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Student Aid and Fiscal Responsibility Act of 2009

Rep. George Miller, Chairman of the House Committee on Education and Labor, introduced the Student Aid and Fiscal Responsibility Act of 2009 (SAFRA) on Wednesday, July 15, 2009 (text of HR 3221, legislation blog). Full committee markup occurred on July 21, 2009. The bill passed the House on September 17, 2009 by a vote of 253 to 171.

Action in the Senate was delayed because of concern about the ability to obtain the 60 votes needed to prevent a filibuster. Instead, the legislation would be passed through budget reconciliation, which needs just a simple majority (51 votes) for passage. However, the need to preserve budget reconciliation as an option for passage of the health care reform legislation required a delay, since there may be only one budget reconciliation bill per budget cycle. The delay lead to a rescoring of the legislation that reduced the savings from 100% direct lending to $68 billion over 11 fiscal years (10 award years), a $20 billion drop. This, when coupled with a $10 billion increase in the deficit reduction, forced Congress to drop many provisions from the legislation. In addition, an underestimate of the number of students who would qualify for the Pell Grant as increased by the American Recovery and Reinvestment Act of 2009 lead to a $13.5 billion funding shortfall for the Pell Grant program. This required that a significant portion of the Pell Grant funding be diverted toward backfilling the funding shortfall and in turn derailed the proposal to index the maximum Pell Grant to 1% over the Consumer Price Index. See Health Care and Education Reconciliation Act of 2010 for an overview of the final version of the legislation that was ultimately enacted.

The legislation implements President Obama's FY2010 budget proposals for student financial aid (with some differences), including a switch to 100% direct lending, indexing the maximum Pell Grant to inflation plus 1%, reengineering the Perkins Loan Program and establishing the College Access Challenge Grant program.

The student aid provisions appear in Title I (pages 4-39 of the PDF) and Title II (pages 39-88 of the PDF). A detailed review of the student aid provisions of the legislation follows.

Pell Grant as a Quasi-Entitlement

The SAFRA legislation sets the maximum Pell Grant at $5,350 in 2009-2010 and $5,550 in 2010-2011, and increases the maximum grant thereafter by CPI + 1%, rounded to the nearest $5, reaching $6,900 in 2019-2020. (This is consistent with an average inflation rate of 1.6% + 1.0%.) The fact sheet and legislation blog state that the cost will be $40 billion over ten years.

It appears that the legislation is able to reduce the ten-year cost to $40 billion from the $98 billion cost for President Obama's original proposal by maintaining a distinction between mandatory and discretionary Pell Grant funding. President Obama's proposal would have required all Pell Grant funding to be mandatory, making it a true entitlement, and would have based eligibility on the mandatory maximum Pell Grant. SAFRA sets the maximum Pell Grant as the sum of the maximums under mandatory and discretionary funding, with eligibility for the Pell Grant continuing to be based on just the maximum Pell Grant under discretionary funding (i.e., an eligibility cutoff at 95% of the discretionary maximum, with a minimum Pell Grant at 10% of the discretionary maximum). All inflation-adjusted increases in the total maximum Pell Grant would be implemented through increases in the mandatory funding. Discretionary funding would remain flat unless changed by the appropriations committee. Thus under the SAFRA proposal the EFC cutoff on eligibility would remain unchanged at $4,617 since the discretionary maximum would remain unchanged. This is in contrast with the Obama Administration's proposal would have set it at 95% of the overall maximum Pell Grant (i.e., increasing to $6,555 by 2019). SAFRA increases the funding received by each recipient without expanding the number of recipients. The Obama administration proposal would also expand the number of recipients. Assuming 7 million current recipients, the SAFRA proposal yields a ten-year cost of approximately $43 billion.

