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NOTE: Copies sent to the Speaker of the House and the President of the Senate

March 2, 1998

Honorable Newt Gingrich
Speaker of the House of Representatives
Washington, DC 20515

Dear Mr. Speaker:

I am pleased to submit to you this summary of the Administration's proposals for the reauthorization of the Higher Education Act of 1965 (HEA). Over the past six months, members of my staff have provided legislative language for reauthorization of the HEA to staff members of the House Committee on Education and the Workforce and the Senate Committee on Labor and Human Resources. We will continue working with the Congress to ensure that the HEA is reauthorized in a manner that serves students well and protects the taxpayers' interest.

Many of the changes we are proposing reflect amendments to existing laws; however, the Administration is also proposing several new initiatives that are included in the President's fiscal year 1999 budget request. I will discuss them briefly to provide context to our overall goals and objectives; legislative language on these new initiatives will be provided shortly. I have also enclosed our legislative language for the Title IV, Student Financial Assistance programs. This language is the same as the language we provided to your staff on February 17, with one exception. We have added our proposal to adjust student loan interest rates which Vice President Gore announced on February 25.

Student Loan Interest Rates and Related Improvements

The Administration's plan -- to go forward with a scheduled 10% reduction in the interest rate on student loans while making improvements in the program so that banks can continue to participate -- is designed to preserve low interest rates for students and maintain student access to loans. The lower rate -- due to take effect on July 1 -- has been criticized by banks who say it is not profitable enough. But a new Treasury Department analysis indicates that Congress could address the lenders' concerns "at little or no net cost to students." The Administration is preparing to eliminate unnecessary costs to lenders by changing the benchmark for setting the interest rate to an instrument that more closely tracks lenders' own financing practices. This makes a lower rate possible for student borrowers.

In addition to this proposed change in how student interest rates are calculated, the President's FY 1999 budget and the HEA legislative language that we have already provided to Committee staff include a comprehensive restructuring of the Federal Family Education Loan (FFEL) program guaranty agency system to a performance-based fee-for-service model. By increasing accountability, standardizing policies and procedures, and rewarding guaranty agencies for the effective provision of specific, clearly defined services, these proposals offer clear benefits for lenders and schools; save Federal taxpayers over $2 billion over FY 1999-2003; and significantly improve the effectiveness of the FFEL program as a whole.

In brief, the Administration's proposal to streamline the guaranty agency system is built around six major provisions: (1) the Federal Government will pay 100 percent of all eligible default claims directly to lenders. Guaranty agencies will no longer be required to pay a small share of the cost of each default from Federal funds held under their trusteeship. (Lenders will continue to bear a small portion of the cost of each default;) (2) guaranty agency reserve funds will be returned to the Treasury. Under the current system, agencies use these funds to pay lender default claims, and are then reimbursed by the Federal Government. With the Department paying lenders directly, these reserve funds will no longer be needed; (3) the percentage of default collections agencies may retain will be reduced to more accurately reflect their collection costs. Agencies currently retain 27 percent of all collections; this amount will be reduced to 18.5 percent under the President's proposal, similar to the rate paid to collections contractors; (4) current, ineffective Federal payments to encourage agency default prevention activities will be replaced with a lender-paid fee based on successful agency efforts to bring delinquent loans current; (5) agency administrative funding will be based on fees tied to the provision of specific services, rather than on the current, statutorily set entitlements; and, (6) agencies will operate under 5-year, performance-based agreements that can be terminated for substantial performance failure.

These proposals offer the following significant benefits to FFEL program participants:

• Reduced compliance costs. Lenders and schools currently have to track and comply with policies and processes that vary widely across the 36 guaranty agencies. These diverse requirements, which change frequently as the various agencies revise their systems and procedures, greatly increase the cost and complexity of participating in the FFEL program. Under the President's proposal, in which lender claims are paid directly by the government, standard procedures will be established that will greatly reduce compliance costs for lenders and schools.

• Increased flexibility to consider new approaches. By simplifying the resolution of default claims, the President's proposal opens the door for consideration of new approaches that will streamline lender operations, reduce unnecessary paperwork, and take full advantage of new technologies. For example, under this approach, the Department would issue certificates to individual lenders, which would no longer have to document guarantees on a loan-by-loan basis. This proposal alone could dramatically streamline FFEL program processes and paperwork requirements.

