Ms. Laurie Wolf Executive Dean of Student Services Des Moines Area Community College Chair, NASFAA Reauthorization Task Force
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The National Association of Student Financial Aid Administrators and its 3,000 members appreciate the opportunity to provide the Department of Education with suggestions and specific proposals regarding the forthcoming reauthorization of the Higher Education Act.
Over the past 18 months, NASFAA's Reauthorization Task Force engaged the membership through listening sessions, articles, and requests for responses to proposed changes in order to form well-defined suggestions for change. From the thousands of responses received the Task Force crafted more than 100 recommendations that address specific sections of the HEA. The purpose of these suggestions is to amend the current statute while providing simplicity in processes, equity to students no matter what type of institution they chose to attend, and the elimination of redundant or antiquated processes and procedures.
All of these recommendations have been approved by NASFAA's Board of Directors and submitted to the House Education and Workforce Committee as requested. Meanwhile, NASFAA is working closely with other educational associations to address the concerns of the community and to make certain that our recommendations do not create undue hardships to the students we seek to serve, to institutions, or to the federal government.
As the process goes forth, we also look forward to working with the Education Department and others to consider all proposals and to refine and modify NASFAA's recommendations if better ideas are forthcoming.
Therefore, in keeping with the request set forth by the Department in the February 11, 2003 Federal Register, NASFAA's statement uses a number of our recommendations to address the seven questions that were proposed. In addition, we have attached a complete set of NASFAA's approved recommendations for the Department's consideration. Please call upon NASFAA if you have questions or need our assistance.
NASFAA Response to 2/11/03 ED Request for CommentsQuestion A: How can we improve access and promote additional educational opportunity for all students, especially students with disabilities, within the framework of the HEA? How can the Federal Government encourage greater persistence and completion of students enrolled in postsecondary education?
NASFAA Response: It is well documented that the greatest deterrent preventing qualified students from enrolling in and completing postsecondary education is the lack of appropriate financial resources. To address this deficiency NASFAA urges the Administration and the Education Department to take the bold step to make the Pell Grant Program a true entitlement, divorced from the vagaries of the appropriations process, as the best way to guarantee predictable, adequate grant assistance to all qualified students. In establishing the Pell Grant entitlement, we propose a five-year, phased-in stepped increase that would double the current $4,000 maximum award to $8,000 by the 2009-10 award year, and apply an annual inflation adjustment to the maximum award each year thereafter.
NASFAA also believes that the Pell Grant Program should be modified to provide a bonus grant to those who are the poorest of the poor, as evidenced by a negative Expected Family Contribution (EFC). For example, a student with a negative EFC of 600 would have $600 added to the maximum award that the student is qualified to receive.
We also encourage the Department to eliminate current statutory provisions mandating that schools which lose eligibility to participate in the FFEL or Direct Loan Programs due to high default rates also lose their eligibility to participate in the Federal Pell Grant Program. We understand that-as a result of this provision in the 1998 reauthorization-many schools whose primary missions are to provide educational opportunities for needy students have dropped their participation in the FFEL or Direct Loan Programs so that they would not lose Pell Grant eligibility for their students. These schools should not be disadvantaged in their Pell Grant participation, since many such schools (especially community colleges) have few borrowers. Consequently, a few defaults could tilt them in a loss of loan eligibility and consequent loss of Pell Grant eligibility.
We further propose elimination of the current statutory "tuition sensitivity" provision mandating that a student eligible for a maximum Pell Grant will have that award reduced in the following fashion: For any academic year for which an Appropriation Act provides a maximum basic grant in an amount in excess of $2,700, the amount of a student's basic grant shall equal $2,700 plus one-half of the amount by which such maximum basic grant exceeds $2,700; plus the lesser of-- (a) the remaining one-half of such excess; or (b) the sum of the student's tuition and, if the student has dependent care expenses (as described in section 472(8)) or disability-related expenses (as described in section 472(9)), an allowance determined by the institution for such expenses.
The result is that this provision reduces the award for the neediest Pell Grant recipient attending a lower cost college. Currently, only California community college students are affected by this provision, but as the Pell Grant maximum award increases, students at other lower cost schools across the nation will be impacted. The provision was developed as a compromise more than ten years ago and has outlived its usefulness. It perpetuates an injustice on poor students that will be extended to other postsecondary institutions that attempt to give postsecondary opportunities to students through a policy of low costs. In addition to these changes to the Pell Grant Program, NASFAA also encourages the Department to continue and increase the authorization levels for LEAP and the three campus-based programs. Each of these effective time-proven programs-because of their matching requirements-provides additional need-based student aid funds that are critical to improving access through an on-going and successful federal, state, and institutional partnership.
Also, to improve access and persistence, NASFAA believes one of the highest priorities for this HEA reauthorization, after providing for adequate grant assistance, is to raise loan limits. Reauthorization Task Force members wrestled with the question of whether or not to increase loan limits and, if so, how high. We believe we have developed a balanced approach to student loans with a strong emphasis on the need to increase grant funding. We believe loan limits should be increased. We reject the notion advanced by some that there is no need to raise loan limits because there is little evidence that students need increased limits.
