[Senate Report 105-122]
[From the U.S. Government Publishing Office]
Calendar No. 235
105th Congress Report
SENATE
1st Session 105-122
_______________________________________________________________________
EMERGENCY STUDENT LOAN CONSOLIDATION ACT OF 1997
_______
October 29, 1997.--Ordered to be printed
_______________________________________________________________________
Mr. Jeffords, from the Committee on Labor and Human Resources,
submitted the following
R E P O R T
together with
ADDITIONAL VIEWS
[To accompany S. 1294]
The Committee on Labor and Human Resources, to which was
referred the bill (S. 1294) to amend the Higher Education Act
of 1965 to allow the consolidation of student loans under the
Federal Family Education Loan Program and the Direct Loan
Program, having considered the same, reports favorably thereon
with an amendment in the nature of a substitute and recommends
that the bill (as amended) do pass.
CONTENTS
Page
I. Introduction.....................................................1
II. Purpose and summary of the bill..................................3
III. Background and need for legislation..............................4
IV. Legislative history and committee action.........................5
V. Committee views..................................................5
VI. Cost estimate....................................................8
VII. Application of law to the legislative branch....................11
VIII.Regulatory impact statement.....................................11
IX. Section-by-section analysis.....................................11
X. Additional views................................................13
XI. Changes in existing law.........................................14
I. Introduction
One of the most pressing challenges facing American
families is the cost of paying for higher education. The
benefits of higher education are strikingly clear. Recent
research indicates that individuals with a bachelor's degree
earn more than one and a half times as much as a person with a
high school diploma. But this is not the end of the story. In
1996, the unemployment rate for high school graduates was 4.7
percent. The unemployment rate for college graduates was 2.4
percent. These rates declined further with each additional
level of education.
The College Board reports, however, that tuition at 4-year
private institutions has risen by 89 percent over the past
fifteen years while median family income has risen by only 5
percent. Students are responding by borrowing at record
levels--in fact, student borrowing under Title IV since 1990
exceeds student borrowing in the 1960's, 1970's and 1980's
combined. Between 1993 and 1995, graduate and professional
student borrowing increased by over 74 percent.
student loan consolidation
In order to ease the burden of repaying these debts,
Congress created the student loan consolidation program. This
program allows students to consolidate their student loans into
a single loan that has a variety of repayment options that can
reduce monthly payments, improve monthly cash flow, allow
borrowers to pursue lower paying careers, or accommodate
temporary financial setbacks. In many instances, the reduction
in the payments possible under a consolidated loan allows
borrowers to qualify for other credit such as home mortgages.
Current law allows students to consolidate all of their
Federal Direct Loan Program (FDLP) loans and their Federal
Family Education Loan Program (FFELP) loans into a Federal
Direct Loan Program consolidation loan administered by the
Department of Education. A student may consolidate his or her
FFELP loans into a FFELP consolidation loan but may not
consolidate his or her direct loans into the FFELP Program. As
a result, borrowers who wish to consolidate both FDLP loans and
FFELP loans into a single loan must go to the Department of
Education's Direct Loan Consolidation Program. On August 26,
1997, the Department of Education announced that it had
accumulated a backlog of 84,000 applications and that no new
applications would be accepted until this backlog was
eliminated.
hope tax credit and lifetime learning tax credit
The Taxpayer Relief Act of 1997 contained educational tax
credits designed to help students and their families pay for
the rising cost of higher education. Under current law, the
need analysis formula will consider students and their parents
who receive the tax credit as having greater resources to pay
for college, thereby reducing their eligibility for student
financial aid. As a result, students and their families will
find their Federal financial aid reduced and that the amount
they expended for higher education remained relatively
unchanged by the educational tax credits. If a change in the
need analysis formula is not made, approximately 69,000
individuals will lose as much as $120 million in student
financial aid.
II. Purpose and Summary of the Bill
The purpose of S. 1294, ``The Emergency Student Loan
Consolidation Act of 1997'', is to amend the Higher Education
Act of 1965 to allow, for one year, the immediate consolidation
of loans made under the Federal Family Education Loan Program
and the William D. Ford Federal Direct Loan Program by FFELP
lenders. In addition, the bill amends the Higher Education Act
to exclude the Hope and Lifelong Learning tax credits from any
consideration during financial aid need analysis in order to
allow eligible students and their families to benefit fully
from both the tax credit and the Federal student aid programs.
a. loan consolidation
On August 25, 1997, the Department of Education announced
that it had suspended acceptance of new Direct Loan
consolidation loan applications. At the time of the shutdown,
the Department had built up a backlog of 84,000 applications
for loan consolidation. In addition, students whose
applications were being processed were experiencing delays of
six months or longer and errors were being made in the payoff
amounts. The problem is being compounded by the fact that
approximately 12,000 students are being turned away from the
program each month while the Department works to correct the
problems with the program. This legislation will temporarily
allow students to seek relief by consolidating their Direct
Loans through the FFELP program.
