June 21, 2007

Students’ Gain, Lenders’ Pain

Looking around the crowded Senate hearing room Wednesday, it was relatively easy, at first glance, to sort out the winners and losers as the Senate Committee on Health, Education, Labor and Pensions approved a package of legislation to renew the Higher Education Act.

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The college students (organized by national student groups) in the brightly colored sweatshirts, bearing the names Maryland, UConn, North Carolina A&T and other institutions, celebrated the legislation that would provide $17.3 billion in new financial assistance for needy students; the dark-suited lobbyists for student loan companies, from whom the measures would squeeze $18.3 billion out of profits to pay for the new aid and to reduce the federal deficit, watched the proceedings with frowns on their faces.

The Democratic (and some Republican) lawmakers and staff members who drafted and supported the proudly bipartisan bill shook hands with gusto after the lopsided votes, pleased with their work and talking hopefully, even confidently, about getting the measures onto the Senate floor and enacted as soon as next month. The few budget hawks who voted against the budget reconciliation bill because they said it would inappropriately increase federal entitlement spending by billions of dollars grumbled that more of the funds should have gone toward reducing the deficit.

And as some college lobbyists and accrediting officials who have opposed the U.S. Education Department’s push in recent months to change federal regulations governing accreditation and transfer of academic credit applauded language in the legislation that would give institutions significant latitude, Education Secretary Margaret Spellings threw up the white flag by hand-delivering a letter just before the hearing started saying that she would not propose new accreditation rules “at this time,” given Congress’s intention to act.

But despite those and other outcomes, Wednesday’s session to approve the higher education legislation also suggested that none of the celebrants should get too comfortable with their good fortune, as those who appeared to be on the losing side right now made it clear that they had no intention of giving up their causes and would pursue them at later points in the process.

Some senators also vowed to raise other issues and objections down the road, such as a desire to toughen provisions aimed at discouraging colleges from raising their tuition prices. And there is likely to be a long and potentially hazardous road ahead to eventual enactment of legislation to renew the Higher Education Act. One need only remember that Congress began working on this legislation more than three years ago, and hit brick walls several times.

Wednesday, though, belonged to the supporters of the two pieces of legislation that, taken together, would extend authority for the federal government’s higher education programs for five years. One, approved unanimously by a 20-0 vote, contains scores of changes in federal policies and programs on higher education; the other, approved by a vote of 17-3, with dissenting votes from three Republicans, is a “budget reconciliation” measure aimed at using savings derived from subsidies for lenders in the federal student loan programs to pay for increases in student aid programs that lawmakers might not otherwise be able to afford. In the tradition of the Senate education panel, Democrats and Republicans worked hard to craft a compromise measure, requiring lots of last minute give and take to the last minute.

The two bills, which together run more than 600 pages, would make an enormous number of changes to higher education programs and policies. Among the highlights, the legislation would:

• Provide $17.3 billion over five years for a new program of “Promise Grants,” which would go to Pell Grant eligible students with the greatest financial need. The creation of the Promise Grants, which would essentially be just an extension of the Pell program, would result in the equivalent of increasing the maximum Pell Grant to at least $5,100 next year and to $5,400 by 2011, assuming that Congress does not otherwise increase the Pell Grant through the normal appropriations process. (A comparable budget reconciliation bill in the House would increase the maximum Pell Grant by $100 a year for five years beginning in 2008-9; it assumes that Congress will increase discretionary spending on the Pell program to $4,700 this year.)
• Institute a system of “income-based repayment” for borrowers, in which their student loan payments would be capped at a manageable percentage of their income (15 percent of the amount by which a borrower’s adjusted gross income exceeds 150 percent of the poverty line) and their debt canceled after 25 years of repayment.
• Raise the amount that working students can earn — through the “income protection allowance” — without reducing their financial aid awards. Those amounts would rise to $6,000 by 2012-13 for dependent students and $9,330 for financially independent students.
• Forgive the remaining student loan balance after 10 years for borrowers who enter and spend a certain amount of time working in public service fields and fulfill other national needs.
• Increase to $30,000 from the current $20,000 the family income level under which a student is automatically eligible for the maximum Pell Grant.
• Pay for the cost of those changes by cutting the amount that the government reimburses lenders on defaulted loans to only 97 cents on the dollar (from the current 98), instead of the 95 cents in the House bill; reducing lender profits on new federal loans by 0.5 points for for-profit lenders and 0.35 points for nonprofit lending agencies; dropping to 16 percent from 23 percent the proportion that guarantee agencies can keep of the funds they collect from borrowers; doubling the fee that lenders pay the Treasury when consolidating loans, to 1 percent from 0.5 percent; and ending a program that rewards loan providers who are “exceptional performers” in servicing their student loans.
• Significantly increase the amount of information that colleges would be required to report about their costs and prices, and create a “Higher Education Price Increase Watch List” to rank (and publicly embarrass) institutions with tuition and fees that “outpace the applicable price index” for its type of institution. The bill’s approach on college costs would be less punitive to colleges than the approach taken in a parallel House bill.
• Institute a broad series of restrictions on the relationships between lenders and guarantee agencies and colleges and universities, consistent with many of the changes included in the Student Loan Sunshine Act and the code of conduct that New York’s attorney general, Andrew M. Cuomo, has promulgated. Among other changes, the Senate bill would phase out the “school as lender” program by 2011, but unlike other legislative proposals circulating in Washington, it would continue to allow banks to make philanthropic contributions to colleges that are unrelated to their financial aid programs.
• Compel accrediting agencies to require the colleges they oversee to report whether they deny the transfer of a student’s academic credits based solely on the accreditation status of the institution from which the student is transferring, and prohibit the Education Department from changing federal regulations on colleges’ transfer of credit policies.
• Direct colleges to use “empirical evidence” and “external indicators,” “as appropriate, to show how successfully they educate students, in areas such as student retention, course and program completion and graduation, state licensure and job placement (for work-related programs), and enrollment of students in graduate programs. The proposed changes would put into federal statute much of what the Education Department has sought to do in recent months through the regulatory process.
• Leave at their current levels annual and aggregate limits on how much individual students can borrow from the federal loan programs. (Unlike the parallel House bill, the Senate legislation would also not decrease the interest rate that borrowers pay on federally subsidized student loans.
• Open the Academic Competitiveness Grant Program (which heretofore has been restricted to full-time students in degree-granting programs) to students attending college at least half time and to those in certificate programs, as well as to lift a restriction that limited the grants (and the parallel SMART Grants) to American-born citizens.
• Institute a broad array of changes aimed at simplifying the Free Application for Federal Student Aid and the process of applying for federal financial assistance.
• Eliminate from the federal financial aid application a controversial question asking whether applicants have been convicted of drug possession and sales while receiving federal student aid. That question has been used to identify and strip financial aid from thousands of students.
• Eases the requirement that for-profit colleges derive at least 10 percent of their revenue from sources other than federal financial aid funds, by expanding the sources of funds that the institutions may count in the 10 percent figure (additions include funds from 529 savings plans and institutional aid, among others).
• Prohibit the Education Department from establishing a national database of student academic records, though it would permit states and consortiums of states to do so.
• Greatly expand the information that colleges must report to the government and/or to students, to include information on their policies on illegal file sharing and downloading of music and movies, the racial and ethnic diversity of their financial aid recipients, and fire safety, among many other things.

