SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Student Aid Reward Act of 2005''.

SEC. 2. STUDENT AID REWARD PROGRAM.

    Part G of title IV of the Higher Education Act of 1965 (20 U.S.C. 
1088 et seq.) is amended by inserting after section 489 the following:

``SEC. 489A. STUDENT AID REWARD PROGRAM.

    ``(a) Program Authorized.--The Secretary shall carry out a Student 
Aid Reward Program to encourage institutions of higher education to 
participate in the student loan program under this title that is most 
cost-effective for taxpayers.
    ``(b) Program Requirements.--In carrying out the Student Aid Reward 
Program, the Secretary shall--
            ``(1) provide to each institution of higher education 
        participating in the student loan program under this title that 
        is most cost-effective for taxpayers, a Student Aid Reward 
        Payment, in an amount determined in accordance with subsection 
        (c), to encourage the institution to participate in that 
        student loan program;
            ``(2) require each institution of higher education 
        receiving a payment under this section to provide student loans 
        under such student loan program for a period of 5 years after 
        the date the first payment is made under this section;
            ``(3) where appropriate, require that funds paid to 
        institutions of higher education under this section be used to 
        award students a supplement to such students' Federal Pell 
        Grants under subpart 1 of part A;
            ``(4) permit such funds to also be used to award need-based 
        grants to lower- and middle-income graduate students; and
            ``(5) encourage all institutions of higher education to 
        participate in the Student Aid Reward Program under this 
        section.
    ``(c) Amount.--The amount of a Student Aid Reward Payment under 
this section shall be not less than 50 percent of the savings to the 
Federal Government generated by the institution of higher education's 
participation in the student loan program under this title that is most 
cost-effective for taxpayers instead of the institution's participation 
in the student loan program that is not most cost-effective for 
taxpayers.
    ``(d) Trigger to Ensure Cost Neutrality.--
            ``(1) Limit to ensure cost neutrality.--Notwithstanding 
        subsection (c), the Secretary shall not distribute Student Aid 
        Reward Payments under the Student Aid Reward Program that, in 
        the aggregate, exceed the Federal savings resulting from the 
        implementation of the Student Aid Reward Program.
            ``(2) Federal savings.--In calculating Federal savings, as 
        used in paragraph (1), the Secretary shall determine Federal 
        savings on loans made to students at institutions of higher 
        education that participate in the student loan program under 
        this title that is most cost-effective for taxpayers and that, 
        on the date of enactment of the Student Aid Reward Act of 2005, 
        participated in the student loan program that is not most cost-
        effective for taxpayers, resulting from the difference of--
                    ``(A) the Federal cost of loan volume made under 
                the student loan program under this title that is most 
                cost-effective for taxpayers; and
                    ``(B) the Federal cost of an equivalent type and 
                amount of loan volume made, insured, or guaranteed 
                under the student loan program under this title that is 
                not most cost-effective for taxpayers.
            ``(3) Distribution rules.--If the Federal savings 
        determined under paragraph (2) is not sufficient to distribute 
        full Student Aid Reward Payments under the Student Aid Reward 
        Program, the Secretary shall--
                    ``(A) first make Student Aid Reward Payments to 
                those institutions of higher education that 
                participated in the student loan program under this 
                title that is not most cost-effective for taxpayers on 
                the date of enactment of the Student Aid Reward Act of 
                2005; and
                    ``(B) with any remaining Federal savings after 
                making Student Aid Reward Payments under subparagraph 
                (A), make Student Aid Reward Payments to the 
                institutions of higher education eligible for a Student 
                Aid Reward Payment and not described in subparagraph 
                (A) on a pro-rata basis.
            ``(4) Distribution to students.--Any institution of higher 
        education that receives a Student Aid Reward Payment under this 
        section--
                    ``(A) shall distribute, where appropriate, part or 
                all of such payment among the students of such 
                institution who are Federal Pell Grant recipients by 
                awarding such students a supplemental grant; and
                    ``(B) may distribute part of such payment as a 
                supplemental grant to graduate students in financial 
                need.
            ``(5) Estimates, adjustments, and carry over.--
                    ``(A) Estimates and adjustments.--The Secretary 
                shall make Student Aid Reward Payments to institutions 
                of higher education on the basis of estimates, using 
                the best data available at the beginning of an academic 
                or fiscal year. If the Secretary determines thereafter 
                that loan program costs for that academic or fiscal 
                year were different than such estimate, the Secretary 
                shall adjust by reducing or increasing subsequent 
                Student Aid Reward Payments rewards paid to such 
                institutions of higher education to reflect such 
                difference.
                    ``(B) Carry over.--Any institution of higher 
                education that receives a reduced Student Aid Reward 
                Payment under paragraph (3)(B), shall remain eligible 
                for the unpaid portion of such institution's financial 
                reward payment, as well as any additional financial 
                reward payments for which the institution is otherwise 
                eligible, in subsequent academic or fiscal years.
    ``(e) Definition.--In this section:
            ``(1) Student loan program under this title that is most 
        cost-effective for taxpayers.--The term `student loan program 
        under this title that is most cost-effective for taxpayers' 
        means the loan program under part B or D of this title that has 
        the lowest overall cost to the Federal Government (including 
        administrative costs) for the loans authorized by such parts.
            ``(2) Student loan program under this title that is not 
        most cost-effective for taxpayers.--The term `student loan 
        program under this title that is not most cost-effective for 
        taxpayers' means the loan program under part B or D of this 
        title that does not have the lowest overall cost to the Federal 
        Government (including administrative costs) for the loans 
        authorized by such parts.''.
Student Aid Reward Act of 2005 - Amends the Higher Education Act of 1965 (HEA) title IV (Student Assistance) to direct the Secretary of Education to carry out a Student Aid Reward (SAR) Program of payments to encourage institutions of higher education (IHEs) to participate in the student loan program under title IV that is most cost-effective for taxpayers.

Requires that a SAR payment to an IHE equal at least 50 percent of the savings to the Federal Government generated by the IHE's participation in the most cost-effective student loan program, rather than one not cost-effective for taxpayers.

Requires IHEs receiving SAR payments to: (1) provide student loans under that most cost-effective program for five years after the payment date; and (2) use payment funds, where appropriate, to supplement student Pell Grants. Allows such funds to be used also to award need-based grants to lower and middle income graduate students.
A bill to ensure that the Federal student loans are delivered as efficiently as possible, so that there is more grant aid for students.