[Senate Report 105-122]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 235
105th Congress                                                   Report
                                 SENATE

 1st Session                                                    105-122
_______________________________________________________________________


 
            EMERGENCY STUDENT LOAN CONSOLIDATION ACT OF 1997

                                _______
                                

                October 29, 1997.--Ordered to be printed

_______________________________________________________________________


    Mr. Jeffords, from the Committee on Labor and Human Resources, 
                        submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 1294]

    The Committee on Labor and Human Resources, to which was 
referred the bill (S. 1294) to amend the Higher Education Act 
of 1965 to allow the consolidation of student loans under the 
Federal Family Education Loan Program and the Direct Loan 
Program, having considered the same, reports favorably thereon 
with an amendment in the nature of a substitute and recommends 
that the bill (as amended) do pass.


                                CONTENTS
                                                                   Page
  I. Introduction.....................................................1
 II. Purpose and summary of the bill..................................3
III. Background and need for legislation..............................4
 IV. Legislative history and committee action.........................5
  V. Committee views..................................................5
 VI. Cost estimate....................................................8
VII. Application of law to the legislative branch....................11
VIII.Regulatory impact statement.....................................11

 IX. Section-by-section analysis.....................................11
  X. Additional views................................................13
 XI. Changes in existing law.........................................14


                            I. Introduction

    One of the most pressing challenges facing American 
families is the cost of paying for higher education. The 
benefits of higher education are strikingly clear. Recent 
research indicates that individuals with a bachelor's degree 
earn more than one and a half times as much as a person with a 
high school diploma. But this is not the end of the story. In 
1996, the unemployment rate for high school graduates was 4.7 
percent. The unemployment rate for college graduates was 2.4 
percent. These rates declined further with each additional 
level of education.
    The College Board reports, however, that tuition at 4-year 
private institutions has risen by 89 percent over the past 
fifteen years while median family income has risen by only 5 
percent. Students are responding by borrowing at record 
levels--in fact, student borrowing under Title IV since 1990 
exceeds student borrowing in the 1960's, 1970's and 1980's 
combined. Between 1993 and 1995, graduate and professional 
student borrowing increased by over 74 percent.

                       student loan consolidation

    In order to ease the burden of repaying these debts, 
Congress created the student loan consolidation program. This 
program allows students to consolidate their student loans into 
a single loan that has a variety of repayment options that can 
reduce monthly payments, improve monthly cash flow, allow 
borrowers to pursue lower paying careers, or accommodate 
temporary financial setbacks. In many instances, the reduction 
in the payments possible under a consolidated loan allows 
borrowers to qualify for other credit such as home mortgages.
    Current law allows students to consolidate all of their 
Federal Direct Loan Program (FDLP) loans and their Federal 
Family Education Loan Program (FFELP) loans into a Federal 
Direct Loan Program consolidation loan administered by the 
Department of Education. A student may consolidate his or her 
FFELP loans into a FFELP consolidation loan but may not 
consolidate his or her direct loans into the FFELP Program. As 
a result, borrowers who wish to consolidate both FDLP loans and 
FFELP loans into a single loan must go to the Department of 
Education's Direct Loan Consolidation Program. On August 26, 
1997, the Department of Education announced that it had 
accumulated a backlog of 84,000 applications and that no new 
applications would be accepted until this backlog was 
eliminated.

            hope tax credit and lifetime learning tax credit

    The Taxpayer Relief Act of 1997 contained educational tax 
credits designed to help students and their families pay for 
the rising cost of higher education. Under current law, the 
need analysis formula will consider students and their parents 
who receive the tax credit as having greater resources to pay 
for college, thereby reducing their eligibility for student 
financial aid. As a result, students and their families will 
find their Federal financial aid reduced and that the amount 
they expended for higher education remained relatively 
unchanged by the educational tax credits. If a change in the 
need analysis formula is not made, approximately 69,000 
individuals will lose as much as $120 million in student 
financial aid.

                  II. Purpose and Summary of the Bill

    The purpose of S. 1294, ``The Emergency Student Loan 
Consolidation Act of 1997'', is to amend the Higher Education 
Act of 1965 to allow, for one year, the immediate consolidation 
of loans made under the Federal Family Education Loan Program 
and the William D. Ford Federal Direct Loan Program by FFELP 
lenders. In addition, the bill amends the Higher Education Act 
to exclude the Hope and Lifelong Learning tax credits from any 
consideration during financial aid need analysis in order to 
allow eligible students and their families to benefit fully 
from both the tax credit and the Federal student aid programs.

