Senate Panel Votes to Cut Lender Subsidies and Increase Student Aid

New versions of major higher-education and spending bills advance quickly with strong bipartisan support

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By KELLY FIELD

Washington

The Senate education committee approved a pair of bills last week that would slash government subsidies to student-loan companies, increase student aid, and set higher-education policy for the next five years.

No Democrats and only three Republicans voted against the first bill — a "budget reconciliation" measure that would cut lender subsidies by over $18-billion — and none voted against the second, a bill to reauthorize the Higher Education Act. Both measures had been crafted with input from the committee's Republicans.

The House of Representatives passed its own version of the budget reconciliation this month, but has yet to deliberate on a bill to reauthorize the Higher Education Act. The House and Senate have until September to reach agreement on a compromise reconciliation bill.

The Senate's budget-reconciliation measure would use the savings derived from reducing subsidies to student-loan companies to pay down a portion of the federal deficit and create two new grant programs intended to help low-income students attend college.

Over all, the bill would cut lender subsidies by more than $18-billion, while reducing the federal deficit by almost $1-billion and increasing student aid by more than $17-billion. It would also cap the amount of money that student borrowers in income-contingent repayment plans must pay each month and expand loan forgiveness to more borrowers.

The Senate's reauthorization bill would raise the authorized level for the maximum Pell Grant to $6,300, over three years. It would set the minimum Pell grant at 10 percent of the maximum award, an increase from the current minimum of $400.

Moving Money Around

Sen. Edward M. Kennedy, a Massachusetts Democrat who is the education committee's chairman, said the reconciliation bill "signals to students that their futures are our top priority."

Lenders warned, however, that the bill's cuts to lender subsidies could drive smaller companies out of the federal student-loan program and force the remaining providers to scale back on borrower benefits, such as rate reductions for those who make their payments on time. They said those reductions would ultimately hurt middle-class borrowers, many of whom wouldn't qualify for the new grants.

Still, the proposed subsidy cuts are not as deep as many lenders had feared. Earlier this year, the Consumer Bankers Association circulated a draft proposal from Senator Kennedy's office that called for cutting the subsidy rate on student loans by 60 basis points, or six-tenths of a percentage point, and reducing the governments' reimbursements to lenders for loans in default from 97 cents on the dollar to only 85 cents.

By contrast, the bill approved by the education committee last week would cut subsidies by 50 basis points for for-profit lenders and 35 basis points for nonprofit lenders, and would trim the default-insurance rate by only one percentage point.

The three Republican senators who voted against the reconciliation bill, including Sen. Judd Gregg of New Hampshire, said they objected to the use of budget reconciliation — intended to help reduce the deficit — to increase federal spending. Mr. Gregg pointed out that while the bill would trim the deficit by $1-billion, it would increase federal student aid by many times that amount.

"The reconciliation process is supposed to give Congress a chance to review entitlement spending programs that grow unchecked year after year," he said. "To find massive amounts of savings in entitlement programs and use only a fraction of it for deficit reduction while hijacking the rest for the creation and expansion of new programs is a blatant abuse of this process."

Mr. Kennedy pointed out that reconciliation bills have been used to expand student aid in the past, most recently in 2005. He also emphasized that all the new spending would be balanced by cuts to the student-loan programs.

Gains in Student Aid

In addition to creating the two new grant programs, the Senate reconciliation bill would repeal a federal rule, known as "tuition sensitivity," that has prevented some students attending low-cost colleges from receiving the maximum Pell Grant. It would also raise the income cutoff for automatic eligibility for the maximum Pell Grant from $20,000 to $30,000, and it would ease the "work penalty," allowing working students to deduct more of their earnings when calculating their expected family contribution.

The bill would also eliminate a question on the Free Application for Federal Student Aid, or Fafsa, that asks students if they have ever been convicted of possessing illegal drugs while receiving federal student aid.

The bill would also test the concept of using an auction to set the subsidies the government pays to lenders in the federal guaranteed-student-loan program. Those subsidies are now set by Congress. The pilot program for testing the concept would be limited to PLUS loans to parents. The House bill called for a similar pilot program but did not limit it to PLUS loans.

In an effort to contain college costs, the reauthorization bill would require the secretary of education to establish a "higher-education price index" and to place colleges whose tuition and fees rose too fast, relative to the index, on a watch list.

The bill would also take aim at conflicts of interest in the student-loan industry, codifying many of the reforms championed by New York's attorney general, Andrew M. Cuomo.

In 2012 it would end the school-as-lender program, in which colleges lend money directly to their graduate and professional students and then sell the loans to commercial lenders for a gain.

Meanwhile, the bill would require international-studies programs applying for funds under Title VI of the bill to explain how they "will reflect diverse perspectives and a wide range of views" and describe how they will deal with disputes regarding whether they are meeting that goal. It would also require the secretary of education to consider complaints lodged against a program when determining whether to renew its grant.

Accreditation Concerns

During debate on the two bills last week, the education committee approved a handful of amendments, including one that would prohibit the Education Department from requiring Upward Bound programs to participate in an evaluation.

The evaluation, which began this spring, has required some programs to recruit twice as many students as normal and then assign them randomly to participate in either Upward Bound or a control group. Students selected for the control group will never be allowed to participate in Upward Bound, a program that provides grants to colleges and organizations to prepare financially needy high-school students for college.

Sen. Sherrod Brown, Democrat of Ohio, the amendment's sponsor, called the study's use of a control group divisive. "It raises expectations for students, then dashes them," he said.

The committee also adopted a "manager's amendment" that would soften provisions that would have increased federal oversight of institutions' transfer-of-credit policies.

Originally, the bill would have barred colleges from refusing to accept academic credits "solely" on the basis of the sending college's type of accreditation. As revised, it would simply require colleges to state whether they refused credits on that basis.

Sen. Lamar Alexander, Republican of Tennessee, had been expected to offer an amendment barring the Education Department from changing how it regulates accreditation until after Congress passed the reauthorization bill. But he said he would forgo that amendment because he had received a letter from Secretary of Education Margaret Spellings assuring him that she would "hit pause and not move ahead until we legislate."

"I don't think the amendment is necessary today, given the secretary's letter," he said.