SECTION 1. REFERENCE.

    Except as otherwise expressly provided, whenever in this Act an 
amendment or repeal is expressed in terms of an amendment to, or repeal 
of, a section or other provision, the reference shall be considered to 
be made to a section or other provision of the Higher Education Act of 
1965 (20 U.S.C. 1001 et seq.).

SEC. 2. CONSOLIDATION LOAN INTEREST RATES.

    (a) FFEL Loans.--Paragraph (3) of section 427A(l) (20 U.S.C. 
1077a(l)) is amended to read as follows:
            ``(3) Consolidation loans.--
                    ``(A) Borrower election.--With respect to any 
                consolidation loan under section 428C for which the 
                application is received by an eligible lender on or 
                after July 1, 2006, the applicable rate of interest 
                shall, at the election of the borrower at the time of 
                application for the loan, be either at the rate 
                determined under subparagraph (B) or the rate 
                determined under subparagraph (C).
                    ``(B) Variable rate.--Except as provided in 
                subparagraph (D), the rate determined under this 
                subparagraph shall, during any 12-month period 
                beginning on July 1 and ending on June 30, be 
                determined on the preceding June 1 and be equal, for 
                such 12-month period, to--
                            ``(i) the bond equivalent rate of 91-day 
                        Treasury bills auctioned at the final auction 
                        held prior to such June 1; plus
                            ``(ii) 2.3 percent,
                except that such rate shall not exceed 8.25 percent.
                    ``(C) Fixed rate.--Except as provided in 
                subparagraph (D), the rate determined under this 
                subparagraph shall be determined on the date on which 
                the obligation to repay the loan is signed, and be 
                equal, for the duration of the term of the loan, to--
                            ``(i) the average bond equivalent rate of 
                        the 3-year Treasury note as determined on the 
                        basis of the last publication in May of the 
                        Federal Reserve Statistical Release H-15 (or 
                        its successor) prior to the date on which the 
                        obligation to repay the loan is signed; plus
                            ``(ii) 2.3 percent,
                except that such rate shall not exceed 8.25 percent.
                    ``(D) Consolidation of plus loans.--In the case of 
                any such consolidation loan that is used to repay loans 
                each of which was made under section 428B or was a 
                Federal Direct PLUS Loan (or both), the rates 
                determined under subparagraphs (B) and (C) shall be 
                determined--
                            ``(i) by substituting `3.1 percent' for 
                        `2.3 percent'; and
                            ``(ii) by substituting `9.0 percent' for 
                        `8.25 percent'.''.
    (b) Direct Loans.--Subparagraph (C) of section 455(b)(7) (20 U.S.C. 
1087e(b)(7)) is amended to read as follows:
                    ``(C) Consolidation loans.--
                            ``(i) Borrower election.--Notwithstanding 
                        the preceding paragraphs of this subsection, 
                        with respect to any Federal Direct 
                        Consolidation Loan for which the application is 
                        received by an eligible lender on or after July 
                        1, 2006, the applicable rate of interest shall, 
                        at the election of the borrower at the time of 
                        application for the loan, be either at the rate 
                        determined under clause (ii) or the rate 
                        determined under clause (iii).
                            ``(ii) Variable rate.--Except as provided 
                        in clause (iv), the rate determined under this 
                        clause shall, during any 12-month period 
                        beginning on July 1 and ending on June 30, be 
                        determined on the preceding June 1 and, for 
                        such 12-month period, not be more than--
                                    ``(I) the bond equivalent rate of 
                                91-day Treasury bills auctioned at the 
                                final auction held prior to such June 
                                1; plus
                                    ``(II) 2.3 percent,
                        except that such rate shall not exceed 8.25 
                        percent.
                            ``(iii) Fixed rate.--Except as provided in 
                        clause (iv), the rate determined under this 
                        clause shall be determined on the date on which 
                        the obligation to repay the loan is signed, 
                        and, for the duration of the term of the loan, 
                        not be more than--
                                    ``(I) the average bond equivalent 
                                rate of the 3-year Treasury note as 
                                determined on the basis of the last 
                                publication in May of the Federal 
                                Reserve Statistical Release H-15 (or 
                                its successor) prior to the date on 
                                which the obligation to repay the loan 
                                is signed; plus
                                    ``(II) 2.3 percent,
                        except that such rate shall not exceed 8.25 
                        percent.
                            ``(iv) Consolidation of plus loans.--In the 
                        case of any such Federal Direct Consolidation 
                        Loan that is used to repay loans each of which 
                        was made under section 428B or was a Federal 
                        Direct PLUS Loan, the rates determined under 
                        clauses (ii) and (iii) shall be determined--
                                    ``(I) by substituting `3.1 percent' 
                                for `2.3 percent'; and
                                    ``(II) by substituting `9.0 
                                percent' for `8.25 percent'.''.

SEC. 3. RECAPTURE OF EXCESS INTEREST.

    Section 438(b)(2)(I) (20 U.S.C. 1087-1(b)(2)(I)) is amended by 
inserting after clause (vii) the following new clause:
                            ``(viii) Recapture of excess interest.--
                                    ``(I) Excess credited.--With 
                                respect to a loan on which the 
                                applicable interest rate is determined 
                                under section 427A(l) and for which the 
                                first disbursement of principal is made 
                                on or after July 1, 2006, if the 
                                applicable interest rate for any 3-
                                month period exceeds the special 
                                allowance rate applicable to such loan 
                                under this subparagraph for such 
                                period, then an adjustment shall be 
                                made by calculating the excess interest 
                                in the amount computed under subclause 
                                (II) of this clause, and by crediting 
                                the excess interest to the Government 
                                not less often than annually.
                                    ``(II) Calculation of excess.--The 
                                amount of any adjustment of interest on 
                                a loan to be made under this subsection 
                                for any quarter shall be equal to--
                                            ``(aa) the applicable 
                                        interest rate minus the special 
                                        allowance rate determined under 
                                        this subparagraph; multiplied 
                                        by
                                            ``(bb) the average daily 
                                        principal balance of the loan 
                                        (not including unearned 
                                        interest added to principal) 
                                        during such calendar quarter; 
                                        divided by
                                            ``(cc) four.''.

SEC. 4. STUDENT LOAN BORROWER CHOICE OF LOAN CONSOLIDATOR.

    Section 428C(b)(1)(A) of the Higher Education Act of 1965 (20 
U.S.C. 1078-3(b)(1)(A)) is amended by striking ``and (i) the lender 
holds'' and all that follows through ``selected for consolidation)''.
Amends the Higher Education Act of 1965 (HEA) to allow borrowers consolidating student loans to choose: (1) a variable or fixed interest rate; and (2) the loan consolidator.

Provides for the Federal Government's recapture of excess interest charged by lenders, under HEA provisions for special allowances for lenders of student loans.
To allow borrowers consolidating student loans to choose a variable or fixed interest rate, and for other purposes.