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# Legislative Bulletin..............................................November 15, 2005

**Contents:**

> **H.R. 4241 -- Deficit Reduction Act -- Title II**

**[Title II: Committee on Education and the Workforce]{.underline}**

**[Background]{.underline}**: Under the budget resolution (H. Con. Res.
95), the House authorizing committees were instructed to find savings to
reduce the growth in mandatory spending. The House Committee on
Education and the Workforce was originally tasked with finding \$12.7
billion in savings as part of a \$35 billion package of savings over
five years. Once the Republican Conference adopted the more ambitious
goal of \$50 billion in savings over five years, the Committee was
expected to find additional savings.

**[Savings to Taxpayers]{.underline}**: According to CBO, Title II would
reduce federal spending by \$20.4 billion over five years (see Table 1).
Such savings amount to 37.9% of the \$53.9 billion deficit reduction
package.

[]{.mark}

**Table 1. Savings By Subtitle, Outlays In Millions**

  ----------------------------------------------- ------------- -------------
  **Committee on Education and the Workforce**    **2006**      **2006-10**

  Higher Education Act Amendments                 -7,525        -14,470

  Higher Education Relief                         210           210

  Pension Benefit Guaranty Corporation            -363          -6,162

  **Total Savings**                               **-7,678**    **-20,422**
  ----------------------------------------------- ------------- -------------

**[Committee Action]{.underline}**: On October 26, 2005, the House
Committee on Education and the Workforce reported its submissions to the
House Budget Committee to be compiled into one reconciliation package
along with the submissions of the other authorizing committees. On
November 3, the Budget Committee reported the package, the Deficit
Reduction Act, for consideration by the full House of Representatives.

**[Summary by Subtitle:]{.underline}**

**Note:** The contents of Subtitle A -- reauthorizing TANF (welfare) --
is summarized in the legislative bulletin for Title VIII (Ways and
Means).

***[Subtitle B: Higher Education]{.underline}***

**[Table 2. Higher Education Act Savings, Outlays In
Millions]{.underline}**

  ----------------------------------------------- ------------- -------------
                                                  **2006**      **2006-10**

  Change in Borrower Interest Rates               -5,925        -11,180

  Change in 9.5% Loans                            -850          -1,795

  Change in Lender Fees                           -520          -1,825

  Change in Lender Insurance                      -385          -915

  Change in Mandatory Administrative Costs        17            -2,206

  Changes in Guaranty Agencies' Share of          -270          -495
  Collections                                                   

  Change in Borrower Origination Fees & Ins.      -90           2,250
  Premiums                                                      

  Increased Loan Limits                           0             1,585

  Other Reforms                                   192           409

  Interaction Effects                             306           -298

  **Subtotal - Student Loan Reforms**             **-7,525**    **-14,470**
  ----------------------------------------------- ------------- -------------

[Part 1 -- Amendments to the Higher Education Act of 1965]{.underline}

-   **50/50 Rule:** Modifies the 50/50 rule pertaining to the definition
    of an institution of higher education by excluding courses offered
    via telecommunications services from being considered as
    correspondence courses. As a result, telecommunications courses
    would not contribute toward the 50 percent limit on correspondence
    classes to be considered an institution of higher learning.

-   **Loan Fees:** Strikes the authorization for lenders to be assessed
    and to pay an "administrative cost allowance" and inserts a "loan
    processing and issuance fee" instead; (up to 0.4 percent of the
    balance of loan that were insured each year).

-   **Family Education Loan Program:** Reauthorizes the federal family
    education loan program (FFELP) through 2016; reauthorizes the
    federal loan insurance program through 2008; reauthorizes interest
    subsidized loans through 2012; reauthorizes federal consolidation
    loans through 2012.

