Order Code RL34452
Proposals to Ensure the Availability of Federal
Student Loans During an Economic Downturn:
A Brief Overview of H.R. 5715 and S. 2815
Updated May 29, 2008
David P. Smole
Specialist in Education Policy
Domestic Social Policy Division

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Proposals to Ensure the Availability of
Federal Student Loans During an Economic Downturn:
A Brief Overview of H.R. 5715 and S. 2815
Summary
Federal student loans are made available under two major loan programs
authorized under the Higher Education Act (HEA) of 1965, as amended: the Federal
Family Education Loan (FFEL) program, authorized by Title IV, Part B, of the HEA;
and the William D. Ford Federal Direct Loan (DL) program, authorized by Title IV,
Part D, of the HEA. Under the FFEL program, private lenders make loans and the
federal government guarantees lenders against loss due to borrower default, death,
permanent disability, or, in limited instances, bankruptcy. Under the DL program,
the federal government lends directly to students and their families, using federal
capital (i.e., funds from the U.S. Treasury). The FFEL program is the successor
program to the guaranteed student loan (GSL) program, originally enacted under
Title IV, Part B, of the HEA. It is the older and larger of the two major federal
student loan programs. Approximately four-fifths of non-Consolidation loans are
made under the FFEL program, while approximately one-fifth are made under the DL
program.
During the first several months of 2008, a number of FFEL program lenders
have curtailed or ceased their participation in the FFEL program, citing reasons that
include difficulties in raising capital through the securitization of student loan debt
and reductions in lender subsidies enacted under the College Cost Reduction and
Access Act of 2007 (CCRAA). Concerns were raised that if lender participation in
the FFEL program decreased substantially or if a substantial portion of lenders ceased
lending to students who attend certain institutions of higher education (IHEs), large
numbers of students might face difficulty in obtaining FFEL program loans. In
addition, concerns were raised about access to borrowing opportunities for students
who have come to rely on private (non-federal) student loans because they had
exhausted their eligibility for federal student loans.
Legislation pertaining to federal student loans has been active in the 110th
Congress. On October 27, 2007, the CCRAA was enacted, which made numerous
changes to the federal student loan programs. Also in the 110th Congress, the House
and the Senate have passed bills, H.R. 4137 and S. 1642, respectively, to amend and
extend the HEA. In April 2008, H.R. 5715, the Ensuring Continued Access to
Student Loans Act of 2008, was introduced in the House; and S. 2815, the
Strengthening Student Aid for All Act, was introduced in the Senate to amend the
HEA to address concerns about the continued availability of federal student loans.
Ultimately, the House and the Senate amended and passed H.R. 5715 to amend the
HEA to address concerns about the availability of federal student loans. On May 6,
2008, the Ensuring Continued Access to Student Loans Act of 2008 was enacted as
P.L. 110-227. This report examines amendments to the federal student loan
programs made under P.L. 110-227. It will not be updated.

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Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Overview of the Federal Student Loan Programs . . . . . . . . . . . . . . . . . . . . . 2
H.R. 5715 and S. 2815 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
H.R. 5715 as Enacted (P.L. 110-227) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Increased Borrowing Limits for Unsubsidized Stafford Loans
to Undergraduate Students . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Repayment of Parent PLUS Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Extenuating Circumstances for Individuals with Adverse Credit
to Borrow PLUS Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Lender-of-Last-Resort Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Student Eligibility for LLR Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Institution-Wide Student Qualification for LLR Loans . . . . . . . . . . . . . 9
Requirements Applicable to LLR Lenders and Guaranty Agencies . . . 9
Advances of Federal Capital to Guaranty Agencies for LLR Loans . . 10
Mandatory Funding for LLR Advances to Guaranty Agencies . . . . . . 10
Temporary Authority for the Secretary to Purchase FFEL
Program Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Sense of Congress on Access to Student Loans . . . . . . . . . . . . . . . . . . . . . . 11
Academic Competitiveness Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Tables
Table 1. Undergraduate Annual and Aggregate Stafford Loan Limits, by
Student Type and Level: Prior Law and as Amended by P.L. 110-227 . . . . . 5

