Archived Information

Reauthorization of the Higher Education Act


Part D -- Direct Loans

Section 451. Section 451 of the bill would amend sections 451(b), 453(c) and 455 of the Act to eliminate inconsistent names for some types of direct loans that resulted from the renaming of the program in 1994.

Section 452. Section 452 of the bill would amend section 453 of the Act to eliminate the volume goals for direct loans currently in section 453(a) of the Act. The volume goals were useful for the startup of Direct Loan program, but are no longer necessary. The Secretary has repeatedly indicated his support for the continuation of both the Direct Loan and FFEL programs, and the elimination of the Direct Loan volume goals should not be construed as inconsistent with those statements. In addition, section 452 of the bill would amend section 453(c) of the Act to remove outdated language concerning the initial year of the program.

Section 452A. Section 452A of the bill would amend section 455(b) of the Act to modify the interest rates currently scheduled to go into effect on July 1, 1998 for Direct subsidized, unsubsidized and PLUS loans by changing the instrument to be used for setting the interest rate to the 91-day Treasury bill, and by changing the percentage added to that instrument to 1.7 percent during in-school and grace periods and 2.3 percent in repayment for subsidized and unsubsidized Direct Loans, and to 3.2 percent for Direct PLUS loans. These amendments to the Direct Loan interest rates are proposed to ensure that these interest rate calculations for the Direct Loan program remain parallel to the FFEL interest rate calculations, as amended in section 423A of the bill. These changes would continue to provide students and parents with the interest rate reduction scheduled to take effect on July 1, 1998 under current law, as enacted in the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66).

Section 453. Section 453 of the bill would amend section 455(b) of the Act to place in the statute regulatory requirements concerning when interest may be capitalized on Direct Loans: when the loans enter repayment, at the expiration of a grace period, at the expiration of a deferment or forbearance period, when a borrower defaults, and annually when a borrower chooses to repay under the alternative repayment or income contingent repayment plans, and required payments are less than the interest accrued. A similar amendment is proposed for unsubsidized FFELs in section 433 of the bill.

In addition, section 453 of the bill would amend section 455(b) of the Act to authorize the Secretary to prescribe in regulation interest rate reductions for Direct Loan borrowers as the Secretary determines appropriate to encourage on-time repayments. The Secretary will evaluate the use of this authority to encourage the use of other repayment practices, such as the electronic debiting of a borrower's bank account. The reductions could be offered only if the Secretary determines that they would be cost neutral, to the extent appropriate, and in the best financial interest of the Federal Government.

Section 454. Section 454 of the bill would amend section 455(c) of the Act to reduce the loan fee from four percent to three percent for all Direct Loans loan made part on or after July 1, 1999, and would phase out the loan fee on the subsidized Direct Stafford/Ford Loans by July 1, 2003. The loan fee for Direct Loans in current law is designed to be the equivalent of the FFEL insurance premium plus the FFEL origination fee.

These amendments are proposed in conjunction with amendments in section 425 of the bill that would eliminate the one percent insurance premium that may be charged to a FFEL borrower at the time his or her loan is originated and phase out FFEL origination fees on subsidized FFELs by July 1, 2003. These reductions in fees will provide significant benefits to all students, and will provide additional funds to borrowers up front, at the time that the loan funds are needed to pay for costs of attendance. The proposed changes would also assist in standardizing borrower benefits within the FFEL program as well as between the FFEL and Direct Loan programs, because lenders and guaranty agencies will no longer be able to selectively reduce costs for certain FFEL borrowers by waiving or paying the insurance premium on the borrower's behalf. The Secretary is not authorized to waive or lower loan fees under the Direct Loan program.

Section 455. Section 455 of the bill would amend section 455(d) of the Act to make certain minor changes to conform to the amendments proposed in section 423 of the bill that would provide FFEL borrowers with the extended and graduated repayment options currently available only to Direct Loan borrowers.

Section 456. Section 456 of the bill would add a new paragraph (5) to section 455(f) of the Act that would provide that interest would not accrue on an unsubsidized loan while the borrower is performing community service and has an economic hardship deferment on repayment of the loan. A similar amendment is proposed for Unsubsidized Stafford Loans in section 433 of the bill. This proposal is part of the President's call to action to all Americans to serve their communities, and would allow eligible individuals with student loans to take up to three years to serve their communities without accruing additional interest on their loans during that period.

Many people performing community service qualify for deferments of their loans under an economic hardship deferment. Under current law, during periods in which a borrower has an economic hardship deferment, interest is not paid by the borrower on subsidized loans, but interest continues to accrue on unsubsidized loans. This amendment would provide similar treatment of subsidized and unsubsidized loans, in these limited circumstances, in order to remove this financial obstacle to community service for borrowers who already satisfy economic hardship criteria.

Section 457. Sections 457(a) and (b) of the bill would amend sections 452(c) and 455(j)(2) and (k)(3) of the Act to conform with changes proposed in section 401 of the bill that would update Federal Pell Grant program references from "basic grants" to "Federal Pell Grants." Section 457(c) of the bill would amend section 458(a) of the Act to eliminate references to the administrative costs allowance for guaranty agencies, consistent with the proposed restructuring of guaranty agencies and the fees that they would be paid, as proposed in section 426 of the bill.

Section 458. Section 458 of the bill would repeal section 457 of the Act, which pertains to regulatory and application requirements applicable to the first year of the Direct Loan program's operation, and is no longer necessary.

Section 459. Section 459 of the bill would amend section 108(f)(1) of the Internal Revenue Code of 1986 to exclude from income any balances remaining on Direct Loans that are forgiven after the maximum number of years of repayment. Under current law, a taxpayer generally has income when all or part of a loan made to the taxpayer is forgiven. However, an exception is provided in section 108(f) of the Code for the forgiveness of certain student loans. Under this provision, income resulting from the forgiveness of student loans made by the United States, a State or local government, or a public benefit corporation with control over a state, county, or municipal hospital, is excluded from the student's income. The loan forgiveness is contingent on the student's working for a certain period of time in certain professions for any of a broad class of employers.

Income­contingent repayment serves at least two important public policy objectives. First, it makes it possible for borrowers to pursue lower­paying public service careers without concern that monthly student loan repayment amounts will be an insurmountable burden. Second, it helps to reduce barriers to postsecondary education, particularly for those from low­income backgrounds. Some of these prospective students fail to take advantage of educational opportunities because the financial risks­­including the possible inability to repay student loans­­are too severe. Income­contingent repayment helps to address these fears by assuring students that if postsecondary education does not yield sufficient financial benefits, their loan repayments would be deferred or reduced, and, if the situation continued for a long period (up to 25 years), the balance cancelled. This provision would ensure that borrowers whose remaining balances are eventually forgiven under ICR are not further penalized with additional tax liability.

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Last updated: April 4, 2002 by [pss]

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