The "Preventing Financial Exploitation in Higher Education Act" penalizes colleges with large endowments for high student loan default, delinquency, and underpayment rates, and increases taxes on institutions that significantly raise tuition.
Beth Van Duyne
Representative
TX-24
The "Preventing Financial Exploitation in Higher Education Act" aims to hold colleges accountable for their students' loan outcomes by imposing financial penalties on institutions with large endowments if their students have high rates of loan default, delinquency, or underpayment. It also increases the tax on net investment income for certain educational institutions with large endowments that increase tuition. These penalties and tax increases are designed to encourage institutions to better support their students in managing their student loan obligations and to control tuition costs. The penalties collected will not affect the borrower's loan status or obligations.
Wealthy Universities Face New Penalties for Student Loan Defaults, Tuition Hikes Under Proposed Law
The "Preventing Financial Exploitation in Higher Education Act" aims to shake up how some of the richest colleges handle student loans and tuition costs. Starting in fiscal year 2025, universities with endowments of $2.5 billion or more will face penalties if too many of their former students default on, fall behind on (delinquent), or underpay their federal loans. The bill also slaps a bigger tax on investment income for these schools if they significantly raise tuition.
Show Me the Money: Penalties and Taxes
This bill sets up a sliding scale of penalties. For example, in FY2025, if 11% or more of a university's borrowers are in default, the school owes the Department of Education 30% of the total outstanding loan balance of those defaulted borrowers (SEC. 2). That percentage changes each year. If 10% of borrowers are between 31 to 360 days late on payments during FY 2025, then the penalty is 28% of the outstanding loan balance for those borrowers (SEC. 2). "Underpayment," meaning borrowers are paying but still owe more than they originally borrowed, also triggers penalties, starting at 26% of the outstanding loan balance for an underpayment rate of 9% or more in FY2025 (SEC. 2). It's important to note that these penalties are paid by the university and don't change what the student owes.
On the tax side, if a wealthy university (again, $2.5 billion+ endowment) jacks up tuition above a certain inflation-adjusted amount after 2025, their tax rate on net investment income jumps from 1.4% to a hefty 25% (SEC. 4). Think of it like this: if University X's average tuition in 2025 is the baseline, any big increases in the following years could trigger this higher tax rate.
Real-World Ripple Effects
Let's say you're a recent graduate of Big Name University (with a huge endowment) and you're struggling to keep up with your loan payments. Under this law, your alma mater could be on the hook for a significant chunk of change if enough of your fellow alumni are in the same boat. The idea is that this will force these universities to take a hard look at the financial aid they offer, the support they provide to graduates, and, most importantly, the tuition they charge.
The bill requires that institutions comply with section 454A of the Higher Education Act of 1965 (SEC. 3). This section outlines the necessary agreements between educational institutions and the Secretary of Education for participation in federal student aid programs. These agreements cover a range of requirements, including financial responsibility, administrative capability, and providing accurate information to students.
Potential Pitfalls?
While the goal is to protect students and taxpayers, there are some open questions. Could universities find loopholes? For instance, they might offer short-term incentives to keep borrowers out of default just long enough to avoid the penalties. Or, they could raise "fees" instead of "tuition" to dodge the tax hike. There's also the chance that some schools might cut back on financial aid or other student services to offset these new costs. It's a complex situation, and this bill is trying to tackle it with some pretty big financial sticks.