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OverviewThe Administration's 2011 budget request makes a historic commitment to increasing college access and success by dramatically expanding financial aid while making it simpler, more reliable, and more efficient. The request is consistent with the Student Aid and Fiscal Responsibility Act (SAFRA), which has passed the House of Representatives and is pending in the Senate, and which would index the Pell Grant maximum award above inflation, insulate student loans from financial turmoil, modernize and expand the Perkins Loan program, and simplify access to student aid. In addition to supporting this pending legislation, the 2011 request would make funding for the Pell Grant program mandatory and would help borrowers struggling to repay student loans by easing the terms of repayment in the Income-Based Repayment (IBR) program. At the same time, the 2011 budget recognizes that colleges must do their share, creating incentives for colleges to keep costs affordable and help students not only enroll in school, but also finish their studies with a degree or certificate.
The Federal government has greatly increased investment in college student aid in the past few years. In addition to the large growth in Pell Grants and low-interest student loans, the ARRA created the new American Opportunity Tax Credit (AOTC), which will provide an estimated $12 billion in tax relief for 2009 filers. The combination of Department student aid and selected tax benefits will grow from $105 billion in fiscal year 2008 to almost $173 billion in fiscal year 2011, an increase of nearly $68 billion, or 64 percent.
Federal Postsecondary Student Aid Soars
| Federal Assistance to College Students | Fiscal Year | Change | ||
| 2008 | 2011 | Dollars | Percent | |
| Total Aid Available | $97.7 billion | $156.1 billion | $59.4 billion | 60% |
| Selected Tax Benefits | $7.5 billion | $17.7 billion | 9.22 billion | 123% |
The Administration's budget would provide a record $34.8 billion in Pell Grants to nearly 9 million students during the 2011-2012 award year, with a projected maximum Pell award of $5,710. Under the provisions contained in pending legislation and in the budget, the Pell Grant maximum would increase annually at a rate equal to the consumer price index plus 1 percentage point, using the 2010-2011 maximum of $5,550 as a base. In addition, making Pell Grant funding mandatory, rather than discretionary, would eliminate uncertainty and end the practice of "backfilling" billions of dollars in Pell Grant funding shortfalls.
To make loans more affordable for those with high debts and low incomes, the Administration proposes to reduce maximum monthly payments under the Income-Based Repayment program from 15 percent of a borrower's prior-year income to 10 percent, and to reduce the length of time a borrower is in the IBR program before his or her loan is forgiven from 25 years to 20 years. Borrowers in public service jobs would continue to receive forgiveness after 10 years of payments. According to the 2008 National Postsecondary Student Aid Survey, borrowers graduating from a 4-year undergraduate school in the United States will have an average Federal student loan debt of approximately $17,000 comprised of Subsidized and Unsubsidized Stafford Loans. Students who consolidate their loans have an average total debt of $35,668. Many of these students would be eligible for lower payments under the Income-Based Repayment plan.
In addition, the 2011 budget would simplify the current cumbersome process for applying for student aid. The current Free Application for Federal Student Aid (FAFSA) is longer and more involved than many Federal tax returns, and research indicates this complexity could discourage some students from applying for college admission. The Administration supports pending legislation that would simplify the financial aid application process by eliminating questions from the FAFSA. The legislation would complement efforts to make the online application faster and easier, partly by using IRS data to help answer questions.
The Budget also supports pending legislation that would end entitlements for financial institutions that process Federal student loans to students and parents. Subsidies in the Federal guaranteed student loan program—Federal Family Education Loans (FFEL)—are set by Congress through the political process. The FFEL program has needlessly cost taxpayers billions of dollars and subjected students to uncertainty due to turmoil in the financial markets. Under the 2011 budget request, the Department of Education would take advantage of low-cost and stable sources of capital to make most postsecondary student loans through the Federal Direct Student Loan program, thus ensuring student access to loans and providing high-quality servicing by using competitive, private-sector providers to process loans and payments. Ending FFEL loan origination beginning July 1, 2010 would save an estimated $45.6 billion through fiscal year 2020.
