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103D CONGRESS

1ST SESSION H. R. 2219

To amend the Higher Education Act of 1965 to achieve savings in the

operation of the student loan programs under part B of title IV of

that Act, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

MAY 20, 1993

Mr. GORDON (for himself and Mr. GOODLING) introduced the following bill;

which was referred to the Committee on Education and Labor

A BILL

To amend the Higher Education Act of 1965 to achieve

savings in the operation of the student loan programs

under part B of title IV of that Act, and for other

purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. FINDINGS.

4 The Congress finds the following:

5 (1) The current public/private partnership has

6 succeeded in fulfilling the mission set for it by Con7 gress—delivering loans to students reliably and in a

8 timely fashion—and as such should be preserved.
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1 (2) The current Federal Family Education

2 Loan (FFEL) program is, however, in need of re3 form. Many important positive changes were made

4 during the reauthorization of the Higher Education

5 Act in the 102d Congress, but further changes are

6 needed to make the FFEL program more efficient.

7 (3) It would be preferable to improve on a pub8 lic/private partnership that is known to work rather

9 than dismantle it in favor of an unproved direct

10 Government lending program, which would increase

11 the Federal debt, further enlarge the Federal bu12 reaucracy, add major new financial oversight activi13 ties to the already overburdened Department of

14 Education, and force the Congress to depend on es15 timated savings which may prove illusory.

16 (4) The large Direct Lending Demonstration

17 Program that was begun by the Higher Education

18 Amendments of 1992 is only now getting started. It

19 would be better to allow this Demonstration Pro20 gram to proceed and show some results before ex21 panding it to cover the entire federally insured stu22 dent lending system.

23 (5) Reforming the FFEL system with the im24 mediate savings and efficiencies that are contained

25 in this bill will in no way prevent the passage and
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1 implementation of legislation that would begin a Na2 tional Service Program, as proposed by the Presi3 dent.

4 (6) Reforming the current FFEL system will

5 produce immediate savings without increasing the

6 size and debt of the Federal Government. It will also

7 assure students and their parents that they will con8 tinue to receive the funds they need for higher edu9 cation when they need them.

10 SEC. 2. INTEREST RATES.

11 Section 427A of the Act (20 U.S.C. 1077a) is amend12 ed—

13 (1) by redesignating subsection (h) as sub14 section (i); and

15 (2) by inserting after subsection (g) the follow16 ing new subsection:

17 ‘‘(h) IN-SCHOOL AND GRACE PERIOD INTEREST

18 RATES.—

19 ‘‘(1) APPLICABLE RATE.—Notwithstanding any

20 other provision of this section, with respect to any

21 loan for which the first disbursement is made on or

22 after October 1, 1993, the applicable rate of interest

23 for interest which accrues—

24 ‘‘(A) prior to the beginning of the repay25 ment period of the loan, or
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1 ‘‘(B) during the period in which principal

2 need not be paid (whether or not such principal

3 is in fact paid) by reason of a provision de4 scribed in section 428(b)(1)(M) or

5 427(a)(2)(C),

6 shall not exceed the rate determined under para7 graph (2).

8 ‘‘(2) METHOD OF CALCULATION.—For purposes

9 of paragraph (1) the rate determined under this

10 paragraph shall, during any 12-month period begin11 ning on July 1 and ending on June 30, be deter12 mined on the preceding June 1 and be equal to—

13 ‘‘(A) the bond equivalent rate of 91-day

14 Treasury bills auctioned at the final auction

15 prior to such June 1; plus

16 ‘‘(B) 2.6 percent.’’.

17 SEC. 3. LOAN TRANSFER FEES.

18 Section 428(b)(2) of the Act (20 U.S.C. 1078(b)(2))

19 is amended—

20 (1) by striking ‘‘and’’ at the end of subpara21 graph (E);

22 (2) by striking the period at the end of sub23 paragraph (F) and inserting ‘‘; and’’; and

24 (3) by adding at the end thereof the following

25 new subparagraph:
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1 ‘‘(G) provide that, if a lender or holder, on

2 or after October 1, 1993, sells, transfers, or as3 signs a loan under this part, then the transferee

4 shall pay to the Secretary a transfer fee in an

5 amount equal to 0.25 percent the principal and

6 accrued unpaid interest of the loan.’’.