The last time loan limits were raised for first-year students, Ronald Reagan was president (1986). The last time loan limits were raised for all other students, George Bush (the father) was president (1992). Loan limits were not raised during the 1998 HEA reauthorization. We regret this fact since we warned then that without an increase in the federal limits borrowers would increasingly turn to private label loans. That prediction has come true.
We need to raise loan limits now, not only to "catch up" for past lack of loan limit increases, but also to establish a structure for future changes. Consequently, instead of the current three limits, we recommend subsidized loan limits for undergraduates that are the same no matter what academic year the borrower is in. All the proposed loan limits are straight-line inflation increases from the last time loan limits were raised in 1992. Such estimates use the Consumer Price Index (CPI) inflation index rather than the higher education index (HEPI) since the CPI is the federal standard and HEPI is less recognized by the federal government. Using HEPI, our proposed loan limits would have been considerably higher.
NASFAA recommends increased subsidized loan limits in 2004 starting at $7,000 for undergraduate borrowers and starting at $10,000 for graduate and professional students, with stepped increases in the out-years for both. We also recommend increasing unsubsidized loan limits for undergraduates starting at $7,000 and for graduate and professional students to 150% of the subsidized limits with stepped increases in the out years. It is important to note these limits are statutory limits and do not include certain health profession student annual and aggregate limits which are regulatory and would be added to both categories; there would be no change from current practice for such loans-annual and aggregate.
Even though we propose increased loan limits, we also recommend a complimentary policy that would allow schools to implement lower loan limits on a school-wide, class level, or academic program basis. A school could decide to have a school-wide limit that was lower than the federal limit. A school could decide to have a lower loan limit for its first-year students. A school could decide to have a lower loan limit for liberal arts majors and a higher one for its engineering students. It would be up to the school to decide to have a lower limit and what that limit should be. This new authority would be in addition to the current authority found in Section 428(a)(2)(F), which permits schools to refuse to certify (or to reduce the amount of) a student's loan on a case-by-case basis.
In addition to the aforementioned recommendations which are designed to provide appropriate and adequate funding for all qualified students to enroll and complete their programs of study, we also propose the following three proposals which should help students to persist.
First, eliminate the 30-day delay for first-time students and multiple disbursements for single term loans. The two provisions that allowed waivers of these requirements recently expired and efforts to renew them continue unabated. They should be permanently extended in reauthorization if this is not accomplished before then.
Second, eliminate loan proration for student borrowers enrolled in programs of at least one academic year in length and retain proportional proration for student borrowers enrolled in undergraduate programs of less than an academic year in length. Currently, Stafford loan limits must be prorated if (1) the student is enrolled in a program which is shorter than one academic year, or (2) the student is enrolled in a program that is one academic year or longer but the individual student is borrowing for a final period of enrollment that is less than a full academic year in length. The latter circumstance may occur when the program itself is not an even multiple of academic years (e.g., a program spanning three semesters where two semesters comprise an academic year, or a 1500-clock hour program where the academic year is 900 clock hours). It can also occur when the student is taking longer than the normal time to complete; for example, a student in a 4-year (8-semester) program needs one additional semester to graduate. In either case, loan limits for the student's final ("remaining") period of enrollment must be prorated. Proration is not required for loan periods that are shorter than an academic year if that period does not represent the student's final period of enrollment in the program; for example, a student who "stopped out" for the fall term of his junior year but re-enrolls for the spring term of that year may borrow up to the full loan limit. Loan proration for remaining periods is proportional; the maximum amount the student may borrow is directly related to the number of credit or clock hours for which the student is enrolled.
Proration of loans for remaining periods is complex and burdensome to administer. It also creates hardship for students who have already incurred at least one year's worth of educational expenses and have need for a greater amount than proration currently allows. Retaining loan proration only for programs that are less than an academic year in length most effectively targets borrower populations that are more likely to find repayment of higher loan debt difficult. Third, require schools to provide notice to students of their policies for paying a maximum of $500 in prior award year charges with Title IV aid and allow the student to opt out, rather than requiring advance permission from the student. Experimental site studies over the past seven years have demonstrated that permitting students to use a portion of their current term aid to pay prior award year charges aids student retention. Students, who would otherwise have been denied the ability to re-enroll due to outstanding prior award year charges and no means to pay those charges, have been able to re-enroll through use of this provision.
Question B: How can existing HEA programs be changed and made to work more efficiently and effectively? In what ways do they need to be adapted or modified to respond to changes in postsecondary education that have occurred since 1998?
