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**RSC Policy Brief:**

**H.R. 5715, Ensuring Continued Access to Student Loans Act of 2008**

***(Miller, D-CA)***

*April 9, 2008*

Last week marked a major turning point in the ongoing debate regarding a
pending student loan predicament, as Senate Health, Education, Labor and
Pensions Committee Chairman Ted Kennedy (D-MA) and House Education and
Labor Committee Chairman Miller (D-CA) each announced that they would be
introducing legislation (H.R. 5715, the Ensuring Continued Access to
Student Loans Act of 2008 and S. 2815, the Strengthening Student Aid for
All Act) seeking to ensure the continued availability of student
financial assistance. In light of tomorrow's markup of H.R. 5715 in the
Education and Labor Committee, this policy brief outlines initial
concerns regarding Chairman Miller's proposal, and the effects that
previous legislation has had on the loan market.

**[Student Loan Programs Background]{.underline}**:

The federal government provides subsidized and unsubsidized loans to
parents and students for higher education (both undergraduate and
graduate) using two major programs: the Federal Family Education Loan
(FFEL) program and the Direct Loan (DL) program. The FFEL loan program
offers subsidized loans provided to students from private lenders.
Conversely, in the DL program, the federal government acts as the lender
itself and provides the capital for all loans. In FY 2007, these
programs provided \$63.9 billion in new loans to students and their
parents. In that year, the FFEL program provided 11,359,000 new loans
averaging approximately \$4,494 each, and the DL program provided
2,791,000 new loans averaging approximately \$4,603 each.

For loans subsidized by the federal government, the government pays the
interest while the student is enrolled as at least a part-time student.
The government does not pay the interest on unsubsidized loans.

**[Impact of Recent Legislation on the Student Loan
Market]{.underline}**:

Last September, the President signed H.R. 2669, College Cost Reduction
and Access Act (CCRA), into law. H.R. 2669 is having serious effects in
the market. The CCRA passed as financial markets were undergoing a
"credit crunch" that raised the cost of borrowing for financial
institutions. Among the effects of H.R. 2669, the burden of private
lenders participating in the FFEL program has increased drastically. By
reducing subsidies to lenders at a time when interest rates on the
market were rising, the CCRA has made lenders participation in the
program less attractive, causing some to pull out of the program and
creating access difficulties for students and institutions.

Many of the offsets in H.R. 2669---which were included to pay for large
increases in mandatory spending---have increased the costs for lenders
to provide loans through the program. As such, the legislation
discouraged lenders from participating in the FFEL program.

**[Direct Loan Program vs. Federal Family Education Loan
Program]{.underline}:**

Some conservatives may be concerned that Chairman Miller's proposal is
part of a larger effort by some Democratic lawmakers to breathe new life
into the Direct Loan (DL) program, and at the same time, stifle the
Federal Family Education Loan (FFEL) program. Similar proposals have
been made in the past, including Senator Kennedy's effort during the
109^th^ Congress, S. 754, the Student Aid Reward Act of 2005, which
sought to encourage universities to use the DL program, instead of
participating in the FFEL program.

The FFEL program has been extremely successful in efficiently providing
students with access to college loans. According to a report by
America's Student Loan Providers, as of 2004, 83% of schools exclusively
used the FFEL program to provide financial assistance to students. At
that same time, only 11% of schools used only the DL program, while the
remaining 6% utilized both. In addition, [another
report](http://www.studentloanfacts.org/NR/rdonlyres/81D7AFB7-FAC8-4F0F-8675-0F71DA0F478F/8800/FY2009BudgetvFinal.pdf)
by American's Student Loan Providers shows that FFEL loans cost
taxpayers significantly less than DL.

**[Summary of Chairman Miller's draft bill]{.underline}**:

The bill would increase unsubsidized Stafford loan limits for
undergraduate and graduate students by \$2,000. Furthermore, Chairman
Miller's proposal would provide a grace period deferment for parents of
PLUS loans (loans given to parents only; PLUS Loans are available
through both the FFEL and the DL programs).

The bill would also clarify that existing law gives the Secretary of
Education the authority to advance federal funds to guaranty agencies in
the event that they do not have sufficient capital to originate new
loans. The Secretary believes that this authority already exists.
According to statements made by the Republican Education and Labor
Committee staff,

> The Secretary has determined that she has the authority to issue
> mandatory advances of funds to guaranty agencies. The Secretary also
> announced that she plans to meet with the guaranty agencies to discuss
> the plans for implementation of the lender of last resort program.

