Summary of significant issues from the House Mark-Up of H.R. 609

Full Committee mark-up \--July 20, 2005 through July 22, 2005

HR 609 passed on a party line vote of 27 to 20; 1 present vote

Provisions From the President's Budget included in H.R. 609

-   [Include active duty military personnel in the definition of
    \"independent student\"]{.underline} used for purposes of need
    analysis under Part F of Title IV of the HEA. Veterans of the Armed
    Forces (except those with dishonorable discharges) are already
    included in that definition. Active duty personnel are typically
    supporting themselves already, and are truly financially independent
    of their parent. Members of the National Guard and those in training
    will continue to be treated as dependent students for need analysis
    purposes. The President's budget proposal would have extended
    treatment as an independent student to members of the National Guard
    who have been ordered to active duty for other than training
    purposes.

-   [Increase annual Federal Subsidized Stafford loan
    limits]{.underline} to \$3,500 for first-year students, \$4,500 for
    second-year students, and annual Federal Unsubsidized Stafford loan
    limits to \$12,000 for graduate and professional students.

-   [Make permanent the teacher loan forgiveness provisions of the
    Taxpayer-Teacher Protection Act of 2004]{.underline}. This Act,
    which expires on September 30, 2005, currently expands loan
    forgiveness for highly-qualified math, science, and special
    education teachers serving in low-income communities from \$5,000 to
    \$17,500. These communities are often forced to hire uncertified
    teachers or assign teachers to "out-of-field" subjects in order to
    meet instructional needs. Making this Act permanent would allow
    school districts in these communities to continue recruiting and
    retaining these highly-qualified teachers.

-   [Maintain the current variable interest rate formula for
    non-consolidation loans]{.underline} that have resulted in
    historically low student loan interest rates. Under current law,
    interest rates on student loans will be fixed at 6.8% for new loans
    beginning July 1, 2006. PLUS loans will be fixed at 7.9% for new
    loans beginning July 1, 2006.

#  {#section .heading1}

-   [Make permanent the provisions related to tax-exempt securities
    included in the Taxpayer-Teacher Protection Act of 2004]{.underline}
    so that the Department will no longer be required to pay inflated
    special allowance rates in a low-interest rate environment to loan
    holders who finance FFEL loans with tax-exempt funds.

-   [Eliminate the practice of recycling with respect to 9.5 percent
    loans]{.underline}. Currently, lenders are permitted to use the
    proceeds from 9.5 percent guaranteed subsidy loans to make new loans
    receiving the same subsidy. Such practices result in excessive
    special allowance payments being made to lenders far above the
    prevailing market interest rates. By stopping this practice, the
    Department can generate additional savings to increase student
    benefits.

-   [Eliminate the statutory provision known as the "single holder
    rule"]{.underline} that limits a borrower's ability to choose a
    consolidation lender. Generally, a current borrower whose loans are
    held by a single lender must consolidate with that same lender. The
    "single holder rule" restricts Consolidation borrowers from choosing
    the lender which best suits their needs. Eliminating this provision
    would grant borrowers freedom of choice in the loan consolidation
    market. H.R. 609 proposes to implement this for all consolidation
    loans originated on or after July 1, 2006.

-   [Eliminate spousal consolidation]{.underline}. Spousal consolidation
    is burdensome, complicated and hard to administer, especially in
    situations where only one borrower in the spousal consolidation is
    applying for a total and permanent disability.

-   [Require, rather than allow, guaranty agencies to collect the
    one-percent insurance premium on all loans guaranteed or disbursed
    on or after July 1, 2006]{.underline}. The insurance fee is
    deposited in a Federal Fund and used to pay default claims. In 2003,
    only 16 guaranty agencies charged borrowers the optional fee,
    thereby reducing the value of the Federal Fund. If a guaranty agency
    allows the Federal Fund to become depleted, it will be unable to pay
    default claims. This amendment would strengthen the financial
    stability of the guaranty agency system.

