Archived Information

THE HIGHER EDUCATION ACT REFORM AMENDMENTS OF 2005

Section-by-Section Analysis

[Section 101.]{.underline} Section 101 of the bill would provide that,
unless otherwise expressly stated, references in the bill to sections or
other provisions to be amended or repealed are to be considered
references to sections or provisions of the Higher Education Act of 1965
(20 U.S.C. 1001 [et]{.underline} [seq.]{.underline}, the \"HEA\").

[Section 102.]{.underline} Section 102(a) of the bill would amend the
definition of an \"institution of higher education\" in section
101(b)(2) of the HEA to permit an institution to implement programs that
permit students to be enrolled in the institution while still attending
high school, and still meet the definition of an \"institution of higher
education\" for HEA purposes. Currently, that definition requires that
the institution\'s regular students have received a high school diploma
or the recognized equivalent, or be beyond the age of compulsory school
attendance. This change would enable institutions, particularly
community colleges, to implement dual enrollment programs, such as those
that would be assisted under the amendments proposed in section 105 of
the bill, without risking the loss of HEA eligibility. Students who are
dually enrolled would still be ineligible to receive Federal student
financial aid under Title IV of the HEA. Sections 102(b)(2) and (3) of
the bill would make comparable changes to the definitions of a
\"proprietary institution of higher education\" and a \"postsecondary
vocational institution\" in sections 102(b) and (c) of the HEA,
respectively.

> Section 102(b)(1) of the bill would amend section 102(a)(3) of the HEA
> to eliminate

the so-called \"50 percent rules\" related to distance education, which
limit the amount of distance education (telecommunications and
correspondence) an institution can offer and be eligible to participate
in student aid programs under Title IV of the HEA. Ever-increasing
numbers of postsecondary students are considered \"nontraditional;\"
they attend part-time, have dependents at home, are older, and work
full- or part-time. These students benefit from expanded options for
pursuing postsecondary education that accommodate their life situations.
It is the role of accrediting bodies to ensure the quality of
postsecondary education, regardless of how the instruction is delivered.

Section 102(b)(2)(A) of the bill would amend section 102(b)(1) of the
HEA to eliminate the so-called \"90/10 rule\" in the definition of a
\"proprietary institution of higher education\" that requires such an
institution to derive at least 10 percent of its revenues from sources
other than Title IV of the HEA. Although well-intentioned, the 90/10
rule has not been shown to be a useful tool in ensuring the quality of
education provided by proprietary institutions, and has only served to
cause institutions that have a mission of serving the lowest-income
students to restrict the number of Federal Pell Grant recipients that
they enroll.

Section 102(c) of the bill sets out the effective dates for the
amendments that would be made by sections 102(a) and (b) of the bill.

[Section 103.]{.underline} Section 103 would make a number of changes to
section 401 of the HEA, which authorizes the Federal Pell Grant Program.
First, section 103(a) of the bill would amend section 401(a) of the HEA
to extend the program authorization through fiscal year 2015, and then
would make significant changes in how the particular aspects of the
program are funded. Proposed new section 401(a)(2)(A) of the HEA would
make available mandatory funding in the amount of \$4,300,821,000 for
fiscal year 2006 in order to retire the estimated shortfall in budget
authority for Federal Pell Grants through award year 2005-2006, which
would put the program on a firm financial footing. Proposed new sections
401(a)(2)(B) and (b)(2)(A) of the HEA would make available mandatory
funding for an increase in the maximum Federal Pell Grant amount of
\$100 for each of the next five years in order to provide additional
assistance to low-income students. These changes would increase the
investment in Federal Pell Grants by more than \$19 billion in new
mandatory funding for 2006-2015. With this new mandatory funding, the
total 2006 Federal Pell Grant request is nearly \$18 billion, an
all-time high.

The Administration proposes to pay for these funding changes by using
mandatory savings generated by other changes to the HEA that are
proposed in this bill. Discretionary appropriations would be needed to
fully fund a \$4,050 maximum Pell Grant award; in 2006, \$420 million in
mandatory funding would support a \$100 increase in the maximum award,
to \$4,150.

The President\'s FY 2006 Budget also includes a new budget scoring rule
to ensure the program is fully funded and that shortfalls do not
materialize in future years.

These changes to the way in which the Federal Pell Grant program is
funded are the centerpiece of the Administration\'s HEA-related budget
proposals, and are designed to increase the grant aid available to
address the financial need of low-income students pursuing a
postsecondary education.

Sections 103(a) and (b)(1) of the bill would also eliminate outdated and
confusing provisions in section 401(a) and (b)(1) of the HEA relating to
how funds are disbursed, and the portion of a student\'s cost of
attendance that a Federal Pell Grant, in combination with other forms of
aid, is intended to cover.

Next, section 103(a)(2)(C) of the bill would eliminate the tuition
sensitivity award rule in section 401(b)(3) of the HEA. While the intent
of the rule was to provide grant parity for students attending
high-tuition schools, its effect has been to penalize students attending
extremely low-tuition schools by reducing their awards. Low-tuition
schools primarily serve individuals from low-income families\--the very
students for whom the Federal Pell Grant is intended. In addition,
implementation of this award rule requires a cumbersome set of
additional payment tables that must factor in tuition in addition to
total cost of education and expected family contribution, thus
increasing the risk of error in making Pell Grant awards.

Section 103(a)(2)(E) of the bill would amend section 401(b)(5) of the
HEA (to be redesignated by section 103(a)(2)(D) of the bill as section
401(b)(3) of the HEA) to index the minimum Pell Grant award to increases
in the maximum award. Currently, although there is a \$400 minimum
award, students qualifying for an award between \$200 and \$399 also
receive \$400. At first, indexing would raise the \$200 minimum award
dollar-for-dollar with increases in the maximum, without adjusting the
\$400 actual payment; for example, the \$100 increase proposed for FY
2006 would increase the minimum award to \$300, with a \$400 actual
payment. Once the indexed minimum is increased to \$400, there would be
no discrepancy between the minimum for which the student qualifies and
the actual minimum payment. This would better target aid to students
with the greatest financial need.

