Higher Ed Act Gets Hairier

With House poised to take up bill, one lawmaker offers plan to require 5 percent payout by endowments, and leaders back default-rate change pushed by for-profit colleges.
February 6, 2008

The idea of requiring colleges to spend a minimum proportion of their endowments has gained some political currency of late, promoted mostly by Sen. Charles Grassley, and higher education officials have suspected that the alluring notion might make it into legislative form some time in the not-too-distant future. Little did they know it would be tomorrow.

As the full House of Representatives prepares to take up legislation to renew the Higher Education Act Thursday, two major developments Tuesday threatened to reshape the tenor and shape of the debate. The Democratic and Republican leaders of the House Education and Labor Committee released a new draft of the bill -- known as a "manager's amendment" -- that included several key changes to which they had given their imprimatur, including a softening of a proposal on student loan default rates that had been vigorously opposed by for-profit institutions.

And buried among the 61 amendments to the Higher Ed Act bill that lawmakers said they would seek to offer on the House floor Thursday was one, offered by Rep. Peter Welch (D-Vt.), that would require colleges, regardless of wealth, to spend at least 5 percent of their endowments each year in ways that would reduce what students pay to attend college.

Welch's amendment had college officials in a full-fledged tizzy Tuesday. Unlikely amendments of all kinds get offered at this stage of the legislative process all the time, and most of them never see the light of day because the process for offering amendments can be tightly controlled. But several things give Welch's amendment a solid shot of getting to a vote on the House floor. First, he's a Democrat, and amendments offered by the party in power tend to get preference. Second, he is a member of the House Rules Committee, which has the power to decide the ground rules for debating each bill and for offering amendments on the floor.

And if Welch's amendment makes its way to the House floor, anything can happen. While college leaders have argued strenuously that the idea of requiring a minimum endowment payout is misguided, winning agreement even from some public policy makers who are not shy about criticizing higher education, university officials know that the concept has a certain populist political appeal.

It certainly seems to for Welch. The Vermont lawmaker and his staff could not be reached for comment late Tuesday, but college lobbyists said that he told the presidents of several Vermont private colleges at a meeting this week that he had read about the 5 percent payout idea in an article in The New York Times this week and that it made sense to him.

An aide to Grassley said at an American Enterprise Institute seminar on endowments last week that the senator was contemplating such an approach for colleges with endowments over $500 million, but Reuters reported today that Grassley appeared to be backing away from the idea of legislating on the matter at all. The Iowa senator reportedly told a group of regulators that in the wake of recent moves by wealthy universities to increase their spending on financial aid, "If the trend continues as it is, there probably won't be a need for legislation."

Welch's amendment would go much further than Grassley's proposal would have, applying to every college in the country, not just the richest ones.

"The institution of higher education will expend on an annual basis from any endowment funds of the institution an amount that is equal to not less than 5 percent of the total value of such endowment at the end of the preceding year toward reducing the costs of the programs of instruction offered by such institution, including through grants and other aid to reduce the amounts charged for tuition, fees, textbooks, means room and board."

Welch also plans to offer another amendment that would require institutions to submit to the Education Department annual reports on all of its endowment expenditures, including "an identification of the amounts expended toward reducing the costs of the programs of instruction offered by such institution, including through grants and other aid to reduce the amounts charged for tuition, fees, textbooks, means room and board."

At last week's AEI seminar, Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education, laid out a series of potential problems with the concept of requiring minimum endowment payouts. Welch's version, Hartle said in an interview on Tuesday, is like "the initial idea on steroids."

"At the same time that there seems to be a widespread feeling that maybe the federal government shouldn't jump feet first into this type of thing, here comes somebody who says, 'Why not?' And he has come up with a proposal that is clumsy and far-reaching."

Backtracking on Default Rates

The underlying legislation that House members will take up tomorrow was released Tuesday by Rep. George Miller, the California Democrat who heads the Education and Labor Committee, and drafted in consultation with Rep. Howard P. (Buck) McKeon, the senior Republican on the panel. It contains some meaningful changes from the version that the education panel approved in November, notably with some easing of the provisions related to college costs and prices.

As the full "manager's amendment" was released Tuesday, it revealed that for-profit colleges still have the juice to get things done on Capitol Hill.

Last week, executives of for-profit colleges flocked to Washington to urge their members of Congress to oppose a provision in the Higher Ed Act legislation that extends to three years from two the period the federal government uses to calculate the rate at which student loan borrowers default.