“In short, our proposals will restore the fundamental principle that guided the Higher Education Act at its inception — that no student should have to mortgage his or her future in order to pay for higher education today,” said Sen. Edward M. Kennedy (D-Mass.), the chairman of the Senate panel, who co-sponsored the Higher Education Act and budget reconciliation measures with Sen. Michael B. Enzi of Wyoming, the committee’s senior Republican. Enzi was one of the seven Republicans on the committee who supported both higher education bills; three — Sens. Judd Gregg of New Hampshire, Richard Burr of North Carolina, and Wayne Allard of Colorado — backed the Higher Education Act legislation but opposed the budget bill.

They cited a range of reasons for doing so. In addition to his complaints about the misuse of the budget reconciliation process, Gregg said he wished that the panel had gone further in requiring lenders that seek to participate in the federal student loan programs to bid at auction for the right to do so; as currently drafted, the legislation would create a pilot project that would apply only to federal loans for parents.

Gregg also said he believed that Congress should go much further in ensuring that colleges and universities do not “raise their tuitions to reflect [the bill’s] increases in Pell Grants.... We’re not here to subsidize the colleges, we’re here to help the students,” he said. Gregg said he would seek to amend the legislation at a later point that would “create more transparency” about how colleges spend their money and what they charge students. “The question is how we keep these increases in Pell Grants from being totally eaten up by increases in tuition.” College officials greatly prefer the college cost provisions now in the Senate bill to the more aggressive ones in the parallel House bill, and are likely to be wary of the changes that Gregg seeks.

Although Enzi voted for both bills, he said he was concerned about the panel’s approach to the transfer of academic credit issue, which got significantly altered on the eve of the panel’s vote, much to the dismay of for-profit college officials, who complain that academic credits accumulated by students from their nationally accredited institutions are often rejected outright by regionally accredited colleges. Enzi said he would work to ensure that language more favorable to the career colleges found its way into the bill — an effort that the Career College Association applauded and nonprofit colleges vowed to fight.

Also looming down the road, warned Sen. Chris Dodd (D-Conn.), was a plan to incorporate into the Senate higher education legislation elements of a measure the Senate Banking Committee is drafting that would give the federal government more authority to regulate the private student loan market, which has been seen as operating outside the scope of Education Department purview, at least.

Sen. Lamar Alexander (R-Tenn.) was another senator who held back on offering amendments but suggested they might come down the road. He objected to the significant new reporting requirements that would be imposed on colleges in the Higher Education Act legislation, displaying a chart showing that the regulatory burden on colleges would double because of the bill.

One of his planned proposals, which would have barred the Education Department from issuing regulations on accreditation, was forestalled when Secretary Spellings — under increasing pressure in recent weeks from Alexander and other members of Congress — sent a letter to the 17 members of the Senate panel who had written her last week, asking her not to propose new rules until Congress has a chance to act.

Perhaps reading the writing on the wall, Spellings’ letter, hand delivered to committee members in the hearing room Wednesday, said the department would not issue new rules for the time being. Alexander characterized it as a decision by the secretary to “hit pause.”

Only three amendments actually were offered Wednesday, all of which were approved. One of which would forestall controversial changes that the Education Department has sought to make in the TRIO programs for low-income students.

Change-resistant as they were Wednesday, the higher education bills may be unlikely to stay that way for long, given the concerns expressed on multiple fronts by numerous lawmakers on the education committee, the uncertainty that can emerge any time a bill this complicated and important hits the Senate floor, and the ultimate need to merge the Senate legislation with the parallel Higher Education Act and budget reconciliation legislation that eventually emerges from the House of Representatives.

Some of the winners and losers could ultimately change, though it is unlikely that the fundamental shape of the Higher Education Act measures — shifting funds from lenders to students — will be altered.

— Doug Lederman

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