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Congress Passes Series of Bills Before Holidays

January 6, 2006

Significant cuts to student loan programs, a bleak budget for student aid and research for FY06, monetary relief to colleges damaged by Katrina and Rita, and an extension of the USA Patriot Act were among the issues voted on by Congress in the final days of 2005. The most significant legislation contains a $12.7 billion cut in student loan programs backed by the federal government. This is part of a deficit reduction package known as a reconciliation bill, which promises to reduce spending by $40 billion over the next five years.

The reconciliation bill, which squeaked by in the Senate (51-50), makes several modifications to other statutes, including the Higher Education Act. A number of provisions that have been under consideration as part of the long-delayed reauthorization of the HEA were incorporated into reconciliation. Although the Senate passed the final version of the bill before the holidays, it also made changes to the bill that require the House to take it up again before President Bush can sign it into law. This is currently scheduled for early February.

Congress also approved FY06 appropriations for health, education, and labor, which cuts most education programs or freezes them at FY05 levels, and provides a small increase for research funded by the National Institutes of Health. A provision in the defense appropriations bill cut 1 percent from all discretionary spending in the federal budget, which affects research funding and most student aid programs except Pell Grants. The maximum Pell Grant award remains at $4,050 as it has for the past three years.

Gulf Coast institutions damaged by last year’s hurricanes received a one-time grant of approximately $200 million, less than half of the original $500 million requested by the higher education community but a bit of good appropriations news nonetheless. The defense appropriations bill, which included the hurricane relief funding, dictates that most of the funds be split equally among institutions in Mississippi and Louisiana, even though the damage in Louisiana was far greater. The Department of Education will receive $10 million to distribute to institutions that took in displaced students last fall without charging them tuition.

Reconciliation Bill Cuts Billions, Makes HEA Changes

Facing pressure to lower the deficit, Congress passed a bill cutting $40 billion in programs over the next five years including $12.7 billion from the federal student loan programs. A portion of those savings -- $3.75 billion over five years -- would fund additional grant aid for high-achieving Pell Grant recipients.

The savings would be achieved through cutting subsidies to lenders, raising interest rates on loans, and requiring borrowers to pay origination fees to guarantee agencies. A controversial loophole guaranteeing lenders a 9.5 percent interest rate regardless of the rate charged to the student would be closed, although lenders with less than $100 million in assets would be allowed to continue receiving the 9.5 percent rate until 2010.

Although the House did not go along with the Senate’s plan to incorporate the reauthorization of the Higher Education Act as part of reconciliation, a number of changes to the HEA were included. (In a separate action, Congress passed a temporary extension of the HEA until March 31.) Some of the provisions in the reconciliation bill:

  • Raises the loan limits for first- and second-year undergraduates to $3,500 and $4,500 respectively, and graduate students to $12,000.

  • Repeals the 50-percent rule that made institutions ineligible for the federal student aid programs if more than half their students or half their programs are through distance education.

  • Clarifies that students would only lose student aid eligibility if convicted of drug offenses while enrolled in college, not for earlier convictions.

  • Restricts the ability of colleges and universities to join the school-as-lender program if they have not done so before April 2006. Some institutions are moving to approve at least one loan before the deadline to preserve their ability to participate.

  • Makes permanent loan forgiveness provisions for certain teachers and expands eligibility to teachers at private schools.

  • Allows three years of loan deferment for active duty military and makes returning military personnel independent students.

Few Bright Spots in Funding Bills

The across-the-board cuts in discretionary spending mandated by the defense appropriations bill made a lackluster year for federal support for higher education a little worse. However, some programs that the president’s budget had called for eliminating or cutting did survive, including Perkins Loan, TRIO, and Gear Up programs. Funding for the estimated Pell Grant shortfall is included, which has been a perennial headache. And, in a departure from the practice of recent years, earmarks—funds directed by Congress to particular institutions or programs—were eliminated.

The Health Professions Program, which helps disadvantaged and minority students enter medical professions, will lose almost 70 percent of its funding. Funding for new biocontainment laboratory facilities was not provided, despite the president’s request. Overall research funding through NIH will decrease slightly from last year once the across-the-board cuts are factored in.