> []{.mark}
>
> The federal government operates two major student loan programs, the
> FFELP and the Federal Direct Loan Program (FDLP). Under the FFELP,
> loan capital is provided by private lenders. Under the FDLP, the
> federal government provides loans directly to students and their
> families using money from the U.S. Treasury. Under current law, FDLP
> is authorized through December 31, 2005, and is reauthorized under
> this legislation (see HEA §458 or Reconciliation bill § 2124).  The
> two programs essentially provide the same set of loans and compete
> with one another, and debate continues as to which program is more
> cost effective. When the FDLP was established in 1993, it was argued
> that it would remove the "middleman" (private institutions) from
> student loans, and thus save taxpayers money. According to a recent
> CAGW Report, "participation in FDLP has declined by 29% over the past
> seven years and the program has a deficit of \$13 billion" and has
> missed its estimated revenue projection every year for ten consecutive
> years. In 2004, 83% of schools use the FFELP exclusively to provide
> student loans and 76% of students loans were originated by FFELP
> lenders. Since FY01, the FFELP has returned more than \$12 billion to
> the Treasury, due to the government overestimating the cost of this
> program.
>
> For recent Citizens Against Government Waste studies regarding the
> effectiveness of various federal loan programs, [click
> here](http://www.cagw.org/site/News2?page=NewsArticle&id=9108) and
> [here](http://www.cagw.org/site/PageServer?pagename=reports_directloan).
> To review a CRS Report on federal student loans, click
> [here](http://www.congress.gov/erp/rl/pdf/RL31575.pdf).
>
> []{.mark}

-   **Increased Loan Limits:** Increases the federal loan limits from
    \$2,625 to \$3,500 for first year students and from \$3,500 to
    \$4,500 for students who have completed their first year, the net
    effect being greater access and options to higher education for
    students.

-   **Consolidation Loan Limits:** Requires, after July 1, 2007, federal
    consolidation loans to be counted against the applicable limits on
    the total indebtedness of the student -- one of the determinates in
    qualifying for student loans.

-   **Loan Interest Rates:** Eliminates a scheduled switch (on July
    1, 2006) from the current variable-rate formula (also known as an
    adjustable rate - an interest rate that fluctuates based on an
    underlying index, in this case the 91-day Treasury bill plus 2.3%)
    to a fixed rate (6.8% for students and 7.9% for parents) for certain
    federal student loans. Thus, current variable-rate formulas would
    continue to be in effect at such date, the net effect of which would
    increase federal income from incoming loan payments. Using the
    current variable rate formula, a student's interest rate would be
    approximately 4.7% today.

-   **Consolidated Loan Interest Rates:** Allows, after July 1, 2006,
    students with consolidated loans to choose between a variable rate
    formula (91-day Treasury bill rate plus 2.3% for students or plus
    3.1% for parents) and a fixed rate (set at the 91-day Treasury bill
    rate plus 3.3% for students or plus 4.1% for parents).

-   **Interest Rate Caps:** Extends interest rate caps -- one for
    student loans at 8.25% and one for parent loans at 9%.

-   **Loan Origination Fee:** Imposes a one-time consolidation loan
    offset fee of 1% on the principal amount on consolidated student
    loans. Also phases down the current 4% fee on Stafford loans to 1%
    over five years. Thus, borrowers in both FFELP and FDLP will pay 1%
    on Stafford loans by FY2010.

-   **Loan Deferment for Military:** Adds a new provision under which
    military or National Guard personnel who are serving on active duty
    during a war or other military operation or national emergency may
    defer their loan payments for up to three years.

-   **Loan Forgiveness for Service in Areas of National Need:** Provides
    for loan forgiveness for service in areas of national need and
    stipulates specific areas of service, including early childhood
    educators, nurses, foreign language specialists, librarians, certain
    teachers, and others.

-   **9.5 Percent Loans:** Modifies the formula for certain loans funded
    with financing based on tax-exempt bonds (commonly known as "9.5
    Percent" loans) by permanently extending the current policy (due to
    expire December 31, 2005, when they would revert back to a
    pre-October 2004 structure which is more costly for the government)
    and expanding its scope to include all new loans supported with
    similar financing.

> Historically, these loans have had a different formula for determining
> payments to lenders. The 9.5% has been higher in recent years and
> become the norm. Thus, this modification would permanently eliminate
> the "9.5% loan" structure, and lender formulas for these types of
> loans would conform to the rates paid to other lenders.

-   **Lender Fees:** Increases lender fees from .5 to 1.0 percent,
    charged on all loans at the time of disbursement and increases fees
    charged annually on outstanding consolidation loans from 1.05 to
    1.30 percent under certain circumstances.

-   **Default Loan Rate Insurance:** Reduces the percentage that most
    lenders are reimbursed for defaulted loans from 98 to 96 percent and
    tightens eligibility requirements for lenders to qualify as
    "exceptional" to receive 98 percent reimbursement (instead of the
    previous 100 percent reimbursement rate for exceptional qualifiers).