                         a. loan consolidation

    On August 25, 1997, the Department of Education announced 
that it had suspended acceptance of new Direct Loan 
consolidation loan applications. At the time of the shutdown, 
the Department had built up a backlog of 84,000 applications 
for loan consolidation. In addition, students whose 
applications were being processed were experiencing delays of 
six months or longer and errors were being made in the payoff 
amounts. The problem is being compounded by the fact that 
approximately 12,000 students are being turned away from the 
program each month while the Department works to correct the 
problems with the program. This legislation will temporarily 
allow students to seek relief by consolidating their Direct 
Loans through the FFELP program.
    The consolidation provision contains language which 
reflects a bipartisan commitment to non-discrimination in the 
student loan programs. Eligible lenders may not discriminate 
against any borrower based upon the number or type of eligible 
student loans the borrower seeks to consolidate, the type of 
institution that the borrower attended, the interest rate that 
is authorized to be collected, or with respect to the types of 
repayment schedules. Lenders may continue to offer programs to 
encourage borrower financial responsibility, but they must 
offer these programs to all borrowers who qualify. Language is 
also included providing eligible lenders time to adjust their 
computer systems to accommodate the change to the new interest 
rate.

          b. hope tax credit and lifetime learning tax credit

    The Taxpayer Relief Act of 1997 contained two educational 
tax credits designed to help students and their families pay 
for the cost of higher education. The need analysis system that 
is currently used to calculate eligibility for Federal student 
financial aid will consider those who receive the credit as 
having greater resources to pay for college and they will be 
eligible for less student aid. The Emergency Student Loan 
Consolidation Act of 1997 would amend the Higher Education Act 
to exclude the tax credit from any consideration in need 
analysis thus allowing eligible students to benefit fully from 
both the tax credit and the Federal student aid programs. Any 
effort to remedy this problem after December 1, 1997, will 
require an offset of approximately $120 million.

                III. Background and Need for Legislation

    On August 10, 1993, the Student Loan Reform Act of 1993, 
contained within the Omnibus Budget Reconciliation Act of 1993 
(P.L. 103-66), amended the Higher Education Act to allow the 
Department of Education to establish a Federal Direct Loan 
consolidation loan program. Section 428C(b)(5) of the Higher 
Education Act required that the Department offer these loans 
only if it had the necessary origination and servicing 
arrangements in place. The Direct Loan consolidation loan 
program, however, has proven difficult to administer.
    In September 1997, Thomas R. Bloom, Inspector General at 
the Department of Education, testified before the House 
Committee on Education and the Workforce regarding the 
circumstances which led to the temporary suspension of student 
loan consolidations under the Federal Direct Loan Program. Mr. 
Bloom testified that in 1995 the Department of Education 
awarded a contract to EDS to develop and operate a new system 
for the origination and consolidation of student loans. He 
stated that problems have been readily apparent with this 
contract since its inception. The contract called for EDS to 
begin consolidating loans on January 15, 1996. EDS failed to 
meet the start-up date and the Department extended the deadline 
to the end of February 1996. EDS failed to meet this new start-
up date and the Department extended the deadline to May 1996. 
When it became clear that EDS would not meet this deadline, the 
Department mandated a change in the management of the contract. 
EDS began consolidating its first student loans on September 
16, 1996.
    On July 3, 1997, the Independent Quality Control Unit set 
up by EDS reported that a guaranty agency had been overpaid by 
$900,000 as a result of a systems error which led to duplicate 
payments being made for loans being consolidated. According to 
the inspector general the Department halted the consolidation 
process for several weeks while this systems problem was 
analyzed and addressed. One month later, Sallie Mae, a 
financial services organization which funds approximately 40 
percent of all insured loans, reported to the Department of 
Education that it was receiving duplicate payments from the 
Department for consolidated loans.
    On July 22, 1997, the inspector general sent an action 
memorandum to the Assistant Secretary for Postsecondary 
Education indicating that borrowers wishing to consolidate 
their loans were unable to reach the customer service staff at 
EDS. One month later EDS also reported problems with the 
consolidation system and made recommendations for improvements 
in the process. The inspector general reported that in August 
1997 the Department was aware of four major unresolved problems 
with EDS's system: (1) duplicate verification certificates 
resulting in double pay-offs of loans; (2) data entry errors; 
(3) borrowers being double billed for old and consolidated 
loans; and (4) a significant backlog of applications.
    On August 26, 1997, the Department announced that it had 
accumulated a backlog of 84,000 applications for student loan 
consolidations and that it would not accept new applications 
for loan consolidation until the backlog was eliminated. Acting 
Deputy Secretary of Education Marshall Smith testified before 
the House Education and the Workforce Committee that the 
problems were due to unanticipated application volume and an 
over reliance upon automated systems. The original contract, 
consistent with the experience of the previous contractor, 
estimated volume at 6,000 applications per month. Actual 
application volume is closer to 12,000 per month. At the time 
of the shutdown, EDS had booked 54,000 consolidation loans at 
an average of 4,500 per month.
    Acting Deputy Secretary Smith stated that he anticipated 
that the backlog would be eliminated no later than December 1, 
1997. The Department has noted, however, that interest in the 
consolidation program has been substantially higher than 
anticipated. Upon reopening the program, the contractor may 
face a disabling surge of consolidation loan applications as an 
estimated 36,000 students who have been turned away from the 
program since August 26, seek the benefits of student loan 
consolidation. In addition, more than 40 percent of the backlog 
is being eliminated by the withdrawal or deactivation of 
applications. The Emergency Student Loan Consolidation Act of 
1997 will allow lenders within the FFELP program to assist the 
Department by authorizing FFELP lenders to consolidate loan 
portfolios containing both FFELP and FDL loans.
    The legislation also contains language supported by the 
committee and requested by the administration that would adjust 
the need analysis formula so that students will be able to 
receive the education tax credits that were authorized through 
The Taxpayer Relief Act of 1997 and their full student 
financial aid benefits. This change will affect approximately 
69,000 students. Failure to act prior to December 1, 1997, will 
have budget scoring consequences in future years.

