The Student Aid and Fiscal Responsibility Act

Brief on HR 3221

The Student Aid and Fiscal Responsibility Act

TexasA&MUniversity

Student Government Association

2009-2010

Table of Contents

Background and History………………………………… 3

Direct Lending…………………………………………... 5

Facts and Statistics………………………………………. 7

Effects on Students……………………………………… 8

Economic Implications…………………………………..9

Sources…………………………………………………. .10

Background and History

H.R. 3221, The Student Aid and Fiscal Responsibility Act, introduced into the House by George Miller (D-CA) on July 15, 2009 to amend the Higher Education Act of 1965. [1]

According to the National Association of Student Financial Aid Administrators (NASFAA), the bill will use savings from the elimination of the Federal Family Education Loan Program to boost the Pell Grant program, fund a new Direct Lending program, and increase funding to different higher education programs. By eliminating the private lender option and placing student loans into federal hands, loans will be protected from inflation and market fluctuations. Legislators hope this added effectiveness will cover more tuition and even aid the often overlooked students of moderate incomes.

Not overlooking lower level education, the bill is projected to increase the number of low income children entering kindergarten by revising state standards and actions taken by early childhood education providers. School districts will be provided with funds for modernization, technological advancement, and repair projects in order to create a healthier, more efficient learning community. [2]

After the bill was introduced on the House floor, the bill was referred to the House Education and Labor committee and reported out of this committee with changes to the bill’s text on July 21, 2009. According to the NASFAA, a total of twenty-four amendments to the legislation were proposed and accepted by House members on September 16-17, 2009. These amendments include the following:

• The Manager’s Amendment submitted by Rep. George Miller (D-CA) allows for a larger pool of recipients of federal financial aid. Part-time students, students whose parents or guardians were killed in action in Iraq or Afghanistan after September 11, 2001 and students whose parents or guardians were killed in the line of duty as a public safety officer would all receive greater eligibility for expanded Pell Grants. This amendment also removes the portion of the bill that would eliminate limitations for borrowers wanting to consolidate FFEL loans into the Direct Lending program. Additionally, this amendment provides the Department of Education with $50 million in 2010 to provide schools with funds and resources to ease the transition into the Direct Lending program.

• Financial Literacy Amendment submitted by Rep. Jim Himes (D-CT), Rep. Carolyn McCarthy (D-NY), and Rep. Allyson Schwartz (D-PA) strengthens the financial literacy provisions of the State Innovation Completion Grants, Innovation in College Access and Completion National Activities, and brings forth requirements related to private student loan services.

• Guarantor Amendment submitted by Rep. Bob Etheridge (D-NC), Rep. Peter Welch (D-VT), Rep. David Price (D-NC), Rep. Earl Pomeroy (D-ND), Rep. John Lewis (D-GA), Rep. David Scott (D-GA), Rep. Chellie Pingree (D-ME), Rep. Paul Tonko (D-NY) and Rep. Doris Matsui (D-CA) allows borrower services to use grant funds and authorizes the Department of Education to directly contract with agencies for funding services.

• Direct Loan Outreach Amendment submitted by Rep. Henry Cueller (D-TX) requires the Secretary of Education to educate students and families on the transition into Federal Direct Lending.

On September 17, 2009, the bill was passed by the House with 253 favoring and 171 votes opposing the bill.

As of September 23, 2009, the bill has been passed on to the Senate for voting. A companion bill which has yet to be written will be up for debate in the Senate soon.

Direct Lending

Background and History

Direct loans are low-interest loans for students and parents paying for higher education. With the US Department of Education acting as the lender, students will be able to borrow directly from the federal government. By borrowing from the government, students have one single contact with the lender and have a choice of various repayment programs that are designed to accommodate most borrowers.

In President Obama’s Fiscal Year 2010 budget beginning July 1, 2010, all Stafford, PLUS, and consolidation loans will be made through the direct loan program and no new loans will be made under the Federal Family Education Loan Program. With federally backed loans, students will receive more stability, efficiency, and reliability in regards to funding for education. The government projects that taxpayers will save more than $4 billion a year in reduced entitlement subsidies.

The proposal, made on February 26, 2009, is a part of HR 3221, a student aid and funding bill that was recently passed in the House and has now been referred to the Senate. Upon approval, the latest a loan from FFEL can be made is June 30, 2010. Taking affect on July 1, 2010, Direct Lending will insure that transactions will be made solely between the federal government and universities, cutting out the middleman but raising taxes. [3]

Effects on Students

Students choosing to participate in the Direct Loan program will have a five repayment plans devised by the Department of Education. [4]

Standard Repayment

With this plan, students will have a fixed amount to pay every month of at least $50 and have ten years to pay back the government in full. Because students with this plan are paying the highest amount monthly, they will also receive the lowest interest rates in hopes of encouraging a quicker repayment.

Extended Repayment

In order to qualify for this plan, a student must have over $30,000 in Direct Loan debt and not have an outstanding balance on Direct Loans as of October 7, 1998. With this plan, students will have the choice of fixed or graduated payment options and 25 years to achieve repayment. Graduated payment options will start low and increase every two years, while fixed plans remain the same every month. Although students will have to pay less monthly, they will also have higher interest rates due to the extended amount of time needed to repay.

Graduated Repayment

Students with this plan will start with low repayment amounts that will increase every two years and have up to ten years to repay. Many students expect to have a steady increase in income, so this option works best for them. For these students, monthly payments will never be less than the amount of interest that accumulates between payments and will never be more than three times greater than any other payment.

Income Contingent Repayment

With this plan, a student’s repayment amount will be calculated on the basis of his adjusted gross income, family size, and total amount of his Direct Loans. Under this plan, a student will pay the lesser of the amount he would pay if he repaid in twelve years multiplied by an income percentage factor that varies with annual income, or, 20% of his monthly income. If payments are not large enough to cover the amount of interest accumulated on the loans, the unpaid amount will become capitalized once each year, but this capitalization will not exceed 10% of the original amount due. Students will have up to 25 years to repay and if repayment has not been achieved within 25 years, the amount left will be discharged. However, students may be taxed on the amount discharged.

Income-Based Repayment

Students with this plan will have repayment amounts based on their income during any period of partial personal economic hardship. Repayment amounts will be adjusted every year and students will have over 10 years to repay. For students meeting certain criteria over a specified period of time, repayment for outstanding balances may be cancelled.

Facts and Statistics [5]

• The House Committee on Education and Labor believes by investing $40 billion, the bill is believed to expand federal Pell Grants to $5500 in 2010 and $6900 by 2019.
• The federal deficit will allegedly decrease by $87 million over the course of ten years.
• In order to bolster college access and completion, the CEL hopes to invest $3 billion that will hopefully provide students with a greater sense of financial literacy.
• After interest rates increase from 3.4 percent to the projected 6.8 percent by 2012, the bill will make interest rates variable for lower income students on need-based funding.
• Historically BlackColleges and Universities as well as universities representing other minorities will receive $2.5 billion in order to provide students with a greater guarantee of completion.

Effects on Students

The Student Aid and Fiscal Responsibility Act implements several changes to current programs as well as proposes new initiatives which all have direct effects on students, not only in the state of Texas, but all over the United States. Below are explanations of the most impactful parts of the bill. [6, 7]

Direct Lending

H.R. 3221 changes the current government lending system so that starting July 1, 2010, students will receive federal education loans directly. Additionally, non-profit state agencies would receive special considerations and would be granted top priority in receiving funds. States would receive contracts in which they can guarantee loans to borrowers. According to financialaid.org, servicers receiving funds will have to meet the following criteria: “servicing and capacity, default aversion activities and outreach activities.” Using direct lending for states and borrowers makes lending and loaning easier. Borrowers will not have to go through third-party lenders or companies which can cut extra costs and make the lending process more efficient.

Pell Grant Inflation

This bill will also increase the maximum amount received by Pell Grant recipients by 1% each school year. For the 2009-2010 school year Pell Grants are amounted at $5,350, 2010-2011 grants will be $5,550 and in 2019-2020, Pell Grants will increase to $6,900. Students who qualify for Pell Grants will be able to receive more money each year they are in school which can be used for tuition, books, housing, etc.

Perkins Loan Changes

The new Federal Direct Perkins Loans will be similar to the unsubsidized Stafford loan except for a few differences. Eligible recipients must demonstrate financial need, colleges reserve the right to decide who receives loans, funding will be increased to $6 billion per year and there is the possibility for loan matching. Loans would be disbursed through school financial aid offices and interested rates will decrease. Students will be able to receive loans more efficiently, will receive more money at lower interest rates which will make it easier to pay back after graduation.

College Access and Completion Innovation Fund

H.R. 3221 designates $600 million per year for five years to establish the College Access and Completion Innovation Fund. This fund is designed to “improve college access, retention and completion, provide financial literacy training to students, encourage students to reduce loan debt, expand [agreements] between [2- and 4-year] institutions, and facilitate post-completion employment.” Through this program, students will have more opportunities, a better quality of education, and an increased investment in student success.

Economic Implications

The Student Aid and Fiscal Responsibility Act creates several economic effects for the federal and state governments. Recently, the Congressional Budget Office analyzed the bill and provided a cost estimate report for the House Committee on Education and Labor. A breakdown and explanation of several parts of the bill are listed below. CBO estimates H.R. 3221 will reduce spending by $13.3 billion over the four year period between 2009 and 2013 and $7.8 billion between 2009 and 2019. However, discretionary spending will increase by at least $13.5 billion. [8]

Direct Lending

The direct lending changes made it the Perkins Loans and Pell Grants would led to a decrease direct spending by $13.3 billion over 2009 to 2014. From 2009 to 2019, direct spending would decrease by $7.8 billion.

Pell Grant Inflation

The CBO found that direct spending will increase by $10.4 billion between 2010 and 2014 and $39.4 billion from 2010 to 2019. The report also notes that this may affect discretionary spending. An appropriations act establishing a “discretionary maximum award at a level greater than $4,860,” would increase costs. Additionally, changes in eligibility and “needs analysis formulas” would increase direct spending.

Perkins Loan Changes

Under the new Perkins Loans, states would have to return the government’s share of their “revolving funds” to the Department of Treasury. The other changes would decrease spending by $1.6 billion over the 2010 to 2014 time period and increase direct spending by $1.3 billion from 2010 to 2019.

College Access and Completion Innovation Fund

H.R. 3221 calls for an appropriation of $3.0 billion for the College Access and Completion Innovation Fund. After comparing this proposed program to other programs, it is estimated that this initiative will increase direct spending by $3.0 billion from 2010 to 2019.

Sources

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Compiled by Kate Putman & Audrey Ritcheson, Legislative Relations Commission, TexasA&MUniversity Student Government Association. This document may not be copied, reproduced or distributed without the written consent from the Legislative Relations Director. The Positions within this document do not necessarily reflect the views of the Texas A&M Student Body.

Prepared by Audrey Ritcheson and Kate Putman

TexasA&MUniversity Legislative Relations

TexasA&MUniversity Legislative Relations Commission