United States Student Association
MEMO ON H. 4241 “HOUSE BUDGET RECONCILIATION”: HOW THE HOUSE BUDGET RECONCILIATION BILL MAKES COLLEGE MORE EXPENSIVE, RAISES THE COST OF STUDENT LOAN BORROWING, AND ELIMINATES STUDENT AID SAFEGUARDS H.R. 4241, cuts $14.3 billion from the student loan programs. It provides minimal increases for grant aid programs, and drastically increases the cost of borrowing for students and parents. This memo is a synopsis on H.R. 4241 and provisions pertaining to college affordability. It is intended to provide a detailed picture of this legislation, and its impact on students. The bottom line on H.R. 4241 Overall, the bad provisions in H.R. 4241 far outweigh the few positives. This bill, if enacted, would include the largest cuts ever to the student loan programs—more than $14 billion. By our estimates, the average college student would pay about $5,800 more in loan costs under H.R. 4241, as opposed to current law. This bill hikes interest student loan interest rates, charges borrower new fees on their loans, effectively freezes student aid, and eliminates key safeguards for students. Below is a more in-depth look at specific good and bad provisions in H.R. 4241. Bad provisions in 4241 1. Keeps interest rate at 8.25 percent, going back on a Congressional promise to lower interest rates. H.R. 4241 would change current law and keep interest rates capped at 8.25 percent, reversing a bipartisan decision in 2001 to lower interest rates to 6.8 percent for student borrowers starting next year. Net loss to the average undergraduate borrower = as much as $2,600 in increased interest payments. 2. Increases the cost of consolidating for students in school. H.R. 4241 eliminates the in-school consolidation benefit, which allows borrowers who consolidate in school or in grace period to receive a lower rate. This change hikes the in-school consolidation interest rate by .7 percentage points. Net loss to the average undergraduate borrower = $985 in increased interest payments. 3. Hikes the fixed rate in consolidation and charges borrowers a fee to consolidate. H.R. 4241 increases the fixed consolidation rate by 1 percentage point and establishes a .5 percent origination fee for borrowers to consolidate their loans. Both of these changes make consolidation more costly for borrowers. Due to pressure from big student loan companies, the
Committee also passed up the opportunity to increase the consolidation rate by only .5 percentage points with NO origination fee, which would have saved the same amount of money as the adopted proposal. Big student loan companies have worked to eliminate the fixed rate option entirely since they make less money on these loans and don’t like competing with smaller companies for borrowers. Net loss to the average undergraduate borrower = $1,777 in increased loan costs. 4. Forces student borrowers to pay 1 percent guaranty fee. H.R. 4241 would prevent lenders from waiving the 1 percent guaranty fee from student borrowers, which most agencies now do. This change will force student borrowers to pay even more for their loans. It would also discourage competition among lenders. Net loss to the average undergraduate borrower = $175 dollars to pay the guaranty fee. 5. Eliminates on-time repayment incentives in the Direct Loan Program. H.R. 4241 prevents student borrowers with Direct Loans from receiving the interest rate reduction that currently exists for on-time repayments. This change will force borrowers to pay more, potentially encourage more late loan payments, and penalizes borrowers who have Direct Loans, since FFEL lenders are not prevented from offering these incentives. Currently, the Direct Loan Program provides a rebate of 1.5 percent of a borrower’s loan balance for borrowers making 12 on time loan payments. Net loss to the average undergraduate borrower = $263 in increased loan payments. 6. Increases the maximum Pell Grant by only $200 for the next six years. H.R. 4241 would increase the authorized Pell Grant maximum by only $200 (to $6,000) for the next six years. Pell Grants, which help 5 million low and middle-income students afford college each year, have already been halved in purchasing power over the last 20 years. This is essentially a freeze in authorized funding for the Pell Grant, as this $200 increase isn’t even enough to keep pace with inflation for two years, let alone keep pace with rising college tuitions. Furthermore this increase is only to authorized levels and does not dictate a similar increase in appropriated funds. 7. Freezes funding the Leveraging Educational Assistance Partnership Program (LEAP), at $105 million. The LEAP Program helps provides incentives for states to provide need-based aid to college students. The program’s funding has already been frozen for the last three years. Net loss: $16.8 million lost over the next six years, given just inflation increases. 8. Freezes Federal Work Study funding, at $1 billion. Federal Work Study provides part-time jobs to nearly 800,000 students who need help to finance their education. About half of the students who receive work-study come from families with annual incomes of less than $30,000. Net loss: $159 million lost over the next six years, given just inflation increases.
