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On January 8, President Bush signed S. 1932, the Deficit Reduction Act of 2005, into law. The Deficit Reduction Act makes important improvements to federal student loan programs. The bill cuts excess government subsidies to lenders and makes other reforms that will help to reduce overall student loan costs by about $22 billion. With that money, taxpayers will save an estimated $12 billion. The bill contains a number of changes to the FFEL and Direct Loan programs as well as changes that affect expected family contributions and the creation of a new grant program that is meant to encourage students from low-income families to study science, math, engineering and certain foreign languages. However, there is little direct change to the Perkins Loan Program.

Provisions of the bill that address the education programs with significant budget effects include:

• Changing parent-loan interest rates and the formulas used to calculate lenders’ yields.
• Imposing limits on when the separate formula for lenders’ yields for loans supported with certain tax-exempt funding would apply.
• Changing the insurance provided to lenders and the fees charged by lenders.
• Eliminating mandatory funding of administrative expenses (except the account maintenance fee for guaranty agencies) for student financial assistance activities.
• Reducing borrowers’ origination fees and requiring collection of a 1% fee from guaranty agencies.
• Increasing the loan limits for first-year, second-year, and graduate students, as well as allowing graduate students to borrow under the parent-loan program.
• Canceling the repayment of student loans for certain teachers.
• Establishing 2 new grant programs that would supplement the Pell Grant program during the 2006-2010 period.