The proposed legislation, titled "Preventing Financial Exploitation in Higher Education Act" (H.R. 713), seeks to address the financial outcomes linked to federal student loans by imposing penalties on institutions of higher education with substantial endowments, particularly targeting those with high rates of student loan defaults, delinquencies, and underpayments. The bill outlines a phased penalty system starting in 2025, progressively tightening the thresholds through 2030. Additionally, it proposes an increased tax on investment income for colleges that significantly raise tuition fees.

General Summary of the Bill

The heart of the legislation is institutional accountability, emphasizing financial penalties on colleges with large endowments that exhibit certain rates of default, delinquency, or underpayment on federal student loans. The penalties are set to escalate annually, pressing institutions to manage their student loan portfolios more effectively. In parallel, for institutions that substantially increase their tuition rates, a heavier tax burden on investment income is proposed, nudging these institutions to reconsider how they leverage financial resources.

Summary of Significant Issues

Several critical issues emerge from the proposed legislation:

• Equity in Accountability: The bill's penalties are directed solely at institutions with endowments over $2.5 billion, potentially leaving smaller institutions unregulated despite possibly having similar or worse performance indicators in student debt management.

• Complex Penalty Structure: The phased penalties have a detailed and aggressive timeline, which might impose a sudden financial burden on affected institutions, possibly leading to compliance challenges and confusion due to the complex definitions and calculations required.

• Lack of Support for Improvement: The bill's language emphasizes penalties without offering guidance or support for institutions to improve their repayment statistics. This could impose financial strain without addressing underlying issues, particularly for institutions serving high-risk student populations.

• Impact on Tuition Strategies: The significant tax increase for institutions raising tuition could disincentivize necessary tuition adjustments that align with inflation or updated educational offerings, potentially affecting educational quality and access.

Broad Public Impact

From a public perspective, the bill aims to protect students from excessive debt burdens and encourages institutions to manage educational costs and loan repayment more effectively. However, the punitive nature of the bill could lead institutions to pass additional costs onto students or reduce services or enrollments, which may inadvertently restrict access to higher education for some students.

Impact on Specific Stakeholders

• Large Educational Institutions: These institutions may face financial pressure from both penalties and taxes, potentially influencing how they manage endowments, price tuition, and support students with financial aid. The bill might push these institutions to focus on improving graduates' financial outcomes.

• Students: Ideally, students would benefit from a reduction in loan defaults and more stable tuition costs. However, the bill could lead to unintended consequences, such as tighter enrollment policies or decreased financial aid, affecting accessibility for traditionally underserved or financially vulnerable students.

• Smaller and Medium-Sized Institutions: These institutions may not be directly impacted by the penalties or tax increases, potentially allowing them to operate under less financial scrutiny and accountability, leading to questions about fairness in oversight across the higher education landscape.

Overall, while the "Preventing Financial Exploitation in Higher Education Act" aims to hold institutions accountable for student loan outcomes, its implementation challenges and potential impacts on both educational access and institutional operations warrant careful consideration and targeted adjustments.

The bill H.R. 713 focuses on imposing financial penalties on certain higher education institutions based on the repayment behaviors of their students. Specifically, it targets institutions with substantial endowments exceeding $2.5 billion and outlines penalties for high rates of student loan defaults, delinquencies, and underpayments. Let's explore the financial aspects of the bill in detail.

Financial Penalties

The bill introduces a system of penalties that are calculated as percentages of the total outstanding student loan balances associated with an institution. These penalties are phased in over several fiscal years:

• Fiscal Year 2025: Institutions with a cohort default rate of 11% or more will incur penalties equating to 30% of the loan balances. The penalty rate decreases incrementally over subsequent years, with the threshold for penalty application also becoming stricter.

• By Fiscal Year 2030 and beyond, the penalty applies to institutions with a cohort default rate of just 6% or more, with penalties at 20% of the related loan balances.

These penalties aim to hold institutions financially accountable for student loan defaults and inadequacies. However, the structured phases and high penalty rates, starting aggressively in 2025, may place undue financial strain on impacted institutions, prompting concerns about fairness and the ability of institutions to adapt quickly.

Focus on Large Endowments

The bill's approach selectively targets larger institutions with endowments over $2.5 billion, excluding smaller institutions from these penalties regardless of their student loan repayment performance. This focus on larger endowments aims to leverage their considerable financial resources to support better student loan outcomes. However, it raises equity concerns regarding the exclusion of smaller institutions that might similarly contribute to the federal student loan challenges.

Tax Implications

In addition to penalty provisions, the bill proposes an increasing tax on the net investment income of educational institutions that raise their tuition fees beyond an inflation-adjusted base amount. For these "disqualified" institutions, the tax rate would increase to 25% from the standard 1.4%. The fiscal policy aims to discourage disproportionate tuition hikes that might not align with rising operational costs.

Clarification and Implementation Challenges

There are complexities in defining terms like "cohort delinquency rate" and "cohort underpayment rate." These definitions are crucial, as they determine penalty applications and tax adjustments. Institutions may face challenges interpreting these terms, potentially leading to compliance difficulties.

Moreover, the lack of provided guidance or assistance for institutions to improve their rates only emphasizes penalties, which may not effectively address the root causes of student loan defaults and delinquencies. The absence of tailored