• Potential reduced default costs. Under current law, guaranty agencies receive payments based on their success in delaying defaults; many of these loans, however, ultimately go into default after the payments are made. Under the President's plan, agencies would be paid by lenders for bringing delinquent loans current. These loans are much more likely to remain in repayment, safeguarding a stream of future repayments for the lenders; lowering institutional cohort default rates, which are the basis for continued eligibility to receive Federal student aid funds; and avoiding default costs for the taxpayer.

• Greater financial accountability. The FFEL system has long been plagued by inconsistent, unreliable financial data, which the General Accounting Office, the Department's Inspector General, and a series of congressional investigations have all highlighted as a significant impediment to sound program management. Under the President's proposal, failure to provide timely, accurate, and consistent data to the Department will be grounds for terminating a guaranty agency's participation in the program.

• Greater efficiency. Under the President's proposal, agencies will be free to concentrate on those activities that they do best. For example, agencies with efficient collection activities will continue to earn significant revenue under the President's proposal to reduce the amount retained on collections from 27 percent to 18.5 percent. (The proposed level roughly reflects the cost of the Department's own collection activities.) Other agencies, with less efficient collection efforts, will be encouraged to streamline their operations or focus on other areas.

Guiding Principles for Reauthorization

The Department's HEA reauthorization proposals are based on seven guiding principles: (1) make college more affordable, (2) simplify the student aid process, (3) ensure students receive a high quality education and taxpayer dollars are well spent, (4) encourage Americans to work and save for college, (5) help more low-income Americans prepare for and go to college, (6) help working Americans improve their wages and their lives through further education, and (7) recruit qualified teachers to high-need communities with a teacher shortage.

Within each principle, and within many of the specific reauthorization proposals, we have also stressed administrative flexibility, so that we can respond to technological innovations and provide financial assistance in the easiest way possible to students and families. The challenge of this reauthorization is to maximize the effectiveness of our investment in postsecondary education. Our overall proposal is ambitious, but realistic. We are recommending targeted program improvements and reforms that we can support while maintaining a balanced Federal budget.

MAKE COLLEGE MORE AFFORDABLE

The President has emphasized universal access to postsecondary education and lifelong learning as a top priority of his Administration. Our reauthorization proposals build upon the strong bipartisan support that exists for postsecondary education and complement the historic higher education tax proposals enacted last year. Clearly, they will set the direction for Federal support of postsecondary education as we enter the next century.

More than ever before, education is the fault line between those who will prosper in the new economy, and those who will be left behind. Today's good jobs increasingly require skills and training beyond a high school education, and effective and accessible postsecondary education is critically important to enhancing the productivity of our workforce and enriching the lives of our citizens. In fact, the most recent estimates available from the Census Bureau show that a person with a bachelor's degree earns about $600,000 more in today's dollars over the course of a lifetime than a person who did not continue his or her education beyond high school.

For over 30 years, the HEA has successfully promoted access to postsecondary education, with college enrollment increasing from 5.9 million students in the fall of 1965 to 14.3 million in the fall of 1995. In academic year 1998-99, more than 8 million students will receive more than $40 billion through HEA student financial aid programs, at a cost to the Federal Government of approximately $12 billion. This is a good investment in America's future.

But our task is unfinished. Students from low-income families still enroll in higher education at far lower rates than do their peers from more affluent families. In 1996, only 49 percent of 18- and 19-year-old high school graduates from the lowest income quintile entered college within two years of graduation, compared to 58 percent of students in the middle three quintiles and nearly 80 percent of students in the highest quintile. Ensuring access to postsecondary education and making college affordable for all students are critical goals of our HEA reauthorization proposals.

Pell Grants, which are the foundation of Federal student aid, have made postsecondary education possible for millions of low-income students who otherwise would not have had this opportunity. Bipartisan support in Congress has resulted in considerable increases in Pell Grant funding and an increase in the number of student recipients. We would like the reauthorized HEA to provide a strong Pell Grant program, and in future budgets we will propose annual increases in the maximum Pell Grant award, as long as they can be paid for within a balanced budget. To this end, the Administration proposed a $3,100 maximum award in the 1999 budget to provide a total of $7.6 billion in Pell Grants to nearly 4 million students.

