[House Report 104-775]
[From the U.S. Government Publishing Office]



                                                                       
104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2d Session                                                     104-775
_______________________________________________________________________


 
                   STUDENT DEBT REDUCTION ACT OF 1996
_______________________________________________________________________


 September 5, 1996.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

     Mr. Goodling, from the Committee on Economic and Educational 
                 Opportunities, submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 3863]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Economic and Educational Opportunities, to 
whom was referred the bill (H.R. 3863) to amend the Higher 
Education Act of 1965 to permit lenders under the unsubsidized 
Federal Family Education Loan program to pay origination fees 
on behalf of borrowers, having considered the same, report 
favorably thereon with amendments and recommend that the bill 
as amended do pass.
  The amendments (stated in terms of the page and line numbers 
of the introduced bill) are as follows:
  Page 2, line 11, insert after ``fee'' the following: ``, 
provided that the lender assesses the same fee to all student 
borrowers''.
  Page 2, line 15, strike ``Section 428H'' and insert ``Section 
428H(f)''.
  Page 2, line 19, strike ``and'' at the end.
  Page 2, line 23, strike the period and insert ``; and''.
  Page 2, after line 23, insert the following new paragraph:

          (3) by adding at the end the following new paragraph:

          ``(6) Exception.--Notwithstanding paragraph (1), a 
        lender may assess a lesser origination fee for a 
        borrower demonstrating greater financial need as 
        determined by such borrower's adjusted gross family 
        income.''.

  Page 2, after line 23, insert the following new subsection:

  (c) Report on Competitive Allocation.--Within 60 days after 
the date of enactment of this Act, the Secretary of Education 
shall submit to each House of the Congress a legislative 
proposal that would permit the Secretary to allocate the right 
to make subsidized and unsubsidized student loans on the basis 
of competitive bidding. Such proposal shall include provision 
to ensure that any payments received from such competitive 
bidding are equally allocated to deficit reduction and to pro 
rata reduction of origination fees in both guaranteed and 
direct student loans.

  Page 2, after line 23, insert the following new section:

SEC. 3. STUDY OF LOAN FEES.

  (a) Study Required.--The Secretary of Education shall conduct 
a statistical analysis of the subsidized and unsubsidized 
student loan programs under part B of title IV of the Higher 
Education Act of 1965 to gather data on lenders' use of loan 
fees and to determine if there are any anomalies that would 
indicate any institutional, programmatic or socioeconomic 
discrimination in the assessing or waiving such fees.
  (b) Report.--The Secretary of Education shall submit to each 
House of the Congress a report on the study required by 
subsection (a) within 2 years after the date of enactment of 
this Act.
  (c) Statistical Characteristics To Be Studied.--In conducting 
the study required by subsection (a), the Secretary of 
Education shall compare recipients of loans on the basis of 
income, residence location, type and location of higher 
education, program of instruction and type of lender.

                                Purpose

    The purpose of H.R. 3863 is to amend the Higher Education 
Act of 1965 by permitting persons other than the student 
borrower to pay the student loan origination fees on behalf of 
the student borrower under the Federal Family Education Loan 
Program

                           Legislative Action

    H.R. 3863 was introduced on July 22, 1996 by Mr. Goodling. 
On August 1, 1996, the Committee on Economic and Educational 
Opportunities assembled to consider H.R. 3863. Amendments to 
the bill were adopted, and the Committee adopted the bill as 
amended. H.R. 3863, as amended, was favorably reported by the 
Committee on Economic and Educational Opportunities on August 
1, 1996, by a recorded vote of 34-0.