Good provisions in 4241 1. Reduces origination fees on student loans for some students. For more than 20 years, student borrowers have paid ‘origination fees,’ on their loans, which are essentially taxes that go towards deficit reduction. H.R. 4241 includes a phased reduction of these fees. However, because the bill also eliminates on-time repayment incentives in the Direct Loan program, origination fees would actually be increased for Direct Loan borrowers in the short term. In addition, because many lenders waive these fees, this change is as much a help to student loan companies as it is to students. Currently, borrowers from the Direct Loan program pay origination fees of 1.5 percent (due to an upfront on-time repayment rebate of 1.5 percent); Federal Family Education Loan (FFEL) borrowers pay 3 percent (although many lenders waive these fees). The changes to these fees in H.R. 4241 are the following: in 2006-07, Direct Loan borrowers would pay 3 percent and FFEL borrowers would pay 2 percent; in 2007-08, Direct Loan borrowers would pay 2.5 percent and FFEL borrowers would pay 1.5 percent; in 2008-09, Direct Loan borrowers would pay 2 percent and FFEL borrowers would pay 1 percent; in 2009-10, Direct Loan borrowers would pay 1 percent and FFEL borrowers would pay 0 percent. Net gain: By 2010, $350 for Direct Loan borrowers and $525 for FFEL borrowers. (assuming these borrowers pay the maximum 3 percent fee now). 2. Eliminates the 9.5 percent student loan loophole. H.R. 4241 fully and permanently eliminates the 9.5 percent student loan loophole, which has allowed some lenders to reap millions of dollars in excessive subsidies from the government. An earlier version of the bill did not include a full closure, so this change is a victory for students. Since this provision has no net impact on the cost of loans for borrowers, it won’t make loans less expensive for students but frees up funds that should be reinvested in need based student aid. 3. Repeals the single holder rule, but still includes a hurdle to borrowers consolidating. H.R. 4241 eliminates the ‘single holder rule,’ an anti-competitive restriction that has prevented borrowers with loans only under one lender from consolidating those loans with any other company. This provision has prevented some borrowers from obtaining the best terms and conditions on their consolidation loans. This rule’s elimination is a good victory; however, there is a provision in 4241 that requires borrowers with only one lender to allow that company the ‘right of first refusal’ in making consolidation loans. This provision could have the same consequences as the single holder rule and at a minimum, will slow down the process of obtaining consolidation loans from other companies. 4. Requires student loan companies to report to all three major credit bureaus. For anti-competitive reasons, some student loan companies were refusing to report student loan information to all three major credit bureaus, which had the potential to negatively impact borrowers’ credit scores. H.R. 4241 now requires full reporting. This has no impact on the cost of student loans for borrowers, however. The bill fails to require student loan companies to report positive credit. Lenders, by failing to report when students make on time repayments, distort students’ credit histories and make them ineligible for cheaper interest rates.
Other changes in H.R. 4241 Increase freshman and sophomore loan limits, while maintaining overall undergraduate borrowing limits. H.R. 4241 maintains the overall limit on how much students can borrow through the federal education loan programs. However, the bill does allow more flexibility in year-to-year borrowing for undergraduates, by increasing the annual loan limits for freshman to $3,500 (from $2,625) and for sophomores to $4,500 (from $3,500). **Calculations: The average student borrower has $17,500 in student loan debt, according to Congressional Research Service. The loan repayment calculations for purposes of this document are made over 15-year repayment plan. Average inflation increase for purposes of this document is 2.5 percent a year.
Luke Swarthout Higher Education Associate State PIRGs 202-546-9707 lswarthout@pirg.org
Jasmine Harris Legislative Director United States Student Association 202-347-8772 leg@usstudents.org