Market-based determination of lender returns

(a)

Joint planning study To select auction mechanisms for testing

(1)

Planning study

The Secretaries of Education and Treasury jointly shall conduct a planning study, in consultation with the Office of Management and Budget, the Congressional Budget Office, the Government Accountability Office, and other individuals and entities the Secretaries determine appropriate, to— (A)examine the matters described in paragraph (2) in order to determine which market-based mechanisms for determining lender returns on loans made, insured, or guaranteed under part B of title IV of the Higher Education Act of 1965 (20 U.S.C. 1071 et seq.) shall be tested under the pilot programs described in subsection (c); and (B)determine what related administrative and other changes will be required in order to ensure that high-quality services are provided under a successful implementation of market-based determinations of lender returns for all loans made, insured, or guaranteed under such part. (2)

Matters examined

The planning study under this subsection shall examine— (A)whether it is most appropriate to auction existing loans under part B of title IV, to auction the rights to originate loans under such part, or whether the sale of securities backed by federally owned student loan assets originated by banks acting as agents of the Federal Government would provide the most efficient market-based alternative; (B)matters related to efficient financial organization of any auctions or sales, including how loans and origination rights are bundled, the capital structure of any securitization plan, and issues related to servicing; and (C)how to ensure that statutory, regulatory, and administrative requirements do not impede separate management and ownership of loans or assets backed by loans under part B of title IV. (3)

Mechanisms

In determining which market-based mechanisms are the most promising models to test the pilot programs under subsection (b), the planning study shall take into account whether a particular market-based mechanism will— (A)ensure loan availability under part B of title IV to all eligible students at all participating institutions; (B)minimize administrative complexity for borrowers, institutions, lenders, and the Federal Government; and (C)reduce Federal costs if used on a program-wide basis. (4)

Report

A report on the results of the planning study, together with a plan for implementation of one or more pilot programs using promising market-based approaches for determining lender returns, shall be transmitted to Congress not later than 6 months following the date of enactment of this Act. (5)

Exclusion

In conducting the planning study, and proposing pilot programs for testing under this section, the Secretaries of Education and the Treasury shall exclude from consideration the Federal PLUS loans described in section 428B that are the subject of the competitive loan auction pilot program under section 499 of the Higher Education Act of 1965 (as added by section 701 of the College Cost Reduction and Access Act). (b)

Pilot programs To be tested

(1)

Authorization

(A)

In general

Notwithstanding any other provision of law, after the report described in subsection (a)(4) is transmitted to Congress, the Secretary of Education shall, in consultation with the Secretary of the Treasury, begin preparations necessary to carry out pilot programs meeting the requirements of this subsection in accordance with the implementation plan included in the report. (B)

Implementation date

The Secretary of Education shall commence implementation of the pilot programs under this subsection not earlier than July 1, 2009. (C)

Duration and loan volume

The pilot programs under this subsection shall be not more than two academic years in duration, and the Secretary of Education may use the pilot programs to determine the lender returns for not more than— (i)10 percent of the annual loan volume under this part B of title IV during the first year of the pilot programs under this subsection; and (ii)20 percent of the annual loan volume under this part B of title IV during the second year of the pilot programs under this subsection. (2)

Voluntary participation

(A)Participation in any auction-based pilot program under this subsection shall be voluntary for eligible institutions and eligible lenders participating under part B of title IV prior to July 1, 2006. (B)All savings to the United States Treasury generated by such auctions shall be distributed to institutions participating under this section on a basis proportionate to loan volume under such part for supplemental, need-based financial aid, except that an institution that is operating as an eligible lender under section 435(d)(2) shall not be eligible for any such distribution. (3)

Independent evaluation

The Government Accountability Office shall conduct an independent evaluation of the pilot programs conducted under this section and under section 499 of the Higher Education Act of 1965 (as added by section 701 of the College Cost Reduction and Access Act). Such evaluation shall be completed, and the results of such submitted to the Secretary of Education, the Secretary of the Treasury, and Congress, not later than 120 days after the termination of the pilot programs under this subsection. (c)

Program-wide implementation

Notwithstanding any other provision of part B of title IV, for the first academic year beginning not less than 120 days after the independent evaluation described in subsection (b)(3) has been transmitted to Congress, and succeeding academic years, the Secretary of Education is authorized to implement for all loans made under such part (other than loans made under the William D. Ford Direct Loan Program), a program-wide, market-based system to determine returns to all lenders as the Secretary of Education determines appropriate, provided that— (1)the Secretary of Education, in consultation with the Secretary of the Treasury, has certified that the auction-based system that the Secretary of Education intends to implement on a program-wide basis would— (A)ensure loan availability under such part to all eligible students at all participating institutions; (B)minimize administrative complexity for borrowers, institutions, lenders, and the Federal Government, including the enhancement of the modernization of the student financial aid system; and (C)reduce Federal costs when used on a program-wide basis; and (2)the Secretary of Education has notified Congress of the Secretary’s intent to implement a program-wide auction-based system, and provided a description of the structure of the auction-based system, at least 120 days before implementing such a system. (d)

Consultation

(1)

In general

As part of the planning study, pilot programs, and program-wide implementation phases described in this section, the Secretary of Education shall consult with representatives of investment banks, ratings agencies, lenders, institutions of higher education and students, as well as individuals or other entities with pertinent technical expertise. The Secretary of Education shall engage in such consultations using such methods as, and to the extent that, the Secretary determines appropriate to the time constraints associated with the study and programs. (2)

Services of other federal agencies

In carrying out the planning study and pilot programs described in this section, the Secretary of Education may use, on a reimbursable basis, the services (including procurement authorities and services), equipment, personnel, and facilities of other agencies and instrumentalities of the Federal Government.