Fiscal Year 2006 Budget Summary February 7, 2005
Section II. D. Student Financial Assistance
In 2006, the Department of Education will administer almost $80 billion in grants, loans, and work-study assistance to help students pay for postsecondary education, including $62 billion in guaranteed and direct student loans and $13.7 billion in Pell Grants. While these funds help millions of Americans obtain the benefits of college, dramatically higher education costs and the vital role advanced training plays in today's global economy require an even greater investment, especially in Pell Grants to low-income students. To achieve that goal, the President's 2006 request for Student Financial Assistance includes a comprehensive set of proposals to reauthorize the Higher Education Act (HEA), increasing aid to students while improving the effectiveness of the Pell Grant and student loan programs.
Budget Authority ($ in millions)
Aid Available to Students ($ in millions)1
Number of Student Aid Awards
Number of Postsecondary Students Aided by Department Programs
In addition to the Department of Education's grant, loan, and work-study programs, significant support for postsecondary students and their families is available through tax credits and deductions for higher education expenses, including tuition and fees. For example, in 2006 students and families will save an estimated $3.2 billion under the HOPE tax credit, which allows a credit of up to $1,500 for tuition and fees during the first 2 years of postsecondary education; $2.1 billion under the Lifetime Learning tax credit, which allows a credit of up to $2,000 for undergraduate and graduate tuition and fees; $1.8 billion under an above-the-line deduction of up to $4,000 annually in higher education expenses; and $810 million in above-the-line deductions for interest paid on postsecondary student loans.
The Pell Grant program helps ensure financial access to postsecondary education by providing grant aid to low- and middle-income undergraduate students. The program is the most need-focused of the Department's student aid programs, with individual awards varying according to the financial circumstances of students and their families.
The key goal of the Administration's reauthorization proposals is to restore the Pell Grant program to firm financial footing while meeting the financial need of low-income students by providing a record $13.7 billion in grants to 5.5 million students in fiscal year 2006. This would be accomplished through the addition of a mandatory funding mechanism to the Pell Grant program, increasing the investment in Pell Grants by more than $19 billion in new mandatory funding in fiscal years 2006-2015. These funds would be used to increase the maximum grant award by $100 a year each of the next 5 years while retiring the current funding shortfall.
Over the past four years, Pell Grant appropriations have not kept pace with program costs, which have grown dramatically as the number of participating students has increased. This persistent failure to fully fund the cost of the program has led to a funding shortfall currently estimated at $4.3 billion. The Administration is proposing to use mandatory savings to retire this shortfall, putting the program on a firm financial footing, and is also proposing a budget scoring rule that would require appropriators to fully fund future program costs, ensuring that dangerous shortfalls do not recur.
The cost of operating the Pell Grant program at the current maximum award level of $4,050, together with program changes discussed below, would continue to be funded through discretionary appropriations, which would total $13.2 billion in 2006.
Under the Administration's proposals, mandatory savings generated by other reauthorization proposals would help finance $100 increases in the Pell Grant maximum award in each of the next five years. Discretionary appropriations would be used to fund the program at a $4,050 maximum award, and mandatory funding would be used to fund the cost of the annual $100 increase in the maximum award. In 2006, $420 million in mandatory spending would support a $100 increase in the maximum award, to $4,150. In 2007, mandatory funding would cover the cost of a $200 increase over $4,050, to $4,250. Beginning in 2007, these mandatory costs would be partially offset by a proposal to index the minimum Pell award to increases in the maximum award.
Indexing the minimum award would better target aid to students with the greatest financial need. Currently, although the minimum award is statutorily fixed at $200, students qualifying for an award between $200 and $400 receive $400. Under the indexing proposal, increases in the maximum award would raise the statutory $200 minimum award dollar-for-dollar while initially leaving the actual minimum payment at $400. For example, with the $100 increase in the maximum award proposed for 2007, the statutory minimum award would rise to $300 and students qualifying for between $300 and $400 would receive $400. In 2008, a further $100 increase in the maximum award would raise the statutory minimum award to equal the actual minimum payment of $400. In future years, the statutory and actual minimum levels would rise together with the maximum award.
The Administration also is proposing several changes to increase the Pell Grant program's effectiveness and improve its overall operation.
Finally, request includes $33 million for a new Enhanced Pell Grants for State Scholars program, which would encourage students and States to participate in the State Scholars program currently in place in 13 States. The proposed program would provide up to an additional $1,000 to students completing the rigorous State Scholars curriculum in high school. The State Scholars program encourages schools to implement rigorous curriculum consisting of at least 3 years of mathematics and science, 4 years of English, 3.5 years of social studies, and 2 years of foreign language study. Funding for the new program would be capped at $33 million in 2006; if recipients qualify for more than this amount, a process would be developed to allocate awards within the available funding level.