The Administration also supports pending legislation that, beginning July 1, 2011, would create an expanded, modernized Perkins Loan program providing $6 billion in new loan volume annually—six times the current Perkins volume. The expanded program would support Perkins Loans at up to 2,700 additional postsecondary education institutions, reaching up to 2.4 million students at full implementation. The Department of Education would service Perkins Loans along with other Federal loans. Loan cancellation costs on existing loans would be funded from the Federal share of loan collections; the institutional share of collections would be returned to schools. The loans would have the same low 5 percent interest rate and allowed loan amounts (both undergraduate and graduate) as in the current Perkins program. Overall, this proposal will save $5.5 billion over 10 years.
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Student Aid Summary TablesBudget Authority ($ in millions)
| 2009 | 2010 | 2011 Request |
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|---|---|---|---|---|---|---|
| Pell Grants | ||||||
| Discretionary funding | $17,288.0 | 1 | — | — | ||
| Mandatory funding | 2,090.0 | $26,988.1 | $34,878.0 | |||
| Subtotal, Pell Grants | 19,378.0 |
26,988.1 |
34,878.0 |
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| Supplemental Educational
Opportunity Grants |
757.5 | 757.5 | 757.5 | |||
| Work-Study | 980.5 | 980.5 | 980.5 | |||
| Leveraging Educational Assistance Partnerships |
63.9 | 2 | 63.9 | 2 | — | 2 |
| Academic Competitiveness Grants | 73.0 | 3 | 1,336.0 | 3 | -36.0 | 3 |
| Iraq and Afghanistan Service Grants | — | 0.2 | 0.2 | |||
| TEACH Grants | -2.9 | 22.9 | 12.7 | |||
| Federal Family Education Loans | -32,801.6 | 4 | -9,104.0 | 4 | — | 4 |
| Federal Direct Loans | -5,709.1 | 5 | -8,472.6 | 5 | -10,404.3 | 5 |
| Perkins Loans | 67.2 | — | -101.5 | 6 | ||
| Total | -17,193.6 |
12,572.5 |
26,087.1 |
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| Recovery Act appropriation | ||||||
| Pell Grants | 17,114.0 | 7 | — | — | ||
| Work-Study | 200.0 | — | — | |||
| Total | 17,314.0 |
— |
— |
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1Amount for 2010 reflects the rebasing of $17,495 million FY 2010 discretionary appropriation to mandatory and $3,030 million in current mandatory appropriations. The amount also includes the availability of an additional $6,463 million in mandatory funding through permanent indefinite authority under the budget proposal. 2Includes $33.9 million in 2009 and 2010 for Special LEAP or Grants for Access and Persistence, which was created by the Higher Education Opportunity Act of 2008 and will replace Special LEAP after a two-year transition period during which States may choose to participate in either program. The budget proposes elimination of this program in 2011. 3Amount for 2009 reflects postponement of $887 million in 2009 funding until 2010; amount for 2010 reflects availability of 2009 delayed funding and a deferral of $561 million to 2011; amount for 2011 reflects proposed cancellation of $597 million in unneeded balances. 4Budget authority requested for FFEL does not include the Liquidating account. The 2009 amount includes a net downward re-estimate of $16.0 billion primarily related to revised economic assumptions and a net downward modification of $2.6 billion reflecting the impact of legislation on existing loans, primarily the Ensuring Continued Access to Student Loans Act of 2008. The 2010 amount includes a net downward re-estimate of $7.4 billion primarily related to revised interest rates. (Re-estimates and modifications reflect the impact of changes on an outstanding FFEL portfolio of over $489 billion.) 5The 2009 amount includes a net upward re-estimate of $119.4 million primarily related to revised interest rates. The 2010 amount includes a net downward re-estimate of $2.6 billion primarily related to revised interest rates and a net upward modification cost of $1.7 billion from the budget proposal expanding the Income Based Repayment plan. (Re-estimates and modifications reflect the impact of changes on an outstanding Direct Loan portfolio of nearly $207 billion.) 6Amounts in 2009 and 2010 reflect cancellations of current Perkins Loans; amount for 2011 reflects proposal to shift Perkins Loan to a mandatory credit program. 7Includes $831 million advance appropriation available for 2010. Aid Available to Students ($ in millions). | ||||||