The SAFRA proposal would not turn the Pell Grant into a true entitlement. The appropriations committee would be able to adjust the maximum Pell Grant upward or downward by increasing or decreasing the maximum grant under discretionary funding. This means that the appropriations committee will be able to divert Pell Grant funding to other priorities. Also, if they reduce the discretionary maximum Pell Grant, the number of students eligible to receive a Pell Grant will decrease by nearly 200,000 recipients for each $100 decrease in the Pell Grant. However, the mandatory portion of the Pell Grant cannot be reduced below the previous year's mandatory portion of the Pell Grant, as SAFRA provides for using the previous year's mandatory portion of the Pell Grant if the current year's mandatory portion of the Pell Grant would be lower. Still, this makes it possible for the appropriations committee to keep the total maximum Pell Grant flat or even decrease it by cutting the discretionary funding. The most likely scenario for cuts in the appropriated maximum Pell Grant would involve across-the-board spending cuts, similar to the $69 cut in the maximum Pell Grant that was included in the Consolidated Appropriations Act of 2008.

Notes:

The CPI + 1% adjustment is applied to the previous year's maximum Pell Grant as rounded, not the underlying unrounded value. This means there will be a cumulative rounding error that will tend to yield a slightly higher maximum Pell Grant (e.g., a $6,900 maximum Pell Grant in 2019 instead of $6,890).

The Consumer Price Index is defined as CPI-U, as specified in section 478(f) of the Higher Education Act of 1965, for the prior year. To the extent that estimates of this index in previous years differ from the actual index values, an adjustment will be made to the CPI-U figure to compensate for the prior year errors.

College Access and Completion Innovation Fund

The goals of the College Access and Completion Innovation Fund are to improve college access, retention and completion, provide financial literacy training to students, encourage students to reduce loan debt, expand articulation agreements between 2-year and 4-year institutions and facilitate post-completion employment. There is a special focus on students from groups that are underrepresented in postsecondary education. The legislation will also provide funding to States to help them develop longitudinal data and reporting systems in support of these goals. Colleges, states and nonprofit organizations may compete for funding.

The fund will provide $600 million per year for five years, a total of $3 billion. This funding will be allocated as follows:

50% of the funding will be used to establish State Innovation Completion Grants. These are competitive matching grants to States to increase enrollment, persistence and completion (especially for underrepresented populations), with a 2/3 federal share. At least one-third of the funds must be used for 2-year institutions and at most 10% for the data system and at most 6% for administrative purposes. The states may elect to issue subgrants to state nonprofit organizations.
25% of the funding will be directed at the College Access Challenge Grant Program that was established by the College Cost Reduction and Access Act of 2007.
24% of the funding will be used for Innovation in College Access and Completion National Activities. This will include studies and programs that identify policies and practices that increase the number of individuals with college degrees or certificates. The focus is on improving measurable outcomes such as degree completion, graduation without debt and post-graduation employment. (This provision is changed to 23% in the Manager's Amendment to HR 3221.)
1% of the funding will be for evaluation of the programs. (This provision is changed to 2% in the Manager's Amendment to HR 3221.)

FAFSA Simplification

The SAFRA legislation makes several changes to support simplification of the Free Application for Federal Student Aid (FAFSA) beginning in the 2011-12 academic year.

SAFRA eliminates assets from the list of data elements on the FAFSA and the student/parent contributions from assets from the need analysis formula. This will not only eliminate six questions from the FAFSA form, but it will also eliminate any disincentive to save for college since there will no longer be any penalty for saving.

However, the legislation also establishes a $150,000 asset cap on eligibility for need-based aid, including need-based grants, loans and work-study. The asset cap would be based on combined student and parent assets for dependent students and combined student and spouse assets for independent students. The asset cap would be adjusted annually for inflation, rounded to the nearest $5. It is unclear how this asset cap could be enforced, given that SAFRA eliminates asset questions from the FAFSA. (The Manager's Amendment to HR 3221 changes the asset cap to apply to "a Federal Pell Grant, a Federal Direct Stafford Loan, or work assistance under this title" instead of "any need-based grant, loan, or work assistance under this title".)

Curiously, the legislation does not repeal the simplified needs test even though it would be rendered moot by the elimination of assets from the FAFSA.

Other simplifications include:

SAFRA bases the Social Security Allowance on total income instead of income earned from work. (This provision is dropped in the Manager's Amendment to HR 3221.)
SAFRA amends the definition of untaxed income and benefits to drop child support, workman's compensation, veteran's benefits, housing/food and other allowances for military and clergy, cash support or any money paid on the student's behalf, and other untaxed income and benefits. This eliminates 12 questions from the FAFSA and would leave just three items in the definition of untaxed income and benefits, namely the interest on tax-free bonds, the untaxed portion of pensions, and payments to IRA/Keogh accounts.
SAFRA modifies the definition of assets to exclude employee pension benefit plans.