Section 103(a)(2)(E) of the bill would amend section 401(b)(6) of the
HEA (to be redesignated by section 103(a)(2)(D) of the bill as section
401(b)(4) of the HEA) to require the Secretary to make up to two Federal
Pell Grants available in a single award year to an eligible student
continuously enrolled in a two- or four-year degree program. This
availability would give Federal Pell Grant recipients the option to
accelerate their studies and promptly complete their education, as well
as enable institutions of higher education to use their facilities more
efficiently.

Section 103(a)(3) of the bill would amend section 401(c) of the HEA to
limit Federal Pell Grant eligibility to the equivalent of 16 semesters
or 24 quarters in duration, as determined by the Secretary in
regulation. This would provide an incentive for a more timely completion
of a degree program.

Section 103(a)(4) would eliminate section 401(g) of the HEA, which
describes procedures for the Secretary to follow in the event of
insufficient Federal Pell Grant appropriations. This provision would be
unnecessary under the funding structure proposed in sections 103(a)(1)
and (2)(B) of the bill.

Section 103(b) would set out the effective dates for the changes made in
section 103(a) of the bill.

[Section 104.]{.underline} Section 104 of the bill would add a new
section 401A to Subpart 1 of Part A of Title IV of the HEA that would
create a new Enhanced Pell Grants for State Scholars Program to provide
\$1,000 grants for up to two years to Federal Pell Grant recipients who
have completed the State Scholars curriculum in high school. Currently,
15 states participate in the State Scholars program, which entails
completing a demanding curriculum in high school in preparation for
technical school, community college, university, or work. Students who
complete a rigorous curriculum (with at least three years of mathematics
and science, as well as four years of English and social studies, and
courses in foreign languages) are more successful in pursuing and
completing further education. Although this proposed new program would
be funded through discretionary appropriations for the larger Federal
Pell Grant program, total funding would be capped at \$33 million for
fiscal year 2006. If recipients qualify for more than this amount,
awards would be allocated within the available funding level.

[Section 105.]{.underline} Section 105 of the bill would amend current
Chapter 3 of Subpart 2 of Part A of title IV of the HEA by replacing the
Academic Achievement Incentive Scholarships with a Community College
Access program.

New section 406A of the HEA would provide findings and a purpose for the
new chapter. The purpose of the chapter would be to enhance higher
education opportunities by promoting dual enrollment programs through
which students can earn college credits while still in high school and
by facilitating the transfer of academic credits among institutions of
higher education, particularly across State lines.

New section 406B(a) of the HEA would require the Secretary to make
grants to partnerships to establish or expand existing dual-enrollment
programs at junior and community colleges or community college systems
that allow high school students to earn high school and transferable
college credit. Grants would be awarded for a period of not more than 5
years. An eligible partnership would include one or more local
educational agencies and one or more junior or community colleges or a
community college system.

New section 406B(b) of the HEA would provide that \"junior or community
college\" would be defined as it is in section 313(f) of the HEA. A
\"dual-enrollment program\" would be defined as a program for 11^th^ and
12^th^ grade high school students that would allow them to enroll in
both academic and vocational courses at junior or community college,
while concurrently attending high school (although advanced placement or
international baccalaureate high school courses would not be included),
for both high school and postsecondary education academic credit that is
transferable to 2- and 4-year institutions of higher education and or
eligible postsecondary vocational institutions and proprietary
institutions of higher education. A dual-enrollment program could not
require participating students to pay the costs of course tuition and
fees at the postsecondary institution.

New section 406B(c) of the HEA would require a partnership desiring an
award to submit an application to the Secretary. Each application would
be required to: list each member of the partnership and their
responsibilities (including who will act as the fiscal agent of the
partnership); describe the need for the program; list the human,
financial, and other resources that each member of the partnership will
contribute to the program, and describe the efforts each member of the
partnership will make in seeking additional resources; describe how the
program will operate, how grant funds will be used for program
activities and to increase the quality and rigor of the courses in the
dual-enrollment programs, and how program progress will be measured; and
describe how the partnership will support and continue to support
dual-enrollment programs after the grant has expired. The Secretary
would be required to use a peer-review process to review applications
and make recommendations for funding to the Secretary.

New section 406B(c) of the HEA would also require the Secretary to give
priority to applications that: place few restrictions on the courses
that students enrolled in the dual enrollment program can take, other
than those imposed on regular students at the junior or community
college; include schools in which at least 50% of the students are
eligible for free and/or reduced lunch under the Richard B. Russell
National School Lunch Act; give priority to students who are low-income
individuals, as defined in section 402A(g)(2) of the HEA; or have
established clear articulation agreements to ensure that dual-enrollment
academic credits earned at a junior or community college participating
in these dual-enrollment programs are transferable.

New section 406B(d) of the HEA would require a grantee to use its grant
funds to carry out one or more of the following: establish or expand
existing dual-enrollment programs, which may include both academic and
technical courses; promote awareness throughout the State of these
programs; provide support services to students; awarding postsecondary,
academic scholarships to high school students who enroll in and complete
the dual-enrollment program and who matriculate to an institution of
higher education; provide books and other materials for students
enrolled in these programs; and annually evaluate the performance of the
program.

New section 406B(d) of the HEA would also require a participating
student under this program, in order to receive assistance in paying for
books and other materials, to: be a low-income individual, as defined in
section 402A(g)(2) of the HEA; have maintained an overall 3.0 grade
point average in high school; and have met the enrollment requirements
of the high school and the junior or community college, or received
permission to participate in the program from his or her high school and
parent or guardian.

New section 406B(e) of the HEA would require each grantee to submit to
the Secretary an annual report on the operation and progress of its
program during the preceding year, using such performance measures and
supplying such documents and data as the Secretary might require. Based
on the annual reports, the Secretary would be required to publish a
report on the performance of the program. The Secretary would also be
required to disseminate successful practices developed under the
program.

New section 406C(a) of the HEA would require the Secretary to make
grants to consortia of two or more States and institutions of higher
education to create comprehensive articulation agreements between
institutions of higher education in the participating States that would
allow for the seamless and timely transfer of postsecondary academic
credits between such institutions, particularly across State lines and
from junior and community colleges to 2- and 4-year institutions. Grants
would be awarded for a period of not more than 3 years. In a State in
which the State constitution or law designates an individual, entity, or
agency in the State other than the Governor to be responsible for the
supervision of institutions of higher education, that individual,
entity, or agency would represent the State within the consortium. Each
participating State in a consortium, after consultation with the State
agency responsible for supervision of institutions of higher education,
would designate a State agency to be responsible for the administration
and supervision of the activities carried out within the State.