The consolidation provision contains language which
reflects a bipartisan commitment to non-discrimination in the
student loan programs. Eligible lenders may not discriminate
against any borrower based upon the number or type of eligible
student loans the borrower seeks to consolidate, the type of
institution that the borrower attended, the interest rate that
is authorized to be collected, or with respect to the types of
repayment schedules. Lenders may continue to offer programs to
encourage borrower financial responsibility, but they must
offer these programs to all borrowers who qualify. Language is
also included providing eligible lenders time to adjust their
computer systems to accommodate the change to the new interest
rate.
b. hope tax credit and lifetime learning tax credit
The Taxpayer Relief Act of 1997 contained two educational
tax credits designed to help students and their families pay
for the cost of higher education. The need analysis system that
is currently used to calculate eligibility for Federal student
financial aid will consider those who receive the credit as
having greater resources to pay for college and they will be
eligible for less student aid. The Emergency Student Loan
Consolidation Act of 1997 would amend the Higher Education Act
to exclude the tax credit from any consideration in need
analysis thus allowing eligible students to benefit fully from
both the tax credit and the Federal student aid programs. Any
effort to remedy this problem after December 1, 1997, will
require an offset of approximately $120 million.
III. Background and Need for Legislation
On August 10, 1993, the Student Loan Reform Act of 1993,
contained within the Omnibus Budget Reconciliation Act of 1993
(P.L. 103-66), amended the Higher Education Act to allow the
Department of Education to establish a Federal Direct Loan
consolidation loan program. Section 428C(b)(5) of the Higher
Education Act required that the Department offer these loans
only if it had the necessary origination and servicing
arrangements in place. The Direct Loan consolidation loan
program, however, has proven difficult to administer.
In September 1997, Thomas R. Bloom, Inspector General at
the Department of Education, testified before the House
Committee on Education and the Workforce regarding the
circumstances which led to the temporary suspension of student
loan consolidations under the Federal Direct Loan Program. Mr.
Bloom testified that in 1995 the Department of Education
awarded a contract to EDS to develop and operate a new system
for the origination and consolidation of student loans. He
stated that problems have been readily apparent with this
contract since its inception. The contract called for EDS to
begin consolidating loans on January 15, 1996. EDS failed to
meet the start-up date and the Department extended the deadline
to the end of February 1996. EDS failed to meet this new start-
up date and the Department extended the deadline to May 1996.
When it became clear that EDS would not meet this deadline, the
Department mandated a change in the management of the contract.
EDS began consolidating its first student loans on September
16, 1996.
On July 3, 1997, the Independent Quality Control Unit set
up by EDS reported that a guaranty agency had been overpaid by
$900,000 as a result of a systems error which led to duplicate
payments being made for loans being consolidated. According to
the inspector general the Department halted the consolidation
process for several weeks while this systems problem was
analyzed and addressed. One month later, Sallie Mae, a
financial services organization which funds approximately 40
percent of all insured loans, reported to the Department of
Education that it was receiving duplicate payments from the
Department for consolidated loans.
On July 22, 1997, the inspector general sent an action
memorandum to the Assistant Secretary for Postsecondary
Education indicating that borrowers wishing to consolidate
their loans were unable to reach the customer service staff at
EDS. One month later EDS also reported problems with the
consolidation system and made recommendations for improvements
in the process. The inspector general reported that in August
1997 the Department was aware of four major unresolved problems
with EDS's system: (1) duplicate verification certificates
resulting in double pay-offs of loans; (2) data entry errors;
(3) borrowers being double billed for old and consolidated
loans; and (4) a significant backlog of applications.
On August 26, 1997, the Department announced that it had
accumulated a backlog of 84,000 applications for student loan
consolidations and that it would not accept new applications
for loan consolidation until the backlog was eliminated. Acting
Deputy Secretary of Education Marshall Smith testified before
the House Education and the Workforce Committee that the
problems were due to unanticipated application volume and an
over reliance upon automated systems. The original contract,
consistent with the experience of the previous contractor,
estimated volume at 6,000 applications per month. Actual
application volume is closer to 12,000 per month. At the time
of the shutdown, EDS had booked 54,000 consolidation loans at
an average of 4,500 per month.
