Details of Final Student Aid Bill Revealed

After long delays, Congressional Democrats finally settled on the details of the student aid bill, partnering it with the healthcare bill to help ensure passage of healthcare reform. Marked with a lot of compromise, the bill still managed to end bank-based federal loan distribution.

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Congress Associated Press Photo

Democratic representatives just before announcing their support for the two bills. Lauren Victoria Burke, AP.

Victories and Compromise

While healthcare legislation has been at the forefront of public debate, the higher education community has been fighting their own legislative battle over student aid reform. Last September, the House passed a bill that included major expansions to the Pell Grant and Perkins Loan programs and big chunks of funding for community colleges, College Access grants and minority-serving institutions. But the bill got held up in the Senate when lawmakers realized that it would only pass under the special procedural rules allowed for 'budget reconciliation.' Since the reconciliation process can only be used once a year, Congress put the student aid bill on hold while they finished work on the healthcare bill.

As healthcare reform reaches its eleventh hour, lawmakers have once again picked up the details of the student aid bill. After weeks of swirling rumors about major funding and program cuts, the final bill was unveiled Thursday in anticipation of an impending vote on healthcare. Although most of the rumors were exaggerated, the final student aid bill is an exercise in compromise. (Scroll down for a summary of what's in and what's out.) The original legislation included over $80 billion in funds to increase student aid and spur positive changes in college operations through a series of new programs and accountability systems. But in order to win over the 'Blue Dog Democrats' and other budget-skeptics in their party, the Democrats ended up redirecting $19 billion toward reducing the federal deficit and covering the cost of healthcare, which will come from revenue that policy changes in the bill are expected to generate.

Other major cuts include $9 billion that would have reduced interest rates on federally subsidized student loans through 2012-13 and beyond. The rate is now expected to drop to 4.5% during the 2010-11 school year and 3.4% in 2011-12, but climb back up to 6.8% the year after that. A $5 billion per annum expansion of the Perkins Loan Program designed to reward institutions for increasing college graduation rates for low-income students was also eliminated, as was an $8 billion provision for early-childhood education programs. The final bill also excluded $3 billion that would have launched a new College Access and Completion fund intended to drive innovation in states and individual institutions. Instead, $750 million will go toward the current College Access Challenge Grant Program.

Financing Low-Income Students

Perhaps the most disappointing concession came in a reduction to the proposed increases for the federal Pell Grant program, named as the administration's top higher education priority. Pell Grants provide much-needed funding to low-income individuals, and because they're grants and not loans, they do not increase student debt. In the last couple of years, the number of Americans qualifying for Pell Grants has skyrocketed due to the recession, which has led to growing college enrollments and shrinking incomes. As a result, the program is facing a $19 billion shortfall in 2009-10 and 2010-11, which forced Congress to set aside $13.5 billion toward paying down that deficit rather than expanding the program.

The version of the student aid bill passed by the House last fall would have increased the maximum annual Pell Grant to $6,900 by 2019 and linked future increases to inflation plus one percentage point. The compromise sets the maximum at $5,975 in 2019 and doesn't provide for any increase in four of the next ten years. When increases do happen they will be tied to inflation, but without that valuable additional percentage point.

Another big compromise came in the form of funding for community colleges, which have been at the forefront of the Obama administration's goals for increasing college attainment rates. They offer an affordable, accessible option that can often guide students toward 4-year programs who otherwise wouldn't have pursued any postsecondary education at all. In order to boost success rates at 2-year institutions, the original House bill included $10 billion for community college grants. Last week lawmakers hinted that this funding would be cut altogether, so education advocates were relieved to see that the final bill included $2 billion intended to improve educational and career-training programs at community colleges. It's a drastic cut, but many felt that in this budgetary climate, it's better than nothing.

One provision that remained untouched from the original bill is the $2.55 billion allotted for historically black colleges and universities, Hispanic-serving institutions (HSIs), tribal colleges and other minority-serving institutions (MSIs). And the final bill actually added funding that wasn't in the House version to ease repayment for student loan borrowers. The bill allots $1.5 billion over the next 10 years to finance increased assistance to borrowers who are eligible for income-based repayment for a federally subsidized loan. The plan would limit their mandatory monthly payments to 10% of their discretionary income, down from the current limit of 15%, and forgive their loan entirely after 20 years, rather than the current 25 years.

Direct Lending

One of the biggest policy victories in the bill was an end to the bank-based system of distributing federally subsidized student loans in favor of direct loans from the Education Department. Over the last several months, the student aid bill has been under attack by financial lobbyists concerned about the end of a program that has provided them with hundred of billions of federal subsidy dollars over the last four-plus decades. Sallie Mae, the largest provider of student loans in the country, kept up the fight to the bitter end, sending 300 employees to protest outside of the offices of two Democrats last Tuesday. The company argues that the changes will force them to lay off workers and end up costing tax payers more in the long run through indirect challenges like lower-quality debt collection efforts.

But congressional Democrats heralded this shift as a triumph of colleges over loan companies. The policy change will put funds directly back into education that would have gone to subsidize large banks and companies like Sallie Mae, including $50 million to help colleges make the transition to direct loans. In fact, many private loan companies have already abandoned the bank-based system over the past year in reaction to the struggling economy and looming legislative changes. And across the country, most colleges and universities have switched to the Education Department's direct-lending method, or taken steps toward making the transition.

The House of Representatives is expected to approve the combined healthcare and student aid plan this weekend, after which the Senate will finalize the two bills. If all goes according to plan, they'll be passed under reconciliation next week.


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What's In What's Out
$36 billion to raise the limits and reduce the deficits for Pell Grants, which will eventually include an automatic annual increase in the maximum grant by rate of inflation A higher maximum for Pell Grants and an automatic annual increase by rate of inflation plus one percentage point
$1.5 billion to increase income-based repayment benefits for student loan borrowers Expansion of the Perkins Loan program from $1 billion a year to $6 billion
$750 million for the existing College Access Challenge Grant program $3 billion for a new College Access and Completion Fund
$2.55 billion for minority-serving institutions (MSIs) $8 billion for early-childhood education programs
$2 billion for education and career-training at community colleges $10 for community colleges grants
$50 million to help colleges transition to the direct loan program Bank-based lending
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