New section 406C(b) of the HEA would provide definitions for
\"articulation agreement\" and \"credit.\"

New section 406C(c) of the HEA would require any consortium desiring an
award under this section to submit an application to the Secretary. Each
application would be required to: list each consortia representative and
their responsibilities; describe the need for the proposed program;
describe the human, financial, and other resources that each member of
the consortium will contribute to the consortium, and describe the
efforts each member of the consortium will make in seeking additional
resources; describe how the proposed program will operate, how grant
funds will be used for authorized activities, and how program progress
will be measured; describe how the proposed program will reduce the
administrative and financial burdens of credit transfer among
institutions of higher education in participating States; and describe
how the consortium will support and continue the program after the grant
has expired. The Secretary would be required to use a peer-review
process to review applications and make recommendations for funding to
the Secretary.

New section 406C(c) of the HEA would also require the Secretary to give
priority to applications that include private institutions of higher
education in the articulation agreements and encourage articulation
agreements that cover rigorous core academic subject areas.

New section 406C(d) of the HEA would require a grantee to use grant
funds to design, establish, and implement comprehensive articulation
agreements between institutions of higher education in participating
States that would allow for the seamless and timely transfer of
postsecondary academic credits between such institutions and to annually
evaluate the performance of the program. A grantee could use grant funds
to acquire technical assistance from State or local entities that have
successfully designed, established, or implemented extensive
transfer-of-credit arrangements and provide technical and administrative
support to institutions and to develop agreements with local educational
agencies for vocational course-equivalency approval procedures for
purposes of satisfying entrance requirements to institutions of higher
education.

New section 406C(e) of the HEA would require each consortium
participating in the program to submit to the Secretary an annual report
on the operation and progress of its program during the preceding year,
using such performance measures and supplying such documents and data as
the Secretary might require. Based on the annual reports, the Secretary
would be required to publish a report on the performance of the program.
The Secretary would also be required to disseminate successful practices
developed under the program.

New section 406D of the HEA would authorize \$125,000,000 to be
appropriated for fiscal year 2006 and such sums as may be necessary for
each of the 4 succeeding fiscal years to carry out the chapter.

[Section 106.]{.underline} Section 106 of the bill would amend Subpart 8
of Part A of Title IV of the HEA by replacing the Learning Anytime
Anywhere Program with a program of Presidential Mathematics and Sciences
Scholarships.

New section 420D of the HEA would provide findings, a purpose, and
definitions for the new Subpart. The purpose of the Subpart would be to
increase the number of postsecondary students from low-income
backgrounds who are enrolled in studies leading to baccalaureate,
graduate, or professional degrees in physical, life, or computer
sciences, mathematics, and engineering.

Definitions of \"computer science\", \"life sciences\", \"physical
sciences\", \"mathematics\", and \"engineering\" would be provided. An
\"eligible student\" would be defined as a student who: is enrolled,
full-time, in an institution of higher education, other than a United
States service academy; has completed at least 2 years of undergraduate
education; has declared, and is pursuing, a major in studies leading to
a baccalaureate degree in physical, life, or computer sciences,
mathematics, or engineering; and is eligible for a Federal Pell Grant.
The Federal Pell Grant program is the most need-focused of the student
aid programs under Title IV of the HEA, with individual awards varying
according to the financial circumstances of students and their families.
A \"managing agent\" would be defined as an entity to which an award is
made under new section 420E to manage a program of Presidential
Mathematics and Sciences Scholarships.

New section 420E(a) of the HEA would require the Secretary, from the
funds authorized under new section 420F and through a grant or
cooperative agreement, to make an award to a private, nonprofit
organization, other than an institution of higher education or system of
institutions of higher education, to manage, through a public and
private partnership, a program of Presidential Mathematics and Sciences
Scholarships. This award would be for a five-year period. One hundred
percent of the funds awarded for any fiscal year would be obligated and
expended solely on scholarships to eligible students, and no Federal
funds could be used to provide more than 50 percent of the cost of any
scholarship to an eligible student.

The Secretary would be authorized to establish: eligibility criteria
that managing agent must meet, including criteria regarding financial
and administrative capability; operational standards for the managing
agent, including management and performance requirements (such as audit,
recordkeeping, record retention, and reporting procedures and
requirements); and rules for the selection and treatment of scholarship
applicants and recipients and for transfer and accounting of funds by
the managing agent and the institutions of higher education that
recipients attend. The Secretary, as necessary, would review and revise
such criteria, standards, and rules and, through agreement with the
managing agent, see that any revisions are implemented. If the managing
agent failed to meet the requirements of this section, the Secretary
could terminate the award to the managing agent.

New section 420E(b) of the HEA sets forth the duties of the managing
agent. The managing agent would be required to: establish a Presidential
Mathematics and Sciences Scholar\'s Fund in a separate, named account,
that clearly discloses the amount of Federal and non-Federal funds
deposited in the account and used for scholarships; solicit funds for
scholarships and for the administration of the program, from non-Federal
sources; solicit applicants for scholarships; from the amounts in the
Fund, award scholarships to eligible students and deliver such funds to
the institutions of higher education that they attend; and annually
submit to the Secretary a financial audit, an evaluation of the program,
and such other documents as the Secretary may require to determine the
effective management of the program.

New section 420E(c) of the HEA would require any entity desiring to be
the managing agent to submit an application to the Secretary. The
application would have to include a description of: how the entity
meets, or would meet, any criteria, standards, and rules established by
the Secretary; how the entity would solicit funds for scholarships and
for the administration of the program, from non-Federal sources; how the
entity would provide nationwide outreach to inform students about the
program and to encourage students to pursue degrees in physical, life,
or computer sciences, mathematics, and engineering; how the entity would
solicit throughout the Nation for applications for scholarships; how the
entity would verify the eligibility of applicants for scholarships and
their eligibility for continued support; the selection criteria the
entity would use to award scholarships and to renew those awards; how
the entity would inform the institution of higher education chosen by a
recipient of the name and scholarship amount of the recipient; what
procedures and assurances the entity and the institution of higher
education that the recipient attends would use to verify student
eligibility, attendance, degree progress, and academic performance, and
to deliver and account for payments to the institution the recipients
attend; the management (including audit and accounting) procedures the
entity would use for the program; the human, financial, and other
resources that the applicant would need and use to manage the program;
how the applicant would evaluate the program and report to the Secretary
annually; and a description of how the entity would coordinate with,
complement, and build on similar public and private mathematics and
sciences programs.