              IV. Legislative History and Committee Action

    S. 1294, the ``Emergency Student Loan Consolidation Act of 
1997'' was introduced by Senator James M. Jeffords on October 
9, 1997. S. 1294 is the companion legislation to H.R. 2535.
    On October 22, 1997, the Labor and Human Resources 
Committee met to consider S. 1294. Senator Jeffords offered an 
amendment in the nature of a substitute. The legislation was 
adopted by a voice vote.

                           V. Committee Views

    The committee is deeply disappointed by the suspension of 
the Federal Direct Loan Consolidation Program. Eighty-four 
thousand student borrowers were left without any options as the 
Department of Education struggled to provide the services that 
had been promised to these borrowers. Students whose 
applications were caught within the system experienced 
unnecessary hardship while trying to responsibly reduce their 
monthly payments. Students who accepted forbearance in order to 
avoid falling into default while waiting to consolidate their 
loans incurred unnecessary additional interest charges. 
Regrettably it may never be clear just how much this situation 
has cost the borrowers trapped within the consolidation system.
    The Department will face three significant challenges when 
it reopens the Federal DirectLending consolidation program. 
First, it has reduced its backlog by deactivating the applications of 
students who fail to respond to any of the consolidation steps within 
two weeks. To date, more students have withdrawn their applications or 
had their loans deactivated than have had them fully consolidated. It 
is not clear when these students will attempt to reenter the system. In 
addition, prior to the suspension of the program, 12,000 students per 
month applied to the Department for loan consolidation. The 
consolidation needs of these students have not been met, and it is not 
clear how quickly they will attempt to consolidate their loans when the 
program reopens for new applications. And finally, the Class of 1997 
has just begun to make payments upon their student loans. There may be 
an additional increase in applications over the next several months as 
these students attempt to cope with their student debt. The Department 
may face a backlog in applications similar to that which led to the 
original shutdown of the system.
    The committee believes that it can best meet the urgent 
needs of these students by allowing expansion of loan 
consolidation in the Federal Family Education Loan Program 
until October 1, 1998. Enactment of S. 1294 will reduce 
pressure upon the Education Department's system and provide 
students with new options for loan consolidation.

                       Loan Consolidation Reports

    The committee greatly appreciates the cooperation shown by 
the Department of Education in providing biweekly reports of 
the Department's efforts to reduce the backlog of borrowers 
seeking to consolidate their loans. The committee requests that 
the Department continue to provide biweekly reports to the 
Senate Committee on Labor and Human Resources and the House 
Committee on Education and the Workforce on the Department's 
efforts to manage the Federal Direct Loan Program consolidation 
loan program. These biweekly reports shall include, at a 
minimum: a) the number of applications received, b) the number 
of loans booked, c) the number of applications withdrawn, d) 
the number of applications deactivated, and e) the size, if 
any, of the backlog in applications.

                      Terms of Consolidation Loans

    The Higher Education Act of 1965 prohibits direct student 
loan borrowers from consolidating their direct student loans 
into FFELP loans. Even if current law permitted these 
consolidations, few students would be likely to take them 
because they would lose the deferment benefits attached to 
their subsidized loans and would pay a higher interest rate.
    To address these issues, the Emergency Student Loan 
Consolidation Act of 1997 will temporarily permit students to 
consolidate their direct student loans into FFELP loans. In 
addition, the bill will change the interest rate calculation 
for FFELP consolidation loans so that the formula for 
calculating the interest rate on Federal Direct Loan 
consolidation loans and FFELP consolidation loans is the same.
    In addition, borrowers who consolidate subsidized loans, 
whether from the Direct Loan Program or the FFELP program will 
not lose their deferment benefits. During periods of deferment, 
the Secretary will pay the interest on the loans which were 
eligible for an interest subsidy prior to the consolidation and 
the borrower will only be responsible for the interest on the 
loans included in the consolidation which were not eligible for 
an interest subsidy under Section 428 or Section 455 of the 
Higher Education Act.