Aid Available to Students ($ in millions)
| 2009 | 2010 | 2011 Request |
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|---|---|---|---|---|---|---|
| Pell Grants | $28,213.3 | $32,295.2 | $34,834.3 | |||
| Supplemental Educational
Opportunity Grants |
958.8 | 958.8 | 958.8 | |||
| Work-Study | 1,417.3 | 1,170.8 | 1,170.8 | |||
| Leveraging Educational Assistance Partnerships |
161.6 | 1 | 161.6 | 1 | — | |
| Academic Competitiveness Grants | 503.0 | 548.0 | — | |||
| SMART Grants | 361.0 | 384.0 | — | |||
| Iraq and Afghanistan Service Grants | — | 0.2 | 0.2 | |||
| New Student Loans: | ||||||
| Federal Family Education Loans | 66,778.0 | 35,233.8 | — | |||
| Federal Direct Loans | 29,738.2 | 73,529.1 | 116,393.2 | |||
| Perkins Loans | 1,106.1 | 1,041.5 | 2,602.9 | |||
| TEACH Grants | 72.3 | 79.8 | 93.2 | |||
| Subtotal, Student Loans | 97,694.6 |
2 | 109,884.2 |
2 | 119,089.3 |
2 |
| Total | 129,309.6 |
3 | 145,402.8 |
3 | 156,053.4 |
3 |
1Reflects only the LEAP program's statutory State matching requirements. 2In addition, consolidation loans for existing borrowers will total $13 billion in 2009, $15 billion in 2010, and $18 billion in 2011. 3Shows total aid generated by Department programs, including Federal Family Education Loan capital, Perkins Loan capital from institutional revolving funds, statutory, institutional and State matching funds. | ||||||
Number of Student Aid Awards
(in thousands)
| 2009 | 2010 | 2011 Request |
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|---|---|---|---|---|---|---|
| Pell Grants | 7,738.0 | 8,355.0 | 8,743.0 | |||
| Supplemental Educational
Opportunity Grants |
1,302.7 | 1,302.7 | 1,302.7 | |||
| Work-Study | 930.0 | 768.3 | 768.3 | |||
| Leveraging Educational Assistance
Partnerships |
161.6 | 1 | 161.6 | 1 | — | |
| Academic Competitiveness Grants | 716.0 | 786.0 | — | |||
| SMART Grants | 139.0 | 150.0 | — | |||
| Iraq and Afghanistan Service Grants2 | — | — | — | |||
| New Student Loans:3 | ||||||
| Federal Family Education Loans | 14,459.1 | 8,215.8 | — | |||
| Federal Direct Loans | 6,109.4 | 14,790.4 | 24,349.0 | |||
| Perkins Loans | 520.5 | 490.1 | 1,224.9 | |||
| TEACH Grants | 30.5 | 31.9 | 37.3 | |||
| Total awards | 32,106.8 |
35,051.8 |
36,425.2 |
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1Reflects only the LEAP program's statutory State matching requirements. 2Less than 1,000 recipients in each year. 3In addition, consolidation loans for existing borrowers will total 408,268 in 2009, 445,179 in 2010, and 492,451 in 2011. | ||||||
Number of Postsecondary Students Aided by Department Programs
| 2009 | 2010 | 2011 Request |
|
|---|---|---|---|
| Unduplicated Count (in thousands) | 12,759 | 14,115 | 14,818 |
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Tax Benefits for Postsecondary Students and Their FamiliesIn 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 fiscal year 2011, about 8 million students and families will claim an estimated $11.4 billion under the new American Opportunity Tax Credit, which allows a credit of up to $2,500for tuition and fees and course materials during the first 4 years of postsecondary education. Other benefits include $3.4 billion under the Lifetime Learning tax credit, which allows a credit of up to $2,000 for undergraduateand graduate tuition and fees; and $1.1 billion in above-the-line deductions for interest paid on postsecondary student loans. For more information on tax benefits for education, please see http://www.irs.gov/publications/p970/index.html.
