REPORT OF THE BOARD OF TRUSTEES
B of T Report 13 - I-05
Subject: Federal Student Loan Program Interest Rates
Presented by: Duane M. Cady, MD, Chair
3 Resolution 729, introduced by the Resident and Fellow Section, was adopted by the House of
4 Delegates at the 2004 Interim Meeting. The first resolve calls on our AMA to “analyze models of
5 federal student loan and student loan consolidation program interest rate regulations (including
6 fixed and variable rates) and make recommendations to maximize their effectiveness in addressing
7 medical education debt and patient access to health care.” The second resolve asks our AMA to
8 “utilize data from the study…to enhance its lobbying efforts toward the reauthorization of the
9 Higher Education Act.”
11 This informational report summarizes developments in recent months. At the time Resolution 729
12 was adopted, the U.S. House of Representatives was in the early stages of reauthorizing the Higher
13 Education Act (HEA) of 1965, which governs all federal postsecondary education funding and
14 requires reauthorization every five years. As part of this reauthorization process, members of
15 Congress were re-examining the costs associated with student loan consolidation. Under current
16 law, the interest rate on consolidated loans is a fixed rate based on the weighted average (rounded
17 up to the nearest 1/8%) of loans eligible for consolidation, or 8.25%, whichever is less. When
18 student loan interest rates fall drastically, which has been the scenario for the past few years, the
19 Federal government’s cost for subsidizing these loans by private lenders sharply increases.
21 Due to tight budgetary constraints, Congress was seeking an alternative to the current fixed rate
22 structure currently used in student loan consolidation. One alternative, preferred by the Bush
23 Administration and numerous Republican members of Congress, was to switch the interest rate for
24 consolidated loans from a fixed rate to a variable rate. However, various studies comparing fixed
25 and variable rates conflicted on the resulting financial benefits and disadvantages. Thus, our AMA
26 adopted Resolution 729 to examine the existing interest rate models to determine which, if any, of
27 the interest rate structures were preferable for managing medical education debt.
29 However, since the adoption of Resolution 729, a new alternative to the current fixed rate structure
30 has been advanced in Congress. This new alternative would allow borrowers a choice between a
31 fixed and variable rate when consolidating their student loans. According to preliminary estimates
32 by the Congressional Budget Office, this proposal would generate significant savings for the
33 Federal government. With the input and assistance of our AMA’s Medical Student Section (MSS)
34 and Resident and Fellow Section (RFS), this “choice” proposal was thoroughly analyzed, and
35 subsequently recommended, by our AMA Council on Legislation (COL) as the preferred
36 alternative for managing medical education debt. Our Board of Trustees approved the COL’s
37 recommendation. In light of this action by our AMA and recent developments in Congress, the
38 study and action required by the first and second resolves of Resolution 729 are no longer timely.
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1 The remainder of this informational report will focus on the third resolve of Resolution 729 which
2 calls on our AMA to “report back to the House of Delegates at the 2005 Interim Meeting regarding
3 the reauthorization of the Higher Education Act.”
5 LEGISLATIVE STATUS OF THE HEA REAUTHORIZATION
7 Helping America’s medical students and young physicians manage their education-related debt is a
8 top priority for our AMA, as well as for our AMA-MSS and AMA-RFS. Medical students often
9 incur substantial debt to finance their education. This student loan debt continues to be a
10 tremendous hardship, especially during a physician’s residency training program. In 2004, the
11 typical average student loan debt of medical school students was $115,219.
13 Unfortunately, the cost of education often affects a medical graduate’s career choices. Borrowers
14 with high loan debt are often deterred from entering public health service, practicing medicine in
15 “underserved” areas, starting a career in medical education or research, or practicing primary care
18 Typically, the HEA, which governs all federal postsecondary education funding, is reauthorized
19 every five years. Although the last reauthorization was “due” in 2003, Congress has passed a
20 series of continuing resolutions over the past few years to allow more time to complete the
23 In recent years, our AMA has worked diligently to educate members of Congress and their staff on
24 the issues important to medical students and residents. Numerous advocacy materials and
25 suggested legislative comments for the upcoming reauthorization have been widely distributed on
26 Capitol Hill. In addition, our AMA has been involved in the negotiations surrounding the
27 reauthorization legislation.
29 Activities in U.S. House of Representatives
31 On July 22, 2005, the House Committee on Education and the Workforce (E&W) passed H.R. 609,
32 the “College Access and Opportunity Act of 2005,” by a 27-20 (1 present) vote. This bill, which
33 seeks to reauthorize the HEA, includes multiple issues impacting medical students and residents
34 and the financing of their medical education.