                Non-Discrimination in Loan Consolidation

    In an effort to address the concerns of the Administration 
and others, the committee approved language within Section 
2(c)(6) which would protect borrowers who were applying for 
consolidation loans from discrimination based upon the type and 
number of eligible student loans the borrower seeks to 
consolidate; the institution the borrower attended, the 
interest rate that is authorized to be collected or the types 
of repayment schedules offered to the borrower. Lenders may 
continue to offer special benefit programs and programs to 
encourage borrower financial responsibility; however, they must 
offer these programs to all borrowers who qualify. Nothing in 
this bill shall be interpreted to supersede requirements placed 
upon eligible lenders by the Department of the Treasury.

                        System Development Time

    The Emergency Student Loan Consolidation Act changes the 
interest rate calculation for FFEL program consolidation loans. 
The legislation states that a consolidation loan for which the 
application is received on or after the date of enactment and 
before October 1, 1998, shall bear interest at the equivalent 
of the 91-day Treasury Bill rate plus 3.1 percent with a cap of 
8.25 percent. In order to allow eligible lenders adequate time 
to make needed changes in their computer systems while serving 
students, the bill allows a lender to continue to calculate 
interest on the loan at the rate previously in effect and 
defer, until April 1, 1998, the recalculation of interest, if 
the recalculation is applied retroactively to the date on which 
the loan is made. The borrower will be held harmless through 
this calculation.

              Reauthorization of the Higher Education Act

    The Emergency Student Loan Consolidation Act of 1997 
provides temporary authority for eligible FFELP lenders to 
consolidate student loan packages which contain direct loans. 
It is intended to provide immediate relief to students who are 
unable to consolidate their student loans as a result of the 
suspension of the Department of Education's loan consolidation 
program.
    The committee has developed legislation designed to make 
the minimum changes to current law that is necessary to provide 
immediate relief to students. As a result, a number of 
important, complex, and substantive issues pertaining to the 
consolidation of student loans have been deferred for 
consideration during the reauthorization of the Higher 
Education Act. Some of these issues, like the consolidation of 
defaulted student loans, will require careful analysis to fully 
assess the costs and benefits to students and the student loan 
programs.

                           VI. Cost Estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, October 23, 1997.
Hon. James M. Jeffords,
Chairman, Committee on Labor and Human Resources,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1294, the Emergency 
Student Loan Consolidation Act of 1997, as ordered reported 
from the Senate Committee on Labor and Human Resources on 
October 22, 1997.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Deborah 
Kalcevic for Federal costs and Marc Nicole for State and local 
government impacts.
            Sincerely,
                                         June E. O'Neill, Director.
    Enclosure.

               Congressional Budget Office Cost Estimate

S. 1294--Emergency Student Loan Consolidation Act of 1997

    Summary: S. 1294 would amend the Higher Education Act of 
1965 to make four changes. The bill would: give lenders 
authority until October 1, 1998, to allow student loan 
borrowers to include federal direct student loans in a 
federally guaranteed consolidated loan; change until October 1, 
1998, the terms of federally guaranteed consolidated loans 
related to federal interest subsidies and loan interest rates; 
reduce the student loan administrative entitlement fund from 
$532 million to $507 million in 1998; and amend the eligibility 
criteria for student financial aid to adjust the formulas for 
recent changes in the tax law.
    CBO estimates the provisions of S. 1294 would increase 
federal outlays by $12 million in 1998 but have a negligible 
budgetary impact over the 1998-2002 period.
    S. 1294 contains no intergovernmental mandates as defined 
in the Unfunded mandates Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments. In 
addition, enactment of this bill would impose no private-sector 
mandates as defined in UMRA.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of these proposals over the 1998-2002 period 
is shown in the following table. The budgetary effects through 
2007 are displayed in the section on pay-as-you-go 
considerations. The budgetary impact of S. 1294 falls within 
budget function 500 (education, training, employment, and 
social services).

 ESTIMATED BUDGETARY IMPACT OF S. 1294 AS ORDERED REPORTED BY THE SENATE COMMITTEE ON LABOR AND HUMAN RESOURCES 
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                        1997      1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
             CHANGES IN DIRECT SPENDING                                                                         
                                                                                                                
Student loan consolidations:                                                                                    
    Budget authority................................  ........        25  ........  ........  ........  ........
    Estimated outlays...............................  ........        25  ........  ........  ........  ........
Student loan administration:                                                                                    
    Estimated budget authority......................  ........       -25  ........  ........  ........  ........
    Estimated outlays...............................  ........       -13        -8        -3        -1  ........
Total changes:                                                                                                  
    Estimated budget authority......................  ........         0  ........  ........  ........  ........
    Estimated outlays...............................  ........        12        -8        -3        -1  ........
----------------------------------------------------------------------------------------------------------------