The Supplemental Educational Opportunity Grant, Work-Study, and Perkins Loan programs are collectively referred to as the "campus based" programs; grants in these programs are made directly to participating institutions, which have considerable flexibility to package awards to best meet the needs of their students. The current statutory formulas allocating campus-based funding have historically distributed a disproportionate share of funding to schools that have participated in the program the longest. Since these longstanding participants do not have a higher proportion of needy students than other institutions, these formulas have been identified as inequitable by the PART. Accordingly, the request proposes to phase in revised allocation formulas beginning in 2006.
This program provides grant assistance of up to $4,000 per academic year to undergraduate students with demonstrated financial need. The $779 million request would leverage $206 million in institutional matching funds to make available a total of approximately $986 million in grants to an estimated 1.3 million recipients.
Program funds are allocated to institutions according to a statutory formula and require a 25 percent institutional match. Awards are determined at the discretion of institutional financial aid administrators, although schools are required to give priority to Pell Grant recipients and students with the lowest expected family contributions. The Administration is proposing to modify the current statutory allocation formula, which distributes a disproportionate share of funding to schools that have participated in the program the longest, regardless of whether these longstanding participants have a higher proportion of needy students than other institutions.
The Work-Study program provides grants to participating institutions to pay up to 75 percent of the wages of needy undergraduate and graduate students working part-time to help pay their college costs. The school or other eligible employer provides the remaining 25 percent of the student's wages. At the request level, over 800,000 students would receive more than $1 billion in award year 2005-06.
Funds are allocated to institutions according to a statutory formula, and individual award amounts to students are determined at the discretion of institutional financial aid administrators. The Administration is proposing to modify the current statutory allocation formula, which distributes a disproportionate share of funding to schools that have participated in the program the longest, regardless of whether these longstanding participants have a higher proportion of needy students than other institutions.
For 2006, the Administration also is proposing to replace the 7 percent community service requirement with a separate set-aside equal to 20 percent of the Work-Study appropriation. The PART process found that while, for the program as a whole, institutions place 15 percent of their students in community service jobs, many institutions fail to meet the 7 percent minimum requirement. Under the proposed approach, institutions would apply for community service funds separately from their regular allocation. Institutions that do not wish to participate in community service activities would not be required to do so and those that do would be awarded additional funds.
To encourage students to enter the vital fields of mathematics and science, the President proposes to create a new program under which the Department of Education would enter into a public-private partnership to award $100 million annually in grants to low-income math and science students. Approximately 20,000 low-income students who receive Pell Grants would receive these separate, additional awards of $5,000 each.
The President proposes to create a new program, jointly administered by the Departments of Education and Labor, to help dislocated, unemployed, transitioning, or older workers and students. This market-oriented program, capped at $284 million in loans to 377,000 students in 2006, will allow participants to acquire or upgrade specific job-related skills through short-term training programs that are not currently eligible for Federal student aid.
New loan volume (in millions)
Number of loans (in thousands)
The Department of Education operates two major student loan programs: the Federal Family Education Loan (FFEL) program and the William D. Ford Federal Direct Loan (Direct Loan) program. These two programs meet an important Department goal by helping ensure student access to and completion of high-quality postsecondary education. Competition between the two programs and among FFEL lenders has led to a greater emphasis on borrower satisfaction and resulted in better customer service to students and institutions.
The FFEL program makes loan capital available to students and their families through some 3,500 private lenders. There are 35 active State and private nonprofit guaranty agencies which administer the Federal guarantee protecting FFEL lenders against losses related to borrower default. These agencies also collect on defaulted loans and provide other services to lenders. The FFEL program accounts for about 75 percent of new student loan volume.
Under the Direct Loan program, the Federal government uses Treasury funds to provide loan capital directly to schools, which then disburse loan funds to students. The Direct Loan program began operation in academic year 1994 95 and now accounts for about 25 percent of new student loan volume.Basic Loan Program Components
Both FFEL and Direct Loans feature four types of loans with similar fees and maximum borrowing amounts:
In recent years, a combination of historically low interest rates and aggressive marketing have resulted in dramatic increases in Consolidation Loan volume, which grew from $12 billion in fiscal year 2000 to $44 billion in fiscal year 2004.
