NASFAA's Executive Committee Acts on Additional Reauthorization Recommendations

The NASFAA Executive Committee met via conference call on January 22, 2003 to consider the five additional recommendations forwarded to the Board of Directors by the Reauthorization Task Force (RTF). The RTF met via conference call on November 25 and December 5, 2002 to finalize these recommendations.

The issues considered are described below. For each issue, the recommendation, and rationale, Executive Committee action, and additional discussion (if appropriate) are included. Note that the issue numbers relate back to NASFAA's original set of recommendations.

Part B Loans/Issue 8: Illegal Inducements [Section 428(b)(3), 428A(a)(1)(B), & 435(d)(5)]

1. Develop new statutory language requiring annual disclosure to ED of date, amount, purpose, recipient name, and type of every single payment, gift or gratuity above $50 for all such expenditures by a lending entity (lender, guaranty agency, and their agents, subsidiaries, etc.) at a postsecondary institution, or to an institutional employee or relation of same, or institution agent, subsidiary, etc.  Such disclosures must be made publicly available, including posting on the web.  Criminal penalties (jail time and fines) apply for not reporting or misreporting such disclosures; penalties apply both for corporate and employee violations.

2. NASFAA urges the lending community to adopt a voluntary policy on illegal inducements and if an effective self-regulatory policy is developed, then NASFAA would withdraw our first recommendation

Rationale: The Task Force spent considerable time debating this issue. It appears that a small number of participants in the FFEL program are crossing the line and violating the illegal inducement section of the HEA. Regrettably, a small number of schools may be encouraging such behavior, especially higher ranking administrators who may not have the developed sense of ethics that their financial aid administrator has. The Department of Education seemingly has been reluctant to enforce the law. This may be due to the fact that the only penalty available to the Secretary is making the offending lending entity ineligible to participate any longer in FFELP.

The Task Force looked at various options to modify current law; it concluded that the law could not be rewritten in a comprehensive fashion to cover all of the circumstances that give rise to such illegal inducements. The Task Force suggests that a new provision mandating disclosure of all spending over $50 made by a lending entity be reported to the Secretary who is then required to make such reports widely available including making them available on the web. Penalties for violation of these disclosure provisions would apply. It is our hope that this disclosure provision will reduce the incidence of illegal inducements since everyone would have access to the information. Knowing this, the competitive pressure on lending entities to cross the line would be reduced since even their competitors would have access to their spending reports. The Task Force believes disclosure is a positive step, but, not as an extreme step as the alternatives. For example, the Inspector General at the Department of Health and Human Services recently issued guidance in the area of inducements by pharmaceutical companies in marketing their drugs to doctors and pharmacies. The HHS Inspector General's guidance is explicit in signaling that marketing violations will be prosecuted under federal bribery and anti-fraud laws. The Task Force suggests that a disclosure provision is a more effective step than writing into law more explicit requirements that might be evaded, that might not be used by ED, or could be more burdensome or Draconian. Disclosure is a necessary step to curb abuse and at the same time preserve competition and provide services to schools. A school and its staff should not be influenced by what a lender will “give” them in determining which lender or loan program to promote to their students.

While NASFAA plans to advance its original recommendation, it would be willing to withdraw this recommendation if the lending community adopts an effective policy on illegal inducements that would address the financial aid community's concerns. We believe self-regulation in this area is preferable to statutory solutions.  NASFAA understands that current problems are not all the fault of the lending community. Regrettably, a few schools have stepped over the line in their activities and, consequently, NASFAA would be pleased to cooperate with other interests in developing such a policy.

Action: TABLED, until the spring 2003 Board of Directors' meeting pending outcome of informal discussions in the lending community about self-regulation.

Part F Need Analysis/Issue 1:  Legal Guardians [Section 479A)]

Recommendation: On a case-by-case basis, use professional judgment authority to determine appropriate treatment for students with legal guardians.

