June 16, 1998
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:
Other Concerns. The Administration will seek to address other deficiencies in S. 1882 including the following.
In addition, the Administration will seek to improve further other provisions of the bill, such as the following.
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.
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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