A comprehensive reform package is proposed to make the student loan programs more efficient, cost-effective vehicles for helping students finance their postsecondary educations. Strategic reductions in loan subsidies to financial participants in the Federal Family Education Loans Program (FFEL) are specifically tied to operational efficiencies and program management improvements that have been realized in the last several years. Savings generated from these proposals would in large part be reinvested in student benefits.
For Students: Higher Loan Limits, Flexible Repayment, Lower Rates
Limits on student borrowing have remained essentially unchanged since the mid-1970s, even as college costs have more than tripled. To help students meet rising college costs, the Administration is proposing to increase annual subsidized loan limits to $3,500 for first-year students, $4,500 for second-year students, and annual unsubsidized loan limits to $12,000 for graduate and professional students. The proposal also includes corresponding increases in aggregate loan limits.
With rising debt levels, flexible repayment options help students manage their debt and reduce the risk of default. Direct Loan borrowers have immediate access to extended repayment plans, while FFEL borrowers currently face certain restrictions in obtaining similar benefits. The Administration proposes to give all borrowers immediate access to extended repayment plans.
To further assist students who borrow to fund their education, the Administration proposes to maintain the current variable interest rate formula on student loans, allowing students to continue to benefit from projected low interest rates. Absent this proposal, the statute would fix borrower interest rates on student loans at 6.8 percent beginning July 1, 2006, substantially increasing interest rates for most borrowers from this year's 3.37 percent.
The Taxpayer-Teacher Protection Act of 2004 expanded loan forgiveness for highly qualified math, science, and special education teachers serving low-income communities from $5,000 to $17,500 for loans made between October 1, 1998, and September 30, 2005 (Borrowers who have already received forgiveness benefits are not affected by this provision.) Schools in these communities often are forced to hire uncertified teachers or assign teachers to "out-of-field" subjects. The Administration is proposing to make this expansion permanent, helping such schools to recruit and retain highly qualified math, science, and special education teachers.
For Lenders and Guaranty Agencies: Expanded Risk-Sharing, Increased Program Efficiency
Approximately 14 million student and parent loans will be originated in 2006, adding more than $57 billion to the $320 billion in outstanding FFEL and Direct Loans. While successful in helping students finance postsecondary education, the PART found that the student loan programs were not market sensitive because statutorily fixed subsidies prevent taxpayers from benefiting when market efficiencies lower loan holders' operating costs. Since the last reauthorization of the HEA in 1998, loan servicing has been significantly concentrated in a few large companies, allowing economies of scale not previously possible. Additionally, loan holders have aggressively participated in the loan securitization markets, increasing their financial returns without a corresponding reduction in Federal subsidies. A central tenet of the Administration's reauthorization strategy is that student aid program participants bear a greater share of overall program risk.
To encourage lenders and guaranty agencies to continue to strengthen default prevention efforts and in recognition of the strong repayment record associated with student loans today, the Administration proposes to reduce the percentage of Federal loans guaranteed against default. For lenders, the amount of loan principal insured against default would be reduced from 98 percent to 95 percent. Lenders identified as exceptional performers would have loans insured at 97 percent, and the Secretary would have authority to increase this to 98 percent for lenders that meet certain data quality standards. For most guaranty agencies, reinsurance would decrease to 92 percent from the current 95 percent.
When borrowers default on their student loans, the Department of Education uses multiple tactics to collect on outstanding balances. For example, it offsets tax refunds, garnishes wages, and contracts with private collection agencies. The Department pays its collection contractors an average of 16 cents on each dollar they collect. For similar collection activity, guaranty agencies retain 23 cents, or 18.5 cents if the collection is made by consolidating the defaulted loan. The Administration expects guaranty agencies to operate more efficiently in the future and proposes to reduce the amount that guaranty agencies may retain from collections on defaulted loans to the average paid to the Department's private collection agents.
Loan holders have increased their financial return through the use of innovative financial instruments, especially through participation in the loan securitization market. The Administration believes the improved efficiency resulting from greater use of private capital markets should lead to lower Federal subsidies. Further, a June 2004 study by the Congressional Budget Office found that lender interest returns on variable-rate student loans are, on average, approximately 0.25 percent above the rate of return guaranteed in the statute. Accordingly, the Administration proposes a 0.25 percent annual loan holder fee on the outstanding balance of non-consolidation loans to reduce Federal subsidies while maintaining maximum lender financing flexibility.
Some loan holders also have increased financial returns through greater use of loan subsidy provisions related to loans funded through tax-exempt securities. The Taxpayer-Teacher Protection Act of 2004 placed a 1-year moratorium on some loans benefiting from this provision. The Administration's reauthorization proposal would make this moratorium permanent.