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| 2009 | 2010 | 2011 Request |
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|---|---|---|---|
| B.A. in millions | |||
| Discretionary | $17,288.0 | — | — |
| Mandatory | 2,090.0 | $20,525.0 | — |
| Proposed new mandatory | — | 6,463.1 | $34,878.0 |
| Total | 19,378.0 |
26,988.1 |
34,878.0 |
| Recovery Act | |||
| Discretionary funding | 15,640.0 | — | — |
| Mandatory funding | 1,474.0 | — | — |
| Total | 17,114.0 |
— |
— |
| Program costs ($ in millions) | 28,252.0 | 32,337.0 | 34,878.0 |
| Aid available ($ in millions) | 28,213.3 | 32,295.2 | 34,834.3 |
| Recipients (in thousands) | 7,738 | 8,355 | 8,743 |
| Maximum grant | |||
| Discretionary | $4,860 | $5,550 | $5,710 |
| Mandatory add-on | 490 | — | — |
| Total | 5,350 |
5,550 |
5,710 |
| Average grant | 3,646 | 3,865 | 3,984 |
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 request would provide a record $34.8 billion in Pell Grant awards to nearly 9 million students during the 2011-2012 award year, with a projected maximum grant of $5,710. The Administration supports congressional work to reform the student aid programs, and the request includes Pell Grant indexing and simplification provisions in the pending SAFRA legislation. Under these proposed provisions, the Pell Grant maximum would increase annually at a rate equal to the consumer price index plus 1 percentage point, using the 2010-2011 maximum of $5,550 as a base. The budget also proposes to reclassify funding for the Pell Grant program as mandatory, rather than discretionary, to eliminate uncertainty and end the practice of "backfilling" billions of dollars in Pell Grant funding shortfalls.
In addition, the request supports simplifying the current cumbersome process for applying for student aid. The current Free Application for Federal Student Aid (FAFSA) is longer and more involved than many Federal tax returns, and research indicates this complexity could cause some students to not apply for college. The Administration supports provisions in the pending SAFRA legislation to simplify the process by streamlining the form itself and using tax data to populate the form with applicant's income information. Taken together, the proposed indexing and simplification policies would increase projected Pell Grant costs by $22.8 billion through 2015.
Campus-Based Programs
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. While the Perkins Loan program would be restructured under the proposed Budget to make loans directly to students, participating institutions would continue to have extensive flexibility in determining student eligibility and award levels.
Supplemental Educational Opportunity Grants
| 2009 | 2010 | 2011 Request |
|
|---|---|---|---|
| B.A. in millions | $757.5 | $757.5 | $757.5 |
| Aid available ($ in millions) | 958.8 | 958.8 | 958.8 |
| Recipients (in thousands) | 1,303 | 1,303 | 1,303 |
| Average award | $736 | $736 | $736 |
This program provides grant assistance of up to $4,000 per academic year to undergraduate students with demonstrated financial need. The $757 million request would leverage $202 million in institutional matching funds to make available a total of $959 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.
| 2009 | 2010 | 2011 Request |
|
|---|---|---|---|
| B.A. in millions | $980.5 | $980.5 | $980.5 |
| Recovery Act | 200.0 | — | — |
| Aid available ($ in millions) | 1,417.3 | 1,170.8 | 1,170.8 |
| Recipients (in thousands) | 930 | 768 | 768 |
| Average award | $1,524 | $1,524 | $1,524 |
The Work-Study program provides grants to participating institutions to pay up to 75 percent of the wages of eligible undergraduate and graduate students working part-time to help pay their college costs. The school or other eligible employer provides the balance of the student's wages. At the request level, 768,000 students would receive a total of nearly $1.2 billion in award year 2011-12. 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 Recovery Act appropriated $200 million for Work-Study, which was used to increase the number of recipients for the 2009-2010 award year.
| 2009 | 2010 | 2011 Request |
|
|---|---|---|---|
| B.A. in millions | $67.2 | — | -$101 |
| Aid available ($ in millions) | 1,106.1 | $1,041.5 | 2,602.9 |
| Recipients (in thousands) | 521 | 490 | 1,225 |
| Average award | $2,125 | $2,125 | $2,125 |
The Perkins Loans program provides long-term, low-interest loans to undergraduate and graduate students with demonstrated financial need at roughly 1,700 institutions. Total assets of over $8 billion represent over 40 years of Federal capital contributions, institutional matching funds, repayments on previous loans, and Federal reimbursements for loan cancellations. Perkins Loan borrowers pay no interest during in-school, grace, and deferment periods and are charged 5 percent interest during the principal repayment period. Annual borrowing limits are $5,500 for undergraduate students and $8,000 for graduate and professional students.
