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Mar 29, 2007

Reconsolidation Loans - what's new in 2007

Reconsolidation loans statutory limitations would be eliminated - that's the core of The Student Debt Relief Act Of 2007 introduced by Senator Kennedy.

On January 22, Sen. Edward Kennedy (D-MA) introduced the Student Debt Relief Act of 2007 (S. 359) along with Senators Durbin (D-IL), Lieberman (D-CT), Mikulski (D-MD), Obama (D-IL), and Schumer (D-NY) as cosponsors.

"A new day has now dawned in Congress, and last week, our colleagues in the House showed they have their priorities right on college costs by cutting student loan interest rates in half," Kennedy stated in a prepared statement in the Congressional Record. "Now it�s our turn in the Senate, but we won�t stop there."

Kennedy, the Chairman of the Senate authorizing committee with jurisdiction over the Higher Education Act (HEA) of 1965, outlined many of the bill�s proposed changes to the HEA that would provide additional support to students. Some of the more prominent changes include the following.

Increase in the Pell Grant

The proposed legislation increases the Pell Grant to $5,100 for the 2007-08 academic year, and increases it in incremental steps thereafter to reach a maximum of $6,300 in the 2011-12 academic year. The Pell Grant would increase according to the following schedule:

* 2007-08 Academic Year: $5,100
* 2008-09 Academic Year: $5,400
* 2009-10 Academic Year: $5,700
* 2010-11 Academic Year: $6,000
* 2011-12 Academic Year: $6,300

S. 359�s Pell Grant maximum award provisions are a striking departure from normal practice. In the past, it was customary for a bill increasing the Pell Grant maximum award to insert new and higher authorized amounts. But, a higher authorization is merely a fishing license to seek funds in the appropriations process to make the higher authorization a reality. Without the appropriated funds for such a higher maximum Pell Grant a higher authorization is merely a goal. In other words, you may have a valid fishing license, but that license does not guarantee you will catch a fish. Chairman Kennedy in this provision of the bill reverses field. He now wants the increases in the Pell Grant maximum award to be mandatory, entitlement funding.

Student Aid Reward Program

The bill contains the Student Aid Reward Program that offers financial incentives to schools to participate in the Direct Loan Program. Schools would receive payments from the government not to exceed 50% of the total savings to the government. Schools could use such payments to supplement the amount awarded to Pell Grant recipients or could use such payment for grants to low- or middle-income graduate students. Schools would be required to join the Direct Loan Program for five years from the date the first payment is made to qualify for the funds. Because payments will be contingent on available funding, schools switching from the FFEL Program to the Direct Loan Program would be paid first and, then, other DL schools, if funds remained, would be paid on a pro-rata basis.

Interest Rate Reduction

Interest rate reductions would mirror the House�s College Student Relief Act (H.R. 5), except that the final interest rate cut would extend through the 2011-12 academic year. The Student Debt Relief Act also differs from the House in that it does not offset these interest rate reductions through reduced payments to FFEL loan participants.

Fair Payment Assurance

Very similar to proposals made by the Project on Student Debt during the latest rounds of Negotiated Rulemaking, this provision would institute a partial financial hardship deferment, allowing Stafford or GradPLUS borrowers to limit their monthly student loan repayment amounts to 15 percent of borrower's income that exceeds 150 percent of the poverty line applicable to the borrower's family size.

Additionally, the Secretary of Education is instructed to cancel any loan after 25 years of being in an economic hardship, partial economic hardship, standard repayment, or income contingent repayment status. Finally, the proposed statute does away with the three year limitation on economic hardship deferments.

In a related provision and applicable to only borrowers with Direct Loans, borrowers employed in public service would receive loan forgiveness after 120 payments under the income contingent repayment plan.

Additional Tax Breaks

The proposed legislation would increase the current tuition deduction from $4,000 to $8,000 in tax year 2007 and then to $12,000 in tax year 2008. Maximum income limits to be eligible for the deduction also would be increased and indexed to the inflation rate.

Current tax deductions on student loans interest for would be turned into a tax credit, but would be limited to the first five years of repayment. Like the income tax deductions, the maximum qualifying income limits would be increased and tied to the inflation rate.

Consolidation Changes

In-school loan consolidation would once again be allowed under this legislation and "reconsolidation" statutory limitations would be eliminated.

Direct Loan Origination Fees

The Direct Loan origination fees would no longer be mandatory, giving the Secretary the discretion to charge the fee or not. Additionally, DL fees, under the terms of the bill, would be reduced another 1 percent as they are phased out over the next several years. No additional reductions were proposed for FFEL Program loan fees which are also being phased out. The Higher Education Reconciliation Act of 2005. mandated origination fees be totally phased out over five years for both FFELP and DL loans, but left in place a mandatory charge of one percent on DL loans that parallels a one percent default fee that may be changed to FFELP borrowers by guaranty agencies.