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Proposals to Ensure the Availability of
Federal Student Loans During an Economic
Downturn: A Brief Overview of
H.R. 5715 and S. 2815
Background
During the first several months of 2008, a number of Federal Family Education
Loan (FFEL) program lenders curtailed or ceased their participation in the FFEL
program, citing reasons that include difficulties in raising capital through the
securitization of student loan debt and reductions in lender subsidies enacted under
the College Cost Reduction and Access Act of 2007 (CCRAA; P.L. 110-84).1
Concerns were raised that if lender participation in the FFEL program decreased
substantially or if a substantial portion of lenders ceased lending to students who
attend certain institutions of higher education, large numbers of students might face
difficulty in obtaining FFEL program loans. In addition, concerns were also raised
about access to borrowing opportunities for students who have come to rely on
private (non-federal) student loans because they have exhausted their eligibility for
federal student loans.
Legislation pertaining to federal student loans has been active in the 110th
Congress. On October 27, 2007, the CCRAA was enacted, which made numerous
changes to the federal student loan programs. Also in the 110th Congress, the House
and the Senate have passed bills, H.R. 4137 and S. 1642, respectively, to amend and
extend the HEA.2 On April 14, 2008, the House Committee on Education and Labor
reported H.R. 5715 (H.Rept. 110-583), the Ensuring Continued Access to Student
Loans Act of 2008; and on April 17, 2008, the bill was passed by the House of
Representatives. Action on the House bill closely followed introduction of S. 2815,
the Strengthening Student Aid for All Act, in the Senate on April 3, 2008. H.R. 5715
and S. 2815 were both introduced to amend the HEA to address concerns about the
continued availability of federal student loans. On April 30, 2008, the Senate
amended and passed H.R. 5715; and on May 1, 2008, the House approved H.R. 5715,
1 For a brief overview of amendments to the HEA enacted under the CCRAA, see CRS
Report RL34077, Student Loans, Student Aid, and FY2008 Budget Reconciliation, by Adam
Stoll, David P. Smole, and Charmaine Mercer.
2 For an examination of proposals to amend the HEA through H.R. 4137 and S. 1642, see
CRS Report RL34283, Higher Education Act Reauthorization in the 110th Congress: A
Comparison of Major Proposals, by Blake Alan Naughton, Rebecca R. Skinner, David P.
Smole, Jeffrey J. Kuenzi, Richard N. Apling.

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CRS-2
as amended and passed by the Senate. On May 7, H.R. 5715 was signed by the
President and became P.L. 110-227.
Overview of the Federal Student Loan Programs
The federal government operates two major student loan programs: FFEL
program, authorized under Title IV, Part B of the Higher Education Act (HEA), and
the William D. Ford Federal Direct Loan (DL) program, authorized under Title IV,
Part D of the HEA.3 These programs make available loans to undergraduate,
graduate and professional students, and the parents of undergraduate dependent
students, to help them finance the costs of postsecondary education. Together, these
programs constitute the largest source of direct aid supporting students’
postsecondary educational pursuits. In FY2008, it is estimated that these programs
will provide $70.3 billion in new loans to students and their parents.
Under the FFEL program, loan capital is provided by private lenders, and the
federal government guarantees lenders against loss through borrower default, death,
permanent disability, or, in limited instances, bankruptcy. Under the DL program,
the federal government provides the loans to students and their families, using federal
capital (i.e., funds from the U.S. Treasury). The two programs rely on different
sources of capital and different administrative structures, but essentially disburse the
same set of loans: subsidized Stafford Loans and unsubsidized Stafford Loans for
undergraduate, graduate and professional students; PLUS Loans for parents of
undergraduate dependent students, graduate students and professional students; and
Consolidation Loans through which borrowers may combine their federal student
loans into a single loan payable over a longer term, that varies according to the
combined loan balance.
The loans made through the FFEL and DL programs are low-interest loans, with
maximum interest rates for each type of loan established by statute. Subsidized
Stafford Loans are need-based loans and are only available to students demonstrating
financial need. The Secretary of Education (the Secretary) pays the interest that
accrues on subsidized Stafford Loans while borrowers are in school, during a 6-
month grace period, and during authorized periods of deferment. Unsubsidized
Stafford Loans and PLUS Loans are non-need-based loans and are available to
borrowers without regard to their financial need. Borrowers are fully responsible for
paying the interest that accrues on these loans.
H.R. 5715 and S. 2815
In the 110th Congress, bills were introduced in the Senate (S. 2815) and the
House (H.R. 5715) to amend the HEA to ensure the continued availability of federal
student loans. These bills were designed to address a separate set of issues than bills
passed by the Senate (S. 1642) and the House (H.R. 4137) to reauthorize the HEA.
In both S. 2815 and H.R. 5715, a number of amendments would affect loans made
3 A third federal student loan program, the Federal Perkins Loan program, is also authorized
under the HEA, at Title IV, Part E. It is beyond the scope of this report.