Acting Deputy Secretary Smith stated that he anticipated
that the backlog would be eliminated no later than December 1,
1997. The Department has noted, however, that interest in the
consolidation program has been substantially higher than
anticipated. Upon reopening the program, the contractor may
face a disabling surge of consolidation loan applications as an
estimated 36,000 students who have been turned away from the
program since August 26, seek the benefits of student loan
consolidation. In addition, more than 40 percent of the backlog
is being eliminated by the withdrawal or deactivation of
applications. The Emergency Student Loan Consolidation Act of
1997 will allow lenders within the FFELP program to assist the
Department by authorizing FFELP lenders to consolidate loan
portfolios containing both FFELP and FDL loans.
The legislation also contains language supported by the
committee and requested by the administration that would adjust
the need analysis formula so that students will be able to
receive the education tax credits that were authorized through
The Taxpayer Relief Act of 1997 and their full student
financial aid benefits. This change will affect approximately
69,000 students. Failure to act prior to December 1, 1997, will
have budget scoring consequences in future years.
IV. Legislative History and Committee Action
S. 1294, the ``Emergency Student Loan Consolidation Act of
1997'' was introduced by Senator James M. Jeffords on October
9, 1997. S. 1294 is the companion legislation to H.R. 2535.
On October 22, 1997, the Labor and Human Resources
Committee met to consider S. 1294. Senator Jeffords offered an
amendment in the nature of a substitute. The legislation was
adopted by a voice vote.
V. Committee Views
The committee is deeply disappointed by the suspension of
the Federal Direct Loan Consolidation Program. Eighty-four
thousand student borrowers were left without any options as the
Department of Education struggled to provide the services that
had been promised to these borrowers. Students whose
applications were caught within the system experienced
unnecessary hardship while trying to responsibly reduce their
monthly payments. Students who accepted forbearance in order to
avoid falling into default while waiting to consolidate their
loans incurred unnecessary additional interest charges.
Regrettably it may never be clear just how much this situation
has cost the borrowers trapped within the consolidation system.
The Department will face three significant challenges when
it reopens the Federal DirectLending consolidation program.
First, it has reduced its backlog by deactivating the applications of
students who fail to respond to any of the consolidation steps within
two weeks. To date, more students have withdrawn their applications or
had their loans deactivated than have had them fully consolidated. It
is not clear when these students will attempt to reenter the system. In
addition, prior to the suspension of the program, 12,000 students per
month applied to the Department for loan consolidation. The
consolidation needs of these students have not been met, and it is not
clear how quickly they will attempt to consolidate their loans when the
program reopens for new applications. And finally, the Class of 1997
has just begun to make payments upon their student loans. There may be
an additional increase in applications over the next several months as
these students attempt to cope with their student debt. The Department
may face a backlog in applications similar to that which led to the
original shutdown of the system.
The committee believes that it can best meet the urgent
needs of these students by allowing expansion of loan
consolidation in the Federal Family Education Loan Program
until October 1, 1998. Enactment of S. 1294 will reduce
pressure upon the Education Department's system and provide
students with new options for loan consolidation.
Loan Consolidation Reports
The committee greatly appreciates the cooperation shown by
the Department of Education in providing biweekly reports of
the Department's efforts to reduce the backlog of borrowers
seeking to consolidate their loans. The committee requests that
the Department continue to provide biweekly reports to the
Senate Committee on Labor and Human Resources and the House
Committee on Education and the Workforce on the Department's
efforts to manage the Federal Direct Loan Program consolidation
loan program. These biweekly reports shall include, at a
minimum: a) the number of applications received, b) the number
of loans booked, c) the number of applications withdrawn, d)
the number of applications deactivated, and e) the size, if
any, of the backlog in applications.
Terms of Consolidation Loans
The Higher Education Act of 1965 prohibits direct student
loan borrowers from consolidating their direct student loans
into FFELP loans. Even if current law permitted these
consolidations, few students would be likely to take them
because they would lose the deferment benefits attached to
their subsidized loans and would pay a higher interest rate.
To address these issues, the Emergency Student Loan
Consolidation Act of 1997 will temporarily permit students to
consolidate their direct student loans into FFELP loans. In
addition, the bill will change the interest rate calculation
for FFELP consolidation loans so that the formula for
calculating the interest rate on Federal Direct Loan
consolidation loans and FFELP consolidation loans is the same.
In addition, borrowers who consolidate subsidized loans,
whether from the Direct Loan Program or the FFELP program will
not lose their deferment benefits. During periods of deferment,
the Secretary will pay the interest on the loans which were
eligible for an interest subsidy prior to the consolidation and
the borrower will only be responsible for the interest on the
loans included in the consolidation which were not eligible for
an interest subsidy under Section 428 or Section 455 of the
Higher Education Act.
