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
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
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
- 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.
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