New section 420E(d) of the HEA would require students who receive
scholarships under this subpart to be known as Presidential Mathematics
and Sciences Scholars. A student desiring to receive a scholarship would
have to submit the free application for Federal student assistance to
the Secretary, and an application to the managing agent. Scholarships
would be awarded for only one academic year of study at a time, but
would be renewable on an annual basis for the established length of the
academic program, not to exceed 4 years of study, if the student
remained an eligible student. The managing agent could condition renewal
of a scholarship on measures of academic progress and achievement with
the approval of the Secretary.

> If a student failed to remain eligible, or to meet established
> measures of academic

progress and achievement, the managing agent would be required to
instruct the student\'s institution of higher education to suspend
payment of the scholarship. A suspension of payment would remain in
effect until the student is able to demonstrate that he or she is again
eligible and meets established measures of academic progress and
achievement. A student\'s eligibility would be terminated if a
suspension period exceeds 12 months. However, a student awarded a
scholarship could, under terms established by, and with the approval of,
the managing agent, postpone or interrupt his or her enrollment at an
institution of higher education for up to 12 months and such
postponement or interruption would not be considered a suspension.

Neither a student nor the student\'s institution of higher education
would receive his or her scholarship payments during the period of
postponement or interruption, but such payments would resume upon
enrollment or reenrollment. In exceptional circumstances, such as
serious injury or illness or the necessity to care for family members,
the student\'s postponement or interruption could, upon notification and
approval of the managing agent, be extended beyond the 12-month period.

New section 420E(e) of the HEA would require the managing agent to
require any institution of higher education that enrolls a student who
receives a scholarship under this subpart to annually provide an
assurance, prior to making any payment, that the student is eligible in
accordance with the new section 420D(c) definition of an \"eligible
student\" and has provided the institution with a written commitment to
attend, or is attending, classes and is satisfactorily meeting the
institution\'s academic criteria for enrollment in its program of study.
The managing agent would be required to provide the institution of
higher education with payments from the Fund for selected recipients in
at least two installments. An institution of higher education would be
required to return prorated amounts of any scholarship payment to the
managing agent, for deposit in the Fund, if a recipient declines a
scholarship, does not attend courses, transfers to another institution
of higher education, or becomes ineligible for a scholarship.

New section 420F of the HEA would authorize \$50,000,000 to be
appropriated for fiscal year 2006 and such sums as may be necessary for
each of the 4 succeeding fiscal years to carry out this subpart.

[Section 107.]{.underline} Section 107(a) would amend section 413A(b)(1)
of the HEA to extend the Federal Supplemental Educational Opportunity
Grant (FSEOG) Program through fiscal year 2010.

Section 107(b) would amend the allocation formula in section 413D of the
HEA to phase out the base guarantee portion of the current formula over
5 years. Under current law, the annual appropriation for each of the
three Title IV, HEA \"campus-based\" programs---the FSEOG, Federal
Work-Study, and Federal Perkins Loan programs---is distributed to
institutions according to a two-part statutory formula. The first part,
the \"base guarantee\", considers a school\'s program expenditures in a
previous year. The second step in the current allocation formula is
based on institutional need for additional funding. The current
allocation formula is problematic because it has historically
distributed a disproportionate share of funding to institutions with a
long history of program participation, rather than on the number of
low-income students they enroll. By phasing out the base guarantee, the
distribution of campus-based program funding would be based more
directly on the needs of an institution\'s current students.

Section 107(b) would also amend section 413D of the HEA to require the
Secretary to allocate up to 10 percent of annual appropriations in
excess of \$700,000,000 to institutions at which at least 10 percent of
the students enrolled are Federal Pell Grant recipients; that offer
programs of at least 4 years, or at least 2, but less than 4 years, in
duration; and that have rates for Federal Pell Grant recipients
graduating (or transferring to a 4-year institution, in the case of the
second category of institutions) within the normal program duration that
exceed the median rate for the institution\'s sector. This would provide
an incentive to institutions to encourage their students to complete
their degrees in a timely manner. Current section 413D of the HEA
authorizes, but does not require, the Secretary to make this allocation,
and the targeting of institutions is less precise.

Section 107(c) of the bill sets out the effective date for the
amendments that would be made by section 107(a) and (b) of the bill.

[Section 108.]{.underline} Section 108 would amend sections 424(a),
428(a)(5) and 428C(e) of the HEA to extend various Federal Family
Education Loan Program authorities. Section 424(a) of the HEA relates to
the scope and duration of the Federal loan insurance program, section
428(a)(5) of the HEA pertains to the duration of the authority to make
interest subsidized loans, and section 428C(e) contains a termination
date for the authority to make consolidation loans.

[Section 109.]{.underline} Section 109 would amend sections 425(a),
428(b)(1), and 428H(d)(2)(C) of the HEA to increase subsidized Stafford
Loan limits for first-year students from \$2,625 to \$3,500, and for
second-year students from \$3,500 to \$4,500, and increase Unsubsidized
Stafford Loan limits for graduate and professional students from
\$10,000 to \$12,000. The aggregate undergraduate subsidized Stafford
Loan limit would also be increased from \$23,000 to \$25,000, and to
reflect this increase, the aggregate subsidized Stafford Loan limit for
graduate and professional students would be increased from \$65,500 to
\$67,500. Loans limits for first-year undergraduate students have
remained effectively unchanged since 1975, and loan limits for
second-year undergraduates have not increased since 1992. At the same
time, the average price of attending an institution of higher education
has increased significantly.