Basis of estimate

            Student loan consolidations
    In the student loan programs, borrowers have the option of 
combining their debt from several different federal student 
loan programs into one loan, which usually has extended 
repayment terms. Guaranteed consolidated student loans are made 
by private lenders and are reinsured by the federal government. 
Direct consolidated student loans are made directly by the 
federal government. The two programs are similar in many but 
not all respects. This bill would make three temporary changes 
to the guaranteed student loan consolidation program in order 
to make it more comparable to the direct student loan 
consolidation program. These changes would be in effect for new 
consolidated loan applications from the date of enactment of 
this bill until October 1, 1998.
    First, the bill would make borrowers eligible to include 
direct student loans in their guaranteed consolidated student 
loan. Under current statute, borrowers with both guaranteed and 
direct student loans can only combine their debt into a direct 
consolidated student loan.
    Second, the bill would allow students to retain their 
interest subsidy benefits on all subsidized loans included in 
the new consolidated loan. This provision is already a feature 
of the direct consolidated student loan program. Currently, 
borrowers with guaranteed consolidated student loans retain 
subsidy benefits only if they combine only subsidized student 
loan debt.
    Third, the bill would make the interest rate on guaranteed 
consolidated loans the same as far direct consolidated loans. 
Under current law, the interest rate on a guaranteed 
consolidated loan is a fixed rate based on the weighted average 
of the interest rates of the loans consolidated rounded upward 
to the next whole percent, capped at 9 percent. Under this bill 
the interest on the loans would be a variable interest rate 
capped at 8.25 percent.
    The effect of these changes on the demand for guaranteed 
consolidated student loans would depend on how widely private 
lenders market the loans and whether the current problems that 
have caused the temporary shutdown of the direct consolidated 
student loan program persist. Assuming an enactment date of 
November 1, 1997, this cost estimate reflects the assumption 
that the proposals would increase guaranteed consolidated 
student loan volume by approximately 10 percent in 1998, or by 
about $400 million, resulting in increased subsidy costs of $25 
million.
            Administrative entitlement fund
    Under S. 1294, the Department of Education's section 458 
capped administrative entitlement fund would be reduced by $25 
million in fiscal year 1998 from $532 million to $507 million. 
Outlays savings would reflect the current pattern of spending 
for the program.
            Eligibility requirements for student financial aid
    S. 1294 would change the current federal formula for 
calculating the expected family contribution (EFC) towards a 
student's cost of higher education. The EFC is used to 
determine eligibility for federal Pell grants and subsidized 
student loans. This bill would permit families to count any 
Hope Credit or Lifetime Learning Credit--enacted as part of the 
Taxpayer Relief Act of 1997--as an allowance against their 
income in determining the amount of their EFC. Without these 
changes, families would be expected to contribute more to their 
education in an amount equal to the tax credits, in effect 
eliminating any beneficial effects to those families receiving 
credits. These changes would be effective for determining Pell 
grant and subsidized loan eligibility beginning in academic 
year 1999-2000.
    CBO is currently unable to estimate the impact of these 
provisions on the costs of student loans. The exclusion of the 
Hope and Lifetime Learning Credits from the EFC could affect 
the amount of subsidized borrowing, but CBO has insufficient 
data to provide an estimate.
    Under current law, the Pell grant program is not authorized 
for academic year 1999-2000 and beyond, the years in which 
these tax credits would be in effect. However, if these 
provisions were to be in effect for academic year 1998-99 and 
the maximum grant award were $3,000, Pell program costs would 
increase by about $100 million, subject to appropriation of the 
necessary funds.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act of 1985 establishes pay-as-you-go 
procedures for legislation affecting direct spending or 
receipts. The projected changes in direct spending are shown in 
the table below for fiscal years 1998-2007. For purposes of 
enforcing pay-as-you-go procedures, however, only the effects 
in the budget year and the succeeding four years are counted.

                                        SUMMARY OF PAY-AS-YOU-GO EFFECTS                                        
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                   1998    1999    2000    2001    2002    2003    2004    2005    2006    2007 
----------------------------------------------------------------------------------------------------------------
Changes in outlays..............      12      -8      -3      -1       0       0       0       0       0       0
Changes in receipts.............                                                                                
(9) Not applicable.                                                                                             
----------------------------------------------------------------------------------------------------------------

    Estimated impact on State, local, and tribal governments: 
S. 1294 contains no intergovernmental mandates as defined in 
UMRA and would not affect the budgets of state, local, or 
tribal governments.
    Estimated impact on the private sector: Enactment of this 
bill would impose no private-sector mandates as defined in 
UMRA.
    Estimate prepared by: Federal cost, Deborah Kalcevic and 
Justin Latus; impact on State, local, and tribal governments, 
Marc Nicole; and impact on private sector, Nabeel Alsalam.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

           VII. Application of Law to the Legislative Branch

    S. 1294 amends the Higher Education Act of 1965 to allow 
the consolidation of student loans under the Federal Family 
Loan Program and the Federal Direct Loan program and as such 
has no application to the legislative branch.

                   VIII. Regulatory Impact Statement

    The committee has determined that there will be only a 
negligible increase in the regulatory burden of paperwork as a 
result of this legislation.

