S 1882 -- 06/16/98
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June 16, 1998

S. 1882 - Higher Education Amendments of 1998
(Sen. Jeffords (R) VT and 5 others)

The Administration is strongly committed to working with Congress to reauthorize the Higher Education Act (HEA) this year and is encouraged that S. 1882 reflects numerous Administration proposals. However, the Administration strongly opposes enactment of S. 1882 in its current form because it contains several highly problematic provisions. These include excessive subsidies to lenders and guaranty agencies in the student loan program and inadequate funding for student aid management in the section 458 account. The Administration understands, however, that the inadequate funding will be resolved in the managers' amendment to S. 1882.

Student Loan Interest Rates. The Administration is pleased that S. 1882 includes the Administration's proposal for a new, low rate that borrowers will pay on student loans, saving those who borrow over the next five years billions of dollars. The Administration, however, strongly objects to the bill's provisions that would provide $2.4 billion in arbitrary and excessive subsidies for lenders over five years. Lenders typically are willing to accept below-average rates of return on government-guaranteed loans because of the lower risk associated with such loans. Yet, according to Department of the Treasury and Congressional Budget Office analyses, the bill would provide returns that are above lenders' profits on their overall loan portfolio. Much of the additional $2.4 billion of spending is not offset in S. 1882 and therefore would trigger a possible sequester of several entitlement programs as specified by law.

The Administration supports moving toward market mechanisms to set appropriate lender returns on FFEL loans by studying and pilot testing some models. A policy that moves toward an auction mechanism for this purpose should be part of the interest rate structure.

Guaranty Agency Reforms. The Administration is deeply concerned that S. 1882 fails to make adequate performance-based reforms to encourage and reward efficient service delivery by guaranty agencies and instead includes new and excessive sources of revenue for guaranty agencies. The most objectionable features of the bill's guaranty agency provisions would:

  • Stifle innovation and accountability for results by unduly restricting the scope of the voluntary, performance-based agreements between the Secretary and the guaranty agencies.

  • Establish an excessive portfolio maintenance payment out of the section 458 account to guaranty agencies. The Administration understands, however, that the inadequacy of funds in the section 458 account for the Department of Education student financial aid administration will be resolved in the managers' amendment to S. 1882.

  • Discourage guaranty agencies from preventing loan defaults by providing them with potentially much larger payments for collecting on loans after they default. This would result in costs of at least $644 million above the reasonable range of collection costs during five years.

Other Concerns. The Administration will seek to address other deficiencies in S. 1882 including the following.

  • S. 1882 fails to include the Administration's High Hopes and College Awareness Information initiatives. The initiatives would provide students, particularly those in low-income middle schools, with effective information, tutoring, and mentoring to prepare for college and deepen their commitment to pursue postsecondary education. The Administration understands that an amendment may be offered to incorporate aspects of these initiatives into S. 1882. Such an amendment would be a step in the right direction.

  • S. 1882 does not lower origination fees for students. The Administration understands that an amendment may be offered to eliminate the one percent insurance premium for borrowers of subsidized FFELs, and to reduce comparably the loan fee for subsidized Direct Loans. The Administration strongly supports such an amendment.

  • S. 1882 does not include the President's proposal to allow individuals with unsubsidized student loans to serve their communities for up to three years without accruing interest on these loans.

  • S. 1882 fails to exclude from taxation any loan balances that are forgiven after the maximum number of years of income-contingent repayment. Income-based repayment ensures that borrowers who remain low-income relative to their debt do not have to carry that burden for more than 25 years. Saddling them with an additional tax liability is neither appropriate nor was it ever intended.

In addition, the Administration will seek to improve further other provisions of the bill, such as the following.

  • The Administration supports the provisions of S. 1882 that would prohibit consolidation of loans that are subject to a judgment secured through litigation or a wage garnishment order. The Administration also supports the provisions that would provide an extended repayment plan for FFEL borrowers with outstanding loans of more than $30,000. This would provide greater comparability between the repayment options available for FFEL and Direct Loan borrowers. The Administration will work with Congress to improve the terms of FFEL consolidation loans to match the terms of Direct Loans.

  • The Administration supports making student financial assistance more widely available to students enrolled in distance education programs. The Administration supports amendments that may be offered to eliminate the bill's excessive restrictions on participation in the proposed distance education demonstration program and include the Administration's Learning Anytime Anywhere Partnership initiative.

The Administration looks forward to working with Congress to resolve these and other issues, such as those recently articulated in a more detailed letter from the Secretary of Education, as Congress works to reauthorize the Higher Education Act.

Pay-As-You-Go Scoring

S. 1882 would increase direct spending; therefore, it is subject to the pay-as-you-go requirements of the Omnibus Budget Reconciliation Act of 1990. The Administration has serious concerns about the significant net costs of the bill which are not offset. If the bill were enacted, its net budget costs could contribute to a sequester of mandatory programs. The Administration will work with the Congress to address its many serious concerns with the bill and to make modifications necessary to eliminate the bill's adverse budget effects. OMB's preliminary scoring of this bill is that it would increase direct spending by $1,560 million during FYs 1998-2003:

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