Fuss Over a Financial Aid 'Fix'

May 31, 2006

When Congress hurriedly passed a mammoth bill designed (in name, at least) to cut the federal deficit in December, lawmakers intended to raise the interest rate on loans taken out by parents to 8.5 percent from 7.9 percent as of July 1. Yet in their haste to get the legislation passed before Congress shut down for the year, those who drafted it mistakenly made the change only for PLUS loans available through lenders in the guaranteed student loan program, leaving at 7.9 percent the rate on loans available to parents through the competing direct loan program.

Although President Bush signed the bill into law, it was widely assumed that Congress -- with the enthusiastic urging of lenders -- would as a matter of course find some way to correct the oversight before July 1.

With that date rapidly approaching, however, nothing has yet been done, and financial aid officers and other higher education officials are increasingly at odds over what if anything to do about it.

In recent weeks, amid a flurry of letters, retractions and e-mails, some leading financial aid officers have urged Congress to “fix” the differing rates in the interests of “fairness” and “equity,” so that some families are not charged a higher rate than others. But others, including the head of the National Association of Student Financial Aid Administrators, who sent a letter this month gently rebuking those who had lobbied for the “fix,” have argued that it is unseemly for college officials to be seen as supporting any effort to raise the interest rates students pay – even a change Congress thought it had already made.

Like most issues or conflicts surrounding the federal student loan programs, this one is not nearly as simple as it appears. The programs have as their underlying purpose to help students afford college, but the political and economic interests of the other involved parties -- institutions, lenders and lawmakers -- sometimes cloud that underlying purpose. That's especially true because of the continuing (and often distracting) conflict between the direct and guaranteed loan programs.

The seeds for the current controversy were sown last year, when Republican leaders in Congress made the decision --  highly unpopular with virtually all groups in higher education -- to inject parts of legislation to renew the Higher Education Act into a $40 billion deficit reduction measure, and to tap into the federal student loan programs to produce nearly a third of the bill's total savings, through a series of cuts and changes.

Despite partisan bickering over how much of the savings would come out of the pockets of students and families versus lenders, some of the shifts had the clearcut impact of raising the costs to individuals, which college officials, in vain, strenuously opposed. The plan to increase the interest rate for PLUS loans, which was designed in part to help cover the costs of allowing graduate students to benefit from the subsidized loans for the first time, was one such example.

But like many bills, the slapped-together budget legislation contained mistakes, including the failure to note the planned change in the PLUS loan interest rate for borrowers in the direct lending program. Most college widely assumed that the error would be fixed when Congress enacted legislation to renew the Higher Education Act this spring, but that measure has been stalled and may not see the light of day this year, despite continued vows by Congressional leaders to get it passed. So that has other supporters of the "fix" looking for other ways to get the job done, perhaps by attaching it to an emergency appropriations bill making its way haltingly through Congress.

Those most interested in seeing the gap in the PLUS loan rates eliminated are, not surprisingly, the banks and other lenders that make PLUS loans in the guaranteed loan program. They argue that it would be inappropriate for parents and graduate students at institutions that participate in the government's direct loan program to be eligible for loans at such a sharply lower rate than the significant majority who are in the guaranteed loan program. In 2005, about 72 percent of the PLUS loans distributed by the federal government were in the guaranteed loan program.

"The goal and rationale for why it must be fixed is simple: It's an issue of equitable treatment of borrowers," said Alexa Marrero, vice president of communications and industry relations for the Education Finance Council, which represents state-based secondary markets that help students in their states gain access to loans. "Providing for a disparate interest rate in one program or another goes against the fundamental principle that the two programs be equal."

College Parents of America, which lobbies on behalf of parents of current and future students, also urges Congress to act to fix the error. "The staff of the United States Senate has made a careless mistake, parents across the country will pay higher PLUS loan interest rates as a result, and now is the time to come to the aid of those parents," said James A. Boyle, the group's president.

College financial aid directors have also weighed in, but in mixed ways. In mid-May, with the July 1 deadline for the interest rate changes fast approaching, several financial aid directors -- some of whom held leadership positions in regional branches of the National Association of Student Financial Aid Administrators -- sent letters and e-mail messages suggesting that their colleagues write their members of Congress urging action.