#  {#section-1 .heading1}

-   [Reinstate expired waivers that require multiple disbursements of
    single-term loans and 30-day delayed disbursement]{.underline} for
    certain borrowers for schools with low cohort default rates. In the
    case of FFEL or Direct Loans made for periods of instruction
    beginning on or after July 1, 2006, an institution with cohort
    default rates of less than 10 percent for the three most recent
    fiscal years would be exempted from the requirement that loans be
    issued in at least two separate disbursements. Under the waiver,
    qualifying schools will be able to issue loans in a single
    disbursement for any period of enrollment that is not more than 1
    semester, 1 trimester, 1 quarter, or 4 months.

> In addition, in the case of FFEL or Direct Loans made for periods of
> instruction beginning on or after July 1, 2006, an institution with a
> cohort default rate of less than 10 percent for the three most recent
> fiscal years is exempt from the requirement that the first
> disbursement of loans to first-year students be delayed for 30 days.
>
> These waiver provisions were originally intended to reward
> institutions that maintained low cohort default rates. The
> Administration has supported the reinstatement of these waivers since
> their expiration in 2002.

**Provisions From the President's Budget included in H.R. 609 in an
Alternative Form**

-   [Modify Exceptional Performer Rules]{.underline}. Revise risk
    sharing for lenders identified as exceptional performers and set
    insurance rates at 98 percent. (We proposed 97 percent.) In order to
    be designated as an exceptional performer by the Secretary of
    Education, a lender or servicer must perform at or above the 95th
    percentile of the industry and demonstrate increased performance
    against the lender's or servicer's average of the last 3 years on
    specific factors such as delinquency rates, the rate at which
    delinquent accounts are restored to good standing, default rates,
    the rate of rejected claims and other measures as determined by the
    Secretary. The Secretary cannot designate a lender or servicer as an
    exceptional performer unless the consequence of the designation is
    cost-neutral to the Federal government.

-   [Require lenders to return excess interest earnings on student
    loans]{.underline}. To create savings that can be used to expand
    college access for low- and middle-income students, the bill will
    reform so-called "floor income" guarantees for lenders. The bill
    will specify that excess interest earnings must be returned to the
    government. The Congressional Budget Office (CBO) estimates that by
    reforming this aspect of current law -- and bringing equity into the
    system for all involved -- savings will be generated that can be
    used to improve access and fairness for middle and low income
    students struggling to attend college. (ED proposed a .25 percent
    annual loan holder fee on the outstanding balance of
    non-consolidation loans to do the same thing).

-   [Replace the current fixed rate interest formula for consolidation
    loans with a fixed rate and a variable rate option]{.underline}.
    Each rate would be capped at 8.25%. The new fixed-rate option would
    be equivalent to the 91-day Treasury Bill, plus 3.3%. The variable
    rate would be equivalent to the 91-day Treasury Bill, plus 2.3%. The
    fixed-rate option also includes a one-time fixed rate "offset fee"
    of 0.5%. This fee is not mandatory. (ED proposed a variable rate
    only).

-   [Standardize repayment plans across FFEL and Direct Loans and add a
    new, delayed repayment plan]{.underline} under which the borrower
    makes scheduled payments for not more than 2 years that are annually
    not less than the amount of interest due or \$600, whichever is
    greater. After two years the borrower would revert back to a
    standard, graduated or income sensitive repayment plan. (ED proposed
    giving FFEL borrowers access to extended repayment plans.)

-   [Increase risk-sharing for lenders and guarantors by reducing the
    amount of loan principal insured against default]{.underline} from
    98 percent to 96 percent and 95 percent to 93 percent, respectively.
    To encourage lenders and guaranty agencies to continue strengthening
    default prevention efforts and in recognition of the strong
    repayment record associated with student loans today, reducing the
    percentage of Federal loans guaranteed against default is the right
    step. Taking these factors into consideration, the Administration
    proposed that these reinsurance percentages be lowered an additional
    percentage point to 95 percent for lenders and 92 percent for
    guaranty agencies. The savings generated by this proposal would be
    used to provide additional benefits to students.