The legislation does not include other simplifications proposed by the Obama administration, such as basing household size on the number of exemptions listed on the federal income tax return.

Suspension of Eligibility for Drug-Related Offenses

SAFRA changes the criteria for suspension of eligibility for drug-related offenses. Previously students could lose eligibility for either the possession or sale of a controlled substance during the period of enrollment. SAFRA drops the penalties for possession of a controlled substance but retains the penalties for sale of a controlled substance. SAFRA also increases the suspension to 2 years for a first offense and indefinite for a second offense.

Switch to 100% Direct Lending

SAFRA switches to 100% Direct Lending starting July 1, 2010, ending the origination of new FFELP loans on that date. All new federal education loans would be made through the Direct Loan program.

Borrowers who have FFELP consolidation loans would be permitted to obtain Direct consolidation loans without needing to provide any justification.

The US Department of Education's authority for awarding contracts for servicing Direct Loans would be modified to give special consideration to not-for-profit state agencies. These state agencies would be given priority in servicing loans originated at institutions located in the state. They would receive guaranteed contracts to service the loans of 100,000 borrowers attending colleges in the state or an equal share among all not-for-profit state servicers of the actual number of loans for borrowers attending colleges in the state, whichever is less. (Borrowers would not be split across servicers. Servicers could include for-profit entities wholly owned by a not-for-profit entity.) The state not-for-profit servicers would still have to meet the Department's standards and agree to service the loans at a competitive market rate as determined by the Department, but such a competitive market rate would include escalators based on the volume of loans serviced by the servicer, in recognition of the amortization of fixed costs over a smaller portfolio of borrowers. It is unclear how a market rate would be defined in such a no-bid situation.

The criteria for selecting servicers will include price, servicing capacity and capability, default aversion activities and outreach activities. Outreach is defined as including programs that encourage enrollment and completion of degree or certification programs, that encourage families to obtain financial aid (but minimize the borrowing of education loans) and that provide financial literacy and counseling tools.

(The Manager's Amendment to HR 3221 adds a retention incentive payment to entities that agree "to give priority for hiring for positions created as a result of such a contract to those geographical locations at which the entity performed student loan origination or servicing activities under the Federal Family Education Loan Program as of the date of enactment of the Student Aid and Fiscal Responsibility Act of 2009." It also adds the retention of highly qualified employees as a positive factor in allocation of loan volume to servicers.)

The legislation includes two provisions that are of benefit to FFELP lenders:

It repeals the reduction in the insurance percentage from 97% to 95% that was scheduled to go into effect on October 1, 2012.
It switches SAP from the 3-month commercial paper rate (financial) to the 1-month LIBOR index, effective January 1, 2010, for loans first disbursed on or after January 1, 2000 (assuming the lender waives the right to a SAP based on the 3-month commercial paper rate) or disbursed on or after the date of enactment of the legislation otherwise. This fixes the index rate mismatch problem and may make it feasible for lenders to securitize any remaining older FFELP loans despite the lack of a future in the FFELP program. (The Manager's Amendment to HR 3221 changes the CP-LIBOR fix dates from 1/1/2010 to 10/1/2009 and 3/31/2010 to 12/31/2009.)

The SAFRA legislation does not, however, include a FFELP community proposal to expand the ABCP conduits established under the ECASLA authority to include consolidation loans made between 5/1/03 and 7/1/09 that are not more than 210 days delinquent. That proposal would have helped resolve some of the outstanding liquidity issues among lenders while generating additional fee income for the federal government.

Changes in Subsidized Stafford Loans

SAFRA ends subsidized Stafford loans to graduate and professional students starting July 1, 2015. (This provision is dropped in the Manager's Amendment to HR 3221.)