Rationale: NASFAA recognizes the complicated and varied situations surrounding students with legal guardians. For this reason, a standardized treatment is not feasible. NASFAA believes that the provisions of Section 479A offer the most equitable options for treatment: students may be considered independent with the possibility of including voluntary support from a legal guardian as a student resource or income.

Action: DELETED.

Additional Discussion: Executive Committee members voiced concern about the possibility of facilitating the shift of financial responsibility to someone outside the family as a matter of convenience. They believe that this recommended action is currently permitted and are concerned about adding any additional examples to those already included in Section 479A.

Part F Need Analysis/Issue 11:  FAFSA Simplification [Section 479(a)]

Recommendation:  Develop a check-off box on the Free Application for Federal Student Aid (FAFSA) for TANF [Temporary Assistance for Needy Families] and General Relief recipients that would allow them to bypass all income and asset questions. These students would automatically qualify for the maximum Pell Grant (plus the additional $750 designated for maximum negative EFC families) and would have a zero EFC for determination of financial need for all other federal student aid programs.   

Rationale:  These families have already passed a needs test certifying their eligibility for federal, state and local subsistence programs. Evidence indicates that the complexity of the FAFSA may discourage these families from applying for financial aid. A simple check-off on the FAFSA would mitigate this problem. 

Action:  APPROVED.

Part F Need Analysis/Issue 12:  Expected Family Contribution (EFC) [Section 473]

Recommendation:  Rename the Expected Family Contribution (EFC) the Family Eligibility Index (FEI). 

Rationale:  The RTF respectfully requests reconsideration of this recommendation. This change in terminology would recognize that the federal analysis of income and assets is an eligibility index for federal, state, and institutional aid rather than an actual family contribution calculation. NASFAA proposes this change to help alleviate misunderstanding among families as to the nature of the contribution.

Action:  MODIFIED to rename the Expected Family Contribution as the Federal Eligibility Index; APPROVED as modified.

Additional Discussion:  Executive Committee members believe that “federal” is a more accurate descriptor of the calculation result as it is a federal formula used for distribution of federal funds.

Part G General Provisions/Issue 29:  Eliminate Hope/Lifetime Learning Benefits (Modify IRS Code)

Recommendation: Repeal the Hope/Lifetime tax credits and tuition deduction only if (1) such tax expenditures are on a dollar-for-dollar basis transferred to pay for creation of a Pell Grant entitlement or are used as an offset for other appropriate Title IV budgetary offsets; and (2) the Administration supports such a change.

Rationale: NASFAA recommends repeal of the Hope/Lifetime tax credits and the recently enacted tuition deduction. We do so for several reasons. The use of tax credits during the period of postsecondary school attendance is less helpful as a part of a national student assistance policy; because of the significant impact on the federal budget and the trade-offs inherent in such practice, and the inefficiency and inequity of tuition tax credits as public policy.

NASFAA believes that the use of these three tax expenditures to support citizens in their postsecondary education is inappropriate. NASFAA agrees with several higher education finance experts who suggest that the use of the tax system can play an important role in helping pay the costs of a postsecondary education. We believe that use of the tax system is appropriate before entrance into a postsecondary school and after the individual leaves the institution, but use of the tax system during times of enrollment is inappropriate, inefficient, and not well targeted to those with the most need for assistance. For example, using tax breaks to encourage savings for college before an individual attends is an efficient method of encouraging a behavior few would object to. And, providing a tax credit or deduction for interest paid on student loans after leaving school is an efficient method of reducing a borrower's debt burden. But, the use of the tax system with the array of benefits as currently structured for periods of enrollment, experts state, is a misguided and not well-targeted policy.

Further, NASFAA recommends this position because tax credits are not available to students when the funds are needed, i.e., during the school year when the tuition bill must be paid. The students or their parents receive the tax credits after filing their federal tax returns when the academic year is nearly completed. Thus, the tax credits do not reach the students at the appropriate time.

