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Delay for Loan Auction, Help for Borrowers

March 31, 2009

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Technically, of course, given the name, Congress passes "technical corrections" bills to fix typos and make other minor changes in legislation that it has passed previously. But given the immense complexity of many federal laws, and how dramatically circumstances can change in just the few months after they are enacted, technical corrections bills sometimes wind up making changes that seem to go way beyond inconsequential tweaking.

That is very much the case with a measure the House of Representatives passed on a voice vote Monday (HR 1777), which is designed to update changes that Congress has made in two recent laws renewing the Higher Education Act of 1965. While many of the provisions of the 54-page bill make the kind of piddling changes on which technical corrections measures usually focus -- replacing the erroneous "Tribally Controlled College or University Assistance Act of 1978" with the correct name, the "Tribally Controlled Colleges and Universities Assistance Act of 1978," for instance -- the new measure would make one hotly contested change in policy and another shift that would help tens of thousands of student loan borrowers.

The former change would postpone for a year a planned auction of federal student loans for parents, which Congress passed as part of a budget reconciliation measure in 2007. The auction, which Democratic supporters in Congress said would experiment with the idea of setting loan interest rates through market-based forces rather than the political whims of lawmakers, had been opposed at the time by the Bush administration and many Republicans as risky and potentially disruptive to parents and students.

In recent weeks, as the national economic picture continued to disintegrate and many major loan providers announced that they would not participate in the state-by-state auctions, potentially putting the plan at risk, the National Association of Student Financial Aid Administrators urged Congress to delay the auction, even as the Education Department announced that it was proceeding.

But given the upheaval surrounding the student loan landscape generally -- with the Obama administration pushing a plan to eliminate the lender-based guaranteed loan program entirely -- even Democrats who supported the auction idea embraced the notion that postponing the auction program makes good sense.

Republicans, though, did not pass up an opportunity to use the backtracking on the auction to offer a cautionary suggestion about the current student loan environment to their Democratic counterparts and anyone in the Obama administration who might be listening. Noting that he and others had opposed the auction proposal as "shortsighted" two years ago, Rep. Howard P. (Buck) McKeon, the senior Republican on the House Education and Labor Committee, said during Monday's brief discussion about the technical amendments bill that he hoped the vote "will send a message that undercutting a successful program to achieve political goals was not a good idea in [2007], and it's not a good idea today," a not-veiled-at-all reference to Education Secretary Arne Duncan's plan to eliminate the guaranteed loan program.

The other significant but less-visible change the technical corrections bill would help tens of thousands of student loan borrowers who, after defaulting on their loans, "rehabilitate" them by making at least nine on-time payments, as explained in this earlier article. The borrowers are supposed to be able to clean their credit records once the loans are repurchased by another lender, but the credit crunch has obliterated the market for such purchases -- leaving borrowers in the lurch.

At the urging of loan guarantors, Congress, in the technical corrections bill, would grant the Education Department the authority to buy rehabbed loans under the larger program that federal agencies announced last fall to ensure that federal student loans would continue to be available to borrowers. This change, if the Senate passes and President Obama signs the technical corrections bill as expected, would allow borrowers who have rehabbed their loans to once again benefit from having dug themselves out of a financial hole.

In other changes that would be made by the technical corrections bill, Congress would:

  • Delay for a year, to 2010-11, implementation of the shortened Free Application for Federal Student Aid that is designed to make it easier for some students and families to apply for financial aid. The Higher Education Opportunity Act that Congress passed last summer directed the Education Department to make an EZ FAFSA available to the subsection of low-income students who already qualify for an expedited review of their financial situations, part of a larger plan to facilitate the student aid application process.
  • Extend the range of people who are barred from receiving "prohibited inducements" from student loan guarantors. The existing language bars "any institution of higher education or the employees of any institution of higher education" from getting such gifts or payments; the corrections bill would extend the prohibition also to "any individual or entity."
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Comments on Delay for Loan Auction, Help for Borrowers

  • An embarassing mess cleaned up
  • Posted by Jack on March 31, 2009 at 8:15am EDT
  • Many in the higher education education have watched in disgust as often unsupervised Congressional aides work to make student aid programs more complex than they need to. The PLUS auction was a prime example of this and it is to the credit of some in Congress that they recognized it as unworkable when it was first proposed and urged its rejection. Unfortunately, others on the Hill seem to support anything that is opposed by student loan lenders. This was also the case here and the auction made it into the Higher Education Act.

    How much money was wasted at the Department of Education in preparing for an auction that they knew would not work? How many schools had to make contingency plans to account for the possibility of the auction not working? How many families college financing planning was made more stressful?

    It is unfortunate that the bill offers only a one year delay. This is because the Congressional Budget Office--the same organization that gave us an estimate of $94 billion in savings for a proposal to end the FFEL program--still claims that the auction saves money. CBO's role in this mess as well as with the FFEL elimination plan merits an investigation of how budget scoring is done.

    Let's hope that the Senate acts this week to complete work on this delay.

  • True colors shining through
  • Posted by DS on March 31, 2009 at 9:45am EDT
  • I doubt the PLUS auction will ever happen (and in an all-time "pot calling the kettle black" moment, Buck McKeon, Congress' #1 recipient of FFELP lender money, calls it playing politics), but it sure gave lenders the opportunity to show whose interests they have in mind at all times...neither students nor taxpayers. One by one, they all issued dramatic press releases that they would not bid and successfully pressured aid associations to join in the protest against reduced profits amidst warnings that this was another sign of the apocalypse. And NASFAA, for the millionth time in a row, sided with the lenders, even though it would've meant cheaper loans for borrowers.

  • A Clear Solution
  • Posted by Claiborne Pell , Dept of Free Money at A College Near You on March 31, 2009 at 3:45pm EDT
  • The answer is clear to any rational human being - make the PELL grant formula variable with EFC and Total Cost of Education the variables, meaning 0$ EFC students get a PELL grant equal to 100% TCE. Then pay for that by charging the PLUS borrowers 18% interest which is closer to market rate. Problem solved. If you can afford it, pay for your education. If you can't, it should be free.