For instance, Bruce Foote, the financial aid director at William Rainey Harper College and head of the federal relations committee of the Midwest Association of Student Financial Aid Administrators, sent a May 16 e-mail that included a proposed letter that peers could send to lawmakers. "This has been widely recognized as a simple, unintentional drafting mistake that needs to be corrected before 7/1/06 so that borrowers are not advantaged or disadvantaged by virture of which federal program their school participates in," Foote wrote.

In the letters they shared, Foote and others, including Richard Eddington-Shipman, director of financial aid at Michigan State University, which participates in the guaranteed loan program, advocated a compromise -- advanced by the Education Finance Council and the National Council of Higher Education Loan Programs -- that would set the interest rate for both programs at 8.3 percent (higher than the 7.9 percent now slated for the direct lending program, but lower than the 8.5 percent now set for the guaranteed program).

"This proposal is fair and provides for modest federal savings," Eddington-Shipman wrote. (His letter did say that "ideally, we'd prefer that all rates be lowered to 7.9 percent." But it added, "If that is not feasible, however, we ask your support to set the PLUS loan rate to 8.3 percent for both programs.")

Supporters of the direct lending program and leaders of student groups slammed the aid officers to supporting increases in interest rates for borrowers. "It is alarming that financial aid administrators, whose jobs are to package the best and most affordable deals for students and look out for their interests, are openly advocating higher interest rates for students and parents, to the benefit of private lenders," said Luke Swarthout, higher education associate for the State Public Interest Research Groups. "Students trust them to look out for their best interests, and not the best interests of Sallie Mae."

Eileen O'Leary, assistant vice president for finance and director of student aid and finance at Stonehill College, which participates in the direct lending program, said she thought it was "outrageous" that the aid directors would encourage Congress to raise rates for students in the direct lending program. "Why aren't we saying, let's decrease the rate for all the [guaranteed loan] students?" O'Leary acknowledged that some of the letters did say that lawmakers should lower all the rates to 7.9 percent, but that line seemed like a half-hearted throwaway, she said.

"Why should financial aid administrators be giving Congress the easy way out?" she added, noting that the draft letters from the financial aid directors largely mimicked letters that lending groups themselves had distributed.

As those letters circulated and criticism mounted, Dallas Martin, president of the National Association of Student Financial Aid Administrators, felt obliged to weigh in. He sent his own May 18 letter asking the national group's members to "resist the impulse" to support the fix -- at least now. First, Martin said, doing so at this point would take away any leverage that financial aid officials might have to push for improvements in other parts of the Higher Education Act reauthorization bill.

"It is entirely possible," he wrote, "by holding out against such a fix now, that later the price of our support for the overall bill may result in improvements elsewhere in the legislation." And second, he said, supporting the fix would abandon the idea, which NASFAA and other college groups pushed unsuccessfully last year, of capping PLUS loan rates at 7.5 percent. "Some argue this would be 'cost prohibitive,' but I would say, Congress can find the offsets if it has the political will to do so."

In an interview, Martin said that his letter followed a discussion in which NASFAA leaders thought it was a mistake for any aid officers to be appearing to support an increase in what students and families pay, especially in a "bad economic time for families" when "everything is going up."

"If one group of students has a better deal, I don't want to take that away from them," he said. "I want to get the other students down to that same deal."

Martin noted that the conflict between the two loan programs sometimes leads officials at institutions to take positions that aren't necessarily in the best interests of students. "Sometimes when we're caught up in this, the thinking is, 'My kids are not going to come out as well as somebody else's," he said. "It's easy to get caught up in the heat of things. But in our discussion, we agreed unanimously that we ought to be talking about what is best for students."

Foote, Eddington-Shipman and other aid directors who had sent out letters that appeared to endorse the higher-rate compromise promptly sent letters clarifying their positions and backing away from appearing to favor raising the interest rate for some parents. "For the record, it is the [Michigan State] position that the disparity between the two programs is a matter of concern and Congress should correct it. It is also our position that the interest rate should be 7.9% for both programs."

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