Since it is a non-refundable tax credit, low-income families with little or no tax liability who in fact need the most assistance with college costs cannot receive this assistance to help them for any out of pocket college costs.

Tax credits to middle and upper-middle income students do not encourage college attendance – they simply reward behavior that would have taken place in the absence of the tax credits. On the other hand, Pell Grants awarded to the neediest of students enable them to attend college, which was previously out of their reach.

Tax credits reach students after the funds are needed and are thus an inefficient means of providing educational funding. In its September 2002 report, "Student Aid and Tax Benefits," the GAO reported that in tax year 1999, 6.4 million tax filers obtained about $4.8 billion in higher education tax credits through the tax code. The government also provided direct support to 3.7 million of the neediest students in the country through the Federal Pell Grant Program, expending $7.2 billion. It is well known that the Pell Grant Program has been underfunded for many years, with the buying power of the federal grant losing ground since its inception. Congress has not appropriated the dollars necessary to fund the maximum authorized Pell levels simply because it has been too expensive to do so. However, NASFAA argues that if Congress is able to forego well over $45 billion in tax revenues over ten years through Hope and Lifetime Learning tax credits and the tuition deduction to the less needy, it should be able to fully fund and expand the Pell Grant Program and also make up past shortfalls by canceling education tax credits and using the revenues for the neediest students in the country.

Consequently, NASFAA recommends shifting that large amount of funding from spending on tax credits and the tuition deduction to paying for improvements in the Title IV student aid programs such as making the Pell Grant Program a true entitlement with a maximum grant of $8,000, or elimination of the origination fee, or increasing loan limits or a combination of these recommendations or other positive changes that better target scarce federal resources to those most in need of such assistance.

While some middle-income families certainly will lose the benefits of these tax credits, it is equally true that other HEA changes suggested by NASFAA will increase middle-income families' eligibility for Title IV program benefits. Our recommendation for increases in loan limits will provide benefits beyond those provided by the tax code. Another increase of benefits, which could accrue to the middle-income families, is the increase in the Pell Grant maximum award which would result in the receipt of a Pell Grant award which could fully or partially offset any loss of tax benefits for which the taxpayer qualifies under current tax code. Again, in an era of limited federal funding resources, NASFAA suggests targeting funding to the most needy of our citizens, rather than those who are better able to afford a postsecondary education.

At NASFAA, we are not naïve enough to believe our recommendation of this change will be accepted without support from powerful quarters.  And, we recognize such a proposal has certain dangers.  Consequently, we are making this recommendation contingent on two matters. 

First, any such change must transfer on a dollar-for-dollar basis such tax expenditure amounts for Hope, Lifetime, and the deduction to the Title IV programs to set up a Pell Grant entitlement and/or to be used as an offset to pay for other NASFAA recommendations, for example, to eliminate the origination fee or increase loan limits. We would vigorously oppose any elimination of any education tax expenditure to fund some other tax benefit not related to education such as elimination of the double taxation of dividends. Again, to be perfectly clear our support of elimination of these three tax expenditures is contingent on such funds being used to support the Title IV HEA student assistance programs. 

Second, such a massive change in policy as we propose is also contingent on the Administration supporting our recommendation.  We know it will be impossible to make such a change without political leadership coming from the White House and the Department of Education.  Consequently, NASFAA suggests this change in tax policy only if explicitly supported by the Administration.  If that support is not forthcoming, then NASFAA does not endorse the elimination of these tax benefits and would support continuation of them.

Action: MODIFIED to remove the contingency of Administration support while retaining the link between the savings achieved and need-based student aid; APPROVED as modified.

Additional Discussion: Executive Committee members believe that the recommendation must stand on the merits and did not support the contingency.

The approved recommendations will be sent to the House of Representatives Subcommittee on 21st Century Competitiveness.

By Marty Guthrie
NASFAA Director of Governmental Relations

Posted January 29, 2003 on www.NASFAA.org, the Web Site of the
National Association of Student Financial Aid Administrators (NASFAA).
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