The Administration supports provisions in the pending SAFRA legislation designed to create an expanded, modernized Perkins Loan program providing $6 billion in new loan volume annually—six times the current annual Perkins volume—and, at full implementation reaching up to 2.4 million students at as many as 2,700 additional postsecondary education institutions. Instead of being serviced by the colleges, loans would be serviced by the Department of Education along with other Federal loans. Loan cancellation costs on existing loans would be funded from the Federal share of loan collections; the institutional share of collections would be returned to schools. The loans would have the same low 5 percent interest rate and allowed loan amounts (both undergraduate and graduate) as in the current Perkins program. To make loans available to more students, interest on the loans would accrue while students are in school. Overall, this proposal will save an estimated $5.5 billion over 10 years.
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Academic Competitiveness Grants/SMART Grants
| 2009 | 2010 | 2011 Request |
|
|---|---|---|---|
| B.A. in millions | $73.0 | $1,897.0 | — |
| Deferral of authority to 2011 | — | -561.0 | $561.0 |
| Rescission of unneeded balances | — | — | -597.0 |
| Total | 73.0 |
1,336.0 |
-36.0 |
| Academic Competitiveness Grants | |||
| Recipients (in thousands) | 716,000 | 786,000 | — |
| Aid available to students (in millions) | $503 | $548 | — |
| Maximum grant (in whole $) | |||
| First-year student | $750 | $750 | — |
| Second-year student | $1,300 | $1,300 | — |
| Average grant (in whole $) | $703 | $697 | — |
| SMART Grants | |||
| Recipients | 139,000 | 150,000 | — |
| Aid available to students (in millions) | $361 | $384 | — |
| Maximum grant (in whole $) | $4,000 | $4,000 | — |
| Average grant (in whole $) | $2,597 | $2,560 | — |
These programs award need-based Academic Competitiveness Grants (ACG) to first- and second-year undergraduates who complete a rigorous high school curriculum, and National Science and Mathematics Access to Retain Talent (SMART) Grants to third- and fourth-year undergraduates majoring in physical, life, or computer sciences, mathematics, technology, engineering, or a critical foreign language. All funding is mandatory, so annual discretionary appropriations are not required.
Academic Competitiveness Grants are awarded to students who are eligible for a Federal Pell Grant. First-year applicants, who may receive up to $750, also must be first-time undergraduates, enrolled or accepted for enrollment in a 2- or 4-year degree granting institution, and have completed a rigorous secondary school program. Second-year ACG applicants qualify for an award of up to $1,300 if they have completed a rigorous program and maintained a cumulative grade point average of at least 3.0 during their first year as an undergraduate.
SMART Grant applicants must maintain a cumulative GPA of at least 3.0 in the coursework required by their major to qualify for up to $4,000 for their third and fourth years of undergraduate study. SMART Grants, in combination with the Federal Pell Grant and other student financial assistance, may not exceed the student's cost of attendance.
The ACG/SMART program sunsets at the end of academic year 2010-2011. Accordingly, no new appropriations are provided or requested for fiscal year 2011. Participation trends during the first 4 years indicate funding already provided in prior years and in fiscal year 2010 will substantially exceed the amounts needed to support anticipated grant awards. As a result, the 2010 appropriation postponed the availability of $561 million in unneeded balances until 2011. As current estimates indicate these funds will not be needed, the Administration proposes to rescind theremaining available funds in the amount of $597 million in FY 2011.