Non-Discrimination in Loan Consolidation
In an effort to address the concerns of the Administration
and others, the committee approved language within Section
2(c)(6) which would protect borrowers who were applying for
consolidation loans from discrimination based upon the type and
number of eligible student loans the borrower seeks to
consolidate; the institution the borrower attended, the
interest rate that is authorized to be collected or the types
of repayment schedules offered to the borrower. Lenders may
continue to offer special benefit programs and programs to
encourage borrower financial responsibility; however, they must
offer these programs to all borrowers who qualify. Nothing in
this bill shall be interpreted to supersede requirements placed
upon eligible lenders by the Department of the Treasury.
System Development Time
The Emergency Student Loan Consolidation Act changes the
interest rate calculation for FFEL program consolidation loans.
The legislation states that a consolidation loan for which the
application is received on or after the date of enactment and
before October 1, 1998, shall bear interest at the equivalent
of the 91-day Treasury Bill rate plus 3.1 percent with a cap of
8.25 percent. In order to allow eligible lenders adequate time
to make needed changes in their computer systems while serving
students, the bill allows a lender to continue to calculate
interest on the loan at the rate previously in effect and
defer, until April 1, 1998, the recalculation of interest, if
the recalculation is applied retroactively to the date on which
the loan is made. The borrower will be held harmless through
this calculation.
Reauthorization of the Higher Education Act
The Emergency Student Loan Consolidation Act of 1997
provides temporary authority for eligible FFELP lenders to
consolidate student loan packages which contain direct loans.
It is intended to provide immediate relief to students who are
unable to consolidate their student loans as a result of the
suspension of the Department of Education's loan consolidation
program.
The committee has developed legislation designed to make
the minimum changes to current law that is necessary to provide
immediate relief to students. As a result, a number of
important, complex, and substantive issues pertaining to the
consolidation of student loans have been deferred for
consideration during the reauthorization of the Higher
Education Act. Some of these issues, like the consolidation of
defaulted student loans, will require careful analysis to fully
assess the costs and benefits to students and the student loan
programs.
VI. Cost Estimate
U.S. Congress,
Congressional Budget Office,
Washington, DC, October 23, 1997.
Hon. James M. Jeffords,
Chairman, Committee on Labor and Human Resources,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 1294, the Emergency
Student Loan Consolidation Act of 1997, as ordered reported
from the Senate Committee on Labor and Human Resources on
October 22, 1997.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Deborah
Kalcevic for Federal costs and Marc Nicole for State and local
government impacts.
Sincerely,
June E. O'Neill, Director.
Enclosure.
Congressional Budget Office Cost Estimate
S. 1294--Emergency Student Loan Consolidation Act of 1997
Summary: S. 1294 would amend the Higher Education Act of
1965 to make four changes. The bill would: give lenders
authority until October 1, 1998, to allow student loan
borrowers to include federal direct student loans in a
federally guaranteed consolidated loan; change until October 1,
1998, the terms of federally guaranteed consolidated loans
related to federal interest subsidies and loan interest rates;
reduce the student loan administrative entitlement fund from
$532 million to $507 million in 1998; and amend the eligibility
criteria for student financial aid to adjust the formulas for
recent changes in the tax law.
CBO estimates the provisions of S. 1294 would increase
federal outlays by $12 million in 1998 but have a negligible
budgetary impact over the 1998-2002 period.
S. 1294 contains no intergovernmental mandates as defined
in the Unfunded mandates Reform Act (UMRA) and would not affect
the budgets of state, local, or tribal governments. In
addition, enactment of this bill would impose no private-sector
mandates as defined in UMRA.
Estimated cost to the Federal Government: The estimated
budgetary impact of these proposals over the 1998-2002 period
is shown in the following table. The budgetary effects through
2007 are displayed in the section on pay-as-you-go
considerations. The budgetary impact of S. 1294 falls within
budget function 500 (education, training, employment, and
social services).
ESTIMATED BUDGETARY IMPACT OF S. 1294 AS ORDERED REPORTED BY THE SENATE COMMITTEE ON LABOR AND HUMAN RESOURCES
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
----------------------------------------------------------------------------------------------------------------
CHANGES IN DIRECT SPENDING
Student loan consolidations:
Budget authority................................ ........ 25 ........ ........ ........ ........
Estimated outlays............................... ........ 25 ........ ........ ........ ........
Student loan administration:
Estimated budget authority...................... ........ -25 ........ ........ ........ ........
Estimated outlays............................... ........ -13 -8 -3 -1 ........
Total changes:
Estimated budget authority...................... ........ 0 ........ ........ ........ ........
