On to the Senate…

Legislation that the U.S. House of Representatives approved last week would make landmark changes to the federal student loan programs — changes that we have advocated at Higher Ed Watch for the last three years.

We can not overstate the significance of this achievement. Despite fierce opposition from the deep-pocketed student loan industry and their allies on Capitol Hill, the House moved forward with a bill that would eliminate unnecessary middlemen from the process of originating and guaranteeing federal student loans, and would have the government make all federal student loans directly. If this change is enacted into law, it will overwhelmingly simplify the federal student loan program and redirect a massive amount of federal funds out of the pockets of lenders and into the hands of the students who need the help the most.

Having said that, the House bill is far from perfect. The measure contains one provision that we believe is extremely misguided and will, if enacted, harm the cause of student loan reform, and another that would gut a key consumer protection provision in federal law that aims to safeguard students from unscrupulous trade schools. It also has other provisions that are well-intentioned but, as written, are unlikely to achieve the lofty goals the bill’s authors have set for them.

Attention will soon shift to the Senate, where the leaders of the Health, Education, Labor and Pensions (HELP) Committee are expected to release their own version of the student loan reform legislation shortly. While the Senate committee will likely stick to the same broad outlines as the House, it could make a few key changes that would significantly strengthen the measure.

Here are some changes that we would like to see:

• Make non-profit lenders compete for servicing contracts:

As we have previously reported, the House bill includes a set-aside for nonprofit student loan agencies to service federal student loans that is nearly identical to a proposal that the Education Finance Council (EFC), which represents these lenders, quietly shopped around Capitol Hill this summer. The legislation would essentially give each and every one of EFC’s members a no-bid contract to service the loans of up to 100,000 student loan borrowers in their home states.

What’s more, when the bill was on the floor last week, the House agreed to an amendment, sponsored by Rep. George Miller, the Democratic chairman of the Committee on Education and Labor, that would sweeten the pot for these non-profit student loan companies even further. Under the original version of the legislation, these non-profit agencies would have been paid “a competitive market rate as determined by the [Education] Secretary” to service these loans. The measure allowed — but did not require — the Secretary to take into account the volume of loans an agency services when making that determination, presumably to help even the smallest entities survive. Under the amended legislation, the Secretary would now be required to set the payment rate at a level that is “commercially reasonable in relation to the volume of loans being serviced” and is high enough so that “the eligible not-for-profit servicer can reasonably provide any additional services, such as default aversion or outreach, provided for in the contracts awarded.”

Speaking to education bloggers last week, Representative Miller said that including these provisions in bill was “absolutely” essential to the bill’s passage. “You have members of Congress who are very familiar with their nonprofit and state agencies, and they like the attention they give to their students and schools.” At the very least, it’s unlikely that the bill would have passed by such a wide margin (253 to 171) without making these types of concessions. Miller won the support of all but four of his Democratic colleagues.

At Higher Ed Watch, we understand that there are political tradeoffs that have to be made to win support for the type of landmark legislation. However, we find the provisions particularly troubling because the history of the FFEL program is replete with these types of political tradeoffs and set asides, which have made the program administratively cumbersome, inefficient, and vulnerable to waste and abuse.

To be absolutely clear, we have no problem with allowing non-profit lenders to compete for a servicing contract from the Education Department. But they should not be treated more favorably — or compensated more generously — than their competitors.

• Do not weaken key consumer protection provisions

The House bill would continue recent efforts by lawmakers to gut the “90-10 rule,” which aims to protect financially needy students from unscrupulous proprietary institutions. The rule requires for-profit colleges to receive at least 10 percent of their revenue from sources other than federal student aid to continue to participate in the government’s financial aid programs.

Congress introduced the requirement in 1992 (at that time it was the “85-15 rule”) as part of a broader effort to crack down on trade schools set up to reap profits from the federal student aid programs. At the time, lawmakers felt that the provision was important because it required proprietary institutions to prove that the training they offered was valuable. They figured that schools that offered worthwhile training would be able to derive at least a small portion of their revenue from students willing to spend their own money on it.

