October/November 2005

1. Fiscal Year 2006 Budget Appropriations
2. Budget Reconciliation
3. Higher Education Act Reauthorization

Fiscal Year 2006 Appropriations

On November 17, the House of Representatives failed to pass the final Conference Report for the Fiscal Year 2006 Labor, Health and Human Services, and Education Appropriations bill . The Labor-HHS bill and the Defense Appropriations bill are the only two appropriations Conference Reports that have yet to be completed. As a result, Congress passed a Continuing Resolution funding the programs included in the two bills at Fiscal Year 2005 levels through December 17. It is expected that the House and Senate will complete the remaining Conference Reports by that date.

Budget Reconciliation

For the first time since 1997, Congress is going through the process of budget reconciliation, where federal funding in mandatory programs is reduced in stand-alone legislation. The Senate passed a reconciliation bill on November 3 and the House passed a bill on November 18.

Major provisions of the House Reconciliation bill related to education include:

• 50/50 Rule: Modifies the 50/50 rule pertaining to the definition of an institution of higher education by excluding courses offered via telecommunications services from being considered as correspondence courses. As a result, telecommunications courses would not contribute toward the 50 percent limit on correspondence classes to be considered an institution of higher learning.
• Loan Fees: Strikes the authorization for lenders to be assessed and to pay an “administrative cost allowance” and inserts a “loan processing and issuance fee” instead; (up to 1 percent of the unpaid balance per loan each year). Both terms are defined in law, but loan processing and issuance fees appear to be payable only once (upon issuance of the loan) rather than annually (as is the administrative cost allowance).
• Family Education Loan Program: Reauthorizes the federal family education loan program (FFELP) through 2008; reauthorizes the federal loan insurance program through 2008; reauthorizes interest subsidized loans through 2012; reauthorizes federal consolidation loans through 2012.
• Increased Loan Limits: Increases federal loan limits from $2,625 to $3,500 for first year students and from $3,500 to $4,500 for students who have completed their first year.
• Consolidation Loan Limits: Requires, after July 1, 2007, federal consolidation loans to be counted against the applicable limits on the total indebtedness of the student – one of the determinates in qualifying for student loans.
• Loan Interest Rates: Eliminates a scheduled switch (on July 1, 2006) from the current variable-rate formula (also known as an adjustable rate – an interest rate that fluctuates based on an underlying index, in this case the 91-day Treasury bill plus 2.3%) to a fixed rate (6.8% for students and 7.9% for parents) for certain federal student loans. Thus, current variable-rate formulas would continue to be in effect at such date, the net effect of which would increase federal income from incoming loan payments. Using the current variable rate formula, a student’s interest rate would be approximately 4.7% today (Treasury bill rate of 2.4% plus the 2.3% fixed add-on).
• Consolidated Loan Interest Rates: Allows, after July 1, 2006, students with consolidated loans to choose between a variable rate formula (91-day Treasury bill rate plus 2.3% for students or plus 3.1% for parents) and a fixed rate (set at the 91-day Treasury bill rate plus 3.3% for students or plus 4.1% for parents).
• Interest Rate Caps: Consolidates several interest rate caps into two – one for student loans at 8.25% and one for parent loans at 9%.
• Loan Origination Fee: Requires a new, one-time origination fee of 1% of the principal amount on student loans.
• Loan Deferment for Military: Adds a new provision under which military or National Guard personnel who are serving on active duty during a war or other military operation or national emergency may defer their loan payments for up to three years.
• Loan Forgiveness for National Service: Provides for loan forgiveness for service in areas of national need and stipulates specific areas of service, including early childhood educators, nurses, foreign language specialists, librarians, certain teachers, and others.
• 9.5 Percent Loans: Modifies the formula for certain loans funded with financing based on tax-exempt bonds (commonly known as “9.5 Percent” loans) by permanently extending the current policy (due to expire December 31, 2005, when they would revert back to a pre-October 2004 structure which is more costly for the government) and expanding its scope to include all new loans supported with similar financing.
• Lender Fees: Increases lender fees from .5 to 1.0 percent, charged on all loans at the time of disbursement and increases fees charged annually on outstanding consolidation loans from 1.05 to 1.30 percent under certain circumstances.
• Default Loan Rate Insurance: Reduces the percentage that most lenders are reimbursed for defaulted loans from 98 to 96 percent and tightens eligibility requirements for lenders to qualify as “exceptional” to receive 100 percent reimbursement.
• Discretionary Administrative Expenses: Eliminates mandatory funding requirement for administrative expenses beginning in 2007, but retains mandatory funding for account maintenance fees.
• Loan Forgiveness for 9/11 Victims: Provides student loan forgiveness for survivors of victims of the September 11, 2001, attacks, including spouses or parents who are paying loans belonging to or on behalf of a 9/11 victim.

Many provisions of the Senate bill are the same as the House bill. However, the Senate bill reinvests some of the savings from reducing lender subsidies back into student aid programs.

Higher Education Act Reauthorization

The Senate attached reauthorization of the Higher Education Act to its budget reconciliation package but the House did not. It is unclear if reauthorization will occur when Congress reconvenes in December. However, it is more likely that reauthorization will be on the agenda for 2006.

Cassidy & Associates is a government relations firm located in Washington D.C. For more information on Cassidy and its services, contact Lisa Bos at 202/585-2885 or lbos {at} cassidy(.)com