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CRS-3
under both the FFEL and DL programs, while other amendments would apply only
to the FFEL program.
As introduced, both S. 2815 and H.R. 5715 would have amended the HEA to
increase borrowing limits for unsubsidized Stafford Loans; delay the start of
repayment for parent borrowers of PLUS Loans; update procedures for ensuring the
availability of lender-of-last-resort (LLR) loans under the FFEL program; and
authorize the Secretary to purchase loans previously made under the FFEL program.
S. 2815 would have also amended the HEA to establish a negative expected family
contribution (EFC) for use in need analysis, a change intended to broaden student
eligibility for need-based federal student aid. In contrast, H.R. 5715, as introduced
in the House, contained language to amend the HEA to extend eligibility to borrow
PLUS Loans, under extenuating circumstances, to individuals with adverse credit, if
their adverse credit was the result of being no more than 180 days delinquent on
home mortgage payments. Finally, H.R. 5715 also expressed a sense of Congress
that institutions such as the Federal Financing Bank, the Federal Reserve, and Federal
Home Loan Banks, in consultation with the Secretaries of Education and the
Treasury, should consider using available authorities to assist in ensuring continued
access to federal student loans.
H.R. 5715 as Enacted (P.L. 110-227)
On May 7, 2008, H.R. 5715, the Ensuring Continued Access to Student Loans
Act of 2008, became P.L. 110-227. It amends the HEA by
! increasing annual and aggregate borrowing limits for unsubsidized
Stafford Loans to undergraduate students;
! delaying the start of repayment for parent borrowers of PLUS Loans;
! extending eligibility for individuals with adverse credit to borrow
PLUS Loans, under extenuating circumstances;
! revising procedures for ensuring the availability of lender-of-last-
resort (LLR) loans under the FFEL program;
! temporarily authorizing the Secretary to purchase loans previously
made under the FFEL program at no net cost to the federal
government; and
! expanding eligibility for aid provided through American
Competitiveness (AC) Grants and Science and Mathematics Access
to Retain Talent (SMART) Grants.
The Ensuring Continued Access to Student Loans Act of 2008 also expresses
a sense of Congress that institutions such as the Federal Financing Bank, the Federal
Reserve, and Federal Home Loan Banks, in consultation with the Secretaries of
Education and the Treasury, should consider using available authorities to assist in
ensuring continued access to federal student loans for students and their families; and
that any action taken by these entities should not limit the Secretary’s authority with
regard to the LLR program, nor the Secretary’s authority to purchase loans previously
made under the FFEL program. P.L. 110-227 also requires the General
Accountability Office (GAO) to evaluate the impact that increases in federal student