While grants are the preferred and primary tool for equalizing
educational opportunity at the postsecondary level, loans have become an
important and necessary part of financing postsecondary education.
Today, 41% of low-income students enrolled at least half-time receive a
Federal student loan, with more than two-thirds of first- and
second-year students enrolled full-time borrowing the maximum subsidized
Stafford loan, and more than half of all graduate students borrowing the
maximum Unsubsidized Stafford loan (more than two-thirds of students in
medicine, other health science related fields and law borrowed the
maximum Unsubsidized Stafford loan).

Section 109(b) of the bill sets out the effective date for the
amendments that would be made by section 109(a) of the bill.

[Section 110.]{.underline} Section 110(a) of the bill would amend
sections 427A and 428C of the HEA to eliminate the change to a fixed
rate of 6.8 percent for Stafford and Unsubsidized Stafford Loans, and to
a fixed rate of 7.9 percent for PLUS Loans, that is scheduled for July
1, 2006, and change the interest rate on consolidation loans to a
variable rate instead of the current weighted-average calculation.

Currently, the interest rate on Stafford and Unsubsidized Stafford Loans
is a variable rate equal to the 91-day Treasury bill rate plus 1.7
percent during in-school, grace, and deferment periods, and plus 2.3
percent during repayment, capped at 8.25 percent. For PLUS Loans (for
parents), the variable rate formula is equal to the 91-day Treasury bill
rate plus 3.1 percent, capped at 9 percent. Retaining a variable
interest rate on these loans would protect borrowers and Federal
taxpayers by tying interest rates and subsidies to market forces. These
amendments would also result in borrowers paying less in interest than
would be the case under the scheduled move to a fixed interest rate.
Moreover, at no time during the 10-year budget-scoring window are
borrower interest rates expected to rise above the currently-scheduled
fixed interest rates of 6.8 percent for student loans and 7.9 percent
for parent loans.

The interest rate for consolidation loans is currently calculated on the
basis of a weighted average of the interest rates on the loans to be
consolidated, rounded up to the nearest one-eighth of a percent. Section
110 of the bill would change this to the same variable rate currently
used for Stafford and Unsubsidized Stafford Loans and extended by these
amendments. This change to a variable rate for consolidation loans would
treat current and former students equally, and borrowers who choose to
consolidate their loans will not find themselves locked in at high
interest rates during a low interest rate environment, as is the case
today. Variable rates will keep student loans tied to current market
conditions that benefit students and taxpayers.

Sections 110(b) and (c) of the bill would make conforming changes to
sections 455(b) and 438(b)(2)(I) of the HEA, respectively, to reflect
the changes proposed in section 110(a) of the bill.

[Section 111.]{.underline} Section 111 of the bill would amend section
428(b)(1)(G) of the HEA to reduce the insurance paid to lenders from 98%
to 95%, and authorize the Secretary to increase that insurance to 96
percent if the lender meets data quality standards specified by the
Secretary.

When the student loan programs were first authorized, lenders were
insured for 100% of the unpaid principal and interest on a loan, in the
event a student failed to repay it. Over the years, as ineffective
institutions were eliminated from the student loan programs, as students
were provided much improved repayment options and counseling services,
and as lenders and guaranty agencies focused their efforts on default
prevention, more students successfully repaid their student loans and
fewer students found themselves unable to repay. As a result, Congress
reduced the lenders\' level of insurance so that lenders began to share
in the risk associated with defaults. Currently, the monetary risk to a
lender as a result of a default is 2%.

As default rates have continued to decline, to the historic low of 5.2
percent last year, and repayment options improve (including the extended
repayment changes proposed in section 113 of the bill), lenders should
shoulder a greater share of the risk of default. Under this amendment,
lenders would bear 5 percent of the risk of default, unless the
Secretary chooses to increase the level of insurance by 1 percent to
reward those lenders that meet data quality standards specified by the
Secretary.

[Section 112.]{.underline} Section 112(a) would amend section
428(b)(1)(H) of the HEA to require the deposit, in the Federal Fund
established under section 422A(a) of the HEA, of a one percent
origination fee. Current law gives guaranty agencies the option of
charging the borrower an insurance fee of up to 1 percent, which is then
deposited in a Federal Fund and used to pay default claims. In 2003,
only 16 guaranty agencies charged borrowers the optional 1 percent
insurance 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 112(b) of the bill would set out the effective date for the
changes made by section 112(a) of the bill.

[Section 113.]{.underline} Section 113 would amend sections 428(b)(9)
and 455(d) of the HEA to provide all FFEL borrowers, regardless of when
their loans were made, access to the same extended repayment terms
available in the Direct Loan program. Direct Loan borrowers have access
to longer repayment terms than FFEL borrowers with comparable debt
levels; currently, FFEL borrowers must consolidate their loans to
receive similar benefits. This amendment will give FFEL borrowers the
same repayment options as Direct Loan borrowers, so that FFEL borrowers
with higher debt levels have longer repayment periods. With rising debt
levels, flexible repayment options help students manage their debt,
reducing the risk of default. Note that while the extended repayment
terms would not be changed for the Direct Loan Program, they would be
added to section 455(d) of the HEA by section 113(b) of the bill.

[Section 114.]{.underline} Section 114(a) of the bill would amend
section 428(c)(1) of the HEA to reduce the reinsurance rate for a
guaranty agency from 95, 85, or 75 percent, depending on the percentage
of loans insured by that guaranty agency and in repayment for which the
Secretary makes reimbursement payments in a fiscal year, to 92, 82, or
72 percent, respectively.

This proposed reduction is intended to encourage lenders and guaranty
agencies to continue to strengthen default prevention efforts, and in
recognition of the strong repayment record associated with student loans
today. The proposed reduction is also consistent with the amendments
proposed in section 111 of the bill to increase risk sharing by lenders.
The savings that would be generated by this increased risk sharing among
FFEL Program participants would be redirected to increase the government
investment in Federal Pell Grants (as proposed in section 103 of the
bill) and provide other benefits to students. Under the amendments
proposed in section 114(a) of the bill, guaranty agencies will, on
average, receive \$1.9 million less in fiscal year 2006 and \$4.6
million less in fiscal year 2015.

Section 114(b) of the bill would set out the effective dates for the
amendments made by section 114(a) of the bill.