Chairman Miller's proposal also gives the Secretary of Education the
temporary authority to purchase loans from lenders in the federal
guaranteed loan program (FFEL) and transfer these to Direct Loans. Some
conservatives may be concerned that this provision would have the effect
of transferring major portions of the FFEL program to be serviced
directly by the Department, representing a significant expansion of the
federal government's scope and role in the student loan marketplace.
Some conservatives may also be concerned that the Department may not be
technically equipped to handle such a rapid increase in direct student
lending, potentially resulting in requests for supplemental
appropriations by the Department and creating confusion for borrowers
whose loan servicing has suddenly been transferred into federal hands.

The bill also includes Sense of Congress language that states that
during this time when the economy is fragile and higher education and
retraining opportunities are more important than ever, that federal
financial institutions, such as the Federal Financing Bank and the
Federal Reserve, should consider using available authorities to assist
in ensuring that students and families can access federal student loans.

By way of further information, Senator Kennedy's proposal, S. 2815,
includes many of the same provisions as Chairman Miller's proposal, with
an additional provision which seeks to increase mandatory Pell grant
amounts. Increasing mandatory Pell grant amounts could encourage higher
appropriation levels in order to sustain the same maximum Pell grant
amount (thus increasing federal spending). At this time, Chairman
Miller's proposal does not include this provision.

**[Conclusion]{.underline}**:

Many conservatives remain concerned that the CCRA cut lender subsidies
by \$21 billion at a time when financial and credit markets were in
significant turmoil, rather than adapting the legislation to reflect new
conditions in the capital markets that were developing at the time of
the bill's passage last fall. As an example, Texas-based Brazos Higher
Education Service Corp. has become the latest student lender to stop
making new loans to students through the Federal Family Education Loans
(FFEL) program for the upcoming 2008-2009 academic year. According to
[FinAid.org](http://www.finaid.org/), Brazos is just another private
lender---topping a list of 26 others---which has stopped originating
federal loans.

Some conservatives may be concerned that the Democrats' response to
their ill-timed enactment of CCRA furthers government intervention and
spending, by increasing federal loan limits and providing greater
incentives for participation in DL programs.

According to a [National Review
article](http://article.nationalreview.com/?q=ZmRmNWUzZjIwY2VkMjQ4Zjk5NTM0ZmU0OTVkOThmOTA=)
published after the CCRA passed, the effects of the CCRA were foreseen:

> Loan providers will certainly feel the pain of a \$20 billion subsidy
> cut. If lots of lenders do leave the field, which they may, future
> student borrowers will also feel the pain. Unfortunately, CCRA doesn't
> justify those risks.\
> \
> The excessive interest cuts and stingy grant-award raises \[in CCRA\]
> add up to, essentially, an expensive handout for the middle class. And
> it continues Congress's trend in reforming higher education aid: more
> for middle-class voters, and not nearly enough for the poor students
> for whom federal aid was designed.\
> \
> On top of all this, CCRA doesn't put the screws on colleges to keep
> their tuition hikes in check, either. Economics 101 tells us that if
> colleges and universities can continue to count on the U.S. government
> to increase federal aid, tuition at those schools will also increase.
> That happens for several reasons, not least of which is that federal
> dollars will, in effect, subsidize tuition hikes, making them less
> costly to consumers than they actually would be. Middle-class students
> have more financial wiggle room --- plus, they often receive generous
> merit-based aid packages from colleges desperate to attract talented
> youngsters. Poor kids lose out ...

Finally, since the Department of Education already considers that it has
existing authority to advance federal funds to guaranty agencies in the
event that they do not have sufficient capital to originate new loans,
conservatives may be concerned that the only effects of Chairman
Miller's proposal would be to increase the federal government's
involvement in the student loan market, and create a bias toward more
costly DL programs.

**[RSC Staff Contact]{.underline}**: Sarah Makin,
<sarah.makin@mail.house.gov>, (202) 226-0718;

Chris Jacobs, <Christopher.Jacobs@mail.house.gov>, (202) 226-8585.

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