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Washington Update

Vicki Shipley, NCHELPMASFAP Conference

November 2011

Other Titles??

Show Me The Money! I’m Made as Hell and I’m Not Going to

Take It Any Longer! It’s The Economy Stupid! Let’s Make A Deal! A Trillion Here ….. A Trillion There!

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Today’s Road Trip…..

Budget, Budget, Budget It’s all about Pell Federal Deficit Looms Large Super Committee FFY 2011 and 2012 Budgets Guarantor VFAs and NFP Servicers Other Issues on the Horizon What’s Next?

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Budget and Deficit Reduction

FFY 2011

Debt Ceiling

FFY 2012

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Pell Grant Shortfall

Demand for Pell has Increased Beyond ED & Congressional Estimates 5.9 million recipients in 08-09 academic year 9+ million recipients estimated for 11-12AY 6% of domestic discretionary spending

Statutory Language Precludes Ratable Reductions When Funding is Insufficient

Didn’t They Fix This in SAFRA? “Mandatory funds” are contingent on enough

appropriations to fund $4,860 maximum grant Shortfall could top $20b annually for foreseeable

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FFY 77 FFY 82 FFY 87 FFY 92 FFY 97 FFY 02 FFY 07 FFY 100

5

10

15

20

25

30

$1.50$2.30

$3.50

$5.80 $5.80

$10.00

$12.80

$30.00Rising Cost of Pell Grants

In Billions

Source: Dept. of Education

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Pell Grant Shortfall

$5.7 Billion shortfall for the 2011-12 AY Appropriations are insufficient to fully fund Pell Growth in demand not properly projected “Mandatory” funds provided in SAFRA assume

adequate appropriations Funding gap for 2011-12 but the CR maintains

maximum Pell at $5,500 2012-13 outlook

Shortfall continues to grow Appropriations likely to stay stagnant Growth in Pell appropriations will need to come from

other programs Fewer sources of mandatory funds

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Pell Grant Protection Act

Maintain $5,550 maximum grant by “…making tough choices to save over $100 billion over the next decade….” Eliminate year-round Pell (-$8b per year)

Ten times more expensive than projected No evidence that it accelerates graduation

Eliminate loan subsidies for graduate Stafford Loans (-$2b) Poorly targeted subsidy

Allow split FFEL loans to be combined as “Direct FFELs” (-$2b)

Convert Perkins to Direct Perkins (-$8.6b) Unsubsidized loans; 6.8% interest rate $8.5b in new loan volume

Convert TEACH Grants to Presidential Teaching Fellows (-$15b) Grants to states awarded to students at schools whose

education programs meet benchmarks College Completion Incentive Grants (+1.25b) 9

FFY 2011 Continuing Resolution Government Shutdown Averted on 4/8/11

$38.5 billion in cuts $13B cut from Labor, Education and HHS 2011-12 Pell Grant of $5,550 is maintained but

eliminates year-round Pell Eliminates funding for LEAP, Byrd Honors

Scholarship, loan repayment for civil legal assistance Cuts to GEAR UP, SEOG, TRIO and AmeriCorps Does not include a provision to block the Department

from finalizing and implementing the Gainful Employment regulations

Now the real battle begins…..

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The Debt Ceiling Federal Authority to Borrow Above a

Preset Level» $14.3 trillion» Reached in May, June, August 2

Consequences of a Breach» Inability to pay debtholders (default)» Inability to issue new debt to fund programs» Need to juggle to meet federal obligations

(e.g., military pay, social security payments, loan & grant disbursements)

Let’s Make a Deal Assumptions:

» Congress will wait until the last minute» Tea Party will maintain a hard line» Republican leadership – Boehner and

Cantor – will need to deliver the votes» Democrats will not undermine the President» Republicans will not agree on net tax

increases

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Budget Control Act of 2011 Elimination of interest subsidy for

graduate students. Effective for loans made for periods of enrollment (loan periods) beginning on or after 7/1/2012

Savings of $2B in 2012-13 and $29B over next 10 years

Rationale: Subsidies are not well-targeted Subsidies don’t encourage enrollment

Termination of Direct Loan Borrower Repayment Incentives

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The Big Deal

$2.1t Increase in Debt Ceiling – in 3 stages» $400b immediate increase» Congress can disapprove 2 future increases» President can veto disapproval» Congress must vote on balanced budget amendment