Section 115. Section 115 of the bill would amend section 428(c)(6)(B) to
reduce the collection retention fee paid to guaranty agencies from the
current 23 percent to 20 percent in 2006, then to 18 percent in 2008,
and then, in 2010, to a rate that would be determined in accordance with
the regulations of the Secretary and equal to the average rate paid to
collection agencies under contract to the Department (currently 16
percent). Comparable reductions would also be made with respect to
consolidation loans and rehabilitated loans.

The Department of Education currently pays its collection contractors an
average of 16 cents on each dollar they collect. For similar collection
activity, guaranty agencies retain 23 cents. (Guaranty agencies
currently retain 18.5 cents if the collection is made by consolidating
the defaulted loan.) Guaranty agencies are operating more efficiently
today than in the past, and it is anticipated that their efficiency will
continue to increase in the future. Therefore, an incremental reduction
in the amount guaranty agencies may retain from collections on defaulted
loans to the average paid to the Department\'s private collection agents
is appropriate.

[Section 116.]{.underline} Section 116(a) of the bill would amend
section 428C of the HEA to eliminate the so-called \"single holder
rule.\" Section 116(a) of the bill would also eliminate the option for
joint consolidation by married borrowers, which has proven too
burdensome and complicated.

Currently, the single holder rule in section 428C(b)(1)(A)(i) of the HEA
generally requires that a borrower seeking a consolidation loan, and who
has all of his or her FFEL loans with a single lender, must obtain the
consolidation loan from that lender, unless the borrower certifies that
he or she has been unable to obtain a consolidation loan with
income-sensitive repayment terms from that lender. The elimination of
this provision would permit a borrower to seek out the best possible
arrangement for obtaining a consolidation loan.

Additionally, section 116 of the bill would amend section 428C(a) of the
HEA to permit borrowers to obtain a refinanced consolidation loan, which
would be defined as a new loan made to discharge the liability on a
single previous consolidation loan and no other eligible loans. Among
other benefits, this would enable student loan borrowers to take
advantage of the variable rates for consolidation loans proposed in
section 110 of the bill. A borrower seeking a refinanced consolidation
loan would be required to first apply to the lender who holds the
borrower\'s consolidation loan, and, if the holder denies the
borrower\'s application, the borrower may go elsewhere to obtain a
refinanced consolidation loan. Permitting the borrower to obtain a
refinanced consolidation loan, however, would impose additional costs on
lenders and the Federal Government, so, in order to offset those costs
and to discourage obtaining a refinanced consolidation loan for
frivolous reasons, section 116(a) of the bill would amend section
428C(a) to require the borrower to pay a 1 percent fee.

Conforming changes would also be made to sections 428C(b)(5) and 455(g)
of the HEA to eliminate other barriers to providing maximum flexibility
to a borrower seeking to consolidate his or her loans, and to permit a
borrower to obtain a refinanced consolidation loan under the Direct Loan
Program, subject to the 1 percent fee.

Section 116(b) of the bill would set out the effective dates for the
amendments that would be made by section 116(a) of the bill.

Section 117. Section 117 of the bill would amend section 428G of the HEA
to reinstate two provisions that expired on October 1, 2002, relating to
loan disbursements. As amended, section 428G(a)(3) of the HEA would
provide that, 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.

Section 428G(b)(1) would be amended to provide that, 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 loans to first-year students be delayed for 30 days
prior to disbursement.

These waiver provisions were originally added to the HEA by the Higher
Education Amendments of 1998 (P.L. 105-244), in order to reward
institutions that maintained low cohort default rates. The
Administration has supported the reinstatement of these waivers since
their expiration in 2002.

[Section 118.]{.underline} Section 118 of the bill would amend section
428I of the HEA to make substantial changes to the current \"exceptional
performance\" requirements, under which lenders receive 100 percent
insurance for achieving a 97 percent compliance rate with due diligence
requirements. The current requirements are too easily met and do not
merit an \"exceptional\" designation\--simply performing the tasks
required by the law and regulations 97 percent of the time does not
support exceptional status nor does it warrant payment of 100 percent
insurance. Instead, section 118 of the bill would set insurance for
exceptional performers at 97 percent (exceptional performance would be
limited to eligible lenders and servicers under the proposed new
language), and the Secretary would be authorized to set new performance
measures in regulations (as well as authorized to increase the insurance
rate 1 percent if the lender or servicer meets data quality standards
identified by the Secretary). Until the new performance measures are
established, current designations as exceptional performers would
continue, but the Secretary would not designate any new exceptional
performers.

The reduction to the insurance percentage for exceptional performer
status is consistent with the Administration\'s proposals to increase
risk sharing for FFEL program participants in order to increase the
government\'s investment in Pell Grants and other benefits to students.

Section 118(b) of the bill would set out the effective dates for the
amendments that would be made in section 118(a) of the bill.

[Section 119.]{.underline} Section 119 of the bill would amend section
438(b)(2)(B) of the HEA to make permanent the phase-out of the 9.5
percent floor on special allowance rates for FFELs funded using this
tax-exempt financing. Prior to enactment of the \"Taxpayer-Teacher
Protection Act of 2004\" (P.L. 108-409), holders of FFELs funded with
the proceeds of tax-exempt securities originally issued before October
1, 1993 received the benefit of a 9.5 percent floor on special allowance
rates that was substantially more generous than the special allowance
payments that are paid on other types of loans. These loan holders were
able to retain these higher benefits indefinitely by refinancing the
underlying securities. In response, the Administration proposed to
prohibit these transactions in the fiscal year 2005 budget and was
successful in securing a temporary change to the HEA through the
Taxpayer-Teacher Protection Act of 2004, which eliminated the use of
particular financial techniques designed to enable holders to receive
the more generous special allowance payments indefinitely. Section 119
of the bill would continue the work begun in the Taxpayer-Teacher
Protection Act of 2004.

[Section 120.]{.underline} Section 120 of the bill would amend section
438 of the HEA to increase the lender fee on consolidation loans from
0.50 percent to 1.0 percent, and to create a new annual loan holder
rebate fee of 0.25 percent on non-consolidation loans designed to offset
the loss to the Federal Government that occurs when lenders earn in
excess of the statutorily set lender yield.

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.

