Washington Update February 2010 (D0286101-3).DOCX



WASHINGTON UPDATE

President Obama Focuses on the Economy in his First State of the Union Address and Calls for Reducing College Costs

On January 27, 2010, President Obama gave his first State of the Union address and focused on the economy. President Obama listed job creation as the “number one focus in 2010” and called for prompt Senate action on a jobs bill. But the President talked about the need to expand educational opportunities in America and “invest in the education of our students.” He urged the Senate to pass the Student Aid and Fiscal Responsibility (SAFRA), stating that it ‘will revitalize our community colleges, which are a career pathway to the children of so many working families.”

President Obama went on to say that “to make college more affordable, the bill will finally end the unwarranted taxpayer-subsidies that go to banks for student loans. Instead let’s take that money and give families a $10,000 tax credit for four years of college and increases in Pell Grants. And let’s tell another one million students that when they graduate, they will be required to pay only ten percent of their income on student loans, and all of their debt will be forgiven after twenty years - and forgiven after ten years if they choose a career in public service. Because in the United States of America, no one should go broke because they chose to go to college. And it’s time for colleges and universities to get serious about cutting their own costs - because they too have a responsibility to help solve this problem.”

The student loan proposal announced by the President would improve upon the Income-Based Repayment (IBR) program by lowering the cap on federal student loan payments from 15 to 10 percent of discretionary income and forgiving any remaining debt after 20 years of payments, rather than the current 25 years. An example given in a statement from The Project on Student Debt on January 25, 2010 was that of a single person who owes $33,000 in federal loans and makes $30,000 a year would pay about $110 a month under the President’s proposal, compared with about $380 a month under a standard 10-year repayment plan. Under the current Income-Based Repayment program, the borrower would owe $170 a month. As with the current rules, nonprofit and government workers, as well as others who work in public service, can get their remaining debt forgiven after 10 years in the Income-Based Repayment program. The forgiven balance will not be taxable.

Following the address, House Education and Labor Ranking Member John Kline (R-MN) issued the following statement on student loan reform:

“Unfortunately, when it comes to higher education, the President is offering more of the same one-size-fits-all government expansion the American people have already rejected. The proposal to drive the private sector out of student lending is only made worse by an expanded plan to force taxpayers to fund special benefits for government workers and absorb the balance of unpaid student loans. Making the federal government responsible for a larger share of student debt is likely to do nothing more than exacerbate high college costs.”

President Obama Submits FY 2011 Budget Blueprint to Congress

On February 1, 2010, the President issued his FY 2011 budget request to Congress that would increase discretionary education spending to $50.7 billion and implement many of the changes the President sought in his FY 2010 budget proposal. Secretary of Education Arne Duncan stated that “This budget puts us on a path to success and meeting that goal,” as set by the President, which is to lead the world in college completion.

Congressman John Kline (R-MN), the Ranking Member of the House Education and Labor Committee, issued a statement stating that he applauded some key education investments, such as investments in programs that improve opportunity, but he questioned the pervasive culture of favoritism that “pits union leadership against rank-and-file workers while emphasizing ‘gotcha’ policies that penalize job creators, as evidenced by significant increases in funding for the Department of Labor’s enforcement and investigation offices.

Like the FY 2010 budget proposal, the President’s FY 2011 budget proposal would expand the Pell Grant and help pay for other initiatives paid for from the savings from eliminating the FFEL Program and originating all loans through the Direct Loan Program. The FY 2011 budget proposal is consistent with the Student Aid and Fiscal responsibility Act (SAFRA), which passed the House in September 2009 and is pending in the Senate.

The FY 2011 budget request includes the following for the Department of Education:

• Make the Pell Grants an entitlement program by funding it entirely with mandatory funds and increasing the maximum award by $160 to $5,710;

• Provide $1.1 billion to expand and redesign the Perkins Loan Program to provide $6 billion a year in funding. ED would service all of the loans along with the other Federal loan programs;

• Provide $3.5 billion over 7 years for a College Access and Completion Fund, which would make grants to states, institutions of higher education, and other organizations to support innovative strategies to increase the number and percentage of students entering and completing;

• Provide $10.6 billion over 10 years for the American Graduation Initiative to invest in promising reforms to raise graduation rates, tie courses to business needs, and improve remedial education at community colleges;

• Provide $7.5 billion over 10 years to expand the Income-Based Repayment (IBR) program by decreasing the amount borrowers pay from 15 percent to 10 percent of their discretionary income and offering loan forgiveness after 20 years;

• Provide $29.2 billion over 10 years to make the American Opportunity Tax Credit permanent. The tax credit provides up to $2,500 for tuition and fees and course materials during the first 4 years of postsecondary education;

• Provide level funding (same as current year) of $980 million for Federal Work-Study (FWS) to provide 768,000 students work opportunities; and

• Provide level funding (same as current year) of $757 million for Supplemental Educational Opportunity Grants (SEOG) to provide grants to about 1.3 million students.

