Federal Update 9

July 20, 2009

CONGRESSIONAL DEVELOPMENTS

House Committee Considers Bill to Reform Federal Student Aid Programs

The House Education and Labor Committee is scheduled to mark up HR 3221, the Student Aid and Fiscal Responsibility Act, later this week. The legislation would make significant changes to federal student aid programs.

The Obama Administration proposed to eliminate the federal guaranteed student loan program (FFELP) and shift those schools currently enrolled in FFELP into the federal direct loan program. The savings that would result from eliminating the federal program, estimated to be approximately $87 billion over 10 years, would then be used to make the Pell Grant program a permanent entitlement.

Currently, Pell is funded out of the annual Labor-HHS-Education appropriations bill, which is considered by Congress annually. This means Pell often competes with biomedical research support at NIH and Department of Labor Worker Retraining programs for its funding. By using the $87 billion to establish Pell as an entitlement, the program would be guaranteed a certain level of support each year (indexed at inflation plus one percent), which would expand the number of students who could receive these grants as well as provide an increase to the maximum Pell award.

The House Education Committee draft bill would end the FFELP as President Obama recommended. But, instead of using all of the $87 billion in savings for Pell, the legislation would only allocate $40 billion for Pell. This level of support would raise the maximum Pell award from $5,500 currently to $6,900 at the end of 10 years. The remaining $47 billion would be spent in other ways, including support for a K-12 modernization, renovation and repair initiative. The higher education community is disappointed that monies derived out of savings from higher education programs at the Department of Education would be given to programs that have no relation to higher education.

After closely reviewing the 200-page draft bill, additional problems have emerged, which we hope are addressed at the committee mark-up or during debate on the House floor. If these remain in the bill, it will be difficult for Indiana University to ask the congressional delegation to support the bill. The remaining problems include:

• Elimination of the In-School Subsidy for Graduate and Professional Students

A provision in the bill would eliminate the interest exemption for graduate and professional student borrowers while they are enrolled in school. Currently, students who have subsidized federal loans do not pay interest on the loan while they remain in school. The committee proposal would drop this public commitment to one class of student borrowers -- graduate and professional students. At the IU School of Medicine, we estimate that interest on the loan a student takes out for the four years of school would increase that student's debt load by about $8,000 for the four years the student is in school.

This additional amount to be paid as part of the loan is a disincentive for graduate and professional study. Estimates show that this provision would cost doctoral students an additional $14,000, while at the professional level it would cost upwards of $20,000.

• Changes to the In-School Subsidy for the Perkins Loan Program

While the bill makes several sweeping changes to the Perkins program, one issue of particular concern is a requirement that participating schools would be required to pay interest on behalf of their borrowers. The cost to schools with large loan volumes could be in the millions of dollars annually. At IU, this provision could cost up to $675,000 among all campuses.

• Treatment of Assets in Determining Need-Based Student Aid

While the bill includes several provisions that would simplify the Free Application for Federal Student Aid (FAFSA), the bill would also make a student ineligible for need-based grants, loans or work assistance if the combined net assets of the student and the student's parents exceed $150,000 (excluding home equity).

The Senate will also have to develop its version of the legislation so there is some opportunity to correct these and other items that have been flagged as problematic. We must correct or remove those items in the bill that could jeopardize a student's ability to obtain a college education.