Many students and families increasingly rely on student loans to finance postsecondary education. In order to reduce the costs of borrowing, we are proposing to reduce the loan fees that borrowers must pay by 1 percent in 1999, and eliminate them entirely for needy students by 2003, saving the average student borrower $40 next year and needier student borrowers an average of $150 in 2003. These savings translate into additional dollars that borrowers can spend to cover educational expenses or to reduce borrowing. Furthermore, for students who choose to repay their Direct loans as a share of their income, we are proposing to clarify that amounts forgiven after 25 years of repayment should not be subject to income taxes. This tax burden should not be inflicted on borrowers who have responsibly worked to pay off their debts over a long period of time.

To improve HEA fellowship programs for graduate students, we are proposing to consolidate existing fellowship programs into a new, single, streamlined, and simplified National Need Graduate Fellowship program, which would promote high-quality, graduate-level teaching and research in areas of national need, and encourage women, minorities, and individuals with disabilities to prepare for postsecondary academic careers in which they are underrepresented. The new program would provide needed flexibility while retaining important elements of the programs that would be consolidated.

Despite the progress we have made in ensuring access and making college more affordable, we are concerned that students and parents, especially those from low-income families, have incomplete and sometimes misleading information on the cost of attending postsecondary education, the availability of financial aid, and eligibility requirements for aid. Also troubling are recent reports indicating that parents of even very young children view college costs as one of their foremost worries. Although it is not the role of the Federal Government to determine tuition levels, we can do more to allay fears about college prices by providing more up-to-date information for families, encourage long-term planning for education after high school, and help institutions find innovative ways to lower their own costs.

The Department has produced and is widely distributing an information guide entitled "Getting Ready for College Early" that is intended to address these needs. This guide for parents of middle school students describes typical college costs, the financial and academic steps necessary to prepare for college, and the types of financial aid available to students. Although this publication has been in print only since last August, we have already distributed nearly 400,000 copies. As with all of our publications, "Getting Ready for College Early" is available on our award-winning World Wide Web site and through our toll-free number, 1-800-USA-LEARN.

In addition, the President has requested in his FY 1999 budget to provide information on preparation for college to over 10 million middle school students, with particular emphasis on students from high-poverty areas. The $15 million Early Awareness Information program would educate students and their parents about the importance of higher education and the many steps necessary to prepare for college, through pamphlets and videos, community events, and public service announcements. This new program would also inform families about the academic course work that is needed in middle school and high school to gain entrance into college, and about the financial aid opportunities available to finance postsecondary education.

We are also encouraging institutions to operate more efficiently through programs such as the Fund for the Improvement of Postsecondary Education ( FIPSE ). FIPSE has supported projects that encourage innovation in postsecondary education that enhance quality and cost effectiveness. FIPSE is currently accepting proposals in a new grant competition on innovative ways to control costs while maintaining the quality of higher education. This effort is consistent with the recommendations of the National Commission on the Cost of Higher Education, which highlighted FIPSE as a valuable program and recommended that it be reauthorized. We will continue to stress dissemination of model practices as an important feature of the reauthorized FIPSE, thereby encouraging replication of the exciting and effective projects it funds.

SIMPLIFY THE STUDENT AID PROCESS

Our second guiding principle is that the reauthorized HEA should continue to improve program management and simplify aid delivery. We intend to reduce burden on institutions and provide them the flexibility to manage the programs so that they can serve students better. We must also ensure that students and postsecondary institutions receive efficient, seamless and predictable customer service that enables them to plan ahead, while maintaining accountability for Federal funds. Our reauthorization proposals, thus, include a number of changes that would allow us to develop and use new technologies and systems, simplify existing systems, and reduce burden for students, schools and the Department.

For example, we are committed to adopting the fundamental elements in support of a performance-based organization (PBO) structure for delivering student aid. Creation of this type of organization would enhance the Department's flexibility with respect to potential management and contracting reforms, and allow the Department to deliver student aid more efficiently. At the same time, the organization would be held accountable for results, and the Secretary would maintain control of policy.