The FY 2011 budget proposal would eliminate the almost $64 million in funding for the Leveraging Educational Assistance Partnerships (LEAP) program.

The Academic Competitiveness Grant (ACG) and the National SMART Grant would be allowed to expire at the end of the 2010-2011 academic year.

For budget purposes, the TEACH Grant is treated as a loan program with 100 percent forgiveness of outstanding principal and interest upon completion of a student’s teacher service requirement. The Department estimates that about 80 percent of the participating students will not complete the required service and thus will have their grants converted to Direct Unsubsidized Stafford Loans.

Now that the Administration’s budget is issued, the House and Senate Budget Committees will markup their respective budget resolutions, which set federal spending priorities based on the amount of revenue they project the government will collect. Following approval of the budget resolutions, the House and Senate Appropriations Committees will establish detailed spending instructions for each federal agency.

Healthcare Debate Makes Anybody’s Guess About When the Senate will take up Student Aid Reform Bill

One of the elements included in the Student Aid and Fiscal Responsibility Act (SAFRA), which passed the House in September 2009, would be to eliminate the Federal Family Education Loan Program (FFELP) as of July 1, 2010. Another provision would eliminate the current Perkins Loan Program and introduce the Federal Direct Perkins Loan Program.

While the Senate has yet to take up similar legislation, it has been reported that the final bill would move the Perkins Loan Program implementation date from July 1, 2010 to July 1, 2011. However, the implementation dates on any of the provisions could change.

The continued healthcare debate makes any kind of prediction as to when the Senate will take up its version of student aid reform anyone’s guess. The only thing we know for sure is that the Senate will not take it up until it finishes with the healthcare debate.

Another new element is the Scott Brown victory, which deprives Democrats of a filibuster-proof majority. While the victory does not mathematically eliminate the possibility of a government takeover of the loan program because the Senate can use the reconciliation process, which allows Democrats to pass a bill with a simple majority (51%), it may prevent the liberal Senators from pushing for the elimination of the FFELP.

Negotiated Rulemaking Ends Without Reaching Consensus

The third and last round of negotiated rulemaking on the 14 program integrity issues proposed by the Department of Education ended without having reached consensus on all of the issues. Consensus was not reached on five of the Department’s proposals: Gainful employment in a recognized occupation; Elimination of the safe harbors under the prohibition against paying bonuses, incentives, and commissions for those involved in recruiting or in making financial aid decisions; the return of Title IV and attendance; the return of Title IV and terms with modules; and state authorization as a component of institutional eligibility.

Without consensus, the Department is free to issue its proposed regulations without taking into account any non-Department points of view. However, the Department will likely follow the recommendations made on the nine issues which achieved agreement. The Department will likely go forward with proposed regulations in late Spring 2010 that will permit the public to comment within a short period of time, like 45 or 60 days. If the Department publishes final regulations by November 1, 2010, the final regulations will become effective on July 1, 2011.

Here are the issues that reached consensus:

• Definition of a High School Diploma:

 

The negotiators reached agreement on confirming the validity of a high school diploma rather than "defining" a high school diploma.  Beginning with the 2011-2012 award year, a student completing the FAFSA will be required to list the name of the secondary school or entity that provides a secondary school program of study and the state that awarded his/her high school diploma.  If the secondary school or entity the student provides does not match the list of secondary schools maintained by the Department or if the student does not provide the name of the secondary school or entity or the state that issued the diploma, the Department may flag the student's FAFSA for further review by the institution to determine if the applicant has a valid high school diploma before the student can receive any Title IV aid.

 

The Department will provide guidance to help schools evaluate the validity of a high school diploma for purposes of awarding financial aid.  Operational details are not included in the draft regulatory language because there are still many details to work out.

 

• Ability-to-Benefit:

 

The statutory language permits an applicant to take 6 credits in the institution's program to demonstrate ability-to-benefit, and the Department proposed a 225 clock hour equivalent. 

 

As a result of findings by the Government Accountability Office (GAO), the proposed rules would strengthen the process to certify and decertify test administrators.  The negotiators agreed to require test publishers to take responsibility for verifying the integrity of certified test administrators.  Test publishers would be required to notify institutions and students if it determines that a test administrator improperly administered a test.  The Department will assist with the language of the notification letters. 