Proprietary school lobbyists have spent years and lots of campaign cash trying to get lawmakers to eliminate the requirement or at least weaken it so much that their institutions could easily evade it. And they have largely succeeded in this pursuit.

The bill the House approved last week would extend by an extra year (from two to three) the amount of time that schools can be out of compliance with the law before being penalized. It also would temporarily exempt from the 90-10 calculations any new money the colleges receive from the legislation’s expansion of the Perkins Loan program, and extend an existing exemption for federal student loan limit increases that were approved as part of the Ensuring Continued Access to Loans Act last year.

At a time when the Obama administration is looking to rewrite federal student aid rules to improve the integrity of the programs, it doesn’t make sense for Democratic Congressional leaders to weaken one of the few consumer protection provisions we still have.

• Revamp the proposed Perkins Loans funding formula changes

At the behest of the Obama administration, the legislation the House approved would significantly overhaul and expand the Perkins Loan program to help financially needy students avoid having to take out expensive private loans. We agree that this is a vital goal. But as our former colleague Ben Miller of Education Sector has pointed out, the proposed changes in the loan program’s funding formula try to do too much and will likely “result in a bunch of challenges being tackled in a mediocre manner.”

The House bill would convert the Perkins loan program from a campus-based revolving loan fund to an extension of the Direct Loan program. It would also substantially increase funding for the program, from $1 billion to $6-billion in new loan volume each year. The Department of Education would disburse half of these funds to colleges based on the financial need of their students. The other half would go to rewarding colleges that keep their tuition and fees low, relative to other institutions in their sectors, and to colleges that graduate a large portion of their Pell Grant recipients.

We agree that these are all important aims, but can they all be achieved through the Perkins Loan program? We would like to see the Senate committee choose an overreaching goal and stick with it. Our vote would be to provide the most generous awards to colleges that enroll the largest proportions of low-income students and are most successful in graduating them. The institutions that would benefit the most would be the top performers in their sectors, or those in each sector that show the most improvement over a period of time. Of course, protections should be added to ensure that schools are not just lowering their academic standards to make it easier for their students to graduate.

Helping low-income students avoid taking out high-cost private student loans — with variable, uncapped rates and few consumer protections — should be among our top priorities.

• Consider alternatives to the “Access and Completion Grants”

This provision has a worthy goal of providing grants to states and colleges to improve their efforts in increasing the academic preparation and college awareness of low-income students. But unfortunately, the language in the bill is so convoluted that, even after multiple readings, it’s difficult to know whether the provision will be effective in achieving its aims. A large share of the blame rests with the Obama administration, which never clearly articulated the purpose of this new program. At times, the administration seemed to suggest that much of the $2.5 billion devoted to this effort should go to student loan guaranty agencies as a pay-off to blunt their opposition to the overall student loan reform legislation. We think this would be a terrible way to spend the money, given that there is little empirical evidence to suggest that guarantors do a particularly good job carrying out college access activities.

While we support providing competitive grants and colleges for coordinating their college outreach efforts and forming partnerships with public school systems to improve the preparation of their students, we would also urge the Senate to consider significantly expanding the existing Gaining Early Awareness and Readiness for Undergraduate Programs, which already aims to accomplish these goals. Under GEAR UP, colleges and states partner with schools to provide counseling, mentoring, academic support, and college outreach services to entire grades of disadvantaged students. The partnerships serve these students for seven years, starting no later than seventh grade and continuing through at least high school graduation.

Funding for GEAR UP, however, has been stagnant for much of the last decade, limiting the program’s effectiveness. For example, many partnerships have been serving only one grade level in a school, rather than multiple cohorts, as the program’s creators envisioned. The benefit of directing savings from ending FFEL to GEAR UP is that a relatively modest increase — doubling or tripling the program’s budget, which is currently about $313 million — would go a long way to improving its performance and expanding its reach.

In exchange for the additional money, Congress should require the partnerships to serve multiple cohorts or even whole schools of low-income students, rather than just individual grade levels at the schools.

The Senate HELP committee has a great opportunity to make substantial improvements to the House student loan reform bill. We will soon know whether the panel seizes it.