An Ambitious Student Aid Bill

House legislation would benefit students, cost lenders billions, and punish colleges that raise their prices too much.
June 13, 2007

Democratic leaders of the House of Representatives education committee unveiled wide-ranging legislation Tuesday that over five years would take as much as $20 billion in federal funds away from lenders and redistribute most of it to students and borrowers, in the form of increased Pell Grants and lower student loan interest rates.

The bill also includes Republican-drafted proposals aimed at punishing colleges perceived to increase their tuitions excessively and, remarkably, would strip federal funds from states that reduce their spending on public colleges.

The measure, which will be considered today by the House Education and Labor Committee, emerges as part of Congress's "budget reconciliation" process, which allows members to tap into funds from federal entitlement programs and use them to expand spending on discretionary programs (those typically supported by annual federal appropriations), as long as they agree to put some of the money toward deficit reduction. In this case, the Democratic measure would reduce the deficit by $750 million -- but spend the vast majority of the funds on bolstering student aid and other higher education programs.

The panel's chairman, Rep. George Miller (D-Calif.), drafted the bill, a companion to eventual legislation from his committee and in the Senate to renew the Higher Education Act, with surprisingly significant involvement from his Republican counterpart, Rep. Howard P. (Buck) McKeon (R-Calif.). Whether that cooperation translates into bipartisan support for the bill is not clear; an aide to McKeon said that the lawmaker had significant concerns and that it was still up in the air how he and other Republicans would vote today.

Democrats would clearly like to have significant Republican backing, but in some ways, that support is academic; Democrats control the committee and will have the votes to pass the measure, the College Cost Reduction Act of 2007, which a Miller news release said would make the "single largest investment in college financial aid since the G.I. Bill." It would do so by:

  • Increasing the maximum Pell Grant by $100 a year for five years beginning in 2008-9, to $5,200 (assuming that Congress is poised to raise the Pell to $4,700 in the 2008 fiscal year), and letting students use the grants year-round.
  • Cutting the interest rate on federally subsidized student loans in half, to 3.4 percent, by 2012-13.
  • Instituting a system of "income-based repayment" for borrowers, in which their student loan payments would be capped at a manageable percentage of their income and their debt canceled after 20 years of repayment.
  • Raising the amount that working students can earn -- through the "income protection allowance" -- without reducing their financial aid awards.
  • Lifting the annual and aggregate limits on how much individual students can borrow from the federal loan programs, with the goal of reducing borrowers' dependence on private (and typically more expensive) loans.
  • Forgiving up to $5,000 in loans, and otherwise easing the loan repayment burden, for students who enter public service fields and fulfill other national needs.

In addition to those changes, the legislation would also create two new grant programs, one that would provide scholarships for students who teach in a "national need area" for several years after graduation, and another that would provide matching federal funds to charities that fund need-based aid for students or encourage needy students to attend college.

Taken together, all those new or expanded programs would be expensive, costing (depending on the estimate) anywhere from $18.75 billion to as much as $20 billion. And the House bill -- like President Bush's 2008 budget plan and a Senate budget reconciliation/Higher Education Act bill being developed by Sen. Edward M. Kennedy (D-Mass.) -- would pay for them mostly by shrinking or eliminating subsidies for and increasing fees on banks and other lenders in the guaranteed student loan program.

Among other cuts to loan providers, the Miller legislation would:

  • Cut lender profits on new federal loans by 0.55 percentage point.
  • Reduce the proportion of their collections that guarantee agencies can keep to 16 percent from 23 percent.
  • Double the fee that lenders pay the Treasury when consolidating loans to 1 percentage point from 0.5 percentage point.
  • Reduce the amount that the government reimburses lenders on defaulted loans, to 97 cents on the dollar from 95 cents.
  • End a program that rewards loan providers who are "exceptional performers" in servicing their student loans.

“Each year, the federal student aid programs waste billions of taxpayer dollars on excessive subsidies to lenders,” said Miller. “That money should be used as intended -- help parents and students pay for college, not to pad the profits of lenders. The savings from cutting excess subsidies can be used to increase student aid, such as boosting scholarships and reducing students’ debt by making loans more affordable.”

