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Bill to End FFEL, Reengineer Perkins Loans Approved by House Committee

July 23, 2009

The higher education agenda proposed by the Obama administration in its FY10 budget proposal moved one step closer to becoming law July 21 when the House Education and Labor Committee approved the Student Aid and Fiscal Responsibility Act of 2009 (HR 3221). The legislation would use savings from ending the bank-based Federal Family Education Loan (FFEL) program to provide higher Pell grants, grants to states to promote access and completion, additional support for community colleges and would reengineer the Perkins Loan program.. The bill would not, however, make Pell Grant funding an entitlement as originally proposed, and a significant proportion of the FFEL savings would go to priorities unrelated to higher education. Elementary and secondary public schools stand to gain $10 billion for renovation of facilities, and another $10 billion would be dedicated to federal deficit reduction.

The House is moving quickly on its bill, which was first introduced by committee chair George Miller (D-CA) on July 15. The committee met for four hours on July 21 to consider amendments, approving 16. HR 3221 is scheduled to go to the full House for consideration during the week of July 27. The Senate is not expected to take up its version of the legislation in earnest until September.

Major Provisions of HR 3221

Pell Grants. The maximum Pell Grant would be set at $5,350 for 2009-10, $5,550 the following year, and then would be indexed to the CPI plus 1 percent for subsequent years. The current hybrid funding model would continue, with a mix of mandatory and discretionary funding. The scheduled increases would be added to the mandatory portion of the funding and Congressional appropriators would still annually determine the discretionary amount and resulting maximum grant.

State Innovation Completion Grants. The bill authorizes $600 million annually for five years for grants to states to support innovation that improves "student success, completion, and post-completion employment," particularly for underrepresented groups, and the development of related data systems, metrics, and reporting systems. States would compete for grants and would need to come up with 1/3 matching funds.

Student Loans. Beginning July 1, 2010, all new guaranteed Stafford student loans would be made through the Federal Direct Loan program, ending the bank-based FFEL program. As it does now, ED will contract with multiple private lenders and servicers to collect loans and provide other services. Selection criteria for servicers would include price, capacity, capability, and default aversion services. The bill sets aside some of the servicing work for nonprofit state agencies, and provides for retention incentives to encourage hiring of personnel who serviced FFEL loans.

Under current law, interest rates for subsidized Stafford loans are scheduled to drop to 3.4 percent in 2011 and rise again to 6.8 percent in 2012. HR 3221 would retain the 6.8 percent fixed interest rate for unsubsidized loans, but would make subsidized rates variable beginning July 1, 2012, set at the 91-day T-bill rate plus 2.5 percent. A provision to end subsidized loans for graduate and professional students was dropped in the committee markup.

FAFSA Simplification. Changes to the need analysis formula would eliminate a number of questions from the Free Application for Federal Student Aid. Information would no longer be collected on assets, although the bill would impose a $150,000 cap on assets to be eligible for need-based aid.

Perkins Loan Reform. The Perkins Loan program would be completely revamped and renamed the Federal Direct Perkins Loan program. Loans would continue to be awarded at the institutional level, but would be disbursed and collected as part of the Direct Loan program. Direct Perkins loans would retain the existing loan limits and the 5 percent interest rate, but could only be awarded to students after their eligibility for subsidized and unsubsidized Stafford loans was exhausted.

Overall funding levels would increase to allow for $6 billion in new loans per year, up from $1 billion currently. The allocation formulas in HR 3221 are quite complicated, with half of the funds distributed to institutions based on the self-help need of their students, a quarter as a "low-tuition incentive," and a quarter based on the graduation rate of Pell recipients at the institution. No institution currently participating in Perkins would receive less than the average of the Perkins loans it awarded over the last five years. Institutions that participate in the new program would be required to deposit unspecified matching funds in an escrow account to provide student loans.

Balances in existing Perkins Loan revolving funds would be liquidated and distributed to ED and the institution based on the original capital contribution formula. Institutions could either continue to collect outstanding loans and return the ¾ federal share to ED, minus an administrative fee of 0.5 percent of outstanding principle and interest, or assign the loans to ED and receive payments of the ¼ institutional share from ED. There is a provision addressing outstanding short-term no-interest loans made by institutions to their funds.

Community College Modernization and Construction. HR 3221 would make $2.5 billion available in FY11 for grants to states to support new construction, renovations, and repair of community college facilities. The funds could be used to reduce financing cost for loans, provide matching funds for capital campaigns to support construction projects, or to capitalize revolving funds. Funds would be allocated to states based on enrollments. At least 50 percent of the assistance received by a community college must be used to carry out certified green building projects (such as LEED). Four-year colleges that award a significant number of certificates and associate degrees may also be eligible for this program, but institutions which receive facilities funding under the Higher Education Act or the American Recovery and Reinvestment Act of 2009 are not.

American Graduation Initiative. Under this program, $630 million would be authorized annually from FY10 to FY13 to fund four-year grants of at least $750,000 to community colleges and certain other entities to support innovative programs to train students for skilled occupations in high-demand fields. Then, for the next four years, FY14 to FY19, the same amount would be available to states on a competitive basis for grants to support systematic reform of community colleges by carrying out programs, services, and policies whose effectiveness was demonstrated in the earlier program.

More information about the bill is available from the House Education and Labor Committee. An updated version of the bill, reflecting the amendments approved by the committee is now available.

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