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Student Aid Seen Ripe for Reform In 1991 Congress

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Washington--The Congress is likely to substantially revamp and restructure federal student-aid programs when it reauthorizes the Higher Education Act during this session, according to members of the Bush Administration and education aides on Capitol Hill.

Questions about whether the neediest college students receive adequate financial aid and about the credibility of the beleaguered Stafford Student Loan program--which has been rocked by rising default rates, the troubles of participating financial institutions, and charges of mismanagement--have spurred consideration of wholesale changes.

The Administration is even considering a proposal to eliminate banks, secondary markets, and guarantee agencies from federal student-loan programs to cut government costs. The federal government would instead provide the money directly to colleges for distribution to students.

"There needs to be a big debate, a thorough re-examination of all the programs," said a key Democratic House aide. "I think we need to put everything on the table."

"I greatly hope that we're going to cause a great deal of anxiety among a lot of people," the aide added. "I think that's healthy."

This analysis follows the near-collapse of one student-loan guarantor last year and Congressional hearings that revealed fraud and abuse in the program and inadequate supervision by the Education Department.

But the Bush Administration's attitude toward the program has also helped make the debate possible, according to Congressional aides and Administration officials.

President Reagan sought to weaken student-aid programs, aides said, noting that the previous Administration had proposed eliminating some programs, severely cutting others, and shifting aid from grants to loans.

Many of the fraud, abuse, and oversight problems uncovered by the department's inspector general and in hearings called by Senator Sam Nunn, Democrat of Georgia, have been attributed to lax oversight and accountability in the Stafford loan program over the past decade.

When the Higher Education Act was last reauthorized, in 1986, the Education Department submitted its reauthorization proposal after bills had already been introduced in the Congress, and thus was not an important player in the debate.

The Bush Administration, in contrast, plans to take an active role in reshaping the $6.7-billion federal-aid programs. An Education Department task force has been studying the hea reauthorization for more than a year.

The aid programs authorized under the law include Stafford loans (formerly Guaranteed Student Loans), Perkins loans, Pell Grants, State Student Incentive Grants, Supplemental Educational Opportunity Grants, Parent Loans for Undergraduate Students, and College Work-Study.

"We see [submitting a proposal] as our responsibility," said the department's spokesman, Etta Fielek. "The department administers the programs."

The Administration already has ruffled the feathers of banks and guarantors by considering the proposal to eliminate them as middlemen in the loan programs.

Directly distributing a sum to colleges and having the schools themselves disperse loan money to students--a system currently in use only for Perkins loans--would save $1 billion annually in "special allowances" the government pays banks for offering students loans at below-market rates, proponents of the idea within the Administration estimate.

Moreover, those Administration officials argue, the government would be better able to provide oversight, since it would be monitoring 8,000 schools, rather than relying on outside accreditors to hold in check 10,000 lenders and 54 state-guarantee agencies.

The changes being contemplated in the loan program were made possible by new accounting rules adopted with last fall's budget agreement. Under the rules, the total cost of federal loans, including an estimate of future defaults and repayments, will be included in federal-budget estimates for the year the loans are issued.

Under the previous rules, only money that flowed in and out of the federal treasury in the year loans were issued was noted. That made it advantageous for the government to issue more loans, even to students with a high risk of default, because a large amount of money immediately would reach the federal coffers from loan-origination fees.

The new rules will eliminate that apparent advantage, making it more palatable, proponents said, for the Congress to replace loan guarantees with direct loans to students. The government, however, would be required to come up with more than $12 billion annually to provide loans to nearly 5 million students.

Aides said last week that the Congress would be willing to explore the Administration proposal, but added that information currently available was too sketchy for them to comment in detail.

The aides and representatives of education groups, who also expressed a willingness to explore the proposal, noted that the idea of a federal student-loan bank was not a new one. A similar program foundered in the late 1970's, they said, because the government failed to vigorously collect on the loans.

Critics of the new proposal questioned how the government would provide the $12 billion needed annually to offer the loans, and asked what method would be employed to ensure repayment. They also warned that such dramatic changes to the program could be disruptive.

Administration officials said last week that the direct-loan proposal--which was leaked to the news media, possibly in an effort to gauge public reaction--was only one of several changes that might be proposed.

One Administration official said the President's proposals would have three broad themes.