          Background and Need for Legislation/Committee Views

    H.R. 3863 allows persons other than the student borrower 
and lenders participating in the Federal Family Education Loan 
Program to pay origination fees on behalf of students who 
borrow unsubsidized Stafford student loans. This type of 
financial relief is already permitted in the subsidized 
Stafford Loan Program under which the majority of students in 
the country borrow student loan funds. This bill is a simple 
technical fix which may help lower costs for some students.
    On July 23, 1992, the 1992 Amendments to the Higher 
Education Act were signed into law. The Amendments created a 
new Unsubsidized Stafford Loan Program designed to expand 
access to student loans to middle class families. Prior to the 
1992 Amendments, access to Stafford Loans was based on 
financial need. With the creation of the Unsubsidized Stafford 
Loan Program, eligible students were able to receive loans 
without regard to their financial need. The new Unsubsidized 
Stafford Loan Program closely mirrored the existing Stafford 
Loan Program, except that the Federal Government would not be 
paying interest benefits on these new loans.
    In a May 1996 letter to Congress, Secretary Riley advised 
that the Department of Education had interpreted the 
origination fee provisions found in section 428H dealing with 
unsubsidized Stafford loans and section 438 dealing with 
subsidized Stafford loans differently. Indeed, the provisions 
are worded differently. However, in both cases, the origination 
fee is equal to 3% of the loan amount. In both cases, the total 
3% must be remitted to the Federal Government by the lender. It 
is the Department's interpretation of the words ``shall charge 
the borrower'' that has brought about the need for this 
legislation. These words have been interpreted by the 
Department to mean that in the case of unsubsidized loans, only 
the borrower may pay the fee even if someone else wishes to pay 
the fee on his or her behalf.
    The Committee does not believe Congress ever intended such 
a distinction between these two programs. There was no reason 
to treat these students differently when it came to the payment 
of origination fees and there still isn't. Origination fees 
were adopted to help offset program costs. Who pays them does 
not make any difference to the Federal Government, as long as 
the fees continue to be paid.
    The savings to an individual student may be the full 
origination fee which is 3% of the loan amount. In that case, a 
first year independent undergraduate student only eligible for 
an unsubsidized loan of $6,625 receives an up front fee 
reduction of $198.75. If this student borrows the maximum 
allowed for unsubsidized loans over four years under current 
borrowing limits and receives a 3% reduction in up front fees, 
he or she will have an extra $1,053.75 to use in meeting his or 
her educational expenses.
    A concern about the potential for discrimination among 
students and schools was raised during the Committee's 
consideration of the bill. The Committee notes that lenders 
have been permitted to pay fees on behalf of students who 
borrow subsidized loans and reduce interest rates for 
subsidized and unsubsidized loan borrowers since 1980 with no 
reports of discrimination coming to this Committee. In fact, 
during the discussion of this issue, no examples of 
discriminatory behavior on the part of lenders were reported. 
However, in order to address this concern, the Committee agreed 
to explicitly prohibit discrimination. The Committee adopted an 
amendment which requires a lender to offer the same reduction 
in unsubsidized student loan origination fees to all borrowers, 
except that, lenders may offer greater reductions to those 
students having the greatest financial need.
    As part of the discussion with respect to the potential for 
discrimination, the Committee also adopted an amendment which 
requires the Secretary of Education to study the use of fee 
waivers or discounts. The study is to compare recipients of fee 
waivers on the basis of income, residence location, type and 
location of institution of higher education, program of 
instruction and type of lender.
    The Committee also adopted an amendment which requires the 
Secretary of Education to submit a legislative proposal 
permitting the Secretary to allocate the right to make loans on 
the basis of competitive bidding. The proposal is to include a 
provision which ensures that payments received as a result of 
the competitive bidding are equally allocated to deficit 
reduction and to pro rata reduction of origination fees for all 
students.

                                Summary

    H.R. 3863, a bill amending the Higher Education Act of 
1965, allows lenders in the student loan program to pay 
origination fees charged to students who obtain unsubsidized 
Stafford loans. Currently, lenders are allowed to pay the 
origination fees charged a student at the time a student 
obtains a subsidized student loan (one where the Federal 
Government pays the interest on the student's behalf while in 
school). However, lenders are prohibited from paying such fees 
on behalf of a student who obtains an unsubsidized student loan 
(one where the student is responsible for all of the interest). 
The bill conforms the subsidized and unsubsidized loan 
programs; has no cost to the Federal Government; and increases 
competition in the student loan program which may lower costs 
for students.

                           Section-by-Section

    Section 1 contains the short title, the ``Student Debt 
Reduction Act of 1996.''
    Section 2(a) amends paragraph (1) of section 428H(f) of the 
Higher Education Act of 1965 to require that an origination fee 
of 3% of the principal amount of each loan be paid to the 
Secretary. Lenders are authorized to charge the borrower for 
such fee, provided that the same fee is assessed to all 
borrowers.
    Section 2(b) makes conforming amendments and adds a new 
paragraph (6) to 428(H)(f) which allows lenders to assess a 
lesser origination fee to borrowers with greater financial need 
based on adjusted gross family income.
    Section 2(c) requires the Secretary of Education to submit 
a proposal to Congress that would permit the Secretary to 
allocate the right to make student loans based on a competitive 
bid.
    Section 3 requires the Secretary of Education to conduct a 
study of the Part B loan programs in order to determine if 
lenders discriminate in waiving fees based on institutional, 
programmatic or socioeconomic grounds.