$917b in Cuts Over 10 years (No Tax-Related Measures) Provides $17b to Fill Most of Pell Shortfall

» Eliminates interest subsidy on graduate Stafford Loans» Eliminates repayment incentives for Direct Loans (except auto-

debit)» Both effective for new loans as of 7/1/2012

Goal is to identify $1.5t More in Budget Savings Over 9 Years» Cuts to be developed by Congressional Joint Select Committee

on Deficit Reduction (the “Super Committee”) U.S. Credit Rating Downgraded

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Debt Ceiling and the Super Committee – Deficit Reduction Package Stage One: Nearly $1 trillion in deficit

reduction; $900 billion debt ceiling increase

Stage Two: Joint Committee tasked with legislating $1.5 trillion in deficit reduction, paired with additional debt ceiling increase

If the Committee fails to report legislation that achieves $1.2 trillion in deficit reduction or Congress fails to enact recommendations, sequestration is triggered

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The SUPER Committee Statutory Timeline:

» November 23 – majority vote of committee to approve recommendations

» December 23 – House & Senate must vote» January 15 – enactment deadline

All Programs and Revenues Can Be Included

Could Student Aid be Impacted?» Discretionary spending likely to be cut» Interest subsidies “on the table”

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Senator Coburn (R-OK) “Back in the Black”

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Department of Education - $409.10B savings

“Prevents the Department of Education from becoming one of the world’s largest banks by getting bureaucrats out of the student loan business.”

“Saves much needed room on the federal balance sheets by shifting the student loan program exclusively to the private sector where it belongs.”

FFY 2012 Budget FFY 2012: October 1, 2011 –

September 30, 2012 12 Appropriations Bills Needed – none

passed by the Sept. 30, 2011deadline Continuing Resolution (CR) through

November 18, 2011 (first minibus likely to include CR extension into December)

More changes to student loans to help fund Pell? House – Limit Pell lifetime eligibility? Senate – Eliminate grace period subsidy?

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Proposed Eligibility & Need Analysis Changes

» Revoke Pell eligibility for less than half-time students (-$140 m)

» Reduce lifetime eligibility to 6 years (-$679m)» Eliminate Ability to Benefit option » Reduce student income protection allowances (IPA) to

about the 2009-10 IPA level; parent IPAs unaffected (-$2.1b)

» Reduce automatic zero EFC from $31,000 to $15,000 (-$352m)

» Eliminate Pell awards to students whose EFC would result in an award less than 10 percent of the maximum (-$46 m)

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Proposed Eligibility & Need Analysis Changes – cont’d

» Reinstate previously excluded forms of untaxed income (-$1.1b)◦ The amount of additional tax credits claimed for tax purposes ◦ Welfare benefits ◦ Earned income credit claimed for tax purposes ◦ Credit from tax paid on special fuels ◦ Untaxed social security benefits ◦ Foreign income exclusion

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Is Pell the Ultimate Survivor? Does Pell Really Have Permanent

Immunity? Will the Shortfall Ever Be Filled? What Programs or Benefits Will Be

Kicked Off the Island? How Would You Vote at Tribal Council?

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Restructuring the Perkins Loan Program Similar language to last year’s

proposal Lower cost alternative to private loans Unsubsidized, 6.8% fixed interest rate Loan funds increase from $1B to $8.5B Savings of $4.5B over 10 years per

CBO but $3.8B cost under Fair-Value Scoring discrepancies – “Fair-Value”

versus “Federal Credit Reform Act”22

Other Education Issues

For-Profit Schools Gainful Employment 90/10 Rule Proportion of Pell Grant funds received Influence of hedge funds? Additional Senate hearings

Regulatory Burden Reauthorization of No Child Left Behind

Could include voc-tech program changes College Completion July 2012 interest rate increase 2012 Negotiated Rulemaking

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Not-For-Profit (NFP) Servicers

“As our federally-owned loan portfolio continues to grow, we are ready to move to the next step in ensuring an efficient and effective multi-servicer, borrower centric approach to servicing”.