NASFAA Response: While well intended, the current provisions governing the Return of Title IV Funds are not working as efficiently or effectively as they should. The provisions are not only problematic for institutions, but they often require students to return large amounts of grant aid that have already been spent, thus making it very difficult for them to return these funds and re-enroll to complete their program of study. Therefore, we urge the Department to modify these provisions by adopting the following seven provisions.
First, allow financial aid administrators to override the Return of Funds requirements in the event the withdrawal resulted from documented extraordinary circumstances. This recommendation acknowledges that certain students experience unavoidable circumstances that force them to withdraw from college. For example, a student might experience a temporarily incapacitating illness, or the tragic death of an immediate family member. A member of the military reserves might be called to immediate active duty. Currently, a Pell Grant repayment might still be required despite the fact that the student had every intention and expectation of completing the enrollment period. In all likelihood, the student will return to school, thus justifying the investment of public funds.
Second, repeal the requirement to identify unofficial withdrawals.
Third, allow schools to substitute undisbursed grant funds (for which the student was eligible) for the portion of earned funds originally derived from loans. Schools determine the frequency and dates of disbursement of Title IV funds. It may be no fault of the student if disbursement of some Title IV funds was delayed until after the student withdraws. This recommendation would allow the student access to all Title IV grant funds that were awarded without regard to the timing of disbursements or to circumstances such as retroactive selection for verification.
It is easiest to illustrate this using an example: Assume that a student received a $1000 loan disbursement and was also awarded a $1000 Pell Grant that had not been disbursed by the time the student totally withdrew from the institution. The institutional charges were $1,000 and the student withdrew at the 30% point in the term. According to the Return of Title IV Funds policy, the student has earned $600. Consequently the school retains $600 and returns to the lender $400 of the student's loan. The student was not able to use any of the Pell Grant and has an outstanding loan balance of $600 after leaving school. If this recommendation would be adopted, the institution would be allowed to replace the $600 loan with $600 from the Pell Grant award. This would benefit the student in that her loan balance would be reduced to $0, thereby preventing a possible default.
Fourth, affirm the institutional determination of the student's withdrawal date as stated in the current statute.
Fifth, consider that a student has earned 100% of his or her Title IV aid if the withdrawal occurs on or after the 50% point in the payment or enrollment period. Further, if the student withdraws before the 50% point in the payment or enrollment period, the denominator of the fraction shall be 50% of the number of days or the number of clock hours in the payment or enrollment period.
This recommendation acknowledges that by the mid-point of the term, students have participated in a significant way in the course of study. These students have incurred full liability for their tuition, fees, and room and board. Currently, grants and loans are adjusted to account for withdrawal through the 60% point in the term. Students who withdraw on or before the 60% point in the term incur very large liabilities with the school since at least 40% of their Title IV aid must be returned. We believe that students who attend at least 50% of the term earn 100% of their Title IV aid. In addition, using 50% of the number of days or clock hours in the payment period or period of enrollment as the denominator for the fraction determining the earned percentage recognizes the fact that the student's expenses for the semester are not linear, but primarily incurred during the first month of the term. This recommendation will also eliminate the cliff effect experienced when a student withdraws near the 60% point in the term. If the student withdraws at the 59% point, 41% of Title IV aid must be returned, but if the student withdraws at the 61% point, no Title IV aid is to be returned. Under this recommendation, if the student withdraws at the 49% point, 2% of the Title IV aid must be returned, and if the student withdraws at the 51% point, no Title IV aid is to be returned. The cliff effect is eliminated.
Sixth, restore authority for late and post-withdrawal disbursement at the discretion of the financial aid administrator since that person is in the best position to determine an individual student's need for funds after the student has ceased enrollment.
Seventh, eliminate the category of books and supplies from inclusion in Institutional Charges for Return of Funds purposes. The financial aid community lacks clear guidance and understanding on this issue, as evidenced by the Department's five-page letter explaining when books and supplies qualify as institutional charges. This document was written under pre-1998 refund rules and then was applied to the Return of Funds provisions, but never further updated. Further, the books and supplies are in the possession of the student who therefore holds the value of them. To ensure that all students are treated equally without regard to the school that they attend, books and supplies should not be considered as institutional charges for purposes of the Return of Funds calculation.
In addition, we encourage the Department to change how it currently updates the state and local tax tables and the income protection allowance used in the Federal methodology. We propose replacing the Treasury Statistics of Income file with the data and tax model used by the Institute of Taxation and Economic Policy to update the state and local tax tables. We also propose using the Consumer Expenditure Survey (lowest 20% table), to develop IPA tables instead of updated BLS data.
Like others in the Higher Education community, we also encourage the Department to eliminate requirements that are not germane to the primary purpose of the HEA. Specifically, we urge the elimination of the requirement to suspend or terminate a student's eligibility for Title IV funds based on drug-related convictions as well as the provisions that require schools to track Selective Service registration.
Again, while well-intentioned, neither of these requirements are needed since there is no evidence of significant abuse. However, the questions and procedures have caused confusion and denial of aid to many innocent students.