Bankers decried the House proposal, which (as is their custom) they warned would chase lenders out of the student loan programs. "The House package of budget cuts is an anti-student bill in pro-student clothing," said Joe Below, president of the Consumer Bankers Association. "It increases grants but jeopardizes the stability of the student loan program relied on by approximately eight of every ten students attending U.S. colleges and universities." Belew added: "Loan availability could become tenuous as a result of the combination of a dramatically lower return coupled with significantly increased risk."

Advocates for students pooh-poohed such concerns. "Although lenders are likely to warn that such reductions would drive them out of the market or lead to increased costs for borrowers, the student loan industry’s profit margins tell a very different story," Robert Shireman, executive director of the Project on Student Debt, said in a prepared statement, noting that the White House has proposed similar cuts. "President Bush’s budget also recognizes that there is room for greater cost efficiency, and the recent conflict-of-interest scandals show that there is more than enough money to go around."

The Other Way to Make College Affordable

While the Democratic plan focuses most of its help for students on bolstering student aid spending and making loans cheaper -- objectives college officials overwhelmingly support -- it also embraces a campaign that makes many academic leaders uncomfortable: efforts to restrict tuition increases.

Miller has largely inserted into his legislation the major elements of a bill that McKeon, his Republican counterpart, introduced in January aimed at holding colleges more accountable for what they spend and what they charge to students. The Democratic legislation would require significantly more reporting by colleges about their prices and their performance (including data on completion rates and faculty/student ratios), and it would put in place a series of steps institutions would have to go through if they increase tuition significantly.

Any college that increased its "sticker price" over any three-year period at a percentage that was more than double the basic consumer inflation rate would have to report to the Education Department explaining its increases. The 5 percent of institutions in this category that increased their tuitions by the greatest percentages would have to establish "quality efficiency task forces" to review their operations. And an institution required to report to the Education Department that then failed to lower its rate of tuition increase below the twice-times-inflation level for two years after making such a report would be placed on "affordability alert status."

The bill would offer carrots as well as sticks to colleges, though. Institutions that increased their net tuition by less than the higher education price index would be eligible for additional Pell Grant funds for their students, as would institutions that guarantee to students that they would pay the same or only slightly higher tuition prices during their college careers.

The inclusion of the cost control provisions drew praise from McKeon. A spokesman, Steve Forde, said that the Republican lawmaker "appreciates the fact that Chairman Miller negotiated this proposal in a good faith way with him and his staff." Forde said that McKeon was pleased that the Democratic legislation did not contain proposals (favored by some Democrats) that would give colleges incentives to leave the guaranteed loan program in favor of the government's competing direct loan program, and that would require lenders to compete at auction for the right to provide student loans. "The fact that this measure does not include language to turn over the student loan industry to Washington bureaucrats or ill-conceived auction proposals is a step in the right direction for students, parents, and taxpayers, and Mr. McKeon believes having a seat at the table during these negotiations has been to their benefit," Forde said.

As college leaders and lobbyists digested the 110-page legislation as it was released Tuesday, they said they appreciated the proposed increases in aid for students and largely held their fire on the college cost provisions, which they speculated might get struck from the bill -- possibly as soon as at today's formal drafting session -- as inappropriate to include in budget cutting legislation. The Senate's so-called Byrd rule, named for Sen. Robert Byrd of West Virginia, prohibits the Senate "from considering 'extraneous matter' as part of a reconciliation bill or resolution or conference report thereon."

One other provision that seems likely to fall by the wayside at some point is one aimed at ensuring that states maintain their "commitment to affordable college education," as the legislative language puts it. The measure would withhold funds from the federal matching program known as the Leveraging Educational Assistance Partnership Program to any state that, beginning in 2008, provided less money to its public colleges than it had provided on average in the preceding five years. The LEAP program provides federal funds to states to encourage them to invest themselves in need-based student financial aid.

When they have been attacked by lawmakers or others for raising their tuitions too much, public college leaders have frequently pointed the finger at their states, arguing that they have been forced to raise their tuitions -- the funding source they control -- when their legislatures or governors have fallen short on the financial support they provide.

While that may be so, federal legislation is no way to go about ensuring solid state support, said David Shreve, who oversees federal issues for the National Conference of State Legislatures. He called the provision "pretty stunning," and a "backdoor way to mandate that states spend a certain level on higher ed, regardless of what economic conditions exist in that state on a temporary basis. Given all the other unfunded mandates that the feds have passed down to the states, this is probably not out of character -- but it's still not welcome."


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