### Provisions from the President's Budget not included in H.R. 609

-   [Eliminate the Perkins Loan Program]{.underline}. The proposal would
    repeal the Perkins Loan Program in Part E of Title IV of the HEA.
    Schools would be required to assign their outstanding Perkins Loans
    and return the Federal portion of the liquid assets of their Perkins
    revolving funds to the Secretary.

-   [Reduce from 23 percent to 16 percent the amount guaranty agencies
    may retain from collections on defaulted Federal loans]{.underline}.
    Currently, the Department pays its collection contractors an average
    of 16 cents on each dollar of a defaulted Federal loan they collect.
    Given the same conditions and collection tools, guaranty agencies
    retain 23 cents. The Administration proposes to reduce the amount
    that guaranty agencies may retain from these collections to the
    average paid to the Department's collection contractors.

-   [Allow borrowers to reconsolidate subject to a one percent borrower
    origination fee]{.underline} on each reconsolidation. For borrowers
    reconsolidating previous consolidation loans, a 1 percent
    origination fee would be assessed in recognition of the additional
    costs on lenders and the Federal government.

-   [Increase the current one-time lender fee on new consolidation loans
    by 50 basis points, to one percent]{.underline}. Loan holders have
    increased their financial return through the use of innovative
    financial instruments, especially through participation in the loan
    securitization market. In addition, through market consolidations,
    many lenders have substantially increased their loan portfolios and
    are achieving economies of scale that have resulted in a lower cost
    of doing business. These trends have been most notable with respect
    to FFEL consolidation loans, where the top 50 lenders account for 98
    percent of all consolidation loans made. The improved efficiency
    resulting from greater use of private capital markets and program
    management improvements should lead to lower Federal subsidies.

> Creates a Loans for Short-Term training program which would be jointly
> administered by the Departments of Education and Labor, and would
> provide specific job-related training to dislocated, unemployed,
> transitioning, or older workers and students. Loans would be made to
> students undertaking programs of study less than 10 weeks or 300 clock
> hours in length.

#### Major Issues of Interest

# Title IV -- Federal Student Aid

-   [Reinstates]{.underline} [the military service
    deferment]{.underline} [in the FFEL, Direct Loan and Perkins Loan
    programs]{.underline}. The military service deferment would apply to
    new borrowers on or after July 1, 1993. The amendments do not
    authorize any refunding of any repayment of a loan.

-   [Makes private school teachers who are exempt from state
    certification requirements eligible for teacher loan forgiveness
    under certain circumstances]{.underline}. Private school teachers
    must take competency tests in the applicable grade levels and
    subject areas. The competency tests must be recognized by five or
    more States for purposes of fulfilling highly qualified teacher
    requirements, and the teacher's score on the test must equal or
    exceed the average passing score of those five states.

-   [Establishes loan forgiveness]{.underline} [of up to \$5,000 for
    borrowers who perform service in "areas of national
    need."]{.underline} Borrowers may qualify if they are employed
    full-time for five consecutive years as early childhood educators in
    low income communities; nurses; foreign language specialists;
    speech-language pathologists; or in additional areas of national
    need as designated by the Secretary. Borrowers may also qualify if
    they are employed full-time for five consecutive years as
    highly-qualified bilingual education teachers; highly-qualified
    teachers in schools with title I enrollment in excess of 40%; first
    responders (firefighters, police officers, or emergency medical
    technicians) who serve in low-income communities; child welfare
    workers employed in public or private child welfare services; or
    librarians working in public or school libraries that serve
    low-income populations.

-   [Provides]{.underline} [up to \$5,000 in loan forgiveness on
    interest for]{.underline} [borrowers who agree to]{.underline}
    [perform service in the areas of science, technology, engineering,
    or mathematics]{.underline}. Borrowers may qualify if they are
    employed full-time for five consecutive years as highly qualified
    science, technology, engineering or mathematics teachers in a high
    need local educational agency or as science, engineering, or
    mathematics professionals. If the borrower fails to complete the
    five consecutive years of service, the borrower repays to the
    Secretary the amount of interest paid on behalf of the borrower.

