College & Workforce Readiness

Congress Weighs Changes To Expand Reach Of College Aid

By Sean Cavanagh — June 23, 2004 5 min read
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Every year, the federal government pours billions of dollars into programs designed to help students and families pay for college, offering a multitude of grant, loan, and work-study options, some spiced with federal subsidies aimed at making it cheaper to borrow money and easier to pay off debt.

Yet as the number of teenagers heading to higher education surges and the costs of helping them climbs, members of Congress are trying to offset that fiscal burden by targeting portions of the student-aid puzzle for cuts.

Such trade-offs have been at the core of recent debates over the pending reauthorization of the Higher Education Act, the primary law governing student-aid programs, on which the federal government spends nearly $70 billion a year. The act, created in 1965, was most recently revised in 1998.

Several influential members of Congress say that finding more money for low- and middle-income students will require slashing expenses in other areas covered by the law, such as the profits lenders earn from student loans.

Two Republicans on the House Education and the Workforce Committee, Reps. John A. Boehner of Ohio and Howard P. “Buck” McKeon of California, have proposed legislation that would cut such profits. Their proposed College Access and Opportunity Act would also cut government costs by forcing college graduates to consolidate federal loans at variable, rather than fixed, interest rates—a step opposed by some student-aid advocates and Democrats.

Supporters say those changes would allow the federal government to cut costs and use the savings to devote more money toward low- and middle-income undergraduates, offering them reduced fees on loans and higher borrowing limits during college.

Rep. Boehner, the chairman of the House education committee, says the current loan-consolidation law benefits college graduates, who are presumably earning income and don’t need as great a subsidy, at the expense of needy college-bound teenagers.

“An increasing share of aid is flowing not to incoming low- and middle-income students struggling to achieve a higher education,” Mr. Boehner said at a May 12 hearing on his proposal, “but to former students who have already received an education and entered the workforce.”

Current law allows students to consolidate their debts under the two major federal college-loan programs: the Federal Family Education Loan (FFEL) Program and the William D. Ford Direct Loan Program. Consolidation allows individuals who have graduated from college—not current undergraduates—to combine both federally subsidized and unsubsidized loans from different sources into a single monthly payment. Interest on consolidated loans is now capped at a fixed annual rate of 8.25 percent.

Interest rates have fallen in recent years, making consolidation attractive to borrowers: The volume of consolidated loans rose from $5.8 billion in fiscal 1998 to $41 billion in 2003. But that trend has increased costs for the government, which guarantees lenders participating in the federal loan program a specified rate of return. Forcing borrowers to pay interest rates that vary with the market would reduce the government’s burden, backers of the bill say.

Balancing Costs

Current and recently graduated college students such as Irene Schwoeffermann, left, Julie Ajinkya, and Sarah Burrows listen as a House committee debates federal student-aid programs last month.
—Photograph by Allison Shelley/Education Week

But critics say sacrificing portions of the student-aid program to fund others isn’t necessary. Rep. George Miller of California, the ranking Democrat on the House education committee, points to a study by the nonpartisan Congressional Research Service that estimates that forcing a borrower with $17,000 in loans to consolidate at a variable, rather than fixed, interest rate would cost that individual roughly $5,500 in additional interest payments.

Asking college graduates to pay more so that students just beginning college can pay less makes no sense, Rep. Miller argues: Both groups carry the burden of debt.

GOP leaders see further budgetary savings by requiring lenders to return all excess earnings, above a guaranteed floor income they receive by participating in the program, to the government. That floor income is based now upon a formula rooted in the market rate for commercial paper, plus a fixed percentage rate.

Rep. Miller also supports cutting lenders’ profits, but last month he offered a different approach. He and fellow Democratic Rep. Thomas E. Petri of Wisconsin introduced legislation that would encourage colleges to use the direct-loan program—in which federal aid, managed by colleges, flows directly to students—as opposed to the FFEL program, in which private lenders participate and are guaranteed a return. Savings from lender profits would support more money for Pell Grants for needy students, under provisions in the legislation.

Cutting lender subsidies recently emerged as an issue in the presidential campaign. Sen. John Kerry of Massachusetts, the presumptive Democratic presidential nominee, has proposed requiring banks to bid for the right to handle student loans. Such a policy, he says, could save the government $14 billion over 10 years. President Bush’s campaign opposes Sen. Kerry’s proposal.

Whether any of the higher education legislation will be resolved by Election Day is unclear. The Senate has made little progress on higher education issues over the past year, compared with the House.

Kate Rube, a consumer advocate with the U.S. Public Interest Research Groups, in Washington, supports the proposal to increase first- and second-year borrowing limits, saying it would give students more flexibility.

Underlying the debate over lender profits are questions about the Pell Grant program, the government’s primary tuition grant for low-income families. The Republican bill would leave the maximum amount authorized for individual Pell awards at $5,800 a year. Congress sets the maximum amount for Pell Grants, now $4,050 a year, during the annual appropriations process, not during the HEA reauthorization.

Rep. Boehner notes that boosting the maximum award comes with a big price tag: An increase of $100 costs the federal government $400 million, by some estimates.

But Ms. Rube says lawmakers have to be willing to part with federal money if they are committed to improving college access.

Federal lawmakers, she said, “are trying to make college more affordable by not spending any more money.”

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