President Re-Proposes New Unsubsidized Loan Program in Budget; Passage Highly Unlikely

Prepared by:  Harrison Wadsworth and Wes Huffman (hwadsworth@wpllc.net) and (whuffman@wpllc.net)

President Obama yesterday sent Congress his proposals for spending about $4 trillion in fiscal year 2016, which begins this October 1.  Included in the proposals were funding for the Department of Education and the programs it operates as well as proposals to change tax breaks that benefit college students and their parents.  Republicans who control both houses of Congress immediately said they have no interest in many of the proposals, including any proposal to create a new program.  House Education and Workforce Committee Chairman John Kline (R-MN), for example, issued a statement panning the budget, saying the President, “has missed another opportunity to unite us as a country and begin tackling these tough challenges.”

Among the proposals that are included in the Education Department section of the budget is, for the sixth straight year, a proposal to allow the current Perkins Loan Program to close and to create a new program with the same terms and conditions as unsubsidized Stafford loans.  The name has been changed a couple of times, but remains the same as last year: Unsubsidized Perkins Loans.  Like before, the idea is that the federal government would eventually distribute up to an additional $8.5 billion to participating colleges to make new unsubsidized loans to students.  The idea for how allocations  would be made to campuses are vague but apparently would be based on graduation rates of Pell Grant recipients and the number of Pell Grant recipients in attendance.  Billing and collection and all other functions other than distributing the money would be handled by the federal Direct Loan servicing contractors.

Congress would have to pass a law creating the new program in order for it to happen.  Like for the past four years, no one with any power in Congress to move the proposal forward is interested in the idea.

Regarding the current Perkins Loan Program, it is up to Congress to continue it, or a source of low-cost funds for students will be lost.  At a budget briefing held by senior Department of Education officials yesterday, the officials made clear that all collections from the current Perkins Program will go to the general fund in the US Treasury if the program is allowed to expire.  The federal share of the funds would NOT be available for use for other financial aid purposes.  The Department has not decided how to handle the institutional share of the current revolving funds.

Of note, the Department of Education’s budget proposal talks about using “savings” from the Unsubsidized Perkins Loan scheme to help fund Pell Grants.  At yesterday’s briefing, the head of the Department’s Budget Office explained that “interest arbitrage” is where the “savings” would come from.  In plain English, the idea is that student loan borrowers’ interest payments would, to the extent they are profitable, be used to help pay for Pell Grants.

If you have any questions or comments, please contact us at hwadsworth@wpllc.net or whuffman@wpllc.net .