7 SEC. 4. RISK SHARING.

8 (a) GUARANTY AGENCY REINSURANCE PERCENT9 AGE.—Section 428(c)(1) of the Act (20 U.S.C.

10 1078(c)(1)) is amended—

11 (1) in subparagraph (A), by striking ‘‘100 per12 cent’’ and inserting ‘‘96 percent’’;

13 (2) in subparagraph (B)(i), by striking ‘‘90 per14 cent’’ and inserting ‘‘86 percent’’; and

15 (3) in subparagraph (B), by striking ‘‘80 per16 cent’’ and inserting ‘‘76 percent’’.

17 (b) RISK SHARING BY THE STUDENT LOAN MARKET18 ING ASSOCIATION.—

19 (1) GSL PROGRAM.—Section 428(b)(1)(G) of

20 the Act is amended by inserting before the semicolon

21 at the end thereof the following: ‘‘, except that for

22 loans held by the Student Loan Marketing Associa23 tion (other than loans made pursuant to section

24 439(q)) such percentage shall be 90 percent’’.
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1 (2) FISL PROGRAM.—Section 425(b)(1) of the

2 Act is amended by inserting after ‘‘interest’’ in the

3 matter preceding clause (i) the following: ‘‘, except

4 that for loans held by the Student Loan Marketing

5 Association (other than loans made pursuant to sec6 tion 439(q)) such liability shall be 90 percent of

7 such unpaid balance, and’’.

8 (c) EFFECTIVE DATE.—The amendments made by

9 this section shall apply to any loan on which a default

10 (as defined in section 435 of the Act) occurs on or after

11 the date of enactment of this Act.

12 SEC. 5. SHARES OF POST-DEFAULT COLLECTIONS.

13 Section 428(c)(6) of the Act (20 U.S.C.

14 1078(c)(6)(A) is amended by adding at the end the follow15 ing new subparagraph:

16 ‘‘(D) Subparagraph (A)(ii) shall be applied with

17 respect to determinations of the Secretary’s equi18 table share of payments made by borrowers—

19 ‘‘(i) during fiscal years 1994 and 1995, by

20 substituting ‘27 percent’ for ‘30 percent’; and

21 ‘‘(ii) during fiscal year 1996 and succeed22 ing fiscal years, by substituting ‘26 percent’ for

23 ‘30 percent’.’’.
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1 SEC. 6. FEDERAL ADMINISTRATIVE EXPENSES.

2 (a) ADMINISTRATIVE COST ALLOWANCES.—Section

3 428(f)(1)(B) of the Higher Education Act of 1965 (20

4 U.S.C. 1078(f)(1)(B)) is amended by striking ‘‘1 percent’’

5 and inserting ‘‘0.50 percent’’.

6 (b) REINSURANCE FEES.—Section 428(c) of the Act

7 is amended—

8 (1) by striking paragraph (9); and

9 (2) by redesignating paragraph (10) as para10 graph (9).

11 (c) EFFECTIVE DATE.—The amendments made by

12 this section shall apply to loans made on or after October

13 1, 1993.

14 SEC. 7. PLUS LOAN AMOUNTS AND DISBURSEMENTS.

15 (a) LOAN AMOUNTS.—Section 428B(b) of the Act

16 (20 U.S.C. 1078–2(b)) is amended to read as follows:

17 ‘‘(b) LIMITATIONS ON AMOUNTS OF LOANS.—

18 ‘‘(1) ANNUAL LIMIT.—Subject to paragraph

19 (2), the maximum amount parents may borrow for

20 one student in any academic year or its equivalent

21 (as defined by regulation of the Secretary) is

22 $10,000.

