additional 180 days of deferment for active-duty military personnel following their demobilization.
• Replacement of the current income-sensitive and income-contingent repayment options with an income-based repayment option, which would limit student-loan payments to 15 percent of a borrower’s discretionary income and forgive outstanding balances owed after 25 years.
• Loan forgiveness, but only in the William D. Ford Direct Loan Program, after 10 years of repayment for borrowers earning $65,000 or less who are employed during that period in certain public-service jobs.

The measure also would make several changes in financial-need analysis, including increases in the income-protection allowance, raising to $38,000 the income level to qualify for an automatic-zero Expected Family Contribution, an expansion of professional-judgment discretion for financial-aid administrators, and an expansion of the definition of an independent student. In addition, a controversial question on the Free Application for Federal Student Aid, which can lead to the denial of federal financial aid for students with drug convictions, would be removed from the FAFSA.

Reauthorization
The companion reauthorization legislation, the Higher Education Amendments of 2007, includes the following key provisions:

• Requires the establishment of a higher-education price index, a ranking of postsecondary institutions based on changes in tuition prices over a two-year period, and a watch list of schools whose tuition exceeds the higher-education price index.
• Includes provisions of the Student Loan Sunshine Act, which imposes new requirements on preferred-lender lists and new categories of prohibited inducements for lenders and guarantors.
• Repeals the authority for schools to act as lenders in the FFELP effective in 2012.
• Increases the maximum authorized Pell Grant to $6,300 by 2011 and changes the minimum Pell-Grant award from the current $400 to 10 percent of maximum award. The actual maximum Pell-Grant award is set by annual appropriations.
• Introduces a new matching-grant program to states to enhance student access and persistence in higher education.
• Simplifies the process of applying for financial aid by introducing an EZ FAFSA.

The legislation is expected to be considered on the Senate floor in July.