                    IX. Section-by-Section Analysis

    Section 1 of the bill includes the short title of the 
legislation, the ``Emergency Student Loan Consolidation Act of 
1997'' and clarifies that except as expressly provided, 
references to amendments or repeals in this act refer 
specifically to sections or provisions of the Higher Education 
Act of 1965.
    Section 2(a) of the bill amends section 428C(a)(4) to 
include in the definition of loans eligible for consolidation 
loans made under part D of this title, except that loans made 
under such part shall be eligible for consolidation loans for 
which the application is received by an eligible lender during 
the period beginning on the date of enactment of the Emergency 
Student Loan Consolidation Act of 1997 and ending on October 1, 
1998.
    Section 2(b) provides for terms of consolidation loans by 
amending section 428C(b)(4)(C)(ii) so as to include those 
consolidation loans ``for which the application is received by 
an eligible lender before the date of enactment of the 
Emergency Student Loan Consolidation Act of 1997 or on or after 
October 1, 1998'' and by inserting a new subclause (II) which 
provides that interest shall accrue and be paid ``by the 
Secretary, in the case of a consolidation loan for which the 
application is received by an eligible lender on or after the 
date of enactment of the Emergency Student Loan Consolidation 
Act of 1997 and before October 1, 1998, except that the 
Secretary shall pay such interest only on that portion of the 
loan that repays Federal Stafford Loans for which the student 
borrower received an interest subsidy under section 428 or 
Federal Direct Stafford Loans for which the borrower received 
an interest subsidy under section 455.'' The borrower shall 
only be responsible for the interest on the loans included in 
the consolidation loan which were not eligible for an interest 
subsidy under Section 428 or Section 455 of the Higher 
Education Act.
    Section 2(c) includes a section on nondiscrimination in 
loan consolidation whereby eligible lenders are prohibited 
against discriminating against any borrower (A) based on the 
number and type of eligible student loans; (B) based on the 
type or category of institution of higher education that the 
borrower attended; (C) based on the interest rate that is 
authorized to be collected with respect to the consolidation 
loan; or (D) with respect to the types of repayment schedules 
offered to such borrowers. Lenders may continue to offer 
programs to encourage borrower financial responsibility. 
Nothing in this bill shall be interpreted to supersede 
requirements placed upon eligible lenders by the Department of 
the Treasury.
    Section 2(d) amends section 428C(c)(1) by adding a new 
subparagraph (D) relating to interest rates: ``A consolidation 
loan for which the application is received by an eligible 
lender on or after the date of enactment of the Emergency 
Student Loan Consolidation Act of 1997 and before October 1, 
1998, shall bear interest at an annual rate on the unpaid 
principal balance of the loan that is equal to the rate 
specified in section 427A(f), except that the eligible lender 
may continue to calculate interest on such a loan at the rate 
previously in effect and defer, until not later than April 1, 
1998, the recalculation of interest on such a loan at the rate 
required by this subparagraph if the recalculation is applied 
retroactively to the date on which the loan is made.'' This 
section provides eligible lenders time to reprogram their 
systems to accommodate the change in interest rate calculations 
while providing students with the full benefits of the interest 
rate cap.
    Section 2(e) provides that consolidation loans authorized 
by the amendments made in this section shall be available 
notwithstanding any pending application by a student for a 
consolidation loan under part D of title IV of the Higher 
Education Act of 1965, upon withdrawal of such application by 
the student at any time prior to the receipt of such a 
consolidation loan.
    Section 3 of the bill provides that funds necessary to pay 
for the costs associated with the legislation will be paid for 
from administrative expense reductions in section 458 
decreasing that account from $532,000,000 to $507,000,000.
    Section 4 of the bill includes provisions relating to the 
treatment of tax benefits so as to exclude the tax credit taken 
by the parent under section 25A of the Internal Revenue Code of 
1986 from consideration in need analysis for student 
contributions from available income, family contributions for 
independent students without dependents other than a spouse, 
family contributions for independent students with dependents 
other than a spouse and from total income.

X. ADDITIONAL VIEWS OF MR. KENNEDY, MR. DODD, MR. HARKIN, MS. MIKULSKI, 
         MR. BINGAMAN, MR. WELLSTONE, MRS. MURRAY, AND MR. REED

