On September 27, 2007, President Bush signed the College Cost Reduction and Access Act. See Pub. L. No. 110-84, 121 Stat 784 (2007). The Act amends the Higher Education Act of 1965 (HEA) to increase financial benefits to students under the federal student financial aid programs and to reduce payments to and raise costs for lenders that participate in the federal student loan program. The Act also lays groundwork for significant changes to the federal loan program’s financing structure. The Act does not address matters related to school-lender relationships that have been the subject of recent state attorneys general and congressional investigations. The U.S. Senate addressed such matters in a bill to reauthorize the HEA that it passed in July 2007, and the U.S. House of Representatives is reportedly working on a companion bill that is expected also to address such matters. We summarize here selected aspects of the Act. Unless otherwise stated, the law is effective October 1, 2007.
Student Loan Interest Rate
The Act cuts in half over a four-year period the interest rate on subsidized Stafford loans and Federal Direct Stafford Loans for undergraduates, from the current rate of 6.8 percent to 3.4 percent by 2011. See Pub. L. No. 110-84 § 201. The rate decrease applies only to new loans, and does not apply to unsubsidized Stafford loans. See id.
The Act increases the maximum Pell Grant for which a student is eligible each year, by $1,090 over the next five years. See Pub. L. No. 110-84 § 102. The authorized increase in Pell Grant amounts is subject to appropriations. The Act also eliminates the Pell Grant “tuition sensitivity” provision. Eligible students may now attend institutions that cost less per year than the Pell Grant for which they are eligible, and may receive the difference. See id. § 101.
PLUS Loan Auctions
The Act creates an “Auction Pilot Program” for PLUS Loans to parents of dependent students. See Pub. L. No. 110-84 § 701. (PLUS Loans for graduate students would not be part of the pilot program.) Under the program, the Secretary of Education will establish an auction process to be held every two years in each state. Eligible lenders that meet prequalification requirements will bid competitively to originate PLUS Loans for students at all higher education institutions in the state. Bids will consist of the “special allowance payment” amount the lender is willing to accept from the Secretary for each loan in lieu of the amount otherwise determined under the HEA. (Under the HEA, the federal government provides a special allowance payment to a lender when the interest rate paid by student borrowers on federal loans falls below a market index. The payment amount is determined in accordance with a statutory formula. Special allowance payments are intended to bring a lender’s earnings on eligible federal loans closer to market rates.) The Secretary will select two lenders based on the bids, and those lenders will be the only lenders permitted to originate PLUS Loans for students at higher education institutions in the state. Auction loans are scheduled to be originated beginning on July 1, 2009.
Lender Costs and Payments
The Act makes numerous changes to HEA provisions that affect lenders’ earnings under the federal student loan program. For example, the Act:
- Reduces special allowance payments by 55 basis points for Stafford and Consolidation loans and 85 basis points for PLUS Loans for for-profit lenders and reduces special allowance payments by 40 basis points for Stafford and Consolidation loans and 70 basis points for PLUS loans for non-profit lenders and state agencies. See id. § 305. The greater reduction for PLUS Loans serves to equalize the special allowance payment rates for PLUS and Stafford Loans.
- Reduces lender insurance in case of default from 97 percent to 95 percent of unpaid principal of insured loans. See id. § 303.
- Increases from 0.50 percent to 1 percent the loan fee that the Secretary collects from lenders on each loan disbursed. See id. § 305.