In 2004, 13 guaranty agencies representing 80 percent of FFEL volume did not charge the statutory 1 percent insurance premium, reducing revenue for the Federal Reserve Fund and weakening the financial stability of the guaranty agency system. The Administration is proposing that agencies be required to collect the 1 percent insurance premium, paid by either the borrower or the lender, on all loans guaranteed or disbursed after July 1, 2006.
Restructuring Consolidation Loans
The Administration is also proposing to significantly restructure the current loan consolidation program to better address the needs of both current and former students. The current interest rate formula for Consolidation Loans, in which borrowers lock in a fixed interest rate, deprives some borrowers of the benefit of falling interest rates while increasing Federal interest subsidies to lenders on other loans where borrower rates are fixed at a low level. The 2006 budget request would replace the current fixed-rate interest formula for Consolidation Loans with the variable rate formula used for student loans, placing current and former students on equal terms.
Currently, borrowers wishing to consolidate may face complicated procedures and limited choices. The Administration proposes to eliminate all barriers to consolidation or reconsolidation, including the statutory provision limiting a borrower's ability to choose their consolidation lender. For borrowers reconsolidating previous consolidations, the budget also would create a 1 percent origination fee in recognition of the financial advantage of reconsolidation. Similarly, the current one-time lender fee on all new Consolidation Loans would be increased from 0.5 percent to 1 percent.
Perkins Loans Revolving Funds
To help fund the higher Pell Grant maximum awards and make more funds available to all eligible students, the Administration proposes eliminating the Perkins Loan program and recalling the Federal portion of revolving funds held by participating institutions. With the number of Perkins Loan institutions declining from 3,338 in academic year 1983-84 to 1,796 in 2003-04and with only 3 percent of students enrolled in postsecondary education receiving Perkins Loans each year, the Administration believes the Federal share of funds held by this small group of institutions would better serve students if invested in Pell Grants, which serve all eligible students regardless of institution. Last year, the PART process found the Perkins Loan program to be duplicative of the larger guaranteed and direct student loan programs. Proposed increases to student loan limits in these programs and the projected continuation of very low interest rates (3.37 percent for 2005) would significantly offset the impact of eliminating the Perkins Loan program (fixed 5 percent rate). Under the Administration's proposal, institutions would be reimbursed for their own contributions into Perkins Loan revolving funds as outstanding loans are repaid. Outstanding Perkins Loans would still be eligible for loan cancellations afforded under the Higher Education Act.
The Administration proposes to reinstate two expired student loan provisions affecting institutions with cohort default rates of less than 10 percent for the 3 most recent fiscal years. These institutions would be exempt from requirements that loans to first-year students not be disbursed until 30 days after enrollment, and that all loans be disbursed in at least two separate installments. Two provisions restricting institutional eligibility for Federal student aid programs would be eliminated. The first, which requires 50 percent of a program's courses be offered on campus, restricts distance education. The second, which requires at least 10 percent of a school's revenue come from non-federal sources, has not been shown to be a reliable indicator of institutional quality. To clarify a current provision under which applicants convicted of a drug-related offense are ineligible for Federal student aid, the Administration proposes to restrict the provision's effect to students who commit a drug-related offense while enrolled in higher education. Lastly, military personnel on active duty would automatically be considered as independent for the purpose of determining eligibility for Federal student aid.
The Administration proposes to centralize its request for $939.3 million in 2006 to administer the Federal student aid programs within a unified new discretionary Student Aid Administration account. The current student aid administration budget structuresplit between mandatory and discretionary accountshinders increased accountability for reducing costs and improving financial controls.
The 2006 request represents a $25.2 million, or 2.8 percent, increase over the amount supporting student aid administrative activities in 2005. This increase supports information technology initiatives, such as the Front-End Business Integration and Common Services for Borrowers procurements, that will help improve Department services to students, parents and schools; increase efficiency in the face of steadily expanding workload; and streamline and enhance the effectiveness of oversight and financial management efforts.
Primary responsibility for administering the student aid programs lies with the Office of Postsecondary Education and the performance-based Federal Student Aid (FSA). FSA was created by Congress in 1998 with a mandate to modernize student aid delivery and management systems, improve service to students and other student aid program participants, reduce the cost of student aid administration, and improve accountability and program integrity. Most student aid administrative funding supports private contractors that process student loan applications; originate and service Direct Loans; disburse and account for student aid awards to students, parents, and schools; and payments to guaranty agencies.
For further information contact the ED Budget Service.
This page last modifiedFebruary 7, 2005 (mjj).