NASFAA's Reauthorization Task
Force (RTF) is pleased to share preliminary reauthorization recommendations for
the federal student loan and grant programs for your comments. The RTF
developed this package of recommendations at its June 2005 meeting in Washington, D.C. in
response to a request by NASFAA's Board of Directors. The RTF welcomes your
comments at govtaffairs@nasfaa.org
through close of business on Thursday,
June 16, 2005. All responses will be treated as confidential and
working documents will be stripped of any identifying information by NASFAA
staff before your comments are shared with the RTF or the Board.
Background. In May 2005, NASFAA's Reauthorization Task Force
requested initial comments from the membership on the merits of the proposed Student
Aid Reward (STAR) legislation and the School as Lender (SAL) Program. The RTF
received many thoughtful opinions representing the multi-faceted points of
these topics. In response, the Board
asked the RTF to review what options could be advanced to incorporate the
positive student-centered goals of STAR and SAL.
After an extensive
examination of the responses, the RTF found that the opposition from the
membership to SAL and/or STAR is primarily the uneven distribution of benefits
to students. The main statements of support for SAL and STAR come from the desire
for an increase in grant funds to needy students. The NASFAA membership
universally supports increased need-based student aid that treats all sectors
equitably and believes that savings generated by any changes to the student aid
programs should be reinvested in students and not deficit reduction.
In an attempt to remain
budget-neutral in the current fiscal environment, we understand that any
increases to programs will need to come from changes to other programs within
that budget category. We propose to achieve this goal by specifying that the
savings from these recommendations be directed to fund additional federal
grants through the Federal Supplemental Educational Opportunity Grant (FSEOG)
and Pell Grant programs and through need-based grant support for graduate
students.
Recommendations. The RTF doesn't believe that either the STAR legislation
or the SAL statute support the principles of fairness and equity; therefore, we
offer the following package of recommendations as a better policy option to
generate the savings necessary to provide additional federal grant aid for all
students at no additional cost to taxpayers.
1. Implement tiered
reduction of lender yield based on volume in loan portfolio.
Explanation: The 2001GAO/ED report entitled
Alternative Market Mechanisms for the Student Loan Program [located at: http://www.gao.gov/new.items/d0284sp.pdf]
recognized that as lender yield is reduced incrementally, smaller lenders would
be likely to leave the program first and large lenders who are able to operate
at a lower cost per dollar originated would grow either by acquiring assets of
outgoing banks or increased activity due to less competition.
The Administration's FY 2006
budget proposed a 25 basis point fee to reduce lender yield. The RTF believes
that an approach using portfolio size to determine the fee thus acknowledging
economies of scale is more equitable in terms of impact on net lender yield.
As an example, a large lender
with a portfolio of $1 billion or more would pay a 35 basis point fee and a
small lender with a portfolio less than $50 million would pay no fee. A lender
with a portfolio of loans between $50 million and $1 billion would pay a
graduated fee proportional to its portfolio relative to $1 billion.
2. Support Congressional
Budget Office (CBO) recommendation to eliminate floor on lenders' yield from
FFEL.
Explanation:
Under the Federal Family Education Loan (FFEL) Program, borrowers pay lenders
an interest rate (called the student rate) that is determined once a year
according to a formula set in law. The interest rate that lenders receive (the
lender rate) is based on a target rate that is calculated quarterly using another
legislated formula. If the lender rate is greater than the student rate, the
federal government pays lenders an additional amount in that quarter. If that
rate is less than the student rate, the government does not make any additional
payments. In effect, the student rate is a floor below which a lender's return
cannot fall. This option would eliminate the floor on the interest rate that
lenders receive.
3. Support CBO
recommendation to eliminate the guaranteed 9.5% return on loans financed from
proceeds of certain tax-exempt bonds.
Explanation:
Effective October 30, 2004, Public Law
108-409 prohibits lenders from using refunding and transferring as methods to
increase the volume of student loans receiving the 9.5% guaranteed yield, but
it allows lenders to continue to recycle repayments of existing 9.5% loans into
new 9.5% loans. Those new restrictions are in effect through December 2005. The
President's FY 2006 budget proposes making those restrictions permanent. This option
would do the same, and it would eliminate the recycling of repayments into new 9.5%
loans. Although lenders holding existing 9.5% loans would continue to receive
that guaranteed yield, they would not be able to maintain or increase the
volume of such loans. The yield on all new loans would be the same as on
current loans not financed with pre-1993 tax-exempt financing. Last year, when
the Congress passed a one-year ban on this practice, the savings were used as
an offset to finance loan forgiveness to certain elementary and secondary
teachers; the RTF proposes adoption of this recommendation with such savings
going to need-based grants instead of providing teacher loan cancellations.
4. Originate all new consolidation
loans under the Direct Loan (DL) Program.
Explanation:
Moving all of loan consolidation to DL will save $20
billion over 10 years, which can conceivably be
used to finance benefits for students such as increased loan limits and
elimination of fees and/or need-based grant aid. Regular lenders gain volume
through increased loan limits and schools gain through their students'
additional benefits.
5. If the Direct Loan consolidation
recommendation is not adopted and consolidation remains in both DL and FFEL, eliminate
Special Allowance Payments (SAP) on FFEL variable rate consolidation loans.
Explanation:
The RTF believes that this is an appropriate means of
recovering excess earnings that result from the basic program structure.
Savings from adoption of this provision will be directed to need-based grant
aid.
6. If the Direct Loan
consolidation recommendation is not adopted and consolidation remains in both
DL and FFEL, support the Administration's proposal to increase lender fee from
.5% to 1% on FFEL consolidation loans. Such fee could not be passed on to the
student.
Explanation:The
Administration proposes to increase the current one-time lender fee on new
consolidation loans by 50 basis points to 1% as part of a package of proposals
to reduce costs in the loan consolidation program.
7. Use any savings
generated by new Direct Loan volume to fund federal need-based grants for
students.
Explanation:
The recommendation clarifies that savings generated
by the Direct Loan Program will contribute to additional need-based grant
funding.
NASFAA's Reauthorization Task
Force believes that this package of recommendations is needed to provide the additional
grant resources for needy students. We look forward to your comments at govtaffairs@nasfaa.org by the close of
business on Thursday June 16, 2005. Please remember that NASFAA will treat all responses
as confidential and working documents will be stripped of any identifying
information by NASFAA staff before your comments are shared with the RTF or the
Board.
The RTF will review all
comments and plans to offer final recommendations to NASFAA's Board of
Directors at the July meeting.
Submitted by NASFAA's Reauthorization Task Force
Originally posted June 8, 2005 on www.NASFAA.org, Web Site of the
National Association of Student Financial Aid Administrators
Copyright 2005. Redistribution to nonmember institutions is prohibited
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