Archived Information

Reauthorization of the Higher Education Act

Dear Mr. Leader:

I am writing to urge prompt consideration by the Senate of S. 1882, the "Higher Education Amendments of 1998," as well as to convey my views on some of the more significant provisions of that bill.

I am very pleased that S. 1882 reflects many of the Administration's proposals for the reauthorization of the vitally important Higher Education Act of 1965 (HEA). I also understand that a number of issues of concern, including the adequacy of funds in the section 458 account, which is critical to the Department's ability to manage effectively the over $50 billion annual Federal investment in student financial aid, including such vital activities as student aid application processing, student loan default collection, and the urgently needed modernization of student aid delivery systems, will be resolved as part of the managers' amendment when the bill reaches the floor. I am most appreciative of the work that has gone into addressing these concerns.

However, S. 1882 fails to address adequately major policy issues addressed by the Administration's reauthorization proposals, including issues concerning student loan interest rates and fees, the guaranty agency financing system, ways to reduce the administrative burden on high-performing schools, ways to improve the integrity of the student aid programs, and the Administration's High Hopes, College Awareness, and Learning Anytime Anywhere Partnership initiatives.

I look forward to working with you to develop mutually acceptable provisions on these and other issues. My concerns on some significant issues are described in greater detail below, and further analysis of S. 1882 is also included in the attachment to this letter.

Student loan interest rate structure: I am pleased that the Senate bill includes the Administration's proposal with respect to the interest rates paid by students. However, the Administration strongly objects to the arbitrary and excessive subsidies for lenders. The Administration has recently advanced an alternative proposal that would move toward market mechanisms to set appropriate lender returns. Our alternative would require a study of alternative auction-based systems, pilot testing of the most promising models, and full implementation after an independent evaluation shows the pilot projects have been successful.

The goal of the pilots would be to demonstrate that long-term Federal costs could be lowered while ensuring loan availability to all students, minimizing administrative complexity for program participants, and facilitating program participation by a broad spectrum of lenders to ensure healthy long-term competition. Further explanation of the Administration's position on the use of an auction mechanism to set lender returns is included in the letter Secretary Rubin and I recently sent to Congress.

Fees: I am very disappointed that S. 1882 does not lower origination fees for students to help reduce their cost of borrowing. The Administration proposed to lower the fees by one percentage point for all borrowers, and to phase them out entirely for borrowers of subsidized loans. These fee reductions could be funded from resources that would be made available through the guaranty agency reforms proposed by the Administration. I understand that amendments may be offered to eliminate the one percent insurance premium for borrowers of subsidized FFELs, and to comparably reduce the loan fee for subsidized Direct Loans. The Administration would support such an amendment.

Guaranty agency financing and reform: As evidenced by the Administration's proposals, I support reform of the guaranty agency system in the FFEL program. However, I am deeply concerned that the reforms proposed in S. 1882 fail to make adequate performance-based reforms to encourage and reward efficient service delivery by guaranty agencies, and would include new and excessive sources of revenue for guaranty agencies. Particularly objectionable provisions are identified in the attachment. I look forward to working with the Congress to fashion an acceptable compromise that provides much-needed guaranty agency reform.

High Hopes: I urge that S. 1882 be amended to include the Administration's High Hopes initiative. High Hopes would provide over one million students in low­income middle schools with effective information, tutoring, mentoring, and academic preparation to prepare them for college and deepen their aspirations and commitment to pursue postsecondary education. We are currently working with the Congress and hope to find a way to incorporate High Hopes into S. 1882.

Community Service: I also urge that S. 1882 be amended to include the Administration's proposal for the Secretary to pay the interest that accrues on an unsubsidized FFEL or Direct Loan while the borrower is receiving an economic hardship deferment on the loan and performing community service. This important proposal is part of the President's call to action to all Americans to serve their communities, and would allow individuals with student loans who qualify for economic hardship deferments to take up to three years to serve their communities without accruing additional interest on their loans. This would remove a financial obstacle to community service for borrowers who already satisfy economic hardship criteria, such as Peace Corps volunteers.

Pay-As-You-Go Scoring: The Omnibus Budget Reconciliation Act of 1990 requires that all revenue and direct spending legislation meet a pay-as-you-go requirement. That is, no such bill should result in an increase in net budget costs, and, if it does, it will trigger a sequester if not fully offset. S. 1882 would increase direct spending and, therefore, is subject to the pay-as-you-go requirements of the Omnibus Budget Reconciliation Act of 1990. The bill does not contain provisions to fully offset this increase in direct spending. Therefore, if the bill were enacted, its net budget cost could contribute to a sequester of mandatory programs. OMB's preliminary scoring of this bill is that it would increase outlays by $2,258 million during FYs 1998-2003:

Fiscal Year	1998	1999	2000	2001	2002	2003	1998-2003
Outlays (In millions of dollars)	-$291	$355	$501	$520	$560	$613	$2,258

The Office of Management and Budget advises that there is no objection to the submission of this report to the Congress.

Yours sincerely,   Richard W. Riley

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