We also propose elimination of the requirement that institutions distribute voter registration materials. This could be accomplished more effectively if it was delivered electronically to all citizens by a central entity that has up-to-date information and requirements for each state. To make the federal student assistance process more efficient we would mandate that ED and the IRS implement a verification system of student data by a certain date. The 1998 HEA reauthorization authorized ED and IRS to set up a system to verify student financial aid applicant data. Such data elements included adjusted gross income, Federal income taxes paid, filing status, and exemptions reported by applicants (including parents) under this title on their Federal income tax returns for the purpose of verifying the information reported by applicants on student financial aid applications. Some progress has been made in the last four years, and there is a proposal to move in this direction to the President's FY-2004 budget submission, but the earliest the Department and IRS could even begin a pilot project would be in 2004-2005. Assuming the HEA reauthorization is signed into law in 2004, NASFAA would set a statutory date for implementation of such a system no later than three years from the date of enactment of this law. Current estimates show savings of some $300 to $800 million by implementation of such a verification system. These savings could be used to support increases proposed by NASFAA elsewhere in its recommendations for change.
Question C: How can HEA programs be changed to eliminate any unnecessary burdens on students, institutions, or the Federal Government, yet maintain accountability of Federal funds? How can program requirements be simplified, particularly for students?
NASFAA Response: Simplification and the removal of unnecessary requirements and burdens so all parties involved in the student aid delivery system has always been one of NASFAA's primary goals. While many of our recommendations are designed to address these issues, we specifically would urge the Department to consider the following.
First, allow schools the ability to certify loans up to 30 days after the student's last date of enrollment. This would enable schools to help students who were delayed by the process to receive the resources they anticipated.
Second, direct the Secretary to develop and distribute consumer information to student loan borrowers and potential student borrowers concerning debt management and student loan related information. Lenders, guarantors, servicers and secondary markets will be responsible for the distribution of this material. The Secretary has the ability to design materials that address the needs of the student borrower. In addition, schools may not have the resources available to develop and deliver the comprehensive materials required by the Secretary or needed by the student. It seems more practical for the Secretary and the Department to be responsible for this issue.
Likewise, the points in time at which the borrower needs these materials are generally beyond the control of the school. These points generally involve the borrower and the lender and include, but may not be limited to: when the loan is requested, when the borrower enters repayment, when the borrower is experiencing difficulties in meeting his/her payment obligations, and when the borrower may be seeking new repayment terms and possible consolidation. It is at these points that the borrower needs "just-in-time" counseling on what options are available, something the schools have no control over.
Third, allow those schools that can certify that ten percent of their student body is involved in community service to be exempt from any FWS community service spending requirements. NASFAA strongly supports the notion that all members of the higher education community should participate in community service activities that will benefit the nation and encourage in all a sense of social responsibility and commitment to the community. Because many schools have a strong commitment to community service and incorporate it into their institutional philosophies and program structures and because we believe incentives to grow community service initiatives are more productive than mandates, we suggest recognizing the efforts of schools that are successful in this regard. Because the development and nurturing of exemplary community service programs-even in the absence of JLD participation-is very important, NASFAA recommends encouraging such activity via the creation of a model community service program award to be given annually to schools that exemplify the best of community service. Recognized schools could also receive preferential treatment for the allocation of FWS funds.
Fourth, add a $1,000 asset protection allowance (APA) for dependent students and single independent students under the age of 26. For married students, use an APA based on the age of the older spouse. The minimum allowance for students under the age of 26 will be $1,000. The suggested change would protect students who have been prudent and saved for their education and would not disadvantage these students when compared to the student who couldn't save, or chose not to save. Using a minimum APA will help to ensure that low-income students with modest savings continue to qualify for maximum Pell Grant eligibility.
Fifth, expand Experimental Sites authority to all sections of Title I and Title IV. Require the Secretary to establish policies and procedures for conducting the experiments, to evaluate the results, and to report annually to the Congress, including proposing changes to the regulations in the areas addressed by successful experiments or making recommendations to Congress for statutory changes. The purpose of experiments is to demonstrate the success or failure of different ways of doing things. If experiments prove successful, they should be models for modifying the law for all institutions. Experimental Sites should be true experiments for new ways of doing things and not seen just as regulatory relief or selective exemption from federal laws/regulations.
Sixth, have the Secretary evaluate the results of the Quality Assurance Program and Distance Education Demonstration Project and recommend appropriate changes to law and regulation based on the successful components of those programs. These programs have been in existence long enough for the Secretary to draw conclusions about what is working and what is not. Those pieces that have been successful should be incorporated into the law.
Seventh, modify statute and regulations to define eligibility based on the nature of the degree, not the type of institution so that:
- All programs should be reviewed for eligibility-for the purpose of this provision-based on the nature of the degree. Programs that are at the associate, bachelor's, or graduate level should be exempt from the requirement that the program lead to a specific occupation.
