SAFRA Mandates Switch to Direct Lending

Congress finally passed a version of the student aid reforms proposed by President Obama in his first budget request, as part of the budget reconciliation bill approved last week. While the House passed its version of the Student Aid and Fiscal Responsibility Act (SAFRA) in September, the Senate didn't take up the measure. Instead key student aid provisions were combined with health care reform "fixes" in a filibuster-proof reconciliation bill. The higher education part of the bill, now officially dubbed the "SAFRA Act," was scaled back considerably in order to meet budget and procedural requirements, but the central element remains--elimination of the bank-based Federal Family Education Loan (FFEL) program. Beginning July 1, 2010, new federally guaranteed loans will be made through the Direct Loan program.

The Obama administration planned to use savings generated by elimination of the FFEL program to pay for: a steady increase in Pell Grant funding; expansion of the Perkins Loan program; grants to states to encourage completion; and funds for community colleges and minority-serving institutions. In the end, however, changing financial conditions shrunk the expected savings by some $20 billion, inflated the needs of the Pell Grant program, and dictated a less ambitious outcome.

What changed in six months? There were two key factors. First, ironically, as more and more institutions moved voluntarily from FFEL to the Direct Loan program, the savings attributable to the passage of the legislation went down. Second, as is typical in a recession, the costs of the Pell Grant program ballooned as more students qualified for Pell grants and average grant awards increased. This left the Pell program with a $6.1 billion shortfall for 2009-10. In addition, a temporary boost to the Pell grant maximum award provided by the stimulus bill will expire next year. Pell funding formulas are complex, but the short story is that without the infusion of funds provided in the reconciliation bill, the Pell grant maximum award could have dropped dramatically, to as little as $2,150 by some estimates.

With the intense media focus on health care reform, student aid provisions have received little public attention. The following is a summary of SAFRA.

Pell Grants. In addition to covering the Pell shortfall, the bill provides additional mandatory funding to increase the maximum Pell Grant by an amount equal to the change in the Consumer Price Index each year through 2017-18. The original proposal would have bumped the maximum by CPI + an additional 1 percent each year.

Guaranteed Loans.  No new FFEL loans can be made after June 30, 2010. Institutions will need to be prepared to operate under the Direct Loan program by the July 1 beginning of the new award year. (If an institution treats summer sessions as a "trailer," disbursements could still be made after July 1 from existing FFEL loans.) Additional changes include:

• For one year, until June 30, 2011, borrowers who have loans under either the Direct Loan program, the FFEL program, or FFEL loans that have been sold to the Department of Education, may consolidate them under the Direct Loan program, if they have not entered repayment on at least one loan.
• Foreign institutions, which had been restricted to the FFEL program, will be able to originate Direct Loans through a financial institution designated by the Secretary of Education.
• ED must award contracts for servicing Direct Loans to eligible nonprofit servicers, with accounts of at least 100,000 borrowers allocated to each.
• $50 million is appropriated in FY10 to be used to provide technical assistance to institutions.
• The parameters of the Income Based Repayment option will be adjusted for new borrowers after July 1, 2014, to cap student loan payments at 10 percent of adjusted income (currently 15 percent) and to forgive remaining balances after 20 years instead of 25.

College Access Challenge Grants.  This program was authorized by the College Cost Reduction and Access Act of 2007 (CCRAA) but has never been funded. It seeks to encourage partnerships between federal, state, and local governments and charitable organizations using matching grants to prepare more low-income students to succeed in postsecondary education. The reconciliation bill provides $150 million for each year FY2010 - 14, with each state receiving a minimum of 1 percent of the total appropriated each year.

Community College and Career Training Grant Program. This program, administered through the Department of Labor, supports efforts to develop, offer, or improve educational and career training options for displaced workers and individuals eligible for unemployment compensation. The reconciliation bill provides $500 million in mandatory funds each year for FY2010 - 14. Each state is guaranteed at least 0.5 percent of the total funds for each year. This $2.5 billion over five years for community colleges is considerably less than the amounts these institutions would have received under the House bill, which included $2.5 billion for FY2011 alone for facilities modernization and construction and another $630 million a year to support the American Graduation Initiative.

HBCUs and MSIs. Mandatory funding of $255 million, originally authorized under CCRAA for FY2008 and FY2009, is provided for each year through FY2019 for grants for historically black colleges and universities, Hispanic serving institutions, tribal colleges, and several other programs for strengthening minority-serving institutions under Title III of the Higher Education Act.

Perkins Loans.  The Obama administration proposal included a complete revamp of the Perkins Loan program but no changes to the Perkins Loan program were included in the final bill.

Resources

• The Department of Education is offering two webinars for business officers on transitioning to the Direct Loan program in March and April.