We are also submitting proposals that would simplify the student aid application process and allow institutions to make earlier financial aid packaging decisions. We would consult with all relevant parties before implementing this authority, but believe that it would help students and parents plan for and finance college more effectively while reducing administrative and applicant burden. Moreover, we are proposing clarifications to the provisions that currently authorize financial aid administrators to use their professional judgment in making adjustments in the determination of need that would clarify that these particular protections apply to dislocated workers.

Another way to reduce burden for students is to allow the use of the Free Application for Federal Student Aid (FAFSA) as the loan application for the FFEL program. This proposal has the widespread support of the higher education community and would streamline the application process for schools, lenders, and the Department.

We have made big strides in the past few years in reinventing our regulations and using tailored regulations that balance flexibility and accountability. In order to continue to move away from a "one size fits all" approach and enable the Department to more effectively target its resources on institutions needing more attention and assistance, we are proposing a performance-based approach to institutional oversight that would create a proper balance between reducing burdens on schools and protecting students and Federal funds. A gatekeeping and oversight system based on institutions' respective track records and the relative risk each poses to the Federal taxpayer would recognize the diversity of American higher education, reduce burden where appropriate, provide incentives for institutions to be fiscally and administratively responsible, and target Federal oversight resources on high-risk institutions. We are also proposing to simplify substantially the rules that institutions must follow regarding the refund of Federal student aid when a student withdraws. These changes to the current refund requirements would make the refund process simpler and easier to understand for both schools and students, and were developed with the valuable input of the higher education community.

ENSURE STUDENTS RECEIVE A HIGH QUALITY
EDUCATION AND TAXPAYER DOLLARS ARE WELL SPENT

Ensuring that Title IV student aid funds are used appropriately and that taxpayer funds are not wasted continues to be a crucial part of the Department's mission. The Administration attempts to encourage students to complete their studies in a timely fashion. To that end, we are seeking to impose time limits on a student's ability to receive Pell Grants. Students would be able to receive Pell Grants for up to 150 percent of the time normally required to complete their course of study. Time limits would be adjusted for part-time students, while students with disabilities would be exempt from the time limits. For example, a student who is enrolled half-time in a 2-year associate degree program would be eligible for Pell Grants for up to six years. By providing different treatment for students with disabilities and those who enroll part-time, our proposal is sensitive to their particular needs.

In addition, we believe that institutions that are not providing adequate education or training should not be eligible to participate in federal programs. We are proposing to extend the so-called "70/70" requirement, which requires that 70 percent of an institution's students must graduate and 70 percent must find jobs in order for a program to be eligible for Title IV aid, to more programs and institutions. Currently, the requirement applies only to very short-term vocational programs; we are proposing that all vocational programs of one year or less at all proprietary institutions be subject to the 70/70 rule. Extending this requirement to more schools would ensure that proprietary institutions that offer vocational programs are providing effective education, serving their students well, and meeting their mission to train students for employment in a job commensurate with their education.

The Secretary would also be authorized to prescribe in regulation additional performance measures that are similar to the types of performance measures currently under consideration by Congress in the job training context. Furthermore, we are proposing that institutions make publicly available certain student outcome information (i.e. program completion rates, job placement rates, and earnings) regarding programs that are two academic years or less and provide occupational training. These new requirements would significantly enhance the ability of students to make informed choices.

Similarly, we believe that institutions with high student loan default rates -- default rates greater than 25 percent for three consecutive years -- are not serving their students well and should not be eligible to participate in any of the student aid programs. Certain institutions that face exceptional circumstances, such as those enrolling a significantly high proportion of low-income students and others with few borrowers, would be exempt from the loss of eligibility under our proposal.

Finally, in order to reduce federal costs and improve efficiency in the Federal Family Education Loan (FFEL) program, we are proposing to streamline the current guaranty agency system to make it more accountable and performance-based, and clarify that the Federal Government is the sole insurer of all guaranteed student loans. These proposals are discussed in further detail at the beginning of this letter.

ENCOURAGE AMERICANS TO WORK AND SAVE FOR COLLEGE

Making college more affordable and ensuring access to postsecondary education for all Americans continues to be the most important goal of Federal postsecondary education policy. President Clinton extends the concept of educational access to mean "opportunity with responsibility." And while the States, institutions of higher education, and the Federal Government all have important roles in making that opportunity a reality, students and their parents must also take an active role in financing their own education. We believe, though, that they should be given help and incentives to work and save for postsecondary education, and to do so without jeopardizing the amount of aid that would otherwise be available.