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loan limits may have on tuition, fees, room and board, and on the borrowing of
private (non-federal) student loans.
The remainder of this report provides a brief overview of provisions in the
Ensuring Continued Access to Student Loans Act of 2008 that amend the HEA to
address the continued availability of access to federal student loans.
Increased Borrowing Limits for Unsubsidized
Stafford Loans to Undergraduate Students
The amounts students may borrow in subsidized (need-based) and unsubsidized
(non-need-based) Stafford Loans are constrained by statutory and regulatory loan
limits. One set of limits applies to the annual and aggregate amounts students may
borrow in subsidized Stafford Loans. Another set of limits applies to the total annual
and aggregate amounts students my borrow in combined subsidized Stafford Loans
and unsubsidized Stafford Loans (hereafter, referred to as total Stafford Loans). The
terms and conditions for subsidized Stafford Loans are more favorable to students
than for unsubsidized Stafford Loans. As a form of need-based aid, the eligibility of
students to borrow subsidized Stafford Loans is contingent on their demonstrating
financial need. In contrast, students may qualify to borrow unsubsidized Stafford
Loans without regard to their financial need.
Both annual and aggregate loan limits vary by student dependency status and
educational level.4 In any year, a student may borrow subsidized Stafford Loans in
amounts up to the lesser of (a) the applicable annual subsidized Stafford Loan limits,
or (b) the student’s unmet financial need. In any year, a student may borrow total
Stafford Loans in amounts up to the lesser of (a) the applicable annual total Stafford
Loan limits, or (b) the amount remaining after subtracting other financial assistance
the student is expected to receive, from the cost of attendance (COA) at the school
the student attends. Aggregate loan limits constrain the amounts students may
borrow in subsidized Stafford Loans and total Stafford Loans, overall.
Until the enactment of the Ensuring Continued Access to Student Loans Act of
2008, the same annual subsidized Stafford Loan limits and total Stafford Loan limits
have applied to dependent undergraduate students for each comparable educational
level. However, annual total Stafford Loan limits that were higher than annual
subsidized Stafford Loan limits have applied to independent undergraduate students,
graduate and professional students, and dependent undergraduate students whose
parents are unable to obtain PLUS Loans, for each comparable educational level. In
most instances, loan limits were established by statute; however, aggregate total
4 For purposes of federal student aid, students may be classified as dependent on the
financial support of their parents, or independent of parental support. A student meeting at
least one of the following conditions is classified as an independent student: is 24 years of
age or older by December 31st of the award year; is married; is enrolled in a graduate or
professional program; has a dependent other than a spouse; is an orphan or a ward of the
court (or the applicant was until age 18); or is a military veteran or active duty service
member.

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Stafford Loan limits for independent undergraduate students, graduate students and
professional students have been set by the Secretary according to regulation.
P.L. 110-227 amends annual and aggregate borrowing limits for total Stafford
Loans for dependent undergraduate students, independent undergraduate students,
and dependent undergraduate students whose parents are unable to obtain a PLUS
Loan, effective for loans first disbursed on or after July 1, 2008. Amended loan
limits are presented in Table 1.
Table 1. Undergraduate Annual and Aggregate
Stafford Loan Limits, by Student Type and Level:
Prior Law and as Amended by P.L. 110-227
Total Stafford (sub. and unsub.)
Subsidized
Student Type
As Amended
Stafford
Prior Law
by P.L. 110-
227a
Dependent Undergraduate
1st year
$3,500
$3,500
$5,500
2nd year
$4,500
$4,500
$6,500
3rd year and above
$5,500
$5,500
$7,500
Prep. coursework: undergrad.
$2,625
$2,625
$4,625
degree or certificate program
Prep. coursework: graduate
$5,500
$5,500
$7,500
or professional programb
Teacher certificationb
$5,500
$5,500
$7,500
Aggregate
$23,000
$23,000
$31,000
Independent Undergraduatec
1st year
$3,500
$7,500
$9,500
2nd year
$4,500
$8,500
$10,500
3rd year and above
$5,500
$10,500
$12,500
Prep. coursework: undergrad.
$2,625
$6,625
$8,625
degree or certificate program
Prep. coursework: graduate
$5,500
$12,000
Not specified
or professional programb
Teacher certificationb
$5,500
$12,000
Not specified
Aggregate
$23,000
$46,000d
$57,500e
Sources: HEA, §§ 428 and 428H; 34 CFR 682.204; and P.L. 110-227.
Notes:
a. Effective July 1, 2008.
b. For individuals who have obtained a baccalaureate degree.
c. These loan limits also apply to dependent undergraduate students whose parents are unable to
obtain PLUS Loans.
d. The statute directs the Secretary to prescribe an aggregate loan limit by regulation. The figure
shown has been established by regulation.
e. Enacted statutory aggregate loan limit.