    The Democratic members of the Senate Labor and Human 
Resources Committee all voted in favor of the bill. All members 
of the Committee are concerned about the plight of the 
borrowers who are unable to consolidate their loans. We also 
feel strongly that the change in need analysis is essential to 
allow lower-income students to benefit from the Hope and 
Lifelong Learning tax credits.
    We are concerned, however, about two aspects of the 
Chairman's amendment in the nature of a substitute. While the 
Chairman's amendment partially addresses our concerns on non-
discrimination, we are concerned that the bill does not go far 
enough. The minority is very concerned that, over time, the 
FFELP lenders may ``cream'' the best loans and not consolidate 
loans from the higher risk borrowers, those who often need 
consolidation the most. We note that two-thirds of the 
borrowers affected by the backlog had only FFEL loans and no 
Direct Loans, so that they are not precluded by current law 
from consolidating their loans into the FFEL program.
    We are also concerned that the offset for the consolidation 
provisions in this bill comes from the Department of 
Education's administrative account under section 458. This 
offset violates the budget agreement and does not meet the 
``pay as you go'' requirements. The number of loans to be 
serviced in the Direct Loan program will increase by more than 
40 percent from FY 1997 to FY 1998. The Direct Loan 
administrative costs will rise accordingly, but this amendment 
cuts the funds available to service those loans. We are 
concerned that, in ``solving'' the consolidation problem, the 
bill may create more administrative problems by weakening the 
Department's ability to administer the student loan programs. 
We note that the majority indicated a willingness to address 
this concern as the bill moves forward.

                                                 Edward M. Kennedy.

                      XI. Changes in existing law

    In compliance with rule XXVI paragraph 12 of the Standing 
Rules of the Senate, the following provides a print of the 
statute or the part or section thereof to be amended or 
replaced (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):

                      Higher Education Act of 1965

          * * * * * * *

SEC. 428. FEDERAL CONSOLIDATION LOANS.

    (a) Agreements With Eligible Lenders.--
          (1) Agreement required for insurance coverage.--* * *
          * * * * * * *
                  (C) made under part D of this title, except 
                that loans made under such part shall be 
                eligible student loans only for consolidation 
                loans for which the application is received by 
                an eligible lender during the period beginning 
                on the date of enactment of the Emergency 
                Student Loan Consolidation Act of 1997 and 
                ending on October 1, 1998;
                  [(C)] (D) made under subpart II of part A of 
                title VII of the Public Health Service Act; or
                  [(D)] (E) made under subpart II of part B of 
                title VIII of the Public Health Service Act.
    (b) Contents of Agreements, Certificates of Insurance, and 
Loan Notes.--
          (1) Agreements with lenders.--* * *
          * * * * * * *
                          (I) by the Secretary, in the case of 
                        a consolidation loan for which the 
                        application is received by an eligible 
                        lender before the date of enactment of 
                        the Emergency Student Loan 
                        Consolidation Act of 1997, or on or 
                        after October 1, 1998, that 
                        consolidated only Federal Stafford 
                        Loans for which the student borrower 
                        received an interest subsidy under 
                        section 428; [or]
                          (II) by the Secretary, in the case of 
                        a consolidation loan for which the 
                        application is received by an eligible 
                        lender on or after the date of 
                        enactment of the Emergency Student Loan 
                        Consolidation Act of 1997 and before 
                        October 1, 1998, except that the 
                        Secretary shall pay such interest only 
                        on that portion of the loan that repays 
                        Federal Stafford Loans for which the 
                        student borrower received an interest 
                        subsidy under section 428 or Federal 
                        Direct Stafford Loans for which the 
                        borrower received an interest subsidy 
                        under section 455; or
                          [(II)] (III) by the borrower, or 
                        capitalized, in the case of a 
                        consolidation loan other than a loan 
                        described in subclause (I) or (II);
          * * * * * * *
          (6) Nondiscrimination in loan consolidation.--An 
        eligible lender that makes consolidation loans under 
        this section shall not discriminate against any 
        borrower seeking such a loan--
                  (A) based on the number or type of eligible 
                student loans the borrower seeks to 
                consolidate;
                  (B) based on the type or category of 
                institution of higher education that the 
                borrower attended;
                  (C) based on the interest rate that is 
                authorized to be collected with respect to the 
                consolidation loan; or
                  (D) with respect to the types of repayment 
                schedules offered to such borrower.
    (c) Payment of Principal and Interest.--
          (1) Interest rates.--(A) Consolidation loans made 
        under this section shall bear interest at rates 
        determined under subparagraph [(B) or (C)] (B), (C), or 
        (D). For the purposes of payment of special allowances 
        under section 438(b)(2), the interest rate required by 
        this subsection is the applicable interest rate with 
        respect to a consolidation loan.
          * * * * * * *
                  (D) A consolidation loan for which the 
                application is received by an eligible lender 
                on or after the date of enactment of the 
                Emergency Student Loan Consolidation Act of 
                1997 and before October 1, 1998, shall bear 
                interest at an annual rate on the unpaid 
                principal balance of the loan that is equal to 
                the rate specified in section 427A(f), except 
                that the eligible lender may continue to 
                calculate interest on such a loan at the rate 
                previously in effect and defer, until not later 
                than April 1, 1998, the recalculation of the 
                interest on such a loan at the rate required by 
                this subparagraph if the recalculation is 
                applied retroactively to the date on which the 
                loan is made.
          * * * * * * *

SEC. 458. FUNDS FOR ADMINISTRATIVE EXPENSES.

