House Republican Budget Cutters Take Aim at Spending in Last Year’s Student Loan Reform Bill

As part of its efforts to cut the federal budget deficit, Republican leaders in the House of Representatives are considering trying to rescind spending on programs that Congress included in the student loan reform legislation it approved last year. In a report accompanying the House-passed fiscal year 2012 budget resolution, the budget committee’s leaders argue that the legislation, which eliminated the Federal Family Education Loan (FFEL) program and shifted the federal student loan program to 100 percent direct lending, did not produce enough savings to fully finance these initiatives. [Our sister blog, Higher Ed Watch, made a similar point when the bill was being debated.]

At issue is a fight over how the bill was “scored.” Under current law, the Congressional Budget Office (CBO) abides by rules established by the Federal Credit Reform Act of 1990 to estimate and report the cost of new federal student loans that are expected to be made in the current and future years. Using this approach, CBO in March 2010 reported that moving all FFEL schools into the Direct Loan program would provide the government with savings of $68 billion over eleven years.

Republican lawmakers, who nearly unanimously opposed the legislation, argued, with some justification, that this estimate did not provide an accurate prediction of how much money the transition to direct lending would save. Many budget experts believe that estimates calculated using Credit Reform rules tend to understate the costs of federal loan programs by excluding a full measure of the cost of the loans. Thus government’s student loan programs appear profitable for the government even though they are making loans with below-market rates and repayment terms that are universally available to students regardless of their credit history.

With these concerns in mind, Sen. Judd Gregg (R-NH) asked the budget office to re-score the bill using a “market cost” or “fair value” approach — which many experts, including the CBO, have said provides the most comprehensive measure of a loan program’s costs. Such estimates show the price private entities would charge to offer the same benefits and services — and bear the risks they entail — currently offered by the government. As a result, they say, this accounting method more fully reflects the risks that taxpayers bear in making heavily-subsidized loans.

In response to Senator Gregg’s request, the CBO revealed that under the market-based estimates, the amount the government would save from making the switch dropped to $40 billion over eleven years. Despite the fact that the CBO estimate showed that Direct Loans were still much cheaper than FFEL loans, senior Republican lawmakers trumpeted the report, arguing that it showed that Democrats had misrepresented the savings the legislation would produce.

Democratic Congressional leaders, however, rejected this argument and accused the Republicans of “trying to cook the books,” in requesting the fair-value cost estimate. They said they saw no reason to doubt the CBO’s official cost estimate and, therefore, would stick with it.

Now the Republican leaders of the House Budget Committee are taking the Democrats to task over this decision. Noting that the President’s Commission on Fiscal Responsibility and the Peterson-Pew Commission on Budget Reform have recommended that policymakers use “fair-value accounting for all Federal loan and loan guarantee programs to enable the true assessment of their cost to taxpayers,” the committee report says that the legislation’s authors spent more than they could afford. To remedy the situation, the report says that Congress should consider cancelling “future spending [provided in the 2010 law] in the following ways”:

• Repeal the expansion of the Income-Based Repayment [IBR] program: The final legislation included a provision, proposed by the Obama administration, to increase repayment relief for financially distressed student loan borrowers. Currently, borrowers in IBR do not have to make payments on their federal Stafford loans that exceed 15 percent of their discretionary income, and can have their remaining debt forgiven after 25 years. Under the bill, starting with students who take out their first loan after 2014, the cap is reduced to 10 percent, and outstanding debt can be forgiven after 20 years. Noting that program, which was created in 2007, is “relatively new,” the report states that “Congress should ensure the program is meeting its intended goals before it is expanded.” Eliminating this provision would save about $1.5 billion over 10 years (although nearly all the savings would occur in the last five years of that time period). The savings would also likely be higher using fair-value estimates, since that accounting method likely shows the IBR repayment option provides greater subsidies to borrowers than the official rules.

• Eliminate new funding included in the legislation for the College Access Challenge Grant program, which provides matching grants to states to support efforts to prepare more low-income students to enroll and succeed in college. The student loan reform bill “dedicated mandatory spending to this discretionary program regardless of its effectiveness and created a ‘funding cliff’ with resources abruptly terminating in 2014. Killing this provision would save about $750 million over five years.

• Eliminate a set-aside that the legislation created for non-profit lenders to service Direct Loans. The legislation “established two separate funding categories for Direct Loan servicing contracts, a mandatory stream for eligible non-profit servicers and a discretionary stream for other servicers,” the report says. “Both of these types of servicers should be funding with discretionary funds.” As Higher Ed Watch reported last week, canceling the mandatory carve-out for non-profit servicers could save the government $730 million over five years and $1.2 billion overall, based on the original cost estimates of the provision done by the Congressional Budget Office in 2010.

• Eliminate mandatory funding that the legislation included to provide competitive grants to community colleges that serve dislocated workers in order for them to expand and improve their online course offerings. Funding for this program comes from the Department of Labor’s Trade Adjustment Assistance program, which had never been funded previously. “This is a discretionary program that should not be funded with mandatory funds,” the report states. This proposal would save $2 billion over five years.

Democratic Congressional leaders and Obama administration officials are likely to again reject the House Budget Committee’s complaints about how the student loan reform bill was scored. But given the intense pressure on Capitol Hill and the White House to slash the federal budget deficit and find money to shore up the Pell Grant program, they may have little choice but to give at least some of these proposals a second look.

At Ed Money Watch, we will continue to watch these developments closely. Stay tuned.