Financial Aid in Flux

With big changes looming, a flurry of news developments -- action and promises from Congress, reports on Perkins Loans and guarantee agencies -- add to the uncertainty.
July 13, 2009

SAN ANTONIO -- As members of the National Association of Student Financial Aid Administrators gathered here for their annual meeting that began Sunday, they could be forgiven for feeling unsettled -- and not just because the group's own leadership is in disarray (more on that later).

More fundamentally, the world they operate in is in a state of flux. The next few weeks and months could see some of the biggest changes to the structure and shape of the federal financial aid system in decades, but the ultimate fate of those alterations remains in doubt. The Obama administration is pushing an overhaul of the federal student loan programs, with the promise that the restructuring could free up tens of billions of dollars in new grant and loan funds to help students pay for college.

With Congress expected to take up the administration's proposals as soon as next week, some kind of major change in the loan programs seems assured -- although whether lawmakers, especially in the Senate, will fully embrace the president's plan to shift all lending to the government's direct loan program is unclear. There is far less certainty, however, about how the government might spend the funds that would be generated by the loan program restructuring -- and far less agreement in Congress and among college officials about how that money should be spent.

The prospect of a "Pell Grant entitlement" -- which would ensure steady growth in the value of the government's main aid program for needy students -- has largely (though not officially) been abandoned, and there is significant, but to date below the surface, discord over the administration's proposal to revamp the Perkins Loan Program, which is expected to redistribute funds away from the traditional recipients and toward community colleges and other institutions that educate large numbers of low-income students. And some higher education officials are also concerned that the Obama administration will seek to tap into the projected savings from the loan changes not for Pell Grants, but to pay for other priorities such as community college job training, early childhood education -- or even health care reform.

A series of news developments since Thursday have the potential to shape the landscape surrounding these debates in the coming weeks. Among them:

  • The House of Representatives appropriations subcommittee for health, labor and education programs, in drafting its initial plan for allocating funds in 2010 on Friday, endorsed the Obama administration's plan to raise the maximum Pell Grant to $5,500 but did not address the larger proposal to shift funds for the grants to the "mandatory" side of the federal budget. (The panel also recommended giving $500 million more to the National Institutes of Health than President Obama suggested providing in his 2010 budget plan.)
  • Leaders of the House education panel offered conflicting perspectives on the administration's plan to gut the lender-based guaranteed loan program. While Rep. George Miller, the California Democrat who chairs the Education and Labor Committee, reiterated his support for the administration's proposal, his new Republican counterpart, Rep. John Kline of Minnesota, said in a meeting with reporters he was "hopeful" that Congress (with support from some Democrats) would continue to carve out a role for lenders (and private capital) in the federal loan programs.
  • The Project on Student Debt, in a report released today, offers recommendations for remaking the Perkins Loan Program that are largely consistent with preliminary signals sent by the Education Department about its planned direction. That's unsurprising, given that the chief architect of the department's plan, Robert Shireman, headed the student debt group until January.
  • The New America Foundation released its own report today that questions the need for student loan guarantee agencies but offers Congress, should it decide to sustain a role for them, ideas for how to adapt their role.

As if all the big-picture uncertainty swirling around the federal policies that shape their professional lives wasn't enough, members of the national financial aid group are also dealing with tumult in their own association. The group's leader, Philip R. Day, went on leave last week after prosecutors in California charged him with a series of felonies related to alleged misuse of public money in fund raising campaigns. On Friday, on the eve of the annual convention, NASFAA announced that it had appointed Joan Crissman, the executive vice president, to replace Day on an interim basis.

Sunday, at the group's annual meeting here, NASFAA's national chair, Dave Gruen, director of financial aid at the University of Wyoming, sought to reassure members that "NASFAA is not now and has never been leaderless," citing its strong board and management team. "I can assure you that the association's public policy and advocacy efforts, its service to our membership and all of the other functions the association provides will continue uninterrupted," Gruen said, adding that the group had hired a lawyer to protect its interests.

When they aren't talking about the future of their association at this week's meeting, the members of NASFAA -- along with higher education lobbyists and financial aid policy makers across the country -- will be keeping tabs on and discussing developments in Washington. There are many moving parts to the debate over the future of the student loan and grant programs, but the major focus will be on the legislation that Congress is expected to produce -- through the process known as "budget reconciliation" -- to restructure the student loan programs and redistribute the savings, which the Congressional Budget Office currently projects at $87 billion over 10 years.