                       Explanation of Amendments

    The amendments adopted in Committee are explained in this 
report.

                  Oversight Findings of the Committee

    In compliance with clause 2(l)(3)(A) of rule XI of the 
Rules of the House of Representatives and clause 2(b)(1) of 
rule X of the Rules of the House of Representatives, the 
Committee's oversight findings and recommendations are 
reflected in the body of this report.

                     Inflationary Impact Statement

    In compliance with clause 2(l)(4) of rule XI of the Rules 
of the House of Representatives, the Committee estimates that 
the enactment into law of H.R. 3863 will have no significant 
inflationary impact on prices and costs in the operation of the 
national economy. It is the judgment of the Committee that the 
inflationary impact of this legislation as a component of the 
federal budget is negligible.

                    Government Reform and Oversight

    With respect to the requirement of clause 2(l)(3)(D) of 
rule XI of the Rules of the House of Representatives, the 
Committee has received no report of oversight findings and 
recommendations form the Committee on Government Reform and 
Oversight on the subject of H.R. 3863.

                           Committee Estimate

    Clause 7 of rule XIII of the Rules of the House of 
Representatives requires an estimate and a comparison by the 
Committee of the costs which would be incurred in carrying out 
H.R. 3863. However, clause 7(d) of that rule provides that this 
requirement does not apply when the Committee has included in 
its report a timely submitted cost estimate of the bill 
prepared by the Director of the Congressional Budget Office 
under section 403 of the Congressional Budget Act of 1974.

                Application of Law to Legislative Branch

    Section 102(b)(3) of Public Law 104-1 requires a 
description of the application of this bill to the legislative 
branch. This bill amends the Higher Education Act of 1965 by 
permitting persons other than the student borrower to pay the 
student loan origination fees on behalf of the student borrower 
under the Federal Family Education Loan Program. The bill does 
not prohibit legislative branch employees from otherwise being 
eligible for such benefits.

                       Unfunded Mandate Statement

    Section 423 of the Congressional Budget & Impoundment 
Control Act requires a statement of whether the provisions of 
the reported bill include unfunded mandates; the bill permits 
persons other than the student borrower to pay the student loan 
origination fees on behalf of the student borrower under the 
Federal Family Education Loan Program and as such does not 
contain any unfunded mandates. The Committee also received a 
letter regarding unfunded mandates from the Director of the 
Congressional Budget Office. See infra.

     Budget Authority and Congressional Budget Office Cost Estimate

    With respect to the requirement of clause 2(l)(3)(B) of 
rule XI of the House of Representatives and section 308(a) of 
the Congressional Budget Act of 1974 and with respect to 
requirements of clause 2(l)(3)(C) of rule XI of the House of 
Representatives and section 403 of the Congressional Budget Act 
of 1974, the Committee has received the following cost estimate 
for H.R. 3863 from the Director of the Congressional Budget 
Office:

                                     U.S. Congress,
                               Congressional Budget Office,
                                   Washington, DC, August 23, 1996.
Hon. William F. Goodling,
Chairman, Committee on Economic and Educational Opportunities, House of 
        Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office (CBO) 
has reviewed H.R. 3863, the Student Debt Reduction Act of 1996. 
The bill was ordered reported by the Committee on Economic and 
Educational Opportunities on August 1, 1996. This bill would 
allow private lenders participating in the unsubsidized 
guaranteed student loan program the option of paying the 
government the 3 percent borrower origination fee on behalf of 
the student. H.R. 3863 also would direct the Secretary of 
Education to conduct a study on the use of this authority by 
the private lenders. In addition, the bill would direct the 
Secretary of Education to submit to the Congress a legislative 
proposal to permit the federal government to make subsidized 
and unsubsidized student loans based on competitive bidding.
    Giving private lenders the authority to assume the cost of 
the borrower origination fees would have no effect on the 
overall federal budget. The fee would still be collected by the 
federal government. This authority already exists for lenders 
participating in the much larger subsidized guaranteed student 
loan program. The cost of the studies to be conducted by the 
Department of Education would be negligible. Enactment of H.R. 
3863 would not affect direct spending or receipts, and thus, 
pay-as-you-go procedures would not apply.
    H.R. 3863 contains no private-sector or intergovernmental 
mandates as defined in the Unfunded Mandates Reform Act of 1995 
(Public Law 104-4) and would not affect the budgets of state, 
local, or tribal governments.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Deborah 
Kalcevic.
            Sincerely,
                                         June E. O'Neill, Director.