-   [Makes Direct Loan (DL) and Federal Family Education Loan (FFEL)
    consolidation terms and conditions identical]{.underline}. Many of
    the unique borrower benefits of the DL consolidation program
    (income-contingent repayment and in-school consolidation) are not
    codified in statute, but rather through regulation. This provision
    results in all statutory language related to the FFEL consolidation
    program supplanting any regulations or formal policy guidance issued
    by the Department for the DL consolidation program should there be a
    conflict, thereby making the terms and conditions of these two
    programs identical.

-   [Eliminates "in-school" consolidation in the Federal Family
    Education Loan (FFEL) and Federal Direct Loan (DL)
    programs]{.underline}. This is achieved by stipulating that
    repayment may only begin the day after six months after the date the
    student ceases to be at least half-time. Doing so would prevent the
    repayment of the underlying loans in a consolidation while the
    student is still in school at least half-time. Additionally, this
    would prohibit any borrowers from entering repayment even if their
    intention is not to consolidate.

-   [Reduces gradually student origination fees in FFEL from 3% to 0% by
    2010 and from 4% to 1% in DL]{.underline}. By 2010, all students in
    both loan programs will pay a 1% fee (FFEL borrowers will pay a 1%
    federal default fee; DL borrowers will pay a 1% origination fee).
    Before 2010, FFEL lenders must ensure origination fees are paid to
    ED.

-   [Requires the Secretary, lenders, and guarantee agencies to have an
    agreement with each national credit bureau
    organization]{.underline}. This agreement would require the
    reporting of federal student loan information to all national credit
    bureaus.

-   [Prohibits the Secretary from waiving any loan fees or providing any
    repayment incentives prior to the start of the repayment period in
    the Direct Loan Program]{.underline}. Currently, the Secretary
    waives 1 percent of the 4 percent loan origination fee in the DL
    program in order to maintain parity with the FFEL program.
    Additionally, the Secretary offers two repayment incentive programs.
    The first is a 0.25 percent interest rate reduction for borrowers
    that repay using the Electronic Debit Account repayment (EDA)
    option. The second is an up-front interest rebate (currently for 1.5
    percent) by which the borrower receives these proceeds upon loan
    origination but must repay the rebate amount if the first 12
    required monthly payments are not made on time. The proposed
    legislation would eliminate the Secretary's authority to waive such
    fees and provide such repayment incentives.

-   [Requires Guaranty Agencies to remit 8.5 percent of collection costs
    to ED when a defaulted loan is paid off through consolidation; 18.5
    percent after 10/1/09.]{.underline} On or after October 1, 2006,
    guaranty agencies cannot charge a borrower collection costs in
    excess of 18.5 percent of the outstanding principal and interest of
    a defaulted loan that is paid off through consolidation. GAs must
    remit to the Secretary 8.5 percent of the collection costs of the
    outstanding principal and interest on the defaulted loan paid off
    through consolidation. After October 1, 2009, the GA must remit the
    entire 18.5 percent in collection costs with respect to defaulted
    loans paid off with excess consolidation proceeds.

#  {#section-2 .heading1}

-   [Creates a College Access Initiative]{.underline} that relies on
    guaranty agencies to do data collections of state programs,
    publications, information, and other services available in the each
    state that an agency serves for dissemination by the Secretary to
    the public. Guaranty agency activities may be funded through its
    operating account or restricted account. The Secretary is
    responsibility for ensuring the availability of the information
    through web links or other methods, and the guaranty agencies are
    responsible for ensuring its availability in print.

#  {#section-3 .heading1}

#  {#section-4 .heading1}

#  {#section-5 .heading1}

-   [Strengthens oversight of school-as-lenders by requiring a
    compliance audit]{.underline} from schools in the program as well as
    other oversight activities to address conflicts of interest and
    other issues raised by a GAO report.

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