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CRS-6
In general, effective July 1, 2008, annual total Stafford Loan limits are increased
by $2,000 above previously applicable loan limits for undergraduate students. With
this change, annual total Stafford Loan limits, for the first time, will be greater than
the corresponding annual subsidized Stafford Loan limits for dependent
undergraduate students. The amendments enacted under P.L. 110-227 do not specify
annual total Stafford Loan limits for two categories of students: independent
undergraduate students who have obtained a baccalaureate degree and who are
enrolled in preparatory coursework necessary for enrollment in a graduate or
professional degree or certification program, or are pursuing teacher certification.
Effective July 1, 2008, aggregate total Stafford Loan limits for undergraduate
dependent students are increased by $8,000, from $23,000 to $31,000. For
independent undergraduate students, and dependent undergraduate students whose
parents are unable to obtain a PLUS Loan, P.L. 110-227 establishes a statutory
aggregate total Stafford Loan limit of $57,500, which is an increase of $11,500 above
the previously applicable limit of $46,000, established by regulation.
Finally, P.L. 110-227 requires the Comptroller General to conduct a five-year
study to evaluate the impact of increases in federal student loan limits on prices for
tuition, fees, room and board; and on the borrowing of private (non-federal) student
loans. Interim and follow-up reports on results of the study must be provided to the
House Committee on Education and Labor and the Senate Committee on Health,
Education, Labor, and Pensions.
Repayment of Parent PLUS Loans
Prior to the enactment of the Ensuring Continued Access to Student Loans Act
of 2008, the repayment of PLUS Loans to parents, graduate students, and
professional students commenced not later than 60 days after the last disbursement
of the loan is made; with the first payment being due within 60 days of the loan
entering repayment. In contrast, the repayment of Stafford Loans commences the day
after six months following the borrower ceasing to be enrolled in school on at least
a half-time basis. Nonetheless, borrowers of PLUS Loans have been eligible to defer
repayment of their loans for a variety of reasons, to include while they are enrolled
in school.5 However, deferments have not been available to parent borrowers of
PLUS Loans for the period while the dependent student on whose behalf the loan was
made is enrolled in school.
Under P.L. 110-227, the HEA is amended to permit borrowers of parent PLUS
Loans to extend the period between disbursement and the commencement of
repayment. Effective July 1, 2008, parent borrowers of PLUS Loans will have the
option of delaying the commencement of repayment until six months after the date
5 For some borrowers of PLUS Loans, in-school deferments may be processed upon the
lender’s receipt of information confirming the borrower’s enrollment status, while a
deferment request with supporting documentation may be required for other borrowers. See
for example, U.S. Department of Education, Direct Loan Bulletin, DLB-07-03, “In-School
Deferments for Graduate/Professional Student Direct PLUS Loan Borrowers,” March 5,
2007, at [http://www.ifap.ed.gov/dlbulletins/0305DLB0703.html], visited April 14, 2008.

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the dependent student on whose behalf the PLUS Loan was made ceases to carry at
least a half-time workload. (Deferments remain available only during periods when
the borrower, as opposed to the student on whose behalf the loan was made, meets
the conditions required to qualify.) Interest begins accruing on PLUS Loans when
the loan is first disbursed. Parent borrowers who delay the commencement of
repayment will have the option of paying the interest as it accrues or having accrued
interest capitalized (i.e., added to the principal balance of the loan) no more
frequently than quarterly. Failure to pay the interest as it accrues may increase the
principal balance of a loan above the amount initially borrowed.
Extenuating Circumstances for Individuals with
Adverse Credit to Borrow PLUS Loans
To be eligible to borrow PLUS Loans, individuals may not have an adverse
credit history, as determined pursuant to regulations promulgated by the Department
of Education (ED). Under regulations promulgated by ED prior to the enactment of
P.L. 110-227, lenders have been required to obtain at least one credit report on all
applicants for PLUS Loans; and unless extenuating circumstances exist, lenders have
been required to consider an applicant to have an adverse credit history if the
applicant is 90 days or more delinquent on a debt payment; or if, within the past five
years, the applicant “has been the subject of a default determination, bankruptcy
discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off of a
Title IV debt.”6 Regulations have also required lenders to retain a record of the basis
for determining that extenuating circumstances exist for any borrower, such as an
updated credit report, or documentation from the creditor that the borrower has made
satisfactory arrangements to repay the debt.7
Under P.L. 110-227, the HEA is amended to specify certain extenuating
circumstances under which eligible lenders may extend PLUS Loans to individuals
who otherwise would have been determined to have adverse credit histories. The
amendments permit eligible lenders to determine that extenuating circumstances
exist, if during the period from January 1, 2007, through December 31, 2009, an
applicant is no more than 180 days delinquent on mortgage payments for a primary
residence or medical bill payments; or if an applicant is no more than 89 days
delinquent on any other debt payments. While this provision permits individuals
who are delinquent in repaying their debts to incur additional debt by borrowing
PLUS Loans, as noted above, the commencement of repayment of PLUS Loans may
be delayed until six months after the borrower, or the dependent student on whose
behalf the loan was made, ceases to be enrolled at least half-time.
Lender-of-Last-Resort Loans
Eligible borrowers have long been regarded as having an entitlement to obtain
Stafford Loans; although they have not been regarded as having an entitlement to
6 34 C.F.R. 682.201(c)(2)(ii) and 685.200(c)(2)(vii).
7 34 C.F.R. 682.201(c)(2)(v).