Estimated outlays............................... ........ 12 -8 -3 -1 ........
----------------------------------------------------------------------------------------------------------------
Basis of estimate
Student loan consolidations
In the student loan programs, borrowers have the option of
combining their debt from several different federal student
loan programs into one loan, which usually has extended
repayment terms. Guaranteed consolidated student loans are made
by private lenders and are reinsured by the federal government.
Direct consolidated student loans are made directly by the
federal government. The two programs are similar in many but
not all respects. This bill would make three temporary changes
to the guaranteed student loan consolidation program in order
to make it more comparable to the direct student loan
consolidation program. These changes would be in effect for new
consolidated loan applications from the date of enactment of
this bill until October 1, 1998.
First, the bill would make borrowers eligible to include
direct student loans in their guaranteed consolidated student
loan. Under current statute, borrowers with both guaranteed and
direct student loans can only combine their debt into a direct
consolidated student loan.
Second, the bill would allow students to retain their
interest subsidy benefits on all subsidized loans included in
the new consolidated loan. This provision is already a feature
of the direct consolidated student loan program. Currently,
borrowers with guaranteed consolidated student loans retain
subsidy benefits only if they combine only subsidized student
loan debt.
Third, the bill would make the interest rate on guaranteed
consolidated loans the same as far direct consolidated loans.
Under current law, the interest rate on a guaranteed
consolidated loan is a fixed rate based on the weighted average
of the interest rates of the loans consolidated rounded upward
to the next whole percent, capped at 9 percent. Under this bill
the interest on the loans would be a variable interest rate
capped at 8.25 percent.
The effect of these changes on the demand for guaranteed
consolidated student loans would depend on how widely private
lenders market the loans and whether the current problems that
have caused the temporary shutdown of the direct consolidated
student loan program persist. Assuming an enactment date of
November 1, 1997, this cost estimate reflects the assumption
that the proposals would increase guaranteed consolidated
student loan volume by approximately 10 percent in 1998, or by
about $400 million, resulting in increased subsidy costs of $25
million.
Administrative entitlement fund
Under S. 1294, the Department of Education's section 458
capped administrative entitlement fund would be reduced by $25
million in fiscal year 1998 from $532 million to $507 million.
Outlays savings would reflect the current pattern of spending
for the program.
Eligibility requirements for student financial aid
S. 1294 would change the current federal formula for
calculating the expected family contribution (EFC) towards a
student's cost of higher education. The EFC is used to
determine eligibility for federal Pell grants and subsidized
student loans. This bill would permit families to count any
Hope Credit or Lifetime Learning Credit--enacted as part of the
Taxpayer Relief Act of 1997--as an allowance against their
income in determining the amount of their EFC. Without these
changes, families would be expected to contribute more to their
education in an amount equal to the tax credits, in effect
eliminating any beneficial effects to those families receiving
credits. These changes would be effective for determining Pell
grant and subsidized loan eligibility beginning in academic
year 1999-2000.
CBO is currently unable to estimate the impact of these
provisions on the costs of student loans. The exclusion of the
Hope and Lifetime Learning Credits from the EFC could affect
the amount of subsidized borrowing, but CBO has insufficient
data to provide an estimate.
Under current law, the Pell grant program is not authorized
for academic year 1999-2000 and beyond, the years in which
these tax credits would be in effect. However, if these
provisions were to be in effect for academic year 1998-99 and
the maximum grant award were $3,000, Pell program costs would
increase by about $100 million, subject to appropriation of the
necessary funds.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act of 1985 establishes pay-as-you-go
procedures for legislation affecting direct spending or
receipts. The projected changes in direct spending are shown in
the table below for fiscal years 1998-2007. For purposes of
enforcing pay-as-you-go procedures, however, only the effects
in the budget year and the succeeding four years are counted.
SUMMARY OF PAY-AS-YOU-GO EFFECTS
[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
----------------------------------------------------------------------------------------------------------------
Changes in outlays.............. 12 -8 -3 -1 0 0 0 0 0 0
Changes in receipts.............
(9) Not applicable.
----------------------------------------------------------------------------------------------------------------
Estimated impact on State, local, and tribal governments:
S. 1294 contains no intergovernmental mandates as defined in
UMRA and would not affect the budgets of state, local, or
tribal governments.
Estimated impact on the private sector: Enactment of this
bill would impose no private-sector mandates as defined in
UMRA.
Estimate prepared by: Federal cost, Deborah Kalcevic and
Justin Latus; impact on State, local, and tribal governments,
Marc Nicole; and impact on private sector, Nabeel Alsalam.
Estimate approved by: Paul N. Van de Water, Assistant
Director for Budget Analysis.