- Programs that do not lead to an associate, bachelor's, or graduate degree could be eligible if they met the following criteria:
- The program is at least two years in length and the credits are fully acceptable towards a bachelor's program, OR
- The program leads to a recognized occupation and meets the following minimums:
- It is an undergraduate program that provides at least 15 weeks of instruction and 600 clock hours, 16-semester or trimester hours, or 24-quarter hours. The program may admit students without an associate degree or equivalent.
- It is a graduate/professional program, or admits only students with an associate degree, and provides at least 10 weeks of instruction and 300 clock hours, 8 semester or trimester hours, or 12-quarter hours.
- It is a program that admits some students who do not have an associate degree or equivalent, and must meet specific qualitative standards. (These programs are only eligible for FFEL and Direct Loans.) The program provides at least 10 weeks of undergraduate instruction and 300-599 clock hours. The program may admit students without an associate degree or equivalent.
The regulations currently have different definitions for determining program eligibility based on the type of institution offering the program. We believe that the determination of program eligibility should not be based on whether a school is for-profit, public or private non-profit. Currently, institutions offering similar programs are not treated similarly under Title IV regulations. Only for-profit institutions are blocked from offering degree or certificate program unless they "provide training for gainful employment in a recognized occupation" (as found in the U.S. Department of Labor's Dictionary of Occupational Titles). Although a for-profit institution and a public institution may offer identical programs, accredited by the same authorizing body, the students attending the proprietary institution may be barred from receiving federal aid due to this provision. These limitations are unfair to students and consumers.
Question D: How can we best prioritize the use of funds provided by postsecondary education and the benefits provided under the HEA programs? How can the significant levels of Federal funding already provided for the HEA programs best help to further goals improving education quality, expanding access, and ensuring affordability?
NASFAA Response: First, allow schools to terminate participation in the Federal Perkins Loan Program to continue to collect outstanding loans; to use the collections to establish a federal endowment fund; and to use the proceeds from that endowment for Federal SEOG or Federal Work-Study awards to students.
For many years schools have received a minimal amount of new money for the Federal Perkins Loan Program (based on available appropriations and the funding formula), and rely on repayment funds to lend to new borrowers. Some schools may find that the needs of their students may be satisfactorily met through Stafford Loans but that need still exists for FSEOG and FWS.
Under current provisions, if a school terminates participation in the Federal Perkins Loan Program, it must assign all of its loans to the U.S. Department of Education and return the federal share of the cash balance in the fund.
Under this recommendation, a school that terminates participation in the Federal Perkins Loan Program would be allowed to collect its outstanding loans, to retain the funds to establish a Federal SEOG/FWS endowment, and to use the proceeds from the endowment solely for FSEOG and/or FWS awards. Schools would maintain a vested interest in the collection of the loans issued, and a vested interest in keeping collection costs down. Schools would have an incentive to invest the endowment funds at rates equal to or greater than the current 5 percent interest rate. [Currently schools are required to lend out the repaid funds as soon as possible] The earnings from the fund would expand the amount of federal grant and work-study funds for students without any additional federal appropriations. Since these schools would no longer qualify for an annual federal Perkins allocation, increased FCC would be available to those schools that wish to remain in the Federal Perkins Loan Program. The federal government would not have to expand its collection operations to absorb reassigned loans.
Second, expand the authority of schools to transfer funds between all campus-based programs. NASFAA believes postsecondary institutions should have authority to transfer up to 25% of funds in one campus-based program to another, rather than the more limited transfer authority in current law. Additionally, given the small appropriation for new FCC in the Federal Perkins Loan program, this expansion of authority to transfer funds would be extended to permit transfer of 25% of annual loan collections to FSEOG or FWS. NASFAA believes this is a common sense change that provides administrative flexibility allowing schools to make decisions according to institutional and student needs. We believe that such flexibility is a highly desirable policy change and it would not increase campus-based program appropriations or increase allocations to individual schools.
Question E: Are there innovative and creative ways the Federal Government can integrate tax credits, deductions, and tax-free savings incentives with the Federal student aid programs in the HEA to improve access to and choice in postsecondary education?
NASFAA Response: First, for purposes of determining a dependent student's eligibility for funds under this title, all "529" plans, including prepaid tuition and savings plans, as well as Educational Savings Accounts (ESAs), and other similar educational financial savings plans should be counted as a parental asset, regardless of whether it is owned by the student or the parent. For purposes of determining an independent student's eligibility, all "529" plans, including prepaid tuition and savings plans, as well as Educational Savings Accounts (ESAs), and other similar educational financial savings plans should be counted as the student's asset.
This recommendation is a simple approach to the treatment of these assets that encourages families to save for college. This approach continues to include such assets in the EFC calculation, but moderates their impact significantly.
Second, repeal the Hope/Lifetime tax credits and tuition deduction only if such tax expenditures are on a dollar-for-dollar basis transferred to pay for creation of a Pell Grant entitlement or are used as an offset for other appropriate Title IV budgetary expenditures.