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borrow PLUS Loans due to the requirement to be credit-worthy.8 State guaranty
agencies must establish lender-of-last-resort programs through which loans must be
made available to eligible students who are otherwise unable to obtain them from an
eligible lender.9 Students’ become eligible to borrow LLR loans upon their receipt
of no more than two rejected loan applications from eligible lenders. Students
applying for LLR loans must not be subject to any additional eligibility requirements
beyond what is otherwise required under the FFEL program, and must receive a
response from the LLR lender within 60 days of filing an application.
A guaranty agency may designate an eligible lender as an LLR lender; or the
guaranty agency itself may function as the lender-of-last-resort. An eligible lender
serving as an LLR lender makes loans in the same manner it makes other FFEL
program loans, using private capital. As an incentive for lenders to make LLR loans,
the lender insurance percentage in the case of borrower default is 100% on LLR
loans, as opposed to 97% in the case of other loans. A guaranty agency serving as
an LLR lender may also make LLR loans using available funds.
If a guaranty agency becomes unable to ensure that LLR loans are made
available to eligible students — either by an LLR lender, or by making the loans
itself — the HEA provides the Secretary with authority to take a range of actions
to restore the availability of LLR loans. Prior to the enactment of P.L. 110-227, the
HEA authorized the Secretary to make emergency advances of federal funds to
guaranty agencies for purposes of making available LLR loans, if the Secretary
determines that (a) borrowers eligible for subsidized Stafford Loans were unable to
obtain such loans; (b) that the guaranty agency had the capability to provide LLR
loans, but could not do so without an advance of federal capital; and (c) that it would
be cost-effective to advance such funds. The HEA also specified that the Secretary
is authorized to make emergency advances of federal capital funds to another
guaranty agency for purposes of making LLR loans, if the Secretary determined that
the designated guaranty agency for a state did not have the capacity to make available
LLR loans. However, while the statute authorized the Secretary to advance funds to
guaranty agencies for purposes of making LLR loans, it did not clearly provide, nor
identify, a source of funds for the Secretary to draw upon to make such advances.
This ambiguity in the statute led to deliberation over the extent of the Secretary’s
authority to advance funds to guaranty agencies for purposes of making LLR loans.10
Under P.L. 110-227, several amendments were made to the LLR program.
These are briefly described below.
8 Students and parents must be afforded the opportunity to request a loan from any lender
that is eligible to make loans under the program; however, lenders are not required to make
loans universally available, nor to serve students attending all institutions.
9 Guaranty agencies are state or non-profit entities that administer the federal loan guaranty
and perform additional administrative tasks in operation of the FFEL program.
10 See for example, Paul Basken, “Spellings Sees Administration as Still Sorting Out Its
Authority on Lender-of-Last-Resort Issue,” The Chronicle of Higher Education, April 14,
2008.