With respect to the proposed loan holder rebate fee, a June 2004 study
by the Congressional Budget Office found that lender interest returns on
variable-rate student loans are, on average, approximately 0.25 percent
above the rate of return guaranteed in the statute. Section 120(2) of
the bill would amend section 428 of the HEA to reduce Federal subsidies
accordingly, while maintaining maximum lender financing flexibility.

Reducing these subsidies will allow the Administration to invest more
resources in the Federal Pell Grant Program in order to assist
low-income students while maintaining a healthy and competitive student
loan marketplace.

[Section 121.]{.underline} Section 121(a) would amend section 441(b) of
the HEA to extend the Federal Work-Study (FWS) Program authorization
through fiscal year 2010, and to specify that 20 percent of FWS
appropriations shall be available for the community service agreements
described in section 121(c), below.

Section 121(b) of the bill would amend the allocation in section 442 of
the HEA to phase out the base guarantee portion of the current formula
over 5 years and allocate a portion of appropriations to certain
degree-granting institutions for timely degree completion, consistent
with the changes proposed to the FSEOG allocation formula in section
107(b) of the bill, but with the addition of an allocation for community
services to carry out the changes proposed in section 121(c) of the
bill.

Section 121(c) of the bill would amend section 443 of the HEA to create
a new set-aside of 20 percent of Federal Work-Study funds to be used by
institutions that wish to engage their students in community service
activities. This proposal would replace the current provision of the HEA
that requires all institutions to use 7 percent of their work-study
funds to compensate students employed in community service jobs. While
institutions placed an average of 15 percent of their students in
community service jobs, many institutions do not meet even the 7 percent
requirement. Schools would apply for community service funds by means of
a check-off on their annual applications for campus-based Federal
student aid funds. There would be no separate application, grant
competition or selection process. Institutional allocations of the
community service funds would be based on the same allocation formula
applied to regular Federal Work-Study funds. Any community service funds
not used by an institution for a fiscal year would be reallocated to
other institutions to compensate students employed in community service,
as is the case with the other excess Federal Work-Study allocations, and
the community service allocation of the institution returning the funds
would be reduced for the next fiscal year.

Section 121(c) of the bill would also add a new section 443(f) to the
HEA that would require the Secretary to provide institutions of higher
education and the appropriate public and private nonprofit agencies with
information on effective practices in the creation and maintenance of
high-quality community service and service-learning programs and
technical assistance concerning the implementation of FWS community
service programs. The Secretary would be authorized to consult with the
Corporation for National and Community Service in developing and
disseminating this information and technical assistance.

Section 121(d) of the bill would set out the effective dates for the
amendments made by sections 121(a), (b), and (c) of the bill.

[Section 122.]{.underline} Section 122 of the bill would amend section
458 of the HEA to provide \$795,000,000 per year in mandatory spending
authority for fiscal years 2006 through 2010 for administrative costs
under the Direct Loan and FFEL programs, and for account maintenance fee
payments to guaranty agencies in the FFEL program. Of that \$795,000,000
amount, \$195,000,000 would be available each year for account
maintenance fees.

The Administration continues to support changing the spending authority
under section 458 of the HEA from mandatory to discretionary, in order
to administer the Federal student aid programs within a unified
discretionary Student Aid Administration account. The current student
aid administration budget structure, which is split between mandatory
and discretionary accounts, hinders increased accountability for
reducing costs and improving financial controls. However, in light of
budget scorekeeping requirements and current tight discretionary
spending targets, the Administration believes that this change would be
better accomplished within the context of a broader revision of budget
enforcement legislation, rather than through this bill, HEA
reauthorization or the appropriations process.

Section 122 of the bill would also clarify that a guaranty agency\'s
entitlement to account maintenance fees extends only to the
\$195,000,000 specified for those fees under section 458 of the HEA,
plus any amounts transferred from the Federal Student Loan Reserve Fund
in accordance with proposed new section 458(c)(1) of the HEA (current
section 458(c)(2)(A) of the HEA).

[Section 123.]{.underline} Section 123(a) of the bill would repeal the
Federal Perkins Loan Program in Part E of Title IV of the HEA; section
123(b) of the bill would set out the requirements for the return of
Federal capital contributions and assignment of Federal Perkins Loans to
the Secretary; and section 123(c) of the bill would make conforming
changes to sections 488 and 489(a) of the HEA.

The Federal Government\'s approximately \$6 billion investment in the
Federal Perkins Loan Program is not serving most students effectively.
The number of institutions participating in the Federal Perkins Loan
program has declined from 3,338 in 1983-84 to 1,789 in 2004-05 -- a
decline of 46 percent. The number of community colleges participating
declined from 443 to 141 (a decline of 68 percent) and the number of
for-profit schools participating declined from 1,121 to 194 (a decline
of 83 percent). Only 3% of students enrolled in postsecondary education
receive Federal Perkins Loans each year. While there is significant
variation by sector, in only one sector---private not-for-profit
doctorate-granting institutions---does the percentage of students
receiving Perkins Loans exceed 10 percent.

The Federal Government puts up \$3 for every \$4 in new Federal Perkins
Loans. Compared to the subsidy rates in the FFEL and Direct Loan
programs, new Perkins Loans cost the Federal Government more to make
loans. Not only are these loans more expensive for the Federal
Government at the outset, the national cohort default rate for the
Federal Perkins Loan program is nearly twice (at 9%) the rate for the
other student loan programs.

Federal Perkins Loan borrowers also currently pay higher interest rates
than under the FFEL and Direct Loan programs. The effect on students of
the repeal of the Federal Perkins Loan Program would be mitigated by the
increase in loan limits for subsidized Stafford loans for first- and
second-year undergraduates and for Unsubsidized Stafford loans for
graduate and professional students, as proposed in section 109 of the
bill. The funds returned to the Federal Government would be used to
increase Pell Grant funds as proposed in section 103 of the bill.

Section 123(b) of the bill would require an institution of higher
education participating in the Federal Perkins Loan Program to return,
by October 1, 2006, the Federal portion of the liquid assets of the
student loan revolving fund to the Secretary of Education. The relative
Federal and institutional shares of the fund would be determined on June
30, 2005. The institution would also be required to return promptly to
the Secretary the Federal portion of collections and other receipts to
the fund that are received by the institution after the payment due by
October 1, 2006.