23 ‘‘(2) LIMITATION BASED ON NEED.—Any loan

24 under this section may be counted as part of the ex25 pected family contribution in the determination of

26 need under this title, but no loan may be made to
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1 any parent under this section for any academic year

2 in excess of (A) the student’s estimated cost of at3 tendance, minus (B) other financial aid as certified

4 by the eligible institution under section

5 428(a)(2)(A). The annual insurable limit on account

6 of any student shall not be deemed to be exceeded

7 by a line of credit under which actual payments to

8 the borrower will not be made in any year in excess

9 of the annual limit.’’.

10 (b) MULTIPLE DISBURSEMENT REQUIRED.—

11 (1) AMENDMENT.—Section 428B(c) of the Act

12 is amended by inserting after ‘‘under this section’’

13 the following: ‘‘shall be disbursed in accordance with

14 the requirements of section 428G and’’.

15 (2) CONFORMING AMENDMENTS.—Section

16 428G(e) of the Act (20 U.S.C. 1078–7(e) is amend17 ed—

18 (A) by striking ‘‘PLUS, CONSOLIDATION,’’

19 and inserting ‘‘CONSOLIDATION’’; and

20 (B) by striking ‘‘section 428B or 428C’’

21 and inserting ‘‘section 428C’’.

22 (3) FISL AMENDMENT.—Section 427(b)(2) of

23 the Act (20 U.S.C. 1077(b)(2)) is amended by strik24 ing ‘‘section 428B or 428C’’ and inserting ‘‘section

25 428B’’.
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1 SEC. 8. CONSOLIDATION LOAN SAVINGS.

2 (a) INTEREST RATES.—

3 (1) REDUCTION OF RATES.—Section

4 428C(c)(1)(B) of the Act (20 U.S.C. 1078–

5 3(c)(1)(B)) is amended to read as follows:

6 ‘‘(B) Except as provided in subparagraph (C),

7 a consolidation loan shall bear interest at an annual

8 rate on the unpaid principal balance of the loan that

9 is equal to the lesser of—

10 ‘‘(i) the weighted average of the interest

11 rates on the loans consolidated, rounded to the

12 nearest whole percent; or

13 ‘‘(ii) for any 12-month period beginning on

14 July 1 and ending on June 30, determined on

15 the preceding June 1 that is a rate equal to—

16 ‘‘(I) the bond equivalent rate of 52-

17 week Treasury bills auctioned at the final

18 auction before such June 1; plus

19 ‘‘(II) 3.10 percent.’’.

20 (2) 9 PERCENT CEILING.—Section

21 428C(c)(1)(C) of the Act is amended by striking out

22 ‘‘not less’’ and inserting ‘‘not more’’.

23 (b) LIMITATION OF INTEREST SUBSIDY DURING

24 DEFERMENT.—Section 428C(c)(4)(C) of the Act is

25 amended to read as follows:
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1 ‘‘(C)(i) provides that periodic installments

2 of principal need not be paid, but interest shall

3 accrue and be paid in accordance with clause

4 (ii), during any period for which the borrower

5 would be eligible for a deferral under section

6 428(b)(1)(M), and that any such period shall

7 not be included in determining the repayment

8 period pursuant to subsection (c)(2) of this sec9 tion; and

10 ‘‘(ii) provides that interest shall accrue and

11 be paid—

12 ‘‘(I) by the Secretary, in the case of

13 a consolidation loan that consolidated only

14 Federal Stafford Loans for which the stu15 dent borrower received an interest subsidy

16 under section 428; or

17 ‘‘(II) by the borrower, or capitalized,

18 in the case of a consolidation loan other

19 than one described in subclause (I);’’.

20 (c) LENDER FEES.—Section 428C(c) of the Act is

21 amended by adding at the end the following new para22 graph:

23 ‘‘(6) INSURANCE FEE FROM LENDERS.—Each

24 lender shall pay to the Secretary, by quarterly in25 stallments, an annual amount equal to 0.5 percent
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1 of the average principal amount outstanding on

2 loans under this section held by the lender, as deter3 mined in accordance with such regulations as the

4 Secretary shall prescribe.’’.

5 (d) EFFECTIVE DATE.—The amendments made by

6 this section shall apply to loans for which the first dis7 bursement is made on or after October 1, 1993.