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Student Eligibility for LLR Loans. Previously, the HEA specified that
guaranty agencies had an obligation to ensure that LLR loans would be made
available to students eligible to borrow subsidized Stafford Loans, but who were
unable to obtain them. In accordance with Department of Education regulations
implementing the LLR program, a lender-of-last-resort would be required to make
subsidized and unsubsidized Stafford Loans available to students eligible to receive
subsidized Stafford Loans; and would be permitted to make unsubsidized Stafford
Loans and PLUS Loans available to other eligible borrowers.11 Under P.L. 110-227,
the LLR program is amended to require guaranty agencies to make LLR loans
available to students and parents who are eligible for, but unable to obtain, subsidized
Stafford Loans, unsubsidized Stafford Loans, or PLUS Loans; or who attend an
institution designated for institution-wide student qualification for LLR loans
(described below).
Institution-Wide Student Qualification for LLR Loans. As noted above,
under prior law, individual students became eligible to borrow LLR loans upon the
receipt of two rejected loan applications. Under P.L. 110-227, the LLR program is
amended to temporarily authorize the Secretary through June 30, 2009, to also
designate institutions for institution-wide participation in the LLR program, at an
institution’s request. In order to designate an IHE for institution-wide participation,
the Secretary may require an IHE to demonstrate that, despite due diligence, it has
been unable to secure the commitment of FFEL program lenders to loans to students
attending the institution; to demonstrate that the number or percentage of students
attending the institution who are unable to obtain FFEL program loans exceeds a
minimum threshold; and meet other requirements as determined appropriate by the
Secretary. Institution-wide student qualification makes all students who attend the
institution, and the parents of dependent students, eligible to borrow LLR loans.
Requirements Applicable to LLR Lenders and Guaranty Agencies.
Statutory and regulatory provisions of the FFEL program establish the maximum
interest rates and fees that may be paid by borrowers. Lenders in the FFEL program
have often competed for borrowers by offering different packages of interest rate and
fee discounts. To attract borrowers, lenders may pay origination fees or default fees
without passing on the cost to students. Similarly, to attract loan business, guaranty
agencies may opt to pay the default fee. Under P.L. 110-227, the LLR provisions are
amended to prohibit LLR lenders from offering any borrower benefits on LLR loans
(e.g., waiving or reducing origination or default fees, or reducing interest rates) that
are more favorable to borrowers than the maximum interest rates, origination fees
and default fees, and other terms and conditions applicable to FFEL program loans.
Certain special requirements apply to guaranty agencies with respect to the
operation of LLR program. Among these, guaranty agencies must ensure that
information about the availability of LLR loans is provided to institutions of higher
education in the states the guaranty agency serves. Also, under the LLR program,
guaranty agencies are exempted from the otherwise applicable prohibition against
providing inducements to FFEL program lenders to secure the designation of the
guaranty agency as the insurer of its loans. The amendments to the LLR program
11 34 C.F.R. 682.401(c).

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enacted under P.L. 110-227 make guaranty agencies and lenders subject to the
prohibitions on inducements specified in the HEA at §§ 428(b)(3) and 435(d)(5),
respectively. The amendments also prohibit guaranty agencies and lenders that
operate as lenders-of-last-resort from advertising, marketing or promoting LLR loans,
other than the provision of required information about LLR loans to IHEs.
P.L. 110-227 also requires the Secretary of Education to review the
Department’s regulations on prohibited inducements by guaranty agencies to lenders;
and, as necessary, to revise them to ensure that guaranty agencies do not engage in
improper inducements with respect to the operation of the LLR program. The review
must be completed within 90 days of enactment; and a report must be provided to
House Committee on Education and Labor, and the Senate Committee on Health,
Education, Labor, and Pensions within 180 days of enactment.
Advances of Federal Capital to Guaranty Agencies for LLR Loans.
As noted above, previously the Secretary was required to determine that certain
conditions are met prior to advancing funds to guaranty agencies for purposes of
making LLR loans. Under P.L. 110-227, LLR program provisions were revised to
specify that the Secretary may advance funds to guaranty agencies for making LLR
loans if (a) eligible borrowers are unable to obtain subsidized Stafford Loans,
unsubsidized Stafford Loans, or PLUS Loans under the FFEL program, or an IHE has
been designated for institution-wide qualification for LLR loans; (b) that the guaranty
agency has the capability to provide LLR loans, but cannot do so without an advance
of federal capital; and (c) that it would be cost-effective to advance such funds.
Mandatory Funding for LLR Advances to Guaranty Agencies.
Effective with enactment of P.L. 110-227, mandatory appropriations are provided for
the Secretary to make emergency advances of federal funds to guaranty agencies for
purposes of making loans as lenders-of-last-resort.
Temporary Authority for the Secretary
to Purchase FFEL Program Loans
P.L. 110-227 amends the HEA to grant the Secretary temporary authority to
purchase loans previously made under the FFEL program. The DL program is
amended to authorize funding for the Secretary, in consultation with the Secretary of
the Treasury, to purchase, or enter into forward commitments to purchase, subsidized
Stafford Loans, unsubsidized Stafford Loans, and PLUS Loans first disbursed on or
after October 1, 2003, and before July 1, 2009, upon arriving at a determination that
there is an inadequate availability of capital to meet demand for new loans.12
The Secretary may purchase loans only if doing so is determined to be in the
best interest of the United States. In addition, the purchase of FFEL program loans,
and the cost of servicing such loans, must be determined jointly by the Secretaries of
Education and the Treasury, and the Director of the Office of Management and
Budget (OMB) to result in no net cost to the federal government. The Secretaries of
Education and the Treasury, and the Director of OMB are required to develop and
12 HEA, § 459A.