 

In addition, the new language would update current regulations regarding the administration of tests for individuals with disabilities to reflect current terms and changes to other statutes.  The non-federal negotiators raised concerns about who is the appropriate party to determine if a student needs accommodations.

 

• Misrepresentation:

 

The proposed language would establish the types of activities that constitute substantial misrepresentation by an institution, including Title IV eligible institutions that have contracts or agreements with non-eligible institutions.  Institutions that make substantial misrepresentations could lose their eligibility to participate in Title IV funding or face limitations on their participation in Title IV funding.

 

The proposed language would expand the definition of misrepresentation to include any false, erroneous or misleading statements concerning the cost of college or financial aid such as:

o Offers of scholarships to pay all or part of a course charge;

o Whether a particular charge is the customary charge at the institution for a course;

o The cost of the program and the institution's refund policy;

o The availability or nature of any financial assistance offered to students, including the student's responsibility to repay any loans, regardless of whether the student is successful in completing the program and obtaining employment; or

o The student's right to reject any particular type of financial aid or other assistance or that the borrower must apply for a particular type of financial aid.

 

The Department agreed to discuss in the preamble of the proposed regulations that institutions must disclose which of its programs are not accredited.  In addition, the Department is going to include preamble language to address the institution's reasonable knowledge of employment conditions in industries for which its programs prepare students.

 

• Definition of Credit Hours:

 

As a result of concerns over the assignment of credit hours, particularly in courses offered via distance, on weekends, or compressed, the Department proposed to include a definition of a credit hour. As a result of concerns by the nonfederal negotiators, the Department removed references to the Carnegie unit and clarified the measurement of credit hours in terms of work to be completed by a student.  The proposed language was also modified to clarify the alternative measurements that may be established by an institution to determine equivalencies in cases where the credit hour definition does not apply and such equivalencies are to be based on learning outcomes.  The proposed language would also clarify the role of the accrediting agencies to review an institution's policies and procedures for the assignment of credit hours to its programs and courses as well as the basis the institution uses to establish equivalencies.

 

The Department included language that would modify the current clock to credit hour conversion regulations to clarify the requirement to use clock hours when a limited portion of the program is offered in clock hours due to State or accrediting agency requirements and to require an institution to use clock hours if an institution's designated accrediting agency determines that the institution's policies and procedures, or its application, for determining credit hours for its courses, is deficient.  Additional language is included to permit the institution to use an equivalency in determining the clock to credit conversion if an institution's accrediting agency has not identified any deficiencies in the institution's policies and procedures, or its application, for determining credit hours for its courses.

 

Without the benefit of reviewing final language at the close of the negotiated rulemaking session, non-federal negotiators were concerned about the proposed language that clarified when a program must be treated as a clock hour program.  ED is proposing to require a program to be treated as a clock-hour program if there is a requirement for authorization to be in clock hours.

 

• Agreements Between Institutions of Higher Education:

 

The Department is proposing a requirement to disclose any agreements between an eligible institution and an ineligible institution.   The final agreement by the negotiators would require that, for an arrangement between for-profit institutions with common ownership or control, the institution granting the credential would have to provide more than 50 percent of the program.

 

• Verification:

 

The proposed language reflects a move towards a targeted verification system rather than a defined set of elements to be verified. 

o The current 30 percent cap would be eliminated.  Since the Department is simplifying the FAFSA process and since there will be information sharing with the IRS, the Department is attempting to modify the verification process;

o The Department would publish on an annual basis the data elements to be selected for verification; and 

o Language is also included that would require institutions to submit all corrections for processing to ensure it has the most accurate data.

• Satisfactory Academic Progress:

 

The proposed rules would impose limits on how long a student could continue to receive Title IV funding in order to make up for deficiencies in satisfactory academic progress. The Department has been concerned about the extensive use of probation periods that allow students to maintain Title IV eligibility. The proposed rules distinguish between warning periods (when students could automatically continue Title IV eligibility) and probationary periods (when the student could receive financial aid as a result of a successful appeal).  Only institutions that assess satisfactory academic progress at the end of each payment period could apply warning periods.  Institutions who assess satisfactory academic progress less frequently (e.g., once per academic year) would have to require a successful appeal to permit students to continue receiving Title IV funding on a probation period despite not meeting the minimum SAP standards.  The maximum interval for assessment of SAP would continue to be one academic year.  The proposed language would also clarify that the probation period applied to the next payment period in which the student enrolled.