                             Rollcall Votes

    The Committee defeated an amendment (15 ayes to 18 noes) 
offered by Mr. Andrews to eliminate the insurance premium 
provided for in the Federal Family Education Loan Program; 
reduce the fees charged to borrowers of direct loans from 4% to 
3%; increase the lender paid origination fee in the Federal 
Family Education Loan Program from .5% to 1.5% of the loan 
amount; and return reserve funds from guaranty agencies in the 
Federal Family Education Loan Program in the amount of $39 
million each year for Fiscal Years 1997 through 2002.
    The Committee favorably reported the bill by a vote of 34 
to 0.





                             Correspondence

                                  House of Representatives,
                                 Washington, DC, September 4, 1996.
Chairman William Goodling,
House Committee on Economic and Educational Opportunities, 2175 Rayburn 
        House Office Building, Washington, DC.
    Dear Chairman Goodling: Due to legislative duties, I was 
unable to vote on amendments to H.R. 3863. Had I been present, 
I would have voted no to the amendment offered by Mr. Andrews 
regarding the elimination of the 1 percent insurance fee, and I 
would have voted yes on the motion to report the bill favorably 
to the House of Representatives.
    I appreciate your time and attention to this matter.
            Sincerely,
                                David McIntosh, Member of Congress.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3 of rule XIII of the Rules of the 
House of Representatives, changes in existing law made by the 
bill, as reported, are shown as follows (existing law proposed 
to be omitted is enclosed in black brackets, new matter is 
printed in italic, existing law in which no change is proposed 
is shown in roman):

            SECTION 428H OF THE HIGHER EDUCATION ACT OF 1965

SEC. 428H. UNSUBSIDIZED STAFFORD LOANS FOR MIDDLE-INCOME BORROWERS.

  (a) * * *
          * * * * * * *
  (f) Origination Fee.--
          [(1) Amount of origination fee.--The lender shall 
        charge the borrower an origination fee in the amount of 
        3.0 percent of the principal amount of the loan, to be 
        deducted proportionately from each installment payment 
        of the proceeds of the loan prior to payment to the 
        borrower.]
          (1) Amount of origination fee.--Except as provided in 
        paragraph (5), an origination fee shall be paid to the 
        Secretary with respect to each loan under this section 
        in the amount of 3.0 percent of the principal amount of 
        the loan. Each lender under this section is authorized 
        to charge the borrower for such origination fee, 
        provided that the lender assesses the same fee to all 
        student borrowers. Any such fee charged to the borrower 
        shall be deducted proportionately from each installment 
        payment of the proceeds of the loan prior to payment to 
        the borrower.
          * * * * * * *
          (3) Disclosure required.--The lender shall disclose 
        to the borrower the amount and method of calculating 
        [the origination fee] any origination fee that is 
        charged to the borrower.
          (4) Use of origination fee to offset default costs.--
        Each lender making loans under this section shall 
        transmit all [origination fees authorized to be 
        collected from borrowers] origination fees required 
        under paragraph (1) to the Secretary, who shall use 
        such fees to pay the Federal costs of default claims 
        paid for loans under this section and to reduce the 
        cost of special allowances paid thereon, if any, under 
        section 438(b).
          * * * * * * *
          (6) Exception.--Notwithstanding paragraph (1), a 
        lender may assess a lesser origination fee for a 
        borrower demonstrating greater financial need as 
        determined by such borrower's adjusted gross family 
        income.
          * * * * * * *
          ADDITIONAL VIEWS OF REPRESENTATIVE ROBERT E. ANDREWS