SAFRA also makes changes to the interest rates on subsidized Stafford loans for undergraduate students. Under current law, the interest rates on subsidized Stafford loans for undergraduate students are scheduled to increase from 3.4% to 6.8% on new loans first disbursed on or after July 1, 2012. The SAFRA legislation will change the interest rate formula for new loans originated on or after July 1, 2012 to a variable rate equal to the 91-day T-Bill rate plus 2.3% and capped at 6.8%. (The Manager's Amendment to HR 3221 changes the variable interest rate from 91-day T-Bill rate + 2.3% to 91-day T-Bill rate plus 2.5%.) The unsubsidized Stafford loan interest rate will remain fixed at 6.8%.

The change to the interest rates on subsidized Stafford loans for undergraduate students does not improve college access, retention or completion as the financial benefit is realized after the student enters repayment, not up front when students need money to pay college bills. The income-based repayment program does a much better job of targeting repayment relief to borrowers who are experiencing financial difficulty. Frankly, subsidized interest is very expensive to the federal government and the funds would be more effectively spent by repealing the subsidized Stafford loan program for both undergraduate and graduate students and directing the savings at increasing the Pell Grant even further. Eliminating the subsidized Stafford loan would yield enough funding to turn the Pell Grant program into a true entitlement.

Reengineering of the Perkins Loan Program

SAFRA reengineers the Perkins loan program effective 10/1/2010. The new Perkins loans, which will be called the Federal Direct Perkins Loan, will be the same as unsubsidized Stafford loans and will be serviced by the direct loan program, but with the following differences:

The interest rate will remain at 5% but will no longer be subsidized. It is unclear why the SAFRA proposal retains the 5% interest rate.

Eligible borrowers must demonstrate financial need, per section 464(b) of the Higher Education Act of 1965. However, the legislation does not appear to give priority to students with exceptional need as the old Perkins loan did under section 463(a)(8) of the Higher Education Act of 1965.

Colleges retain discretion in the awarding of Perkins loans to eligible students, but would be required to package them after subsidized and unsubsidized Stafford loan eligibility had been exhausted.

The annual and aggregate loan limits would be the same as the limits in the old Perkins loan program. The undergraduate loan limits are $5,500 annual and $27,500 aggregate. The graduate loan limits are $8,000 annual and $60,000 aggregate (including undergraduate Perkins loans). Aggregate limits apply to the combination of both new and old Perkins loans received by the borrower.

The total funding is increased to $6 billion in new Perkins loans per year.

There is a provision for matching funds for the purpose of providing loan benefits to borrowers as agreed by the college and the Department. No further details are given about this provision.

Funding will be allocated with half based on the adjusted self-help need at colleges (ratably reduced across all colleges if adjusted self-help need exceeds half of the annual available funding), a quarter based on the low tuition incentive, and a quarter based on the college's Pell Grant degree recipient percentage.

The self-help need is the sum of the average non-zero financial need (COA-EFC) during the prior prior year for undergraduate and graduate/professional students, capped at the annual Perkins loan limits ($5,500 for undergraduate students and $8,000 for graduate and professional students) and will an additional 25% of COA cap for undergraduate students.
COA is defined as including average tuition and required fees per FTE enrollment, room and board, books and supplies, transportation and miscellaneous personal expenses (including computers).
The adjusted self-help need is the self-help need or the average of the principal amount of Perkins loans made at the institution during the five most recent award years, whichever is larger. The Perkins loan allocations at other colleges would be ratably reduced, if necessary, to accommodate this preservation of historical allocations. (As noted below, the legislative language would have the unintended consequence of freezing Perkins loan allocations after five years, since section 462A(c)(3) applies to all institutions and not just those with Perkins loan allocations prior to enactment of SAFRA.)
The low tuition incentive is based on comparisons of the tuition and required fees for all undergraduate and graduate students (but not apparently professional students) with financial need at the institution during the prior prior year with the average for the sector during the prior prior year. There would be two such comparisons, one for colleges that are below average and one for colleges that are above averages. The colleges that are below average would get credit for the amount by which the tuition and fees are below average. The colleges that are above average would get credit for the amount by which the tuition and fees net of non-federal need-based grant aid is below average. (As noted below, there appears to be a flaw in the legislative language in that the colleges that are below average do not get any credit for the extent to which non-federal need-based grant aid brings the net tuition and fees even further below average. Another concern is that the figures could be manipulated by increasing fees instead of tuition.)
The Federal Pell Grant and Degree Recipient percentage is the college's share of all students receiving an associate's degree or other postsecondary degree at any college who had previously received a Pell Grant at any college. Colleges that are more successful in graduating Pell Grant recipients will get a larger Perkins loan allocation.