The proposed change -- which is designed to better flag potentially low-quality institutions where students default at abnormally high rates and give lawmakers better information about student loan burdens -- was projected to put many career institutions, and potentially some historically black universities and community colleges as well, at risk of losing their access to federal financial aid.

The "fly-in" sponsored by the career institutions fell short of their ultimate goal: having the provision stripped from the bill. But the version of the bill released by Miller and McKeon Tuesday would significantly blunt the impact of the change on career-related institutions, and contains another set of changes for-profit colleges had sought in a federal law that forces for-profit colleges to garner at least 10 percent of their revenues from sources other than the federal student aid programs.

As passed by the Education and Labor Committee in November, the Higher Education Act renewal would extend to three years from the current two the window that the federal government uses to measure how individual institutions (and lenders) are faring in keeping student borrowers on track to repayment of their loans. As is currently true under the law, which was designed to crack down on fly-by-night schools that preyed on low-income borrowers, institutions whose default rates exceed 25 percent in three successive years or 40 percent in one year face the loss of access to federal grant and loan funds for institutions, and institutions whose rates exceed 10 percent face restrictions on the manner in which they receive federal financial aid.

The manager's amendment released by Miller and McKeon does not abandon the plan for adding a year to the revised version of the "cohort default rate." But under intense lobbying by the Career College Association and its member institutions, the revised measure would delay implementation of the provision until 2012, institute an appeals process for colleges that run afoul of the law, and raise the rates at which the abovementioned penalties kick in to 30 percent from 25 percent and to 15 percent from 10 percent.

"The leadership on the committee has realized that the amendment is ill-considered and its impact was quite dramatic," said Harris N. Miller, president of the Career College Association. "By deferring for several years, it gives schools a chance to adjust, and this provides an opportunity for regulatory relief if a school can show that it has a high percentage of low-income students and high placement rates [into jobs]."

Miller said officials of some historically black universities and community colleges had also lobbied for an easing of the default rate provisions, although the American Association of Community Colleges sustained its formal support for the original changes. "It was helpful to be able to point out to people on both sides of the aisle that this was an amendment that had broader implications than just to career colleges," Miller said.

An aide to Rep. Timothy Bishop (D-N.Y.), who co-sponsored the original amendment with Rep. Raul Grijalva (D-Ariz.), sought to play down the impact of the changes in the default rate provisions. The aide acknowledged that the delay in implementation and the changes in the cutoff points at which default rates can sting an institution represented necessary "compromises," but said that the attention the default rate change would bring in helping "fewer kids default" was "a good thing, regardless of what the percentages are and what happens.... The idea that it's in there and the fact that we're addressing the issue is a good thing."

The other significant change that the Career College Association sought and won in the new version of the House higher education legislation would allow for-profit colleges (for the next four years, before reverting to current law) to count loans that the institutions themselves provide to their students in the 10 percent of revenues they must derive from sources other than federal financial aid. The goal of the "90/10" rule, as it is known, is to ensure that for-profit colleges do not finance their operations entirely through dependence on enrolling needy students who qualify for federal financial aid.

Miller said that the change in the legislation passed in November was especially important now that some lenders are restricting their willingness to make private loans to students at for-profit colleges, and that "schools may decide to help students close the gap" between their federal aid and the cost of enrolling by making loans themselves.

But Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, said the loophole the change would create in the 90/10 rule was in many ways worse than "if they simply zapped the rule altogether," as for-profit college officials have sought.

"At the very least if that happened, there would be no built-in incentive to saddle the kids with more debt," Nassirian said. The change agreed to by Miller and McKeon, he said, allows "the packaging of fictitious but regrettably enforceable obligations on low-income kids."

Among other amendments that lawmakers plan to offer Thursday, assuming they are cleared for consideration by the Rules Committee:

  • Rep. Steve King (R-Iowa) proposes significant new reporting on the admissions processes and decisions at colleges, aimed at exposing potentially illegal affirmative action. King's amendment asks "whether federally funded institutions of higher education are treating student applications differently depending on the student's race, color or national origin, and if so, the way in which these factors are weighted and the consequences to students and prospective students of these decisions."
  • Rep. Rob Bishop (R-Utah) plans to offer an amendment to eliminate a provision in the Higher Ed Act bill that would withhold some federal matching funds from states that fail to increase spending on higher education. The provision has been strongly opposed by state legislators and the National Governors Association.


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