Information Is Power
The Deficit Reduction Act that became law February 8 has received harsh criticism for cutting student aid spending by $12.7 billion over five years, but it also includes provisions that will benefit many students and families. Two major challenges now face institutions of higher ed:
How to cope with the expedited timetable for implementing changes mandated by the legislation, many of which are scheduled to take effect on July 1 of this year
How to educate students to make sure they receive all the aid to which they are entitled under the new law (and take advantage now of benefits that the new law revokes)
The master calendar in the Higher Education Act (HEA) requires that final financial aid rules be published by November 1 in the award year before the rules take effect. This gives all stakeholders (i.e., schools, lenders, guaranty agencies, third-party servicers, and processors) enough time to discuss and implement changes and rewrite critical software.
Congress threw a wrench in this process because the controversial nature of the Deficit Reduction Act delayed congressional approval of the bill, but the dates that provisions take effect were not pushed back to accommodate the delay.
The delay significantly condenses the amount of time the U.S. Department of Education has to implement the legislation. Officials are supposed to conduct a "negotiated rulemaking" process with representatives of the postsecondary education community to develop proposed regulations, but they don't have enough time to conduct this process before July 1. Negotiated rulemaking is required by the HEA for all proposed regulations under Title IV of the HEA except Part F, which deals with needs analysis. (Negotiated rulemaking is a critical step for schools because legislation often provides only a framework for HEA changes, while the department's regulatory process provides the details.) Observers familiar with the current situation expect the department to conduct a negotiated rulemaking process after issuing final rules on provisions that will take effect on July 1.
Adopting statutory changes in the new law presents a significant challenge to schools and the Department of Education because some aspects affect the 2006-2007 processing cycle. The 2006-2007 Free Application for Federal Student Aid (FAFSA) was released before the Deficit Reduction Act became law and has been completed by many families.
In addition, the Central Processing System, the department's facility that handles student applications for federal aid, has been processing FAFSAs since January 1. Many students who applied for aid for the fall 2006 semester under existing law could be eligible for more aid under the new law because it eases qualifications for the Simplified Needs Test and automatic zero in the Expected Family Contribution (EFC) formula; it also changes how some assets are considered in the EFC calculation.
To ensure that students take full advantage of the changes in the law, financial aid administrators may need to identify students and families whose eligibility is affected and make necessary changes to ensure students receive the maximum amount of aid for which they now qualify. Families may also need to revise their aid applications to take advantage of benefits. The Department of Education, meanwhile, faces some heavy lifting to accommodate provisions in the new law.
The following are some significant changes made by Congress that will take effect on July 1 of this year and will apply to families, even if the current law was in effect when they filled out the 2006-2007 FAFSA:
Stafford loan interest rates will increase to a fixed 6.8 percent. The variable rate on Stafford loans under current law is 5.3 percent. In addition, the new law eliminates certain loan consolidation options and will ultimately increase the interest rate on consolidation loans because the interest rate on Stafford loans will be higher.
Origination fee charges on Stafford loans will be gradually reduced beginning with loans made on or after July 1 of this year. This change may affect the net amount of the loan and the cost of attendance component that accounts for loan fees.
Section 529 prepaid tuition plans will no longer be treated as a dollar-for-dollar offset to the cost of attendance or financial aid. When a plan was treated in either of these ways it could cause students to miss out on need-based aid. Instead, the refund value of a prepaid tuition plan will be treated as an asset in the EFC calculation. For dependent students, a plan set up by the parent must be considered a parental asset, as the law prohibits considering any prepaid tuition plan an asset of a dependent student. This change puts the prepaid plans on a par with 529 savings plans.
Many financial aid administrators are glad to see this change, because the old law gave the appearance of penalizing families who saved for college. The current FAFSA does not instruct students to include a 529 prepaid tuition plan as part of their parent's net worth, so financial aid administrators will have to ensure that 529 prepaid tuition plans no longer directly reduce need-based aid.
Simplified Needs Test eligibility requirements are eased for students and parents already receiving benefits from a non-Title IV means-tested mandatory spending federal benefit program (including food stamps, the school lunch program, SSI, TANF, WIC, and other programs identified by the Department of Education). The Simplified Needs Test omits assets when determining the EFC. Low-income families will also have an easier time qualifying for the automatic zero on their EFC, which will make them eligible for the maximum amount of federal, need-based aid. The income cap for families to qualify for the automatic zero is raised to $20,000, up from $15,000. In addition, the new law no longer requires a dependent student's tax filing status to be considered for the Simplified Needs Test or the automatic zero.
Active duty members of the armed forces will be considered independent students, which is likely to make them eligible for more financial aid. This presents an administrative challenge because neither the FAFSA nor the Department of Education identifies active duty students, so implementing the change may require action by financial aid administrators.
Certain small family-owned businesses will be excluded when considering a family's assets.
Graduate and professional students will be able to borrow PLUS loans, federally backed loans that are currently only available to parents of undergraduate students. PLUS loans offer graduate students an 8.5 percent fixed interest rate and unlimited loan amounts. Instituting the new loans for the first wave of graduate students borrowing PLUS loans will provide a challenge for aid offices when informing students of their options under the new law and helping individual students determine if a PLUS loan is their best option for financing higher education. Schools, lenders, and guaranty agencies will have to modify their software if it does not allow them to post PLUS loans for graduate students. In addition, the PLUS master promissory note is currently written for parents and there is no PLUS promissory note for graduate students.
(For a more complete list of modifications, see www.nasfaa.org/deficitact.asp.)
These changes are the tip of the iceberg, however. The Deficit Reduction Act will drastically alter student aid programs and their funding. Postsecondary institutions should already be implementing aspects of the new legislation and watching for rules and guidance issued by the Department of Education to maximize benefits for students and institutions.
Haley Chitty is assistant director for communications for the National Association of Student Financial Aid Administrators (NASFAA).
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