The current need analysis formula -- which determines how much financial aid a student is eligible to receive -- may discourage students from working and families from saving. In order to avoid penalizing students who work during the summer or during the school year, we are proposing to double the income protection allowance for dependent students and raise significantly the income offsets for independent students without dependents. These changes would build on changes enacted last year and significantly expand Pell Grant eligibility, while enforcing the notion that students are expected to study hard and pay some of the costs of their own education, if possible.

A way we can encourage savings is to develop an alternative asset calculation in the determination of need. However, any change would first require consultation with all relevant parties, and it would have to ensure that low-income aid applicants are not penalized. This proposal could create a fairer way to incorporate savings into the need formulas and would simplify significantly the aid application for students and families, because they would have less financial information to report.

HELP MORE LOW-INCOME AMERICANS PREPARE FOR AND GO TO COLLEGE

By forging strong links among elementary and secondary education and postsecondary education, we can establish crucial connections at both ends of the educational spectrum that complement and increase the effectiveness of our investment in student financial aid. We also want to strengthen the Federal commitment to mentoring and early intervention for disadvantaged youngsters by stepping up efforts to inform students at an early age that college is a realistic possibility.

The TRIO programs support and encourage precollegiate students by preparing them for enrollment and success in college. We want to strengthen and expand the TRIO programs, which are a proven success. An evaluation conducted by Mathematica Policy Research showed that Upward Bound participants take more academic course work than nonparticipants. In addition, participants who benefit most from Upward Bound in the short term include Hispanics and students with low educational expectations. We are proposing to increase TRIO's emphasis on projects in underserved geographic areas. For each competition, the Secretary would compare demographic data regarding TRIO-eligible students with TRIO program data to determine which geographic areas are underserved by these programs. This proposal would enable us to respond to changing demographics and ensure that benefits of the programs are reaching the students that are most in need of these valuable services.

In an effort to reach whole groups of disadvantaged students at even younger ages, we are proposing a new High Hopes for College program. This program will build upon TRIO activities, beginning intensively in the middle school grades and following students through high school. Specifically, High Hopes would provide over 1 million needy students with effective information, tutoring, mentoring, and academic preparation to prepare them for college. By partnering colleges with up to 2,500 high-poverty middle schools, this program would motivate young people and their families to develop and deepen their aspirations and commitment to pursue postsecondary education.

We can study the effects of alternative packages of Federal student aid -- in combination with institutional aid and other resources -- on the postsecondary education access and retention of low-income students and students from underrepresented groups through our proposed $20 million Access and Retention Innovation research program.

Finally, we want to raise the quality of education delivered to underserved and minority students by continuing our support for Title III. For FY 1999, we are requesting a $44 million, or 20 percent overall, increase in Title III funding to serve these low-income students. For Historically Black Colleges and Universities, we are requesting a $16 million, or 13.5 percent, increase, to $134.5 million. And as part of the President's Hispanic Initiative, we are proposing to more than double the support for Hispanic-serving Institutions (HSIs) from $12 million to $28 million. In addition, our reauthorization proposal moves the HSIs to a new part of Title III to recognize the important role they serve in educating Hispanics and other low-income students. Also, we are proposing a new part in Title III for Tribal Colleges and Universities to improve, strengthen, and expand their capacity to serve Native Americans. These proposals support the Department's mission to ensure access to high quality postsecondary education by providing federal aid to institutions serving large numbers of needy and underrepresented students.

HELP WORKING AMERICANS IMPROVE THEIR WAGES AND
THEIR LIVES THROUGH FURTHER EDUCATION

We also want to respond to changes in the demographics of the college population as well as technological innovations. Many adult Americans want, and need, to improve their education and upgrade their skills, but find it difficult to do so, as they are often overwhelmed with many other responsibilities. However, with the power of technology, opportunities for lifelong learning make it easier for adults who are faced with the time and location constraints of balancing work and families, or are physically limited from pursuing traditional higher education, for instance, by a disability or by living in a remote location. Non-traditional models of learning based on technology can provide people the flexibility in education they need.

