After a month-long summer recess, members of the House and Senate reconvened today in Washington to take up issues pertaining to the reauthorization of the Higher Education Act and appropriations for Title IV and other education programs.
One of the issues that top legislators' concerns for the next few weeks will reportedly involve proposals to change the way the federal loan consolidation program operates. Lawmakers have in recent months called for reform of the program, and proposed legislation that would make it legal for graduated and out-of-school borrowers to "reconsolidate" their student loans in order to lock in historically low interest rates.
Current law only allows borrowers in repayment to consolidate their various loans once, and many students elected to do so before the interest rates for Stafford Loans dropped to the all-time low of 3.42% on July 1.
Advocates of the change compare the proposal to existing laws that allow homeowners to refinance their home loans in order to secure better rates and save money over the long term.
Lawmakers to Debate Consolidation Bills
Witnesses at a July 22 hearing of the House Subcommittee on 21st Century Competitiveness debated whether consolidation loans could function in a manner similar to other kinds of loans.
Another witness, Rep. Rosa DeLauro (D-Conn.), on June 18 introduced H.R. 2505, the College Loan Assistance Act, which would allow out-of-school borrowers to reconsolidate student loans and would strengthen federal benefits for low-income students by increasing the Pell Grant maximum from the current $4,050 to $7,000.
On July 10 Rep. David Wu (D-Ore.) introduced H.R. 2711, a similar bill to "permit refinancing of federal student consolidation loans, and to permit students freedom to select a student loan consolidator."
The issue has created a political divide in Congress. While representatives from both sides of the aisle have signed on the cosponsor Wu and DeLauro's measures, 21st Century Subcommittee Chair Howard P. "Buck" McKeon (R-Calif.) has stated his opposition to allowing refinancing of college loans.
Both H.R. 2505 and H.R. 2711 have been referred to the House Subcommittee on 21st Century Competitiveness.
A 'Bogus' Analogy?
At the July 22 hearing, NASFAA President Dallas Martin and other members of the higher education community emphasized that student consolidation loans are not comparable to mortgages or other loans.
"Our members are ... perplexed that some individuals suggest that federally subsidized consolidation loans are 'just like home mortgages,'" said NASFAA's Martin, adding "student loans are directly subsidized and that is the critical difference" between the two.
The lending community is largely opposed to any changes that would allow students to refinance their consolidation loans. Nelnet President Don Bouc agreed that student loans are not like a home loans for several reasons. "We're lending money to someone who doesn't have a job, a credit rating, [and] who has no collateral," he pointed out. "The reason the student loans work is because of the government subsidies associated with it."
Bouc said the change could also cause significant fiscal problems for lenders. "If you shake the ground [investors] are standing on by changing the terms of the loans, you end up losing investors and increasing the rates necessary for those who do stick around."
Other lenders are not opposed to the idea of permitting reconsolidation. At the July 22 congressional hearing, Barry Morrow, CEO of Collegiate Funding Services, said that reconsolidation would be costly to lenders "because we'd be turning higher interest rate loans into lower rate loans."
But, he added that "student loan borrowers clearly want the ability to reconsolidate and if Congress can work out the budget-scoring challenges of reconsolidation, we support whatever is best for student loan borrowers--even if our revenues take a hit in the process."
Original Intent
Joseph Russo, director of financial aid for Notre Dame University, noted that "loan consolidation--as popular as it is--is surely not what was intended by those who originally legislated it."
Since there is "not an unlimited pot of money," Russo said "there will be less for current need-based aid ... if federal subsidies are extended for individuals who are no longer students and supposedly are working."
In the reauthorization recommendations NASFAA sent to Capitol Hill on June 27, the Association recommended "returning loan consolidation to first principles, the understanding of the uses of consolidation when the program was first adopted by the Congress, e.g., to help ease the confusion and paperwork of having multiple holders and to prevent default."
The recommendations further state that "convenience loan refinancing should be prohibited. Nowhere in setting up the loan consolidation program years ago did Congress contemplate using the system as a means of refinance."
By Elizabeth B. Guerard
NASFAA Assistant Director of Communications
Posted September 2, 2003 on
www.NASFAA.org, the Web Site of the
National Association of Student Financial Aid Administrators (NASFAA).
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