NASFAA recommends this repeal for several reasons. The use of tax credits during the period of postsecondary school attendance is less helpful as a part of a national student assistance policy; because of the significant impact on the federal budget and the trade-offs inherent in such practice, and the inefficiency and inequity of tuition tax credits as public policy. NASFAA believes that the use of these three tax expenditures to support citizens in their postsecondary education is inappropriate. NASFAA agrees with several higher education finance experts who suggest that the use of the tax system can play an important role in helping pay the costs of a postsecondary education. We believe that use of the tax system is appropriate before entrance into a postsecondary school and after the individual leaves the institution, but use of the tax system during times of enrollment is inappropriate, inefficient, and not well targeted to those with the most need for assistance. For example, using tax breaks to encourage savings for college before an individual attends is an efficient method of encouraging a behavior few would object to. And, providing a tax credit or deduction for interest paid on student loans after leaving school is an efficient method of reducing a borrower's debt burden. But experts state that the use of the tax system-with the array of benefits as currently structured-for periods of enrollment is a misguided and poorly targeted policy. Since it is a non-refundable tax credit, low-income families with little or no tax liability who in fact need the most assistance with college costs cannot receive this assistance to help them for any out of pocket college costs.
Further, tax credits reach students after the funds are needed and are thus an inefficient means of providing educational funding. The students or their parents receive the tax credits after filing their federal tax returns when the academic year is nearly completed.
Tax credits to middle and upper-middle income students do not encourage college attendance - they simply reward behavior that would have taken place in the absence of the tax credits. On the other hand, Pell Grants awarded to the neediest of students enable them to attend college, which was previously out of their reach.
In its September 2002 report, "Student Aid and Tax Benefits," the GAO reported that in tax year 1999, 6.4 million tax filers obtained about $4.8 billion in higher education tax credits through the tax code. The government also provided direct support to 3.7 million of the neediest students in the country through the Federal Pell Grant Program, expending $7.2 billion. It is well known that the Pell Grant Program has been underfunded for many years, with the buying power of the federal grant losing ground since its inception. Congress has not appropriated the dollars necessary to fund the maximum authorized Pell levels simply because it has been too expensive to do so. However, NASFAA argues that if Congress is able to forego well over $45 billion in tax revenues over ten years through Hope and Lifetime Learning tax credits and the tuition deduction to the less needy, it should be able to fully fund and expand the Pell Grant Program and also make up past shortfalls by canceling education tax credits and using the revenues for the neediest students in the country.
Consequently, NASFAA recommends shifting that large amount of funding from spending on tax credits and the tuition deduction to paying for improvements in the Title IV student aid programs such as making the Pell Grant Program a true entitlement with a maximum grant of $8,000, or elimination of the origination fee, or increasing loan limits or a combination of these recommendations or other positive changes that better target scarce federal resources to those most in need of such assistance.
While some middle-income families certainly will lose the benefits of these tax credits, it is equally true that other HEA changes suggested by NASFAA will increase middle-income families' eligibility for Title IV program benefits. Our recommendation for increases in loan limits will provide benefits beyond those provided by the tax code. Another increase of benefits, which could accrue to the middle-income families, is the increase in the Pell Grant maximum award which would result in the receipt of a Pell Grant award which could fully or partially offset any loss of tax benefits for which the taxpayer qualifies under current tax code. Again, in an era of limited federal funding resources, NASFAA suggests targeting funding to our neediest citizens, rather than those who are better able to afford a postsecondary education.
We recognize such a proposal has certain dangers. Consequently, we are making this recommendation contingent on any such change must transfer on a dollar-for-dollar basis such tax expenditure amounts for Hope, Lifetime Learning, and the deduction to the Title IV programs to set up a Pell Grant entitlement and/or to be used as an offset to pay for other NASFAA recommendations, for example, to eliminate the origination fee or increase loan limits. We would vigorously oppose any elimination of any education tax expenditure to fund some other tax benefit not related to education such as elimination of the double taxation of dividends. Again, to be perfectly clear our support of elimination of these three tax expenditures is contingent on such funds being used to support the Title IV HEA student assistance programs.
Finally, we encourage the Bush Administration and the Department of Education to join with us in this recommendation for retargeting scarce federal resources on our most financially needy students. Third, we urge the Department to recommend the repeal of the taxation of scholarships and fellowships, even if such funds are used for living expenses. Amounts withdrawn from qualified tuition programs under Section 529 or Coverdell Education Savings accounts can be used for living expenses such as room and board. The current taxation or amounts used for living expenses from scholarship or fellowships proceeds is thus burdensome and unfair to students.
Question F: What results should be measured in each HEA program to determine the effectiveness of that program?
NASFAA Response: At this time, NASFAA has not taken positions on appropriate results to evaluate program effectiveness. As we continue our reauthorization deliberations, we will incorporate this question into our discussion.