House leaders are expected to largely back President Obama's plan to make all loans out of the direct loan program, giving lenders a chance to compete to service and collect on loans, and direct some funds to state and nonprofit agencies and guarantors to provide college outreach and financial literary programs to borrowers through newly proposed grants to states. But the picture is much fuzzier in the Senate, where Republicans and some Democrats alike are nervous about aspects of the administration's plan and might be more partial to elements of an alternative promoted by a group of lenders last week.

The House had been expected to take up budget reconciliation legislation to remake the loan programs as early as last week, but right now lawmakers are distracted by other priorities. The House education and labor panel is expected to consider health care reform legislation this week, but Miller, the panel's chairman, echoing comments by his spokeswoman last week, told The New York Times that he would soon introduce a bill that would largely embrace the Obama plan.

Given the overwhelming Democratic majority in the House, that probably means that the Miller/Obama plan will sail in that chamber, despite the opposition of 31 "Blue Dog" Democrats and virtually all Republicans, including Kline, who recently became the senior Republican on the education panel. In an interview in his Capitol Hill office Friday, Kline said that he generally supported the administration's goal of increasing funding for Pell Grants, but thought its approach to getting there was flawed.

"It's a smart thing to do to take all this money and put it to Pell Grants, but it's not smart to make the federal government this big lender," he said. Asked if Congressional opponents of the Obama plan have made their objections known, Kline said lawmakers have been distracted and that the loan issue has been "drowned under the wake of other issues" consuming Congress, such as health care and energy cap and trade. "The fight is far from over," he said, and "I remain hopeful that we can keep private capital" in the federal student loan programs.

2010 Appropriations

President Obama's proposal, which has already transmuted from its initial form in February, originally called for shifting all Pell Grant funds from the "discretionary" side of the federal budget (where the program is subject to the whims of how much lawmakers choose to allocate for it each year) to the "mandatory" side, which would ensure a stable and, as Obama envisions it, growing flow of funds to the program each year.

But the nearly $300 billion price tag of such a move, in addition to opposition from Congressional appropriators (who don't like the idea of losing control over how much the program receives), have the administration and its Democratic allies in Congress rethinking the mandatory approach. Exactly what they've settled on as an alternative is not clear, but those familiar with the discussions anticipate that lawmakers will put forward some kind of hybrid approach in which some Pell money comes from annual appropriations and some from mandatory funds. That's the approach Congress used in passing the College Cost Reduction and Access Act two years ago, and it would achieve some of Obama's goals without stripping Congressional appropriators of a meaningful role.

The House's leading appropriator, Rep. David Obey, a Wisconsin Democrat, did not even address the prospect of the president's Pell Grant proposal when the Appropriations Subcommittee on Labor, Health and Human Services, Education, and Related Agencies drafted an initial 2010 budget for those agencies. The House budget plan would provide the same $200 increase (to $5,500) that the Obama budget calls for in 2010, but is otherwise silent on the administration's proposal to shift funding for Pell to the mandatory budget.

The appropriations panel's bill would also keep most other student aid programs at their 2009 levels, but increase funds for the TRIO and Gear Up programs by $20 million each (to $868 million and $333 million, respectively).

(Unrelated to student aid, but still important to colleges and universities, the bill would also provide $31.3 billion for the National Institutes of Health, about a half billion more than the White House proposed in its budget, and $530 million for health professions education programs through the Health Services Research Administration.)

Interest Groups Weigh In

Two groups with close ties to the Obama administration and Congressional Democrats are releasing reports today that seek to influence the continuing deliberations over the plan to restructure the student aid programs.

The New America Foundation's "Rethinking the Middleman" argues that hundreds of millions of dollars the government spends on subsidies to student loan guarantee agencies are either unnecessary expenditures or work at cross purposes by rewarding the agencies more when students default on their loans than when they pay them off. Guarantee agencies are fighting for their continued existence right now, as the Obama plan would significantly undermine them.

The outdated arrangement between the government and the agencies should be either ended (the foundation's clear preference, the authors suggest) or revamped, to reimburse lenders for default losses, bar relationships between lenders and guarantors, and require agencies to compete (with other potential contractors) for the default prevention and loan rehabilitation duties they now fulfill.

The Project on Student Debt's "Reasons & Recommendations for Retooling the Perkins Loan Program" aligns neatly with the Obama administration's emerging ideas on how to remake the Perkins Loan Program, which has long been criticized in some quarters for going to a narrow group of institutions (dominated by private colleges and large, traditional public universities) that serve a comparatively small proportion of the nation's students, especially those who are from low-income backgrounds.

The advocacy group's report recommends that Perkins be restructured to "reward colleges for enrolling and graduating low- and middle-income students, prioritizing college affordability, and discouraging the use of risky private student loans." Details are available here.


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