During the past 10 years, technological advancements incorporating print, telephone, fax, television, radio, video and audio conferencing, the Internet, e-mail, voice mail, and computer-based integrated telecommunications systems have greatly enhanced educational opportunities. In 1995, 33 percent of all higher education institutions offered distance education to more than 700,000 students. And while the rapid growth in technology-based education was not envisioned as recently as five years ago, it is apparent that this model will continue to spread in ways that cannot be anticipated today. While on-campus, or site-based, education will continue to play an important role in providing students with experiences and opportunities that cannot be duplicated in a technological environment, the use of technology will become even more important in expanding access to students who are unable to take advantage of on-campus programs.

In institutions that offer distance learning programs and seek to participate in the Federal student aid programs, we propose that accrediting agencies develop and enforce appropriate outcome standards in order to ensure program quality. To provide equivalent student aid opportunities for all learners, while ensuring the integrity of Federal education funds, we are also proposing to modify several provisions of the HEA, including those that limit institutional eligibility for Title IV aid based on percentages of students and programs in distance learning.

In addition, the Administration is proposing a new $30 million competitive grant program that would support projects using distance learning technologies and other innovations to enhance the delivery of postsecondary education and lifelong learning opportunities to students of all ages. The Learning Anytime Anywhere Partnership Program would encourage partnerships between educational institutions (including four-year institutions, community colleges, technical institutes, adult literacy and education programs, and regional vocational/technical schools that serve adults), community-based organizations, software and technology developers, learning assessment specialists, and private industry employers in an effort to develop new models of quality education that can reach a variety of students who face time and place constraints. Under this initiative, projects would emphasize the development of innovative ways to ensure quality and measure student achievement that are appropriate to distance education.

RECRUIT QUALIFIED TEACHERS TO HIGH-NEED
COMMUNITIES WITH A TEACHER SHORTAGE

Finally, we are concerned about the current level of investment in teacher recruitment and preparation. In order to help meet the President's goal of ensuring a talented, dedicated, and well-prepared teacher in every American classroom, we are proposing to replace the numerous small, disconnected authorities within the current Title V with two new programs that would attract 35,000 qualified teachers over the next five years to high-poverty urban and rural areas, and dramatically improve the quality of training and preparation provided to our future teachers.

The Recruiting New Teachers for Underserved Areas program is designed to increase the number of well-prepared teachers, especially in underserved urban and rural areas. The program would award competitive grants to partnerships between teacher preparation programs and high-poverty school districts. These partnerships would collaboratively determine their schools' needs for teachers, identify a pool of potential teachers to meet those needs, and develop recruitment, preparation, and retention programs tailored to those individuals. The partnerships would provide both scholarships and support services to participants who commit to teaching in high-poverty schools.

The Lighthouse Partnerships program is designed to be a catalyst for improving teacher education across the country. It would provide five-year competitive grants to a number of partnerships among teacher preparation institutions and school districts in high-poverty urban and rural areas. The program, which emphasizes the vital role of K-12 educators in designing and implementing effective teacher preparation programs, would link higher education institutions from across the country with each other, and with K-12 schools, to share best practices, learn from each other's work, and improve their teacher education programs.

CONCLUSION

The Administration's HEA reauthorization proposals address important national needs and priorities and will aid in the continuing development of a strong system of postsecondary education and lifelong learning for all Americans. They are the product of a long and open Department policy development process, including extensive public hearings, that sought to obtain the best ideas from all concerned. We urge you to give them serious consideration and look forward to working with you in improving the Higher Education Act in ways that will allow us to meet the challenges of the next century.

The Omnibus Budget Reconciliation Act (OBRA) requires that all revenue and direct spending legislation meet a pay-as-you-go (PAYGO) requirement. That is, no such bill should result in an increase in the deficit, and, if it does, it will trigger a sequester if not fully offset. The net effect of this proposal would reduce direct spending. Because of the inclusion of the new interest rate policy, the PAYGO savings are greater than assumed in the President's Budget.

If Congress enacts the Administration's HEA proposals, the Department projects that the following savings to the taxpayers will result:

PAYGO Savings
(in millions of dollars)

The Office of Management and Budget advises that there is no objection to the submission of this report to the Congress and that the adoption of the proposals described herein would be in accord with the program of the President.

Yours sincerely,

Richard W. Riley

March 2, 1998

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