Federal budget cuts could cost student loan programs

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Billions of dollars worth of planned cuts to federal student aid programs could make it more expensive for students to take on and consolidate loans as Congress looks to dig itself out of a growing budget deficit and pay for rebuilding efforts after Hurricane Katrina.

The U.S. House of Representatives and the Senate have both passed duel budget reconciliation bills as part of a push by Republican lawmakers to curb the growing federal budget deficit. As part of these cuts, federal student loan programs in the House bill are at risk to lose $14.3 billion, with the Senate version making similar, though redirected, cuts. Congressional leaders have said they look to pass the legislation before the holidays.

“It’s basically a ($14.3-billion) tax on college students,” said Congressman Brad Sherman, who represents the Northridge area and other parts of the San Fernando Valley. Sherman, a Democrat, voted against the legislation, which passed in the House 217-215 on Nov. 18.

One provision of the House’s Deficit Reduction Act of 2005, which looks to cut out about $50 billion in federal spending by 2011-12, centers on student loan consolidation, which allows a student to package all of his or her various loans together, lock in a fixed interest rate and spread out repayment over 30 years.

Under the House bill, borrowers would have the option of consolidating using either a fixed or variable rate, but those who select the fixed rate will be charged new fees, including a new 1 percent origination fee of their outstanding loan debt.

The change would save the government the money it now uses to subsidize the fixed rate loans.

The cost to students for this and other changes would be in the billions over the next five years.

Higher education associations, Democrats and some Republicans in Congress have lobbied against the student aid cuts, with some claiming it will limit access to higher education by making it more expensive for the most needy students to attend college.

“I think in recent years it has become increasingly rare for elected officials at any level of government to plan for the long term,” said Dorena Knepper, director of governmental affairs at CSUN, of access to higher education. “We’re cutting off our nose to spite our face.”

Sherman shared similar sentiments.

“The best investment in the future is a college education,” he said. “Especially for those dedicated enough to want to pay the student loans. (We should not) discourage them with higher interest rates.”

At CSUN, about $58 million is given out to students in loans, according to Diane Ryan, director of Financial Aid and Scholarships.

She said 30-year fixed rate consolidation was “No. 1 on the chopping block” once talk of budget reconciliation began.

“Loan consolidation has played a significant role in helping borrowers manage student loan repayments,” Ryan said. “Without such a mechanism, the potential for default is significantly higher.”

The program became necessary because of the variety of loan options now available to students, who might be carrying with them different loan types, she said.

George Conant, legislative director for the CSU Federal Relations Office in Washington, D.C., said the CSU system does not have an official position between fixed or variable rates.

“I think that a variable rate, for some students, may be a better deal for students,” he said.

He described the two types of students who consolidate – the one who needs to because of debt management and the one who doesn’t really need to – and how a variable rate would allow the first to survive in high-interest-rate market, but would not provide what could be considered a needless loophole to countless government subsidized loans. He said the 8.25 percent cap for variable rates would protect all students.

“As long as you’ve got a cap in there, that’s reasonable,” Conant said.

The budget reconciliation process also will have an effect on how lawmakers pursue the reauthorization of the Higher Education Act, federal legislation that is reauthorized periodically and sets in place federal student aid programs.

The HEA is set to expire before the end of the year unless Congress extends it again, which it has done previously under the current legislation, once in the aftermath of Hurricane Katrina.

The Senate combined its reconciliation bill with its HEA reauthorization. The House reconciliation bill, however, is not linked to HEA, and is unlikely to authorize any new spending, which the Senate bill now has.

Several higher education and CSU officials said they did not know how this would be resolved when the House and Senate try to resolve their bills in a conference committee this month or after Christmas.

Lawmakers discussed this fall whether to raise the minimum authorized Pell Grant, with a nominal $50 increase for students, the most realistically on the table during talks.

If after conference the final reconciliation bill more closely resembles the House version, it is unlikely that students would see an increase in Pell Grants anytime soon. If the two chambers agree on something more closely resembling the Senate bill, however, some of the savings attributed to the federal budget cuts would be funneled into additional grant funding.

“Both versions cut billions of dollars from student loan programs, but the Senate version puts some of the money ‘saved’ back into new, additional aid for Pell Grant recipients,” Knepper said.

“The Senate bill’s mandatory programs are definitely a step in the right direction,” Conant said.

Also under the House bill, students will also be responsible for paying a 1 percent insurance fee on Federal Family Education Loans, or FFEL, which is typically waived by lenders because of federal subsidies.

Loan guarantee agencies use the insurance fees to help lenders protect against students who do not pay their loans on time, or at all.

According to Conant, this move will not only put additional financial pressure on students, but also on many small lenders who have for years waived the fees to compete against larger lenders who can afford it most.

Conant expressed concern that some smaller lenders may be pushed to the brink where lending habits may change because of the severity of cuts levied against them.

“The big worry is how much can you cut lenders before (they) stop making loans to certain students,” he said, referencing a recent letter sent to Republican lawmakers by a coalition of bankers and other student lenders that said the cuts “threaten (their) ability to fulfill the critical national need of providing access to postsecondary education.”

Ryan agreed that some of the possible changes could impact the student loan industry.

“When these legislative rumblings occur, it does cause a big flurry of activity on the part of the lending community,” she said, adding that lenders will gauge their future participation in student loans by examining how their margins are affected by the cuts.

CSU students would also be affected by another provision in the House bill that would change how direct loans – money straight from the government – are carried out.

In 2004-05, CSU students received more than $840 million in FFEL and direct loans. CSUN is not a direct-lending school, although half of the CSU campuses are, according to Conant. Ryan said almost 28 percent of U.S. colleges are direct-lending schools.

Under current regulations, the U.S. Secretary of Education waives most percentage fees on direct loans.

Under the reconciliation bill, this would not be allowed, forcing students with direct loans to pay a 3 percent fee for 2006-07. This fee will be reduced over the next five years before it settles at 1 percent in 2011-12.

The House and Senate will try to put the two reconciliation bills together either before the holidays or when Congress returns in January.

< p>The House will also try to vote on the extension of tax cuts implemented in President Bush’s first term before the holiday break. A previously passed Senate version does not include some of the largest tax cuts.

Some higher education officials said they did not know how the final budget reconciliation cuts were going to turn out for students in need of loans.

Ryan said that regardless of what happens, financial aid would remain a good option for students, calling some of the changes a “necessary recalibration of student loan financing.”

“The bottom line is that student loans are going to be a bit more expensive, but are still going to be a good deal,” Ryan said.

Conant said he did not think the votes were available in the Senate to agree on some of the deep House-like student aid cuts.

“Everybody would just like it to go away,” he said. “Whether that’s a possibility or not – I think it might be. I don’t think anyone wants to see $14.3 billion taken out of federal aid programs.”

Ryan Denham can be reached at editor@csun.edu.