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| 2009 | 2010 | 2011 Request |
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|---|---|---|---|---|---|---|
| BA in millions | -$2.9 | 1 | $23.0 | $12.7 | ||
| Aid available to students (in millions) | $72.3 | $79.8 | $93.2 | |||
| Recipients | 30,506 | 31,932 | 37,277 | |||
| Maximum grant(in whole $) | $4,000 | $4,000 | $4,000 | |||
| Average grant(in whole $) | $2,369 | $2,500 | $2,500 | |||
1Negative number indicates projected revenue from loan repayments exceed projected costs. | ||||||
The TEACH Grant program, which began operations on July 1, 2008, awards annual grants of up to $4,000 to eligible undergraduate and graduate students who agree to serve as a full-time mathematics, science, foreign language, bilingual education or other English language program, special education, or reading teacher at a high-need school for not less than 4 years within 8 years of graduation. For students who fail to fulfill this service requirement, grants are converted to Direct Unsubsidized Stafford Loans, with interest accrued from the date the grants were awarded.
For budget and financial management purposes, this program is operated as a loan program with 100 percent forgiveness of outstanding principal and interest upon completion of a student's service requirement. The Administration currently estimates approximately 80 percent of participating students will not complete the required service and thus will have their grants converted to Direct Unsubsidized Stafford Loans. Consistent with the requirements of the Credit Reform Act of 1990, budget authority for this program reflects the estimated net present value of all future non-administrative Federal costs associated with awards made in a given fiscal year.
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Federal Family Education Loans and Direct Loans
(in millions)
| 2009 | 2010 | 2011 Request |
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|---|---|---|---|---|---|---|
| Federal Family Education Loans | ||||||
| New Loan Subsidies (BA) | -14,208.5 | 1 | -1,701.4 | 1 | — | |
| Net Modification of Existing Loans | -2,640.4 | 2 | — | — | ||
| Net Re-estimate of Prior Loans | -15,952.7 | 3 | -7,402.6 | 3 | — | |
| Total, FFEL Program BA | -32,801.6 |
-9,104.0 |
— |
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| Direct Loans | ||||||
| New Loan Subsidy (BA) | -5,828.4 | 4 | -7,581.1 | 4 | -10,404.3 | 4 |
| Net Modification of Existing Loans | — | 1,691.8 | 2 | — | ||
| Net Re-estimate of Prior Loans | 119.4 | 3 | -2,583.2 | 3 | — | |
| Total, New Budget Authority | -5,709.1 |
-8,472.6 |
-10,404.3 |
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| Total, Student Loans (BA) | -38,510.7 | -17,576.6 | -10,404.3 | |||
1Total includes amount for Consolidation Loans but does not include the Liquidating Account, which deals with costs associated with loans made prior to 1992. 2Under Credit Reform, costs or savings related to the impact of policy changes on existing loans are reflected in the current year. Amount of 2009 FFEL modification reflects the impact of the Ensuring Continued Access to Student Loans Act on existing loans; the Direct Loan modification represents the impact of the budget policy on existing loans. 3Under Credit Reform, the subsidy amounts needed for active loan cohorts are re-estimated annually in both Direct Loans and FFEL to account for changes in long-term projections. Re-estimates and modifications reflect the impact of changes on outstanding portfolios of over $489 billion for FFEL and nearly $207 billion for Direct Loans. 4Total includes amount for Consolidation Loans. | ||||||
New loan volume (in millions)
| 2009 | 2010 | 2011 Request |
||||
|---|---|---|---|---|---|---|
| Federal Family Education Loans | $66,778.0 | $35,233.8 | — | |||
| Direct Loans | 29,738.2 | 73,529.1 | 116,393.2 | |||
| Total | 96,516.2 |
1 | 108,762.9 |
1 | 116,393.2 |
1 |
| Number of New loans (in thousands) | ||||||
| Federal Family Education Loans | 14,459 | 8,215 | — | |||
| Direct Loans | 6,110 | 14,791 | 24,349 | |||
| Total | 20,569 |
1 | 23,006 |
1 | 24,349 |
1 |
1In addition, Consolidation Loans for existing borrowers will total $12.7 billion and 408,000 loans in 2009, $15.0 billion and 446,000 loans in 2010, and $17.6 billion and 492,000 loans in 2011. | ||||||
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. The FFEL program makes loan capital available to students and their families through private lenders. State and private nonprofit guaranty agencies 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.