-   **Discretionary Administrative Expenses:** Eliminates mandatory
    funding requirement for administrative expenses beginning in 2007,
    but retains mandatory funding for account maintenance fees. CBO
    states "Section 458 of the Higher Education Act of 1965 specifies a
    direct appropriation for the government's administrative costs
    associated with operating the financial assistance programs for
    post-secondary education students. The statute does not limit the
    amount provided for those activities after 2002; thus, this account
    is an uncapped direct spending account." While some may question
    whether actual dollar-for-dollar savings will be realized through
    the appropriations process, this reform is an attempt to address an
    open-ended entitlement and provide for more annual oversight.

-   **Loan Forgiveness for 9/11 Victims:** Provides student loan
    forgiveness for survivors of victims of the September 11, 2001,
    attacks, including spouses or parents who are paying loans belonging
    to or on behalf of a 9/11 victim.

**[Table 3. Higher Education Relief, Outlays In Millions]{.underline}**

  ----------------------------------------------- ------------- -------------
                                                  **2006**      **2006-10**

  Cancel repayment of loans for cancelled         70            70
  enrollment periods                                            

  Absorb interest payments for affected borrowers 130           130

  **Subtotal - Student Loan Reforms**             **210**       **210**
  ----------------------------------------------- ------------- -------------

[Part 2 -- Higher Education Relief (for Hurricanes' Katrina &
Rita)]{.underline}

-   **Gulf Coast Loan Forgiveness:** Cancels repayment (provides loan
    forgiveness) for all student loans (for both students and
    institutions) that were disbursed for cancelled enrollment periods
    at post-secondary schools that were closed due to a Gulf Coast
    hurricane.

-   **Gulf Coast Loan Deferment:** Provides up to a 6-month deferment
    for repayment of student and parent loans for students affected by a
    Gulf Coast hurricane (by requiring the federal government pay the
    interest on those loans for the applicable period).

***[Subtitle C: Pensions]{.underline}***

**[Table 4. Pension Reform Savings, Outlays In Millions]{.underline}**

  ----------------------------------------------- ------------- -------------
                                                  **2006**      **2006-10**

  Increase in Flat-Rate Premiums for              -327          -5,155
  Single-Employer Plans                                         

  Premiums for Certain Terminated Single-Employer -36           -1,077
  Plans                                                         

  **Subtotal - Pension Reform Savings**           **-363**      **-6,162**
  ----------------------------------------------- ------------- -------------

-   **PBGC Premiums:** Increases the per-participant flat-rate premiums
    that the Pension Benefit Guaranty Corporation (PBGC) charges to
    sponsors of defined benefit pension plans from \$19 to \$30. Under
    current law, sponsors of single-employer, defined-benefit pension
    plans insured by the PBGC are required to pay the agency a premium
    of \$19 per participant per year. Under this legislation, the
    premium increases to \$30 per participant in 2006, and it is indexed
    to wage growth in 2007 and thereafter. The legislation also grants
    the PGBC the authority to further increase these premiums by up to
    20 percent each year if it determines that such an increase would be
    necessary to achieve an "actuarially sound" program (PBGC has
    incurred substantial losses in recent years, according to CBO).

> The last time the PBGC flat-rate premium was increased was 1991, from
> \$16 to its current rate of \$19. As of September 30, 2004, the
> single-employer program accounted for virtually all of the PBGC's
> deficit. While PBGC's assets grew by 79% from 2001 to 2004 (\$39
> billion), its liabilities grew far larger 345% (\$62.3 billion), for a
> net position of -\$23.3 billion. CBO has estimated that without
> significant reform, PBGC's single-employer program will run out of
> cash in 2020 or 2021.

-   **PBGC Termination Fee:** Implements a termination premium for
    single-employer plans that the PBGC takes over on an involuntary or
    "distressed-termination" basis. The required payments would be
    \$1,250 per plan participant for the three years following the
    termination. To view a recent CRS report on the financial health of
    the PBGC, click
    [here](http://www.congress.gov/erp/rl/pdf/RL32702.pdf).

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-]{.underline}**

**[Sector Mandates]{.underline}?**: No. According to CBO, this
legislation "would provide assistance to institutions of higher
education affected by or serving students affected by the recent
hurricanes. It also would authorize funding for student aid and higher
education programs, much of which would go to public institutions of
higher education. Any costs to those institutions or to state, local, or
tribal governments would result from complying with conditions for
receiving federal assistance."

**[RSC Staff Contact]{.underline}**:

Subtitles B-C: Derek V. Baker;
[derek.baker@mail.house.gov](mailto:Derek.baker@mail.house.gov);
202-226-8585