    (a) Administrative Expenses.--
          (1) In general.--Each fiscal year, there shall be 
        available to the Secretary from funds not otherwise 
        appropriated, funds to be obligated for--
                  (A) administrative costs under this part and 
                part B, including the costs of the direct 
                student loan programs under this part, and
                  (B) administrative cost allowances payable to 
                guaranty agencies under part B and calculated 
                in accordance with paragraph (2), not to exceed 
                (from such funds not otherwise appropriated) 
                [$532,000,000] $507,000,000 in fiscal year 
                1998, $610,000,000 in fiscal year 1999, 
                $705,000,000 in fiscal year 2000, $750,000,000 
                in fiscal year 2001, and $750,000,000 in fiscal 
                year 2002. Administrative cost allowances under 
                subparagraph (B) of this paragraph shall be 
                paid quarterly and used in accordance with 
                section 428(f). The Secretary may carry over 
                funds available under this section to a 
                subsequent fiscal year.
          * * * * * * *

SEC. 475. FAMILY CONTRIBUTION FOR DEPENDENT STUDENTS.

    (a) Computation of Expected Family Contribution.--* * *
          * * * * * * *
    (c) Parents' Available Income.--
          (1) In general.--The parents' available income is 
        determined by deducting from total income (as defined 
        in section 480)--
                  (A) * * *
          * * * * * * *
                  (D) an income protection allowance, 
                determined in accordance with paragraph (4); 
                [and]
                  (E) an employment expense allowance, 
                determined in accordance with paragraph (5)[.]; 
                and
                  (F) the amount of any tax credit taken by the 
                parents under section 25A of the Internal 
                Revenue Code of 1986.
          * * * * * * *
    (g) Student Contribution From Available Income.--
          (1) In general.--The student contribution from 
        available income is equal to--
                  (A) * * *
          * * * * * * *
                  (C) an allowance for social security taxes 
                determined in accordance with paragraph (4); 
                [and]
                  (D) an income protection allowance of 
                $1,750[.]; and 
                  (E) the amount of any tax credit taken by the 
                student under section 25A of the Internal 
                Revenue Code of 1986.
          * * * * * * *

SEC. 476. FAMILY CONTRIBUTION FOR INDEPENDENT STUDENTS WITHOUT 
                    DEPENDENTS OTHER THAN A SPOUSE.

    (a) Computation of Expected Family Contribution.--For each 
independent student without dependents other than a spouse, the 
expected family contribution is determined by--
          (1) adding--
                  (A) * * *
          * * * * * * *
    (b) Family's Contribution From Available Income.--
          (1) In general.--The family's contribution from 
        income is determined by--
                  (A) deduction from total income (as defined 
                in section 480)--
                          (i) * * *
          * * * * * * *
                          (iv) an income protection allowance 
                        of--
                                  (I) $3,000 for single 
                                students;
                                  (II) $3,000 for married 
                                students where both are 
                                enrolled pursuant to subsection 
                                (a)(2); and
                                  (III) $6,000 for married 
                                students where one is enrolled 
                                pursuant to subsection (a)(2); 
                                [and]
          * * * * * * *
                          (vi) the amount of any tax credit 
                        taken under section 25A of the Internal 
                        Revenue Code of 1986; and
          * * * * * * *

SEC. 477. FAMILY CONTRIBUTION FOR INDEPENDENT STUDENTS WITH DEPENDENTS 
                    OTHER THAN A SPOUSE.

    (a) Computation of Expected Family Contribution.--* * *
          * * * * * * *
    (b) Family Available Income.--
          (1) In general.--The family's available income is 
        determined by deduction from total income (as defined 
        in section 480)--
                  (A) * * *
          * * * * * * *
                  (D) an income protection allowance, 
                determined in accordance with paragraph (4); 
                [and]
                  (E) an employment expense allowance, 
                determined in accordance with paragraph (5); 
                and
                  (F) the amount of any tax credit taken under 
                section 25A of the Internal Revenue Code of 
                1986.
          * * * * * * *

SEC. 480. DEFINITIONS

    As used in this part:
    (a) Total Income.--(1) * * *
          * * * * * * *
          (2) No portion of any student financial assistance 
        received from any program by an [individual, and] 
        individual, no portion of a national service 
        educational award or post-service benefit received by 
        an individual under title I of the National and 
        Community Service Act of 1990 (42 U.S.C. 12571 et 
        seq.), and no portion of any tax credit taken under 
        section 25A of the Internal Revenue Code of 1986, shall 
        be included as income or assets in the computation of 
        expected family contribution for any program funded in 
        whole or in part under this Act.
          * * * * * * *
    (j) Other Financial Assistance; Tuition Prepayment Plans.--
(1) * * *
          * * * * * * *
    (4) Notwithstanding paragraph (1), a tax credit taken under 
section 25A of the Internal Revenue Code of 1986 shall not be 
treated as estimated financial assistance for purposes of 
section 471(3).
          * * * * * * *

                                
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