Colleges with historical Perkins loan funding will get to retain the institutional contribution portion of any loan payments made by borrowers as the payments are made (including loan cancellations due to the various forgiveness provisions) and will be required to remit the federal capital contribution portion to the US Department of Education. (Vice versa if the loans are assigned to the Department.) Colleges will also get a payment for administrative expenses of 0.5% of the outstanding principal and interest balance of old Perkins loans as of September 30 of each year.

Flaws in the Perkins Loan Reengineering

There appear to be two flaws in the legislative language for the Perkins loan reengineering:

There is a provision that is intended to ensure that colleges with current Perkins loan allocations will not experience a reduction in their allocations. While the legislative language will be successful in ensuring that these colleges will not experience a reduction in their Perkins loan allocations, it also has the unintended consequence of eventually fossilizing the allocations at all colleges, not just the colleges with current Perkins loan allocations.
The current legislative language requires that a college's allocation can never drop below the five year moving average of previous allocations. After five years this will ensure that college allocations can never decrease, eliminating any opportunity for future adjustments (or allocations to new colleges).
This conflicts with the President's goal of adjusting allocations to changes in the distribution of needy students across colleges. It would not only preserve current historical allocations, but would establish new historical allocations that would be preserved as well after a few years. This only affects half of the annual Perkins funding, as the rest of the funding would still be allocated based on success in controlling college costs, awarding of non-federal need-based grants, and improving the retention and graduation of low-income students.
This problem can be fixed by restricting the five-year averaging to just colleges with Perkins loan allocations in existence before passage of the legislation.
The low tuition incentive has two provisions, one of which applies only to colleges with below average tuition and fees and one of which applies only to colleges with above average tuition and fees. The latter gives the college credit for non-federal need-based grant aid to the extent that it brings the college's tuition and fees below average. The former only gives the college credit to the extent that the college's tuition and fees are below average, without any extra credit for any non-federal need-based grant aid that brings the tuition and fees for needy students even further below average.
The current legislative language would provide a perverse incentive for a college with below average tuition and fees that awards significant non-federal need-based grants to increase tuition above average and to award all of the increased funding as additional need-based non-federal grants. This would yield the same net tuition but would give the college credit for its non-federal need-based grants.
This problem can be fixed by eliminating the distinction between colleges with tuition above or below average, and instead basing the low tuition incentive on the amount by which tuition and fees for needy students, after subtracting any non-federal need-based grant aid, is below the average tuition and fees.

HBCU/HSI Funding

SAFRA provides $1.275 billion in funding for Historically Black Colleges and Universities and Hispanic Serving Institutions at $255 million a year for five years. (At the committee markup on July 21, 2009, this was extended from five years to ten years, doubling the funding to $2.55 billion.)

Community College Initiatives

The legislation also includes several community college initiatives.

$2.5 billion for Community College Modernization and Construction in Title III Subtitle B Section 351 of SAFRA.
$7 billion for the Community College Initiative ($730M/year for FY2010 through FY2013 and $680M/year for FY2014 through FY2019, inclusive). This provides funding with up to a 1:1 federal match to expand opportunities for community college students to earn Bachelor's degrees (e.g., articulation agreements), provide job-skill training programs and student support services (e.g., intensive career and academic advising and job counseling), and the creation of free online high quality online training programs and courses.

90/10 Rule

At the House Committee on Education and Labor markup of the SAFRA legislation on July 21, 2009, the committee passed an amendment by Rep. Robert E. Andrews (D-NJ) by a vote of 42-5 to allow proprietary colleges to count the unsubsidized Stafford loan limit increases established by the Ensuring Continue Access to Student Loans Act of 2008 as part of the 10% in the 90/10 rule through 7/1/2012. Previously this relief would have expired on 7/1/2011. It would also provide similar relief from loans originated under the new Federal Direct Perkins Loan program through 7/1/2012. It temporarily (through 7/1/2012) increased the number of consecutive years of failure to comply with the 90/10 rule before Title IV eligibility suspension from two years to three years and the automatic invocation of provisional status from after one year of failure to two years of failure.