Questions G: Are there other ideas or initiatives that should be considered during reauthorization that would improve the framework in which the federal government promotes access to postsecondary education and ensures accountability of taxpayer funds?
NASFAA Response: As noted earlier in our statement, access and accountability are of critical importance to NASFAA. For example, we believe that many of the measures we have recommended will simplify and streamline program procedures permitting accountability to be strengthened. Our recommendations regarding the Pell Grant entitlement and increasing annual maximums in the student loan programs will promote access.
We believe that the current program structure and method of delivery is generally effective, however, we have recommended a modification for the Perkins Loan Program (described earlier in this statement). Further, we believe that our recommendations to eliminate several current formula treatments-such as the Simplified Needs Test and Automatic Zero EFC-under the Federal Methodology and to initiate a simplified treatment for recipients of TANF (Temporary Assistance for Needy Families) offer a better opportunity to target funds to the neediest students within the current program structure.
In addition, we encourage the Department to explore a Pell Grant front-loading demonstration project. It could be modeled after the distance education demonstration project placed into the law by the reauthorization of the HEA in 1998 (Section 486). It would be entirely voluntary; would be limited to a small number of volunteer schools; would sunset or end with the expiration of the Higher Education Act; would require periodic reports; would be flexible in its parameters; and would test front-loading grants in a way that would give concrete answers as to the benefits and negative consequences of front-loading grants and back-loading loans. While some have concerns about such a proposal, we believe that we have an obligation to explore new ways of delivering aid or, at a minimum, testing ideas in the real world. In that spirit, NASFAA believes a small, voluntary demonstration project is desirable to answer many of the practical and theoretical issues surrounding front-loading.
While we have already highlighted a number of new initiatives throughout our statement, we also ask you to consider the following.
First, establish a common overaward tolerance of $500, applicable to the campus-based and Stafford programs. Currently, there is a $300 tolerance for the campus-based programs and a limited tolerance for Stafford Loans applicable when an overaward results from the $300 tolerance in FWS only. Thus, receipt of an additional scholarship may have a disproportionate effect on a student's awards. This recommendation seeks to ensure consistent treatment of students across the Title IV programs and simplify institutional procedures.
Second, eliminate the lowest EFC order for awarding FSEOG funds. Retain the preference that FSEOG recipients also be Pell Grant recipients but permit schools to direct no more than 10% in FSEOG funds to other exceptionally needy students, who may be non-Pell recipients, as defined by the institution. This flexibility would allow financial aid administrators to target funds to the neediest students. Third, on July 1, 2006, lower maximum cap on interest rates from 8.25 to 6.8% for subsidized and unsubsidized loans; continue variable interest rate, rather than fixed rate; and lower PLUS maximum cap to 7.5% on that date. Provide a refundable tax credit on student loan interest paid to a limit of $2,000 per year for the life of the loan.
President Bush earlier this year signed a bill requiring that on July 1, 2006, the interest rate on Stafford Loans be set at 6.8%. No longer would interest rates be variable as they are now. NASFAA's recommendation would lower the cap on the maximum interest rate from the current 8.25% for Stafford loans to 6.8% and lower the PLUS maximum interest rate cap to 7.5% on that date too. We believe borrowers should have the best interest rate available and that a variable rate is the best option presently rather than a fixed 6.8% interest rate that goes into effect in 2006.
NASFAA recommends establishment of the tax credit up to $2,000 for interest paid on student loans in addition to the current deduction. Such a tax credit would be refundable and is, obviously, more valuable than the current tax deduction. We also recommend a borrower option that such a tax credit could be sent directly to the holder of the loan to help reduce the borrower's loan debt.
Fourth, eliminate the loan origination fee currently charged to students. Transfer responsibility for payment of the insurance premium from the student to the federal government.
The origination fee should be eliminated and if there is a need for an insurance premium that should be paid by the federal government rather than by students. It is appropriate that the federal government make such a payment to support and finance guaranty agencies. NASFAA firmly suggests that the origination fee was intended to be temporary when it was imposed on student borrowers in the early 1980s, and it has continued far too long to the detriment of student borrowers. While a federal budget convenience, the origination fee and insurance premium in both programs is a major handicap for student borrowers, denying them all the loans funds they qualify for and that are necessary to finance their education. As students graduate with increasingly higher student loan debt, NASFAA believes that elimination of the origination fee for all federal student loans is in the best interests of students.