8 SEC. 9. DATE OF DEFAULT DETERMINATIONS.

9 (a) AMENDMENTS.—Section 435(l) of the Act (20

10 U.S.C. 1085(l)) is amended—

11 (1) by striking ‘‘180 days’’ and inserting ‘‘270

12 days’’; and

13 (2) by striking ‘‘240 days’’ and inserting ‘‘330

14 days’’.

15 (b) CONFORMING AMENDMENT.—Section

16 428(c)(1)(A) of the Act (20 U.S.C. 1078(c)(1)(A)) is

17 amended by striking the last sentence and inserting the

18 following: ‘‘A guaranty agency shall file a claim for reim19 bursement under this subsection within 45 days after the

20 agency’s discharge of its insurance obligation, except that

21 when a guaranty agency discharges its insurance obliga22 tion prior to 360 days after a loan becomes delinquent

23 with respect to any installment thereon, the guaranty

24 agency shall file a claim under this subsection within 45
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1 days after the loan becomes 360 days delinquent with re2 spect to any such installment.’’.

3 (c) EFFECTIVE DATE.—The amendments made by

4 this section shall apply on and after October 1, 1993.

5 SEC. 10. SPECIAL ALLOWANCES ON TAX EXEMPT FUNDS.

6 (a) SPECIAL ALLOWANCE AMENDMENT.—Section

7 438(b)(2)(B) of the Act (20 U.S.C. 1087–1(b)(2)(B)) is

8 amended—

9 (1) by striking the first sentence of division (i)

10 and inserting the following: ‘‘The quarterly rate of

11 the special allowance for holders of loans which were

12 made or purchased with funds obtained by the hold13 er from the issuance of obligations, the income from

14 which is exempt from taxation under the Internal

15 Revenue Code of 1986, shall be 85 percent of the

16 quarterly rate of the special allowance established

17 under subparagraph (A).’’;

18 (2) by striking division (ii); and

19 (3) by redesignating division (iii) as division

20 (ii).

21 (b) PURCHASE PREMIUMS.—Section 438(d)(2) of the

22 Act is amended—

23 (1) by striking subparagraph (C); and
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1 (2) by redesignating subparagraphs (D), (E),

2 and (F) as subparagraphs (C), (D), and (E), respec3 tively.

4 (c) EFFECTIVE DATE.—The amendment made by

5 this section shall apply to loans made on and after October

6 1, 1993.

7 SEC. 11. LENDER ORIGINATION FEES.

8 Section 438 of the Act (20 U.S.C. 1087–1) is amend9 ed—

10 (1) in the heading of subsection (c) by inserting

11 ‘‘FROM STUDENTS’’ after ‘‘ORIGINATION FEES’’;

12 (2) by redesignating subsections (d) and (e) as

13 subsections (e) and (f), respectively; and

14 (3) by inserting after subsection (c) the follow15 ing new subsection:

16 ‘‘(d) ORIGINATION FEES FROM LENDERS.—

17 ‘‘(1) DEDUCTION FROM INTEREST AND SPECIAL

18 ALLOWANCE SUBSIDIES.—Notwithstanding sub19 section (b), the total amount of interest and special

20 allowance payable under section 428(a)(3)(A) and

21 subsection (b) of this section, respectively, to any

22 holder shall be reduced by the Secretary by an origi23 nation fee in an amount determined in accordance

24 with paragraph (2) of this subsection. If the total

25 amount of interest and special allowance payable
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1 under section 428(a)(3)(A) and subsection (b) of

2 this section, respectively, is less than the amount of

3 such origination fee, the Secretary shall deduct such

4 excess amount from subsequent quarters’ payments

5 until the total amount has been deducted.

6 ‘‘(2) AMOUNT OF ORIGINATION FEES.—Subject

7 to paragraph (3) of this subsection, with respect to

8 any loan (other than loans made under sections

9 428A, 428B, 428C, and 428H) for which a com10 pleted note or other written evidence of the loan was

11 sent or delivered to the borrower for signing on or

12 after July 1, 1993, the amount of the origination fee

13 which shall be deducted under paragraph (1) shall

14 be equal to 1 percent of the principal amount of the

15 loan.