VII. Application of Law to the Legislative Branch
S. 1294 amends the Higher Education Act of 1965 to allow
the consolidation of student loans under the Federal Family
Loan Program and the Federal Direct Loan program and as such
has no application to the legislative branch.
VIII. Regulatory Impact Statement
The committee has determined that there will be only a
negligible increase in the regulatory burden of paperwork as a
result of this legislation.
IX. Section-by-Section Analysis
Section 1 of the bill includes the short title of the
legislation, the ``Emergency Student Loan Consolidation Act of
1997'' and clarifies that except as expressly provided,
references to amendments or repeals in this act refer
specifically to sections or provisions of the Higher Education
Act of 1965.
Section 2(a) of the bill amends section 428C(a)(4) to
include in the definition of loans eligible for consolidation
loans made under part D of this title, except that loans made
under such part shall be eligible for consolidation loans for
which the application is received by an eligible lender during
the period beginning on the date of enactment of the Emergency
Student Loan Consolidation Act of 1997 and ending on October 1,
1998.
Section 2(b) provides for terms of consolidation loans by
amending section 428C(b)(4)(C)(ii) so as to include those
consolidation loans ``for which the application is received by
an eligible lender before the date of enactment of the
Emergency Student Loan Consolidation Act of 1997 or on or after
October 1, 1998'' and by inserting a new subclause (II) which
provides that interest shall accrue and be paid ``by the
Secretary, in the case of a consolidation loan for which the
application is received by an eligible lender on or after the
date of enactment of the Emergency Student Loan Consolidation
Act of 1997 and before October 1, 1998, except that the
Secretary shall pay such interest only on that portion of the
loan that repays Federal Stafford Loans for which the student
borrower received an interest subsidy under section 428 or
Federal Direct Stafford Loans for which the borrower received
an interest subsidy under section 455.'' The borrower shall
only be responsible for the interest on the loans included in
the consolidation loan which were not eligible for an interest
subsidy under Section 428 or Section 455 of the Higher
Education Act.
Section 2(c) includes a section on nondiscrimination in
loan consolidation whereby eligible lenders are prohibited
against discriminating against any borrower (A) based on the
number and type of eligible student loans; (B) based on the
type or category of institution of higher education that the
borrower attended; (C) based on the interest rate that is
authorized to be collected with respect to the consolidation
loan; or (D) with respect to the types of repayment schedules
offered to such borrowers. Lenders may continue to offer
programs to encourage borrower financial responsibility.
Nothing in this bill shall be interpreted to supersede
requirements placed upon eligible lenders by the Department of
the Treasury.
Section 2(d) amends section 428C(c)(1) by adding a new
subparagraph (D) relating to interest rates: ``A consolidation
loan for which the application is received by an eligible
lender on or after the date of enactment of the Emergency
Student Loan Consolidation Act of 1997 and before October 1,
1998, shall bear interest at an annual rate on the unpaid
principal balance of the loan that is equal to the rate
specified in section 427A(f), except that the eligible lender
may continue to calculate interest on such a loan at the rate
previously in effect and defer, until not later than April 1,
1998, the recalculation of interest on such a loan at the rate
required by this subparagraph if the recalculation is applied
retroactively to the date on which the loan is made.'' This
section provides eligible lenders time to reprogram their
systems to accommodate the change in interest rate calculations
while providing students with the full benefits of the interest
rate cap.
Section 2(e) provides that consolidation loans authorized
by the amendments made in this section shall be available
notwithstanding any pending application by a student for a
consolidation loan under part D of title IV of the Higher
Education Act of 1965, upon withdrawal of such application by
the student at any time prior to the receipt of such a
consolidation loan.
Section 3 of the bill provides that funds necessary to pay
for the costs associated with the legislation will be paid for
from administrative expense reductions in section 458
decreasing that account from $532,000,000 to $507,000,000.
Section 4 of the bill includes provisions relating to the
treatment of tax benefits so as to exclude the tax credit taken
by the parent under section 25A of the Internal Revenue Code of
1986 from consideration in need analysis for student
contributions from available income, family contributions for
independent students without dependents other than a spouse,
family contributions for independent students with dependents
other than a spouse and from total income.
X. ADDITIONAL VIEWS OF MR. KENNEDY, MR. DODD, MR. HARKIN, MS. MIKULSKI,
MR. BINGAMAN, MR. WELLSTONE, MRS. MURRAY, AND MR. REED
The Democratic members of the Senate Labor and Human
Resources Committee all voted in favor of the bill. All members
of the Committee are concerned about the plight of the
borrowers who are unable to consolidate their loans. We also
feel strongly that the change in need analysis is essential to
allow lower-income students to benefit from the Hope and
Lifelong Learning tax credits.