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 Administration is proposing to make all new loans under the Direct Loan program.
Basic Loan Program Components
Both FFEL and Direct Loans feature four types of loans with similar fees and maximum borrowing amounts:
Stafford Loans are subsidized, low-interest loans based on financial need. The Federal Government pays the interest while the student is in school and during certain grace and deferment periods. For undergraduate loans made on or after July 1, 2008, the interest rate is fixed at 6.0 percent. Rates for undergraduates drop each subsequent July 1 through 2011, when rates would be 3.4 percent. Rates would return to 6.8 percent beginning July 1, 2012. The interest rate for loans to graduate students is 6.8 percent in all years.
Unsubsidized Stafford Loans have a fixed interest rate of 6.8 percent, but the Federal Government does not pay interest for the student during in-school, grace, and deferment periods.
PLUS Loans are available to parents of dependent undergraduate students at slightly higher rates than Stafford or Unsubsidized Stafford Loans and the Federal Government does not pay interest during in-school, grace, and deferment periods. Graduate and professional students may also take out PLUS loans.
Consolidation Loans allow borrowers with multiple student loans who meet certain criteria to combine their obligations and extend their repayment schedules. The rate for both FFEL and Direct Consolidation Loans is based on the weighted average of loans consolidated rounded up to the nearest 1/8th of 1 percent. The resulting rate for the consolidated loan is then fixed for the life of the loan.
Ensuring Continued Access to Student Loans
In response to significant disruptions in the credit markets and concern over access to FFEL program loans, the Ensuring Continued Access to Student Loans Act of 2008 provided the Department of Education with authority to purchase student loans to support new originations during the 2008-2009 academic year. Using this authority, which was subsequently extended through the end of the 2009-2010 academic year, the Department established several programs to ensure the availability of student loans. These programs included a Loan Participation Interest program, under which the Department purchased a 100-percent interest in any eligible federal student loan originated by a FFEL lender, meaning that the Department provided all of the funds for the loan, with the lender subsequently either repaying the government with interest or selling the underlying loan to the Department; a Loan Purchase program, under which the Department purchased any eligible loans originated by a FFEL lender during the academic year for face value plus a fixed amount to cover expenses; and an Asset-Backed Commercial Paper Conduit, which facilitated financial transactions similar to those in a typical student loan securitizations. Together, these programs will provide an estimated $112 billion in funding to purchase FFEL program loans, supporting approximately 57 percent of overall new program loans over academic years 2008-2009 and 2009-2010.
2011 Budget Request
The Administration supports provisions in the pending SAFRA legislation that would end entitlements for financial institutions that process Federal student loans to students and parents. Subsidies in the Federal guaranteed student loan program—Federal Family Education Loans (FFEL)—are set by Congress through the political process. The FFEL program has needlessly cost taxpayers billions of dollars and subjected students to uncertainty due to turmoil in the financial markets. The request, consistent with SAFRA, would take advantage of low-cost and stable sources of capital to make all new postsecondary student loans through Direct Loans, so students are ensured access to loans and provided high-quality servicing through the use of competitive, private-sector providers to process loans and payments. Under SAFRA, the switch to 100-percent Direct Loans would begin on July 1, 2010 and save an estimated $45.6 billion through fiscal year 2020.
In addition, the 2011 budget would help borrowers struggling to repay student loans. According to the 2008 National Postsecondary Student Aid Survey (NPSAS), borrowers graduating from a 4-year undergraduate school in the United States will have on average approximately $17,000 in Federal student loan debt comprised of Subsidized and Unsubsidized Stafford Loans. Students who consolidate have an average debt of $35,668. Many of these students would benefit from the Income-Based Repayment (IBR) plan, which is designed to ease the burden of student loan debt and assist borrowers struggling with increasing levels of college debt. The request would encourage more students to take advantage of IBR by reducing maximum monthly payments from 15 percent of a borrower's prior-year discretionary income to 10 percent, and reducing the length of time in the IBR program before a borrower's loan is forgiven from 25 years to 20 years.
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Career, Technical, and Adult Education 
Higher Education Programs
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For further information contact the ED Budget Service.
This page last modified—February 1, 2010 (mjj).