ED anticipates the award of 15 new federal loan servicing contracts from October 2011 through January 2013

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Guarantor Voluntary Flexible Agreements (VFAs)

24 GAs submitted 22 VFA proposals ED’s goal: enhance the integrity and

stability of the FFEL program, improve services to students, schools and lenders and use Federal resources more cost-effectively and efficiently

Must be budget neutral in the aggregate

Providing services to all borrowers regardless of the loan program? 25

FISMA

“Each federal agency shall develop, document, and implement an agency-wide information security program to provide information security for the information and information systems that support the operations and assets of the agency, including those provided or managed by another agency, contractor, or other source…”

--Federal Information Security Management Act of 2002

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Other Issues on the Horizon

3-Year Cohort Default Rate 2012 & 2013: both 2-year and 3-year rates

calculated -- sanctions based only on 2-year rate

2014: sanctions based on 3-year CDR begin Perkins Loans

Will the program expire? Will revolving funds be recalled? Will ED’s proposal to create “Direct Perkins

Loans” be re-tooled?

Cohort Default Rates

FY 2009 rate increased from 7.0% to 8.8%

Rates highlight the need for continued federal investment in default prevention and debt management services that are provided by the nation’s guaranty agencies and not-for-profit student loan organizations

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Presenter Name(s)

17.2

21.4

22.4

17.8

15

11.610.7

10.49.6

8.8

6.9

5.6 5.95.4 5.2

4.55.1 4.6 5.2

6.7 7.0

8.8

0

5

10

15

20

25

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

National Student Loan Cohort Default Rates

Per

cen

tage

30

402

642

433

330

236

138

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11 6 4 0 1 0 0 01 2 5

50

100

200

300

400

500

600

700

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Issued date

Schools Subject to Sanctions

The school numbers are pre-appeal and include only schools impacted by the three years of 25% or greater sanction. A school can be on extended sanction and is therefore reflected in multiple year counts.

Nu

mbe

r of

Sch

ools

5Sanctions

Cohort Default Rate Issues

Increases Across All Sectors» Public: 6.0% to 7.2%» Private: 4.0% to 4.6%» Proprietary: 11.6% to 15.0%

3-Year CDR is Coming» 10-25% increases expected over two-year

rates DL rates likely to catch up to FFELP

rates

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Why Are Default Rates Climbing?

It’s the Economy Stupid!» Unemployment rate for college grads is 13%» Starting salaries ain’t what they used to be» Competition for entry level jobs from

unemployed professionals» Student loan debt outpacing credit card debt» College costs continue to rise while grant aid

fails to keep pace

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“Help Americans Manage Student Loan Debt” Plan “Special” Direct Loan Consolidation –

available for six months beginning January 2012

“Pay As You Earn” program – an acceleration of the enhanced IBR changes from SAFRA (subject to negotiated rulemaking)

President Obama plans to use his executive authority to launch these initiatives

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Private Loans – Growth and Access

FFY 00

FFY 01

FFY 02

FFY 03

FFY 04

FFY 05

FFY 06

FFY 07

FFY 08

FFY 09

FFY 10

0

5

10

15

20

25

In Billions

Source: College Board 34

Private Loan Issues Percentage of students borrowing from

private lenders increased three-fold in four years

Students at for-profit institutions comprise the largest share of private loan borrowers

Among undergraduates who took out private loans, 12% did not apply for federal financial aid and another 11% applied for aid but did not obtain a Stafford loan Source: NCES Report October 2011

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Financial Regulatory Reform Bill

• “Create a Sound Economic Foundation to Grow Jobs, Protect Consumers, Rein in Wall Street, End Too Big to Fail, Prevent Another Financial Crisis”

• Will affect virtually every financial institution in the country

• Created a new Bureau of Consumer Financial Protection with regulatory authority over nearly every type of consumer credit including private student loans

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“Know Before You Owe”

Model Financial Aid Offer Forms – ED works with Consumer Financial Protection Bureau (CFPB)

CFPB unveils model disclosures for student loans

CFPB asks the public to rank the items in terms of usefulness

ED will eventually publish a form that schools can use to provide information to students 37

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Challenges and Opportunities The economy and jobs Rising students’ indebtedness and Pell

shortfalls Local (private sector) services needed

by students, borrowers and schools – who will pay for them

Impact of the Gainful Employment requirements

Other issues 2012 Negotiated Rulemaking

Make Some Noise! Remember, Student Aid Funding is Competing

Against Other Programs» Some of which may be important on campus – e.g.,

medical & scientific research» Some of which are domestic and defense priorities

Cannibalizing of Student Aid Programs has Begun Make friends before you need them! Is it Time to Identify Unpleasant Priorities

» How far to go to preserve $5,550 Pell?» Contain the damage

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Thank You!

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