We are concerned, however, about two aspects of the
Chairman's amendment in the nature of a substitute. While the
Chairman's amendment partially addresses our concerns on non-
discrimination, we are concerned that the bill does not go far
enough. The minority is very concerned that, over time, the
FFELP lenders may ``cream'' the best loans and not consolidate
loans from the higher risk borrowers, those who often need
consolidation the most. We note that two-thirds of the
borrowers affected by the backlog had only FFEL loans and no
Direct Loans, so that they are not precluded by current law
from consolidating their loans into the FFEL program.
We are also concerned that the offset for the consolidation
provisions in this bill comes from the Department of
Education's administrative account under section 458. This
offset violates the budget agreement and does not meet the
``pay as you go'' requirements. The number of loans to be
serviced in the Direct Loan program will increase by more than
40 percent from FY 1997 to FY 1998. The Direct Loan
administrative costs will rise accordingly, but this amendment
cuts the funds available to service those loans. We are
concerned that, in ``solving'' the consolidation problem, the
bill may create more administrative problems by weakening the
Department's ability to administer the student loan programs.
We note that the majority indicated a willingness to address
this concern as the bill moves forward.
Edward M. Kennedy.
XI. Changes in existing law
In compliance with rule XXVI paragraph 12 of the Standing
Rules of the Senate, the following provides a print of the
statute or the part or section thereof to be amended or
replaced (existing law proposed to be omitted is enclosed in
black brackets, new matter is printed in italic, existing law
in which no change is proposed is shown in roman):
Higher Education Act of 1965
* * * * * * *
SEC. 428. FEDERAL CONSOLIDATION LOANS.
(a) Agreements With Eligible Lenders.--
(1) Agreement required for insurance coverage.--* * *
* * * * * * *
(C) made under part D of this title, except
that loans made under such part shall be
eligible student loans only for consolidation
loans for which the application is received by
an eligible lender during the period beginning
on the date of enactment of the Emergency
Student Loan Consolidation Act of 1997 and
ending on October 1, 1998;
[(C)] (D) made under subpart II of part A of
title VII of the Public Health Service Act; or
[(D)] (E) made under subpart II of part B of
title VIII of the Public Health Service Act.
(b) Contents of Agreements, Certificates of Insurance, and
Loan Notes.--
(1) Agreements with lenders.--* * *
* * * * * * *
(I) by the Secretary, in the case of
a consolidation loan for which the
application is received by an eligible
lender before the date of enactment of
the Emergency Student Loan
Consolidation Act of 1997, or on or
after October 1, 1998, that
consolidated only Federal Stafford
Loans for which the student borrower
received an interest subsidy under
section 428; [or]
(II) by the Secretary, in the case of
a consolidation loan for which the
application is received by an eligible
lender on or after the date of
enactment of the Emergency Student Loan
Consolidation Act of 1997 and before
October 1, 1998, except that the
Secretary shall pay such interest only
on that portion of the loan that repays
Federal Stafford Loans for which the
student borrower received an interest
subsidy under section 428 or Federal
Direct Stafford Loans for which the
borrower received an interest subsidy
under section 455; or
[(II)] (III) by the borrower, or
capitalized, in the case of a
consolidation loan other than a loan
described in subclause (I) or (II);
* * * * * * *
(6) Nondiscrimination in loan consolidation.--An
eligible lender that makes consolidation loans under
this section shall not discriminate against any
borrower seeking such a loan--
(A) based on the number or type of eligible
student loans the borrower seeks to
consolidate;
(B) based on the type or category of
institution of higher education that the
borrower attended;
(C) based on the interest rate that is
authorized to be collected with respect to the
consolidation loan; or
(D) with respect to the types of repayment
schedules offered to such borrower.
(c) Payment of Principal and Interest.--
(1) Interest rates.--(A) Consolidation loans made
under this section shall bear interest at rates
determined under subparagraph [(B) or (C)] (B), (C), or
(D). For the purposes of payment of special allowances
under section 438(b)(2), the interest rate required by
this subsection is the applicable interest rate with
respect to a consolidation loan.
* * * * * * *
(D) A consolidation loan for which the
application is received by an eligible lender
on or after the date of enactment of the
Emergency Student Loan Consolidation Act of
1997 and before October 1, 1998, shall bear
interest at an annual rate on the unpaid
principal balance of the loan that is equal to
the rate specified in section 427A(f), except
that the eligible lender may continue to
calculate interest on such a loan at the rate
previously in effect and defer, until not later
than April 1, 1998, the recalculation of the
interest on such a loan at the rate required by
this subparagraph if the recalculation is
applied retroactively to the date on which the
loan is made.