 

• Retaking Coursework:

 

The Department agreed to add language to the definition of "full-time student" in 34 C.F.R. 668.2 to allow repeated courses to count towards a student's enrollment status for term-based programs.  Current rules for non-term programs would continue unchanged.

 

• Disbursements of Title IV Funds:

 

The Department indicated that the issue centers around ensuring that students with estimated Title IV credit balances are able to obtain books and supplies at the beginning of the payment period.  Schools would continue to have the ability to disburse funds at the times and amounts that are in the student's best interest.

 

The negotiators finally agreed to require early disbursements of anticipated credit balances to eligible students if the students met all disbursement requirements no later than 10 days before the start of the payment period, and the requirement would only apply to students who will have a Title IV credit balance.

 

The proposed language does not change existing institutional liability should the student fail to begin attendance in any courses.  However, the proposed language does provide institutions with the flexibility to determine the method to provide funds to students, which may include a book voucher or crediting books to the student's account.  The institution would have to ensure that students can acquire necessary books and supplies by the seventh day of the payment period.  The value amount that would have to be made available to students would be the lesser of the amount the institution determines the student needs for books and supplies or the projected student's credit balance.  The Department agreed to provide preamble language that schools may use the value of the books and supplies component in the student's cost of attendance as the amount for the disbursement.  Credit balances not subject to payment for books and supplies would remain subject to current regulations found in 34 C.F.R. 668.164(e) requiring payment within 14 days of the creation of the credit balance.

 

Here are the issues that did not reach agreement:

 

• Incentive Compensation:

 

The Department proposed that it would eliminate the 12 safe harbors that provide institutions methods to provide incentives to those involved in recruiting or in making financial aid awards.  Some of the non-federal negotiators suggested that the Department provide additional guidance.  The Department's final proposal is similar to current statute.  The rule proposes that "Eligible institutions, organizations that are contractors to eligible institutions and other entities may make merit-based adjustments to employee compensation provided that such adjustments are not based on success in securing student enrollments or the award of financial aid."

 

Those arguing on behalf of the for-profit sector suggested that the use of the number of students enrolled or awarded financial aid to be one factor, but not the primary factor.  The Department responded that most institutions consider many factors in making merit-based awards or bonuses and the proposal eliminates one of the factors.  At the end of the session three, the Department’s floated some language that suggested that the Department might be willing to provide some guidance as to what would be acceptable methods of compensation, but there was no agreement and the proposal was not widely circulated.

 

• State Authorization:

 

The Department questioned whether institutions in a state that does not meet ED expectations for state oversight should remain eligible for Title IV funding.   The non-federal negotiators were concerned about language that appeared in earlier versions but was dropped regarding states that delegate certain functions to accrediting agencies.

 

• Gainful Employment in a Recognized Occupation:

 

The proposed language would set up additional requirements that affect Title IV eligibility of certain educational programs. Currently, for-profit institutions and postsecondary vocational institutions are subject to the criteria that all of the programs must prepare students for gainful employment in a recognized occupation.  Institutions of higher education are subject to the criteria only for their non-degree programs. Currently, there is no definition of “gainful employment.” The proposal would require the use of a student loan debt-to-income ratio as a primary indicator of "gainful employment," where debt would include all forms of student loans, except for institutional payment plans. 

The proposal is based on the Department's determination that graduates should be able to repay their loan debt in ten years without using more than 8 percent of their expected earnings in the occupation.  

Alternative methods would be included in the rules to demonstrate program eligibility, such as using actual earnings rather than the Bureau of Labor Statistics’ (BLS) statistics or demonstrating a 90 percent repayment rate on Title IV loans among the institution’s graduates over a three-year period. 

 

• Return of Title IV for Terms with Modules and Mini-Sessions:

 

Currently, if a student completes a module in a term-based program, the return of Title IV is not required.  The Department indicated that it is concerned that some institutions have established very short modules of only a few days as the first module and, if it is completed and the student withdraws, the student is not considered to have withdrawn for purposes of return of Title IV calculations.

 

The Department proposed that a student would be considered withdrawn from a term constructed of modules, compressed courses or mini-sessions if the student does not complete all days or clock hours in the payment period that the student was scheduled to complete prior to withdrawing.  The non-federal negotiators argued that the proposed rule would lead to more inconsistencies.

 

• Return of Title IV and Attendance: 

 

Currently, an institution is required to take attendance if an outside entity has such a requirement.  This would not include institutions that are voluntarily taking attendance.  The Department proposed new additions to the definition of a school that is required to take attendance:

 

o The institution itself has a requirement that its instructors take attendance; or

o The institution or an outside entity has a requirement that can only be met by taking attendance or a comparable process, including but not limited to, requiring that students in a program demonstrate attendance in the classes of that program, or a portion of that program.