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publish emergency regulations specifying the methodology and factors to be adhered
to in determining that loans will be purchased at a price that will result in no net cost
to the government.
Lenders selling loans to the Secretary must use the proceeds from the sale to
ensure their continued participation as lenders under the FFEL program and to
originate new FFEL program loans. The Secretary may also enter into a contract
with lenders to continue servicing loans purchased, if the cost of doing so would not
exceed the cost to the government of otherwise servicing the loans, and if it is
determined to be in the best interest of borrowers. The authority for the Secretary to
purchase FFEL program loans expires July 1, 2009.
On May 21, 2008, the Secretary of Education issued a “Dear Colleague” letter
which briefly outlines how the Secretary plans to implement the authority granted
under P.L. 110-227 to purchase loans made under the FFEL program.13 The
Secretary identified two options. Under the first option, the Department of Education
(ED) will enter into agreements by July 1, 2009, to purchase FFEL program loans
originated for the 2008-2009 academic year. ED will purchase loans “at a price equal
to the sum of (i) par value, (ii) accrued interest (net of Special Allowance Payments),
(iii) the 1% origination fee paid to the Department, and (iv) a fixed amount of $75
per loan (used to defray the lender’s estimated administrative costs).”14 Lenders
entering into agreements with ED for the purchase of their loans will have until
September 30, 2009, to complete the sale. Upon completion of the sale of loans, ED
will obtain control over loan servicing.
Under the second option, ED will purchase “participation interests” in short-
term trusts comprised of pools of FFEL program loans originated for the 2008-2009
academic year. The price of participation interests will be established at an amount
determined to provide ED a yield equal to the commercial paper rate plus 50 basis
points. ED will hold participation interests in short-term trusts of FFEL program
loans until September 30, 2009, at the latest. Afterwards, trusts may refinance the
loans in the private market, or sell the loans to ED under the first option.
Sense of Congress on Access to Student Loans
P.L. 110-227 expresses a sense of Congress that institutions such as the Federal
Financing Bank, the Federal Reserve, and Federal Home Loan Banks, in consultation
with the Secretaries of Education and the Treasury, should consider using available
authorities to assist in ensuring continued access to federal student loans. It also
states that any action taken by such entities should not limit nor delay the Secretary’s
authority to implement the LLR program or the authority to purchase loans
previously made under the FFEL program.
13 U.S. Department of Education, “Dear Colleague” Letter from Secretary of Education
Margaret Spellings, May 21, 2008, at
[http://www.ifap.ed.gov/eannouncements/attachments/052108FFELPMonitoring.pdf],
visited May 21, 2008.
14 Ibid, p. 2.

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Academic Competitiveness Grants
P.L. 110-227 requires all savings generated by the bill to be used for Academic
Competitiveness Grants, which are provided to students who are eligible for Pell
Grants and meet certain academic requirements. These grants, first established by
the Deficit Reduction Act of 2005 (P.L. 109-171),15 are comprised of two award
types: Academic Competitiveness (AC) Grants for first- and second-year
undergraduates who have completed a rigorous secondary school program; and
SMART Grants for third- and fourth-year undergraduates majoring in certain fields
of science, mathematics, or a critical foreign language.
Effective January 1, 2009, the AC Grant and SMART Grant programs are
amended to expand eligibility. Students will no longer be required to be United
States citizens as a condition for eligibility. Students will become eligible to receive
SMART Grants for up to five years, if enrolled in a five-year program. Students
enrolled at least half-time, as well as those enrolled in certain certificate programs,
will become eligible for AC Grants and SMART Grants. (Prior to January 1, 2009,
students must be enrolled full-time). The amendment also clarifies eligibility for
those who attended private secondary schools or were home-schooled, as well as
those obtaining college credit while in high school. Finally, the amendment requires
post-secondary institutions to certify the majors of those applying for SMART Grants
and makes eligible certain students attending institutions that only offer single liberal
arts degrees and do not permit declaration of a major in a particular field.
15 For more information on these grants, see CRS Report RL33457, Academic
Competitiveness Grants: Background, Description, and Selected Issues, by Charmaine
Mercer.

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