* * * * * * *
SEC. 458. FUNDS FOR ADMINISTRATIVE EXPENSES.
(a) Administrative Expenses.--
(1) In general.--Each fiscal year, there shall be
available to the Secretary from funds not otherwise
appropriated, funds to be obligated for--
(A) administrative costs under this part and
part B, including the costs of the direct
student loan programs under this part, and
(B) administrative cost allowances payable to
guaranty agencies under part B and calculated
in accordance with paragraph (2), not to exceed
(from such funds not otherwise appropriated)
[$532,000,000] $507,000,000 in fiscal year
1998, $610,000,000 in fiscal year 1999,
$705,000,000 in fiscal year 2000, $750,000,000
in fiscal year 2001, and $750,000,000 in fiscal
year 2002. Administrative cost allowances under
subparagraph (B) of this paragraph shall be
paid quarterly and used in accordance with
section 428(f). The Secretary may carry over
funds available under this section to a
subsequent fiscal year.
* * * * * * *
SEC. 475. FAMILY CONTRIBUTION FOR DEPENDENT STUDENTS.
(a) Computation of Expected Family Contribution.--* * *
* * * * * * *
(c) Parents' Available Income.--
(1) In general.--The parents' available income is
determined by deducting from total income (as defined
in section 480)--
(A) * * *
* * * * * * *
(D) an income protection allowance,
determined in accordance with paragraph (4);
[and]
(E) an employment expense allowance,
determined in accordance with paragraph (5)[.];
and
(F) the amount of any tax credit taken by the
parents under section 25A of the Internal
Revenue Code of 1986.
* * * * * * *
(g) Student Contribution From Available Income.--
(1) In general.--The student contribution from
available income is equal to--
(A) * * *
* * * * * * *
(C) an allowance for social security taxes
determined in accordance with paragraph (4);
[and]
(D) an income protection allowance of
$1,750[.]; and
(E) the amount of any tax credit taken by the
student under section 25A of the Internal
Revenue Code of 1986.
* * * * * * *
SEC. 476. FAMILY CONTRIBUTION FOR INDEPENDENT STUDENTS WITHOUT
DEPENDENTS OTHER THAN A SPOUSE.
(a) Computation of Expected Family Contribution.--For each
independent student without dependents other than a spouse, the
expected family contribution is determined by--
(1) adding--
(A) * * *
* * * * * * *
(b) Family's Contribution From Available Income.--
(1) In general.--The family's contribution from
income is determined by--
(A) deduction from total income (as defined
in section 480)--
(i) * * *
* * * * * * *
(iv) an income protection allowance
of--
(I) $3,000 for single
students;
(II) $3,000 for married
students where both are
enrolled pursuant to subsection
(a)(2); and
(III) $6,000 for married
students where one is enrolled
pursuant to subsection (a)(2);
[and]
* * * * * * *
(vi) the amount of any tax credit
taken under section 25A of the Internal
Revenue Code of 1986; and
* * * * * * *
SEC. 477. FAMILY CONTRIBUTION FOR INDEPENDENT STUDENTS WITH DEPENDENTS
OTHER THAN A SPOUSE.
(a) Computation of Expected Family Contribution.--* * *
* * * * * * *
(b) Family Available Income.--
(1) In general.--The family's available income is
determined by deduction from total income (as defined
in section 480)--
(A) * * *
* * * * * * *
(D) an income protection allowance,
determined in accordance with paragraph (4);
[and]
(E) an employment expense allowance,
determined in accordance with paragraph (5);
and
(F) the amount of any tax credit taken under
section 25A of the Internal Revenue Code of
1986.
* * * * * * *
SEC. 480. DEFINITIONS
As used in this part:
(a) Total Income.--(1) * * *
* * * * * * *
(2) No portion of any student financial assistance
received from any program by an [individual, and]
individual, no portion of a national service
educational award or post-service benefit received by
an individual under title I of the National and
Community Service Act of 1990 (42 U.S.C. 12571 et
seq.), and no portion of any tax credit taken under
section 25A of the Internal Revenue Code of 1986, shall
be included as income or assets in the computation of
expected family contribution for any program funded in
whole or in part under this Act.
* * * * * * *
(j) Other Financial Assistance; Tuition Prepayment Plans.--
(1) * * *
* * * * * * *
(4) Notwithstanding paragraph (1), a tax credit taken under
section 25A of the Internal Revenue Code of 1986 shall not be
treated as estimated financial assistance for purposes of
section 471(3).
* * * * * * *