First, the official said, the Administration wants to repair the credibility of the Stafford program, the largest of the student-loan programs, by restructuring it, possibly by curtailing the role of lenders, guarantors, and accreditors, as envisioned under the direct-loan approach.

Providing additional aid--on top of the Pell Grant base--to high-achieving, low-income students who qualify for such grants is also on the agenda, the official said.

The Administration also wants to provide low-income students with more grant aid and less loan aid, according to the official.

Leonard L. Haynes, the Education Department's assistant secretary for postsecondary education, said last month in a speech to the Consumer Bankers Association that the department also may require performance standards for schools that participate in the federal-loan programs. Such standards would be added to the curbs on default rates approved by the Congress during last fall's budget reconciliation.

Congressional aides are also preparing for the reauthorization process. Aides from both parties listed similar reauthorization goals, and it is the method of achieving them that will stir debate.

Like Administration officials, the Congress is particularly interested in ensuring that low-income students receive Pell Grants and are not unduly burdened with loan aid.

One aide described the current system this way: "First you have to demonstrate your low-income status and inability to pay, then we give you a loan, which is contrary to every other loan program in the world."

But aides said lawmakers would like to shift the loan-grant balance for all students. The percentage of loan and grant aid has shifted from 40 percent and 56 percent, respectively, in the 1980-81 academic year to 48 percent and 49 percent, respectively, in 1989-90.

The Congress also will debate what is known as "front-loading"--providing first- and second-year students with grants and issuing them loans later in their college careers.

The new chairman of the House Education and Labor Committee, Representative William D. Ford, is receptive to that idea because it increases access to higher education, an aide to the Michigan Democrat said.

But Mr. Ford's counterpart on the other side of the Capitol, Senator Edward M. Kennedy, Democrat of Massachusetts and chairman of the Labor and Human Resources Committee, has reservations about the approach. Mr. Kennedy fears that front-loading has the potential to create a two-tiered higher-education system by nudging low-income and minority students toward proprietary schools and community colleges, said an aide to the senator.

Other goals for the hea reauthorization cited by Congressional aides include:

Making it easier for the working and middle classes to qualify for Pell Grants. A bill has already been introduced this session that would eliminate home equity from the Pell eligibility equation.

Lawmakers may also discuss proposals to make Pell Grants an entitlement program. A House loan-default bill that included such a provision died in 1988 when its sponsors shelved it in exchange for agreement by the Education Department to postpone implementation of loan-default regulations that lawmakers deemed too draconian. The Administration does not favor making Pell grants an entitlement, a costly proposition.

Simplifying the aid-application and -delivery process--called the "Holy Grail of financial aid" by one aide--to help more low-income students qualify. Aides said making all Aid to Families with Dependent Children recipients automatically eligible for college aid because they already have met a "needs" test illustrates how such simplification would make more of the neediest students eligible.

Implementing an early-intervention program that would notify middle- and high-school students and their parents of student-aid programs. Aides universally agree that some form of early intervention is needed. Too many students are simply not aware that help is available for their college costs, they said.

The National Association of College Admission Counselors is asking the Congress to put $5 million toward such an effort.

Making major changes in the way the Stafford program is administered to restore confidence in the program. Senator Nunn is expected this month to release recommendations on reforming the program.

In addition, aides said the reauthorization could provide a vehicle to amend the Education Department's recent interpretation of civil-rights law that sought to limit the circumstances under which colleges may offer race-exclusive scholarships. (See Education Week, Jan. 9, 1990.)

Congressional aides also said it was still unclear how the Budget Enforcement Act would influence the reauthorization of the Higher Education Act. The budget-enforcement measure, passed last fall along with the budget for the 1991 fiscal year, prevents spending increases for entitlements unless there are corresponding funding decreases in other programs.

Nevertheless, an aide to Mr. Ford said, "our basic premise is that we're going to get more money. There are not many trade-offs within the Higher Education Act."

Congressional hearings on the hea reauthorization are expected to start this spring and conclude in late summer, giving the Congress the fall and winter to complete work on the legislation.

President Bush's budget request is scheduled to go to the Congress Feb. 4, and many thought the Administration's hea-reauthorization proposal might go along with it.

But Mr. Bush's nominee for Secretary of Education, Lamar Alexander, will likely want to review any such proposal before it is released publicly, Ms. Fielek of the Education Department said.

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