16 ‘‘(3) SLS, PLUS, CONSOLIDATION, AND

17 UNDSUBSIDIZED LOANS.—With respect to any loans

18 made under section 428A, 428B, 428C, and 428H

19 and disbursed on or after October 1, 1993, each eli20 gible lender under this part shall pay to the Sec21 retary an origination fee of 1 percent of the prin22 cipal amount of the loan.

23 ‘‘(4) DISTRIBUTION OF ORIGINATION FEES.—

24 All origination fees collected pursuant to this section

25 on loans authorized under section 428A, 428B,
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1 428C, or 428H shall be paid to the Secretary by the

2 lender and deposited in the fund authorized under

3 section 431 of this part.’’.

4 SEC. 12. LENDER-OF-LAST-RESORT REQUIREMENT.

5 Section 439(q)(1)(A) of the Act (20 U.S.C. 1087–

6 2) is amended by ‘‘may begin’’ and inserting ‘‘shall

7 begin’’.

8 SEC. 13. STUDENT LOAN MARKETING ASSOCIATION STUDY.

9 Section 439 of the Act is further amended by adding

10 at the end thereof the following new subsection:

11 ‘‘(s) TRANSITION STUDY AND ACTIVITIES.—(1) The

12 Secretaries of Education and the Treasury, in consultation

13 with the Association, shall prepare a study, to be com14 pleted within 6 months of the enactment of this provision,

15 which shall examine alternatives concerning the status, op16 erations, and purposes of the Association. Such alter17 natives shall include providing for an orderly transition of

18 the Association from a Government-Sponsored Enterprise

19 to a private corporation. Such study shall—

20 ‘‘(A) consider how best to meet the needs of

21 students and taxpayers for financing for postsecond22 ary education;

23 ‘‘(B) reflect the need for the Association to

24 maintain liquidity and perform other functions for

25 the Federal Education Loan program;
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1 ‘‘(C) consider any appropriate changes to part

2 D of title VII, relating to the College Construction

3 Loan Insurance Association; and

4 ‘‘(D) be considered by the Secretaries of Edu5 cation and the Treasury in developing any legislative

6 proposals concerning any changes to the status of

7 the Association as a Government-Sponsored Enter8 prise or its duties under the Federal Family Edu9 cation Loan program.

10 ‘‘(2) The Secretaries of Education and the Treasury

11 are directed to work with the Association to ensure that

12 any changes in the Association’s status, operations, or

13 purposes are carried out efficiently and effectively.’’.

14 SEC. 14. REPAYMENT OPTIONS.

15 (a) REGULATIONS REQUIRED.—The Secretary of

16 Education shall, not later than 60 days after the date of

17 enactment of this Act—

18 (1) prescribe the regulations required for the

19 implementation of the income sensitive repayment

20 options pursuant to section 428(b)(1)(E)(i) and

21 428(m) of the Act;

22 (2) take such steps as may be necessary—

23 (A) to inform borrowers under part B of

24 title IV of the Act of the availability of stand-
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1 ard, graduated, and income sensitive repayment

2 options for student loans; and

3 (B) to ensure that lenders under such part

4 permit borrowers to fully exercise such options.

5 (b) CONFORMING AMENDMENTS.—Section 428(b)(1)

6 of the Act (20 U.S.C. 1078(b)(1)) is amended—

7 (1) in subparagraph (D)(ii), by inserting ‘‘ex8 cept as permitted pursuant to subparagraph (E),’’;

9 (2) in subparagraph (E)—

10 (A) by striking ‘‘subparagraphs (D) and

11 (L)’’ and inserting ‘‘subparagraph (L)’’;

12 (B) by inserting ‘‘or 428H’’ after ‘‘section

13 428A’’;

14 (C) by inserting ‘‘under subsection (m)’’

15 after ‘‘regulations of the Secretary’’; and

16 (D) by striking ‘‘nor more than 10 years’’.

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