 

Strong opposition was expressed by the non-federal negotiators.  Instructors might take attendance to establish a class roster or to establish enrollment by  census date.  The Department continues to believe that any attendance records an institution has should be used for return of Title IV purposes and was unwilling to accept any other proposals.

 

This represents only a short summary of the 14 proposals, and we have not seen final language on some of the proposals. When the proposed regulations are published, we will provide a more detailed summary.  

Department Continues to Encourage Schools to Prepare for Direct Lending

On January 28, 2010, the Department’s Chief Operating Officer, William Taggart, sent a letter to all domestic institutions encouraging them to prepare to use the Direct Loan Program should FFELP lenders not be able to serve the institution’s students next year. “I am not asking that you switch federal loan programs…All I ask is that you are equally prepared.”

On January 25, 2010, Senator Mike Enzi (R-WY), Ranking Member of the Senate Health, Education, Labor and Pensions Committee, requested that the Department of Education turn over all documents related to the Department’s efforts to encourage colleges, universities and outside groups to lobby Congress on behalf of the Administration’s plan to takeover student loans by eliminating the FFEL Program. “Contrary to recent statements made by the Department of Education, there remains bipartisan support in Congress to continue the decades-old private sector program to support students during these difficult times…There is no public law that gives the Department of Education the authority to require that all institutions participate in the Direct Loan Program.”

More recently, Secretary of Education, Arne Duncan blamed the current stalemate on reforming the student loan program on intensified lobbying by the banking industry. In an interview of February 9, 2010 with the Wall Street Journal, Secretary Duncan said banks and institutions like Sallie Mae are lobbying to “keep these subsidies flowing.” The article concluded that the primary obstacle holding up the direct lending bill is not Sallie Mae or lobbyists, but the Democratic Senate’s focus on health-care issues.

A look at the following article gives credence to the belief that the Department is taking over the student loan program. Data shows that loan volume is shifting to the Direct Loan Program.

SLA Reveals Almost Two-Thirds of Federal Student Loans Still Being Made Through FFEL Lenders

On January 27, 2010, Student Lending Analytics (SLA) issued an analysis of new Department of Education federal loan data available through the first two quarters of the 2009-2010 academic year. According to SLA, the FFEL program had a 64.8 percent share of federal student loans disbursed during the first six months of this academic year. According to the latest figures, SLA reported that $15.8 billion was purchased through the Loan Participation Program and about $400 million through the Loan Purchase Program for a total of $16.2 billion or about 67 percent of loans disbursed by the Department of Education from the FFEL lenders. SLA concluded that overall, the Department of Education through Direct Lending and through the Ensuring Continued Access to Student Loans Act (ECASLA) financing programs are funding about $29.5 billion or 78 percent of total federal loans disbursed through the first six months of the academic year.

Perhaps the transition is already taking place to the Direct Loan Program since the Department already holds the highest percentage of loan volume.

FY 2008 Draft Cohort Default Rates Released on February 8, 2010

On January 27, 2010, the Department of Education announced that it released the FY 2008 Draft Cohort Default Rats to all eligible institutions on February 8, 2010.

FAFSA Simplification

In early January 2010, Secretary of Education Arne Duncan and Dr. Jill Biden, the wife of Vice President Joe Biden, joined students at a Washington, DC high school as they worked with high school counselors to complete the new, streamlined Free Application for Federal Student Aid (FAFSA). The 2010-11 FAFSA-on-the-Web has been redesigned to be shorter, simpler, and more user-friendly. Questions on the FAFSA are now asked only if relevant to the applicant (i.e., only returning students are asked about prior drug convictions because the question does not apply to first-year students. Also, immediately after submitting the FAFSA, applicants will not receive a confirmation email message which indicates Pell Grant eligibility and links to information about schools they are applying to, such as graduation and transfer rates and a detailed breakdown of costs and expected expenses associated with the schools.

Beginning this month, those applying for aid in the spring semester using the 2009-2010 FAFSA will be able to retrieve and import their tax data from the Internal Revenue Service (IRS). And in summer 2010, those applying for financial aid in the 2010-2011 award year will also be able to access the IRS web site to retrieve income information to complete the FAFSA.

For more information, go to

Sharon H. Bob, Ph.D.

Powers Pyles Sutter & Verville, P.C.

Seventh Floor

1501 M Street, NW

Washington, DC 20005

202-872-6772

Sharon.bob@

February 18, 2010

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