Next, section 123(b) would require the Secretary to publish, not later
than 180 days after the enactment of the Higher Education Act Reform
Amendments of 2005, a notice describing a plan for the orderly return of
Federal capital contributions, and the assignment of Federal Perkins
Loans to the Secretary. That plan would include provisions requiring the
assignment of Federal Perkins Loans to the Secretary; provisions
describing the periodic payment by the Secretary of the institutional
share of Federal Perkins Loans that are assigned to the Secretary; and
such other provisions for the orderly winding-down of the Federal
Perkins Loan Program and the preservation of Federal capital
contributions as the Secretary may specify. The Secretary could modify
the plan as the Secretary determines is necessary for the orderly
winding-down of the Federal Perkins Loan Program and the preservation of
Federal capital contributions.

Section 123(d) of the bill would provide that a Federal Perkins Loan
borrower would continue to be subject to the terms and conditions
applicable to that loan as of June 30, 2005 until that loan is repaid or
discharged. In addition, an institution of higher education that was
participating in the Federal Perkins Loan Program on June 30, 2005 would
continue to be subject to program requirements while the institution
holds any Federal Perkins Loans or any part of the Federal share of the
revolving fund, and would receive its institutional share of the fund in
accordance with the Secretary\'s plan.

Section 124. Section 124 of the bill would amend section 480(d)(3) of
the HEA to include active duty military personnel, including those
serving in the National Guard or the reserves if they are ordered to
active duty for other than training purposes, in the definition of
\"independent student\" 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 independent of their parent financially. Reservists not called to
active duty, cadets or midshipmen at service academies, and those in
training will continue to be treated as dependent students for need
analysis purposes.

[Section 125.]{.underline} Section 125 of the bill would amend section
484(*l*)(4) of the HEA to make changes to conform to the elimination of
the 50 percent rules, as proposed in section 102(b)(1) of the bill, and
rewrite the definition of a telecommunications course. As rewritten, the
definition would emphasize the interaction between faculty and students
(a key component of quality), incorporate references to new technology,
and more clearly differentiate telecommunications courses from
correspondence courses. The current definition could be interpreted to
allow a correspondence school to qualify for full participation in
student financial assistance programs by introducing even a very limited
amount of e-mail contact between students and a grader or instructional
assistant, with or without subject matter expertise, into what is
essentially a correspondence course. Similarly, a course outline or
notes posted to the Web might also meet the current definition.
Continuation of a broad definition of \"telecommunications\" that blurs
the distinction between telecommunications courses and correspondence
courses increases the risk of program abuse by unscrupulous schools.

[Section 126.]{.underline} Section 126 of the bill would clarify section
484(r) of the HEA so that it only affects the eligibility of student aid
applicants who commit a drug-related offense while enrolled in higher
education and receiving Federal financial assistance; incoming students
would no longer be subject to the provision.

[Section 127.]{.underline} Section 127 of the bill would make several
changes to the HEA in order to require additional performance data from
institutions that offer distance education. This data would be used to
safeguard against abuse as well as provide additional consumer
information to students and their families. These changes would conform
to the proposed elimination of the \"50-percent rules\" in section
102(b)(1) of the bill.

Section 127(a)(1) of the bill would amend section 498(b) of the HEA to

require, as part of the application form used to qualify institutions to
participate in the Title IV programs, information about the
institution\'s distance education courses and students, including the
percentages of students enrolled in telecommunications and
correspondence courses, and the percentages of telecommunications and
correspondence courses offered by the institution.

Section 127(a)(2) of the bill would add a new subsection (k) to section
498 of the HEA. Paragraph (1) of that proposed new subsection would
require each institution that offers distance education, and that meets
criteria established by the Secretary, to provide additional performance
data as required by the Secretary. Paragraph (2) of that proposed new
subsection would authorize the Secretary to consider this data in making
a determination whether to certify, recertify or provisionally certify
an institution to participate in the Title IV programs.

Section 127(b) of the bill would amend section 485(a)(1) of the HEA to
include the data provided under proposed new section 498(k)(1) in the
information that the institution must provide to prospective and
enrolled students.

Section 127(c) of the bill would set out the effective dates for the
amendments made by subsections (a) and (b) of section 127. The
amendments made to section 498(b) of the HEA, as well as proposed new
section 498(k)(1) of the HEA would be effective on enactment, so that
institutions begin tracking the data immediately. The amendments made to
section 485(a)(1) of the HEA and proposed new section 498(k)(2) of the
HEA would be effective as of the beginning of the second award year
following the date of enactment of this Act, and for succeeding award
years. This delay is necessary to provide enough lead time for
institutions to track and report the data, and so that there is
sufficient data on which to make certification decisions.

[Section 128.]{.underline} Section 128(a) of the bill would amend the
Taxpayer-Teacher Protection Act of 2004 (P.L. 108-409) by making a minor
technical change and by permanently extending authorization of the
increased loan forgiveness of \$17,500 for \"highly qualified\" math,
science, and special education teachers at qualified low-income schools.

The Taxpayer-Teacher Protection Act of 2004 amended sections 428J and
460 of the HEA to provide expanded loan forgiveness for highly qualified
math, science, and special education teachers serving low-income
communities from \$5,000 to \$17,500 for loans made prior to October 1,
2005. In the past, schools in low-income communities often were forced
to hire uncertified teachers or assign teachers who are teaching
\"out-of-field.\" By making the increased loan forgiveness available on
loans made on or after October 1, 2005 as well, this amendment would
continue to assist low-income schools in recruiting and retaining highly
qualified math, science, and special education teachers.

Section 128(b) of the bill would extend the Higher Education Relief
Opportunities for Students (HEROES) Act of 2003 (P.L. 108-76) through
fiscal year 2010. The HEROES Act authorizes the Secretary of Education
to waive or modify various statutory or regulatory provisions applicable
to the student financial assistance programs under Title IV of the HEA
as the Secretary deems necessary to provide particular types of relief
for students, institutions of higher education, and others in connection
with a war or other military operation, or national emergency.
Currently, the HEROES Act is scheduled to expire at the end of fiscal
year 2005.