    I share the laudable goal of H.R. 3863, to reduce the costs 
to students of borrowing for educational expenses, and I 
applaud the Committee for its efforts to achieve this goal by 
cutting student loan fees. I would note that student loan 
origination fees were initially intended as a temporary 
measure, and it is high time that we repeal this tax on 
borrowing for all students. However, this legislation remains 
flawed, because it will create an unpredictable and unequal 
student loan system, in which some students will see their loan 
fees cut, while other students will receive no benefit.
    As originally written, H.R. 3863 would have given lenders 
the discretion to pay loan origination fees for some borrowers 
but not others. In all likelihood, the lenders would waive the 
fee for the most affluent students, who are better lending 
risks, in order to attract their business. Thus, the most needy 
students would have been required to pay more to participate in 
the same lending programs as affluent students. The bill also 
would have created incentives for lenders to pay the fee for 
students who are perceived as better lending risks. As a 
result, certain institutions would have a competitive advantage 
over others. This would have forced smaller lenders out of 
business, and might have led to less access to loans for needy 
students.
    To address these concerns about potential discrimination 
among students and schools, I offered an amendment, which I am 
pleased that the Committee adopted, to prevent this possible 
unintended consequence of H.R. 3863. My amendment makes clear 
that lenders cannot vary the fee that they charge to student 
borrowers based on their credit risk. Additionally, my 
amendment gives the lender some discretion to further cut the 
origination fee for some student borrowers if they, in fact, 
show a greater need. Lenders, thus, are prohibited from 
discriminating against lower-income students and are empowered 
to offer them further assistance at their discretion.
    Unfortunately, the bill as currently written would permit 
lenders to pay origination fees for some students, but would 
not provide the same opportunity for cost savings to students 
who receive loans under the Direct Loan program. The result 
will be discrimination among students based on the program from 
which they receive their student loans.
    Students, colleges and universities, and the taxpayers are 
best served if there is free, open competition and choice. 
Competition means that students and families can evaluate all 
the different loan options available to them and make the 
choice that is best for them. To ensure free competition in the 
student loan arena, the basic ground rules should be equal for 
all kinds of loans.
    Loan fee cuts must be applied equitably to benefit all 
students, whether their institution participates in the Federal 
Family Education Program (FFEL), the Direct Loan Program, or 
both. It is important to keep terms and conditions as nearly 
the same as possible, both to provide a level playing field so 
that students and institutions continue to benefit from the 
healthy competition that currently exists between the two 
programs, and to ensure that students in equivalent financial 
situations are treated equally. Not only should we reduce the 
fees on the bank- and guaranty agency-based unsubsidized loans, 
we should also extend that fee reduction to students who 
receive Direct Loans.
    If it is a good idea to reduce these fees for students who 
borrow from banks or from guaranty agencies, then it is an 
equally good idea to extend that same opportunity to all 
students who would borrow from the Direct Student Loan Program. 
This Committee has the opportunity to provide relief to all 
students, regardless of where they get their loan, while 
achieving our goal of a balanced federal budget.
    Cutting fees will help students who are faced with rising 
college costs and declining federal aid. Over the past 15 years 
(1980-95) tuition at private four-year higher education 
institutions has increased 89% and at public four-year 
institutions by 98%. In the same period of time, median family 
income has increased by 5% and student financial aid per 
student has increased by 37%. Clearly the ability of students 
and their families to pay for higher education has diminished 
significantly. Student financial aid has clearly not kept pace 
with rising costs. In the mid-1970's about 76% of the financial 
aid which students received from Federal programs was grants 
and 21% was loans. In the mid-1990's the proportions have been 
reversed, with 26% of the Federal student aid in grants and 72% 
in loans.
    Another problem with H.R. 3863 is that guaranty agencies 
could take the so-called excess reserves accumulated from 
students who have already borrowed money, draw down those 
excess reserves in order to help finance this cut in the fees, 
and, in effect, use the money paid by a student five years ago 
under a fee to help reduce the fee for a student who borrows 
next year. Banks would not have that same opportunity to get 
capital at basically no cost, nor would the federal government. 
In order to level that playing field, we should cut loan fees 
for all students, whether they borrow from a guaranty agency, a 
bank, or the federal government through Direct Lending.
    To pay for fee reductions for all students, regardless of 
where they get their loan, we should apply savings already 
identified in the budget process but not yet used: recovery of 
these excess guaranty agency reserve funds and an increase in 
the lender loan fee. We have already concluded in our budget 
process that lenders and guaranty agencies are in a better 
position to bear these costs than students are.
    In summary, under H.R. 3863 students who take out an 
unsubsidized loan from a guaranty agency or a bank get a fee 
cut, which will lower their cost of borrowing for school. Yet 
their next-door neighbors on campus, with the same family 
income and the same tuition, who happen to receive their loan 
through the Direct Loan program, are not offered the same 
savings. This inequity makes no sense, and it is a serious flaw 
in the legislation.

                                                 Robert E. Andrews.

                                
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