The Student Loan Reform Bill: A Perspective

The final student loan reform bill that Congress approved on March 25 is dramatically scaled back from earlier versions of the legislation (see Sept. 2, 2009 Washington Update).  For starters, it eliminates proposed new programs for community colleges, and the President's state-based higher education reform initiative.  Instead, the final bill opted for more limited funding of an existing job training program at the Department of Labor, and an existing college completion and access program in Title VII of the Higher Education Act.

Private colleges, in particular, breathed a sigh of relief at the removal of the state-based reform efforts for higher education.  While the final bill would have excluded private colleges from both state control and state funding, there was still much concern about the inappropriate precedent the legislation could have set for the governance of public institutions.  There was an equally great concern that such programs could have diminished the federal focus on student aid.

Also cut from the bill was proposed new funding for early childhood education and K-12 school construction.  The greatest lose to private colleges, though, was the elimination of a proposed expansion of the Perkins loan program.  If it had survived, that provision could have provided millions of students access to low-cost Perkins loans instead of high-cost supplemental private loans.

Beyond these last-minute changes, though, the simpler legislation that ultimately emerged still stands as a historic change in federal student aid and health care policy for colleges - one that will have profound effects in the months and years ahead. Here are some of the bill's highlights.

Student Aid

• The new $5,550 Pell Grant maximum goes into effect July 1, and will stay in place (subject to appropriators maintaining base funding of $4,860) through 2012-13.  Then effective July 1, 2013, for five years the grant will increase by the previous year's CPI rate.  After those five years, funding will plateau. The bill provides $36 billion for these increases. 
  
  
• New borrowers of student loans will be eligible for an income-based repayment plan, effective July 2015.  Also, student loans will be forgiven after 15 years of repayment, instead of 20 years, as currently required. 
  
  
• These improvements are paid for by requiring all colleges to convert to direct lending by July 1, 2010.  A $50 million fund has been created to assist colleges in this conversion effort.

Health Care Provisions of Importance to Higher Education

• Colleges and universities that offer their own student health insurance plans may continue to do so.  (Early Senate language unintentionally restricted student health insurance, but this was corrected in the final bill.)
  
  
• Children will now be able to stay on their parents' insurance through age 26.  The change is effective this September.
  
  
• There will be new limitations on Flexible Spending Accounts (FSAs).  Also, a new surtax on so-called "Cadillac" insurance plans will take effect in 2018.  The new 40 percent excise tax will be imposed on health insurance plans valued over $10,200 for individuals, or over $27,500 for families (indexed for inflation).  Many plans offered by colleges could be affected.

A Long Legislative Journey

This bill marks the end of a lengthy legislative voyage through difficult waters.  It marks the apparent end of the long and bitter controversy over direct versus bank-based loans, and some sectors (particularly community colleges) are disappointed that the proposals noted above were ultimately slashed from final bill.  Still, there was a general sigh of relief among higher education groups in Washington that the bill was finally done.

For the first time in nearly eight years, higher education does not have major changes to the Higher Education Act pending in Congress (although nearly all higher education tax provisions will expire this year - see Feb. 10 Washington Update story).  Since the Higher Education Act reauthorization process began in 2002, to the passage of the student aid reform bill March 25, higher education has been in a constant state of legislative review.

HEA reauthorization finally wrapped up in August 2008.  Meanwhile, the student aid programs were altered through three major reconciliation bills in 2006, 2007 and 2010.  There also was emergency legislation on two occasions to provide liquidity to the bank-based student loan programs, plus higher education dealt with  numerous technical bills that frequently made changes well beyond just the technical.

The student loan reform bill that Congress passed on March 25 was by far the most controversial -- especially when a technical issue over a Pell Grant provision sent the entire health care reconciliation act back to the House for another painful vote (see NAICU's March 25 update to presidents).  The bill is certain to keep both colleges and the Department of Education busy, as both work furiously to ensure that all students will be able to borrow through the direct loan program by July 1, 2010.  The transition, which will have to be made at dizzying speed, is certain to have bumps along the way.

The Bottom Line

Collectively, these bills have been a mixed bag for colleges.  On one hand they have brought more reporting requirements for all schools, while loosening fraud and abuse rules on the for-profit sector.  On the other hand, the student aid programs -- particularly the Pell Grant program -- are now household-name federal efforts with an army supporters in both parties. 

The bill that was just passed did provide essential funding to the Pell Grant program.   The Pell funding crisis only became evident in the final weeks before the bill passed.  The funding shortfall facing Pell Grants is so dramatic, that once the bill's $36 billion in new funds are put in the program, this will not guarantee keeping the maximum grant at $5,550 permanently, as more and more needy Americans head to college and a better life.

For low-income students, and the colleges that serve them, the federal role in, and support of student aid has never been more important.  This has been particularly true during the recent economic downturn, when Congress has demonstrated time and again its willingness to infuse massive support into federal student aid.  There are, however, more costs for colleges in delivering that student aid -- mostly through added reports on an array of matters not necessarily related to institutional accountability for federal student aid funds.  Still, both students and colleges have benefited.

Overall, independent colleges have been treated fairly.  The ability of non-profit schools to serve students from all economic backgrounds, while remaining true to their many diverse institutional missions, has been maintained.  At the end of the day, the messy process of sausage making has supported our individual missions, and helped our neediest students.

For more information, please contact:
Stephanie Giesecke