36 Prior to the Committee’s consideration of H.R. 609, our AMA sent a letter to the Chairman and
37 other members of the Committee voicing support for several student aid provisions included in
38 H.R. 609, namely provisions that:
39 Preserve the federal loan consolidation program.
40 Repeal the “Single-Holder” rule, thereby allowing loan consolidation with any lender on
41 the market – not just the borrower’s current lender.
42 Reduce Stafford loan origination fees.
43 Require lenders to report loan payments to all major national credit bureaus.
44 Mandate lenders’ full-disclosure of consolidated loan terms.
46 In addition, our AMA requested that additional provisions affecting medical student debt be
47 included in the reauthorization – particularly one that would allow students a choice between a
48 variable and fixed interest rate when consolidating loans. During the Committee’s consideration of
B of T Rep. 13 - I-05 -- page 3
1 H.R. 609, the bill was amended to include this “choice” proposal. Under this proposal, the variable
2 rate on consolidated loans would be the 91-day Treasury bill rate + 2.3%, capped at 8.25%, and the
3 fixed rate would be the 91-day Treasury bill rate + 3.3%, also capped at 8.25%. If the student
4 borrower elects the fixed rate option, the lender is authorized to collect an offset charge in an
5 amount not to exceed 0.5% of the principal amount of the loan.
7 Another positive change to H.R. 609, which was championed by Rep. Tom Price, MD (R-GA) and
8 approved by the Committee, calls for a study by the Secretary of Education on the indebtedness of
9 medical school graduates. We hope this proposed study will help policymakers understand the
10 debt burden facing America’s medical student graduates, as well as the effect their career choices
11 can have on patient access to care.
12 An additional amendment of interest to our AMA and its medical students and residents was
13 offered by Rep. Charles Boustany, MD (R-LA). This amendment sought an extension of the loan
14 deferment period for eligible medical residents from the current 3 years to a period of up to 8 years.
15 Noting the Committee’s tight budgetary constraints, this amendment was subsequently withdrawn
16 (Note: a 5-year deferment extension was scored at an annual cost of $200 million).
17 Activities in the U.S. Senate
19 In May 2005, our AMA submitted to the Senate Committee on Health, Education, Labor and
20 Pensions (HELP) proposed legislative language to be included in the Committee’s HEA
21 reauthorization bill. This language highlighted several proposals supported by our AMA, including
22 a repeal of the “Single-Holder” rule, providing students with a choice of a fixed or variable rate on
23 consolidated loans, and the expansion of the loan deferment period and the definition of “economic
24 hardship” for loan deferment purposes.
26 On September 8, 2005, the Senate HELP Committee favorably reported by a 20-0 vote its
27 legislation reauthorizing the HEA. The bill, S. 1614, has many provisions affecting medical
28 students and residents, including language that:
29 Extends the provisions of the current loan consolidation program until 2012.
30 Makes the scheduled shift to a fixed rate on undergraduate and graduate non-consolidation
31 borrowing, fixing the interest rate at 6.8 percent effective July 1, 2006.
32 Repeals the “Single-Holder” rule.
33 Requires lenders to report student loans to all major credit bureaus, and to report the type
34 of loan.
35 Simplifies the financial aid process.
37 During the HELP Committee’s consideration of S. 1614, Sen. Judd Gregg (R-NH), Chairman of
38 the Senate Budget Committee, expressed his preference for allowing students the choice of a fixed
39 or variable interest rate on consolidation loans, instead of the continuation of a fixed rate structure
40 included in the bill. HELP Committee Chairman, Sen. Michael Enzi (R-WY), indicated his
41 intention to work with Senator Gregg and others to resolve differences on this important
42 component of the loan consolidation program.
44 Temporary Extension of the HEA
46 Initially, Congress expected to complete the reauthorization of the HEA by Fall 2005. However,
47 hurricane relief efforts and budgetary constraints have delayed the legislative schedule. On
48 September 30, 2005, legislation which temporarily extends programs under the HEA until
B of T Rep. 13 - I-05 -- page 4
1 December 31, 2005, was signed into law by the President (P.L. 109-81). The legislation, which
2 gives Congress additional time to complete the reauthorization of the HEA, passed the House by
3 voice vote on September 20, 2005, and the Senate by unanimous consent on September 26, 2005.
7 Since the House and Senate versions of the HEA reauthorization differ on several provisions, it is
8 likely that a House-Senate conference committee will be necessary to reconcile the differences in
9 the two bills. As the HEA reauthorization moves through the Congressional legislative process,
10 our AMA will work to ensure that medical school graduates are given the necessary tools to help
11 manage their medical student debt. Our AMA will continue to closely monitor this legislation,
12 particularly those provisions which impact our nation’s future physicians and the financing of their
13 medical education.