Fifth, equalize FFEL and DL student terms and conditions. Write into law mandatory student benefits such as on-time repayment and automatic, electronic payment, etc. Provisions of the Higher Education Act are contradictory. A provision of law governing the Direct Loan Program, Section 455(a)(1), requires that "Unless otherwise specified in this part, loans made to borrowers under this part shall have the same terms, conditions, and benefits, and be available in the same amounts, as loans made to borrowers under sections 428, 428B and 428H of this title." While this is straightforward language mandating, unless otherwise specified, that Direct Loan borrowers have the same terms, conditions, and benefits as FFELP borrowers, contradictory law is evident in other HEA provisions. For example, Section 438(c)(2) authorizes lenders to charge an origination fee "not to exceed 3.0% of the principal amount of the loan..." Section 428(b)(1)(H) allows guaranty agencies to collect "a single insurance premium equal to not more than 1.0% of the principal amount of the loan..." A further example, Section 427A(j) permits a lender to charge a borrower an "interest rate less than the rate which is applicable under this part." The meaning of Section 455(a)(1) is contradicted by Sections 438(c)(2), 428(b)(1)(H), and 427A(j) which allow lenders, or other parties to the lending process, to offer benefits to FFELP borrowers that are not available to Direct Loan borrowers since such Direct Loan borrower benefits are not authorized by statute. Direct Loan borrowers have an advantage over FFELP borrowers since they can consolidate their loans while in school.
NASFAA firmly believes it is time to equalize the terms and conditions of student loans so that all borrowers no matter what loan delivery system (FFELP or Direct Loans) have the same loan terms and conditions. At the same time, NASFAA wishes to continue popular student FFELP benefits, but make them available to all borrowers regardless of loan delivery system, school choices, or by inequities among student benefit offerings by the lending community, e.g. lenders, guaranty agencies, secondary markets, et. al.
Consequently, no longer would there be disparities in student loan benefit terms and conditions. Every student would pay the same interest rate, the same origination fee (if it is not eliminated per NASFAA's recommendation), and the same insurance premium (if it continues to be paid by the student and not the federal government per NASFAA's recommendation). NASFAA suggests there is no need in either FFELP or Direct Loans for an in-school consolidation benefit and so would eliminate it from the DL program. NASFAA suggests that inequities in the treatment of borrowers need to be eliminated in the current loan program. This recommendation would do so treating all borrowers alike. At the same time, NASFAA recognizes that a number of the FFELP borrower benefits are creative and help reduce student debt. We recommend that these benefits, such as incentives for on-time repayment or for automatic loan repayment deduction from a borrower's checking account, should be made available to all borrowers regardless of the source of their loans. Sixth, continue loan consolidation program: allow consolidation so that borrowers with multiple loans may have a single holder and/or to prevent borrower defaults. Change the interest rate from a fixed rate to a variable one to conform to recommendation that all interest rates are variable capped at a maximum rate of 6.8%. Clarify the single holder rule. Consider consolidation loans to carry a higher interest rate.
We recommend returning loan consolidation to first principles, the understanding of the uses of consolidation when the program was first adopted by the Congress, e.g., to help ease the confusion and paperwork of have multiple holders and to prevent default. NASFAA suggests too many borrowers are being seduced by sophisticated marketing of loan consolidation options without realizing the consequences of such an action (e.g. higher total loan debt and the loss of eligibility for some loan benefits).
Controversy is rampant over the single holder rule. Our recommendation maintains the rule and clarifies the position of a Perkins Loan in consolidation, i.e. Perkins Loans can be consolidated, but are not considered to be held by another holder in order to get around the single holder rule. This proposal would also include certain health loans made by the school. Many knowledgeable observers suggest elimination of the single holder rule would grossly distort and destabilize, perhaps, cripple the student loan market. This, they say, would occur when the lender who estimates and depends on a certain revenue stream coming from a loan in order to stay competitive, indeed, stay in the student loan business, would not be able to do so if a loan can be consolidated by any competitor with the marketing savvy or high pressure tactics to "steal" that loan away.
NASFAA proposes that the interest rate for consolidation loans track the interest rate for Stafford Loans. NASFAA recommends all loans, including consolidation loans, have a variable interest with Stafford Loans capped at a maximum interest rate of 6.8%. We suggest further study and consideration of applying a premium, a modest basis point increase, be applied to consolidation loans to help reduce the consolidation loan subsidy that might be better used to offset costs to gain other benefits, such as increased loan limits or elimination of the origination fee, in the zero sum budget game that will be played in this HEA reauthorization.
NASFAA further believes that its recommendations for changes in repayment plans and options, if adopted, will go a long way in providing borrowers with attractive, sensitive, and fair terms that will obviate the need for the high level of loan consolidation activities over the last several years. NASFAA's loan consolidation recommendations are intended to bring some common sense, promote consumer protections and awareness, maintain some semblance of FFELP industry stability, and reduce unnecessary increases in loan debt.
Seventh, direct the Secretary to review and revise the Master Promissory Note (MPN) to allow two-year colleges and proprietary institutions the ability to use the multi-year feature provisions of the MPN. Eighth, eliminate the liability of a student's estate or family to repay a grant in the event of a student's death. Currently loans, including PLUS loans, may be forgiven in the case of the death of a student. Under current statute this forgiveness does not apply to the repayment of grants under similar circumstances. While such cases are rare, NASFAA believes this compassionate treatment should be extended when a student dies and has a grant repayment pending.