AASCU TECHNICAL ANALYSIS (S 1932)
The reconciliation conference agreement approved by the Senate and requiring another House vote in January 2006 would increase payments to the federal government and cut federal student loan spending, resulting in gross decrease in federal costs of $22.4 billion. The agreement would then make $9.6 billion in increased grant and loan benefits to students and lenders. Net federal deficit reduction would be $12.7 billion.



NO CHANGE IN STUDENT INTEREST RATE
AASCU had proposed that interest rates for both kinds of loans be variable and capped at 6.8% as a greater benefit for students, but the House and Senate committees responded that they could not both give students variable interest rates capped at 6.8% and achieve their federal deficit reduction goals. The House bill did have a variable interest rate but capped at 8.25%.
Under the conference agreement, there would be no change in current law on interest rates on student loans in the Federal Family Education Loan (FFEL) program or the Direct Loan (DL) program. The basic loan, called a Stafford loan, would become a 6.8% fixed rate loan in July 2006, as mandated by current law. That loan is now variable, capped at 8.25%. The Consolidation loan interest rate would continue to be a fixed weighted average rate based on the rate of underlying loans.



CHANGES THAT INCREASE PAYMENTS TO THE FEDERAL GOVERNMENT
A. From Student Interest.
Interest that students are required by Congress to pay currently exceeds the amount of interest Congress has mandated that lenders should receive for student loans. The reconciliation agreement just passed by the House and Senate has used these excess student interest payments as the principal financing mechanism for deficit reduction.

Due to an apparent legislative drafting error in the reauthorization of the Higher Education Act in 1998, lenders now receive more interest from students than the Congress guaranteed lenders. Instead of reducing student interest, Congress has chosen to require lenders to send the excess student interest payments to the federal government.

B. From Student Fees
The guaranty agencies in the FFEL program would be required to collect a 1% fee from FFEL borrowers or other non-federal sources to offset federal default costs. Agencies now have the option to collect a 1% "insurance premium" from borrowers but are not required to do so.



CHANGE THAT REDUCES FEDERAL COST
Elimination of the current mandatory funding of student aid administrative costs.
This elimination would provide a major reduction in federal mandatory spending by shifting the funding of these expenses to annual discretionary spending. Under the new law, the Department of Education would be required to seek funding of these administrative costs through the annual appropriations process, putting these costs in competition with annual funding of federal discretionary student aid programs and other Department of Education annual administrative expenses.



CHANGES THAT INCREASE FEDERAL COST
Increased loan limits for undergraduate students
Loan limits would be increased for first and second year dependent students: from $2,625 to $3,500 in the first year, from $3,500 to $4,500 in the second year. There would be no increase in the aggregate undergraduate limit.

New entitlement supplemental grant programs for high-achieving Pell Grant recipients who are full-time and U.S. citizens $750 supplemental grants to freshmen Pell Grant recipients who-- have completed a rigorous secondary school program recognized by the Secretary of Education have not previously been enrolled in postsecondary education.

$1,300 supplemental grants to Pell Grant recipients in their second year in college, who -- have completed a rigorous secondary school program recognized by the Secretary, have obtained a cumulative grade point average of at least 3.0 by the end of the first academic year in college.

$4, 000 supplemental grants to Pell Grant recipients in their 3d or 4th year, who -- are pursuing a major in physical, life or computer sciences, mathematics, technology, or engineering, or a foreign language determined by the Secretary to be critical to national security, have obtained a cumulative grade point average of at least 3.0.


Changes in student loan fees
The requirement that FFEL lenders pay the federal government a 3% loan origination fee, which they are now authorized to collect from FFEL Stafford borrowers, would be phased out. Lenders do not require most borrowers to pay the fee now.

The 4% origination fee that the Department of Education is authorized to collect from Direct Loan borrowers would be phased down to 1%. Currently the Secretary collects only a 3% fee, which is further reduced for borrowers who pay promptly.


Elimination of Direct Loan extended repayment option
The current Direct Loan extended repayment is comparable to the FFEL Consolidation loan extended repayment plan. Elimination of the current Direct Loan option means that Direct Loan borrowers will have to consolidate their Stafford loans, as do FFEL borrowers, to have the flexible extended repayment now available.


Extension/modification of teacher loan forgiveness program
This would include the previous increase in forgiveness to $17,500. Benefits would be extended to private school teachers exempt from State certification whose employment would be treated as qualifying employment if the individuals satisfy rigorous subject knowledge and skills tests.



CHANGES THAT DO NOT AFFECT FEDERAL COST
Elimination of FFEL borrower option to repay under the Income Contingent Repayment (ICR) plan by consolidating into the Direct Loan program
Under the new law, FFEL borrowers with either Stafford or Consolidated FFEL loans will have to have the permission of either their lender or their guaranty agency to have access to the Income Contingent Repayment plan.

"Schools as lenders" program modifications
There will be a moratorium on additional institutions becoming FFEL lenders under the school as lender program. To be eligible, institutions must have made loans under this program by April 1, 2006. In addition, institutions must meet the following requirements: no loans under this program to undergraduates, no loans to a graduate/professional student except under FFELP, all contracting/administration on a competitive basis, origination fees/interest rates less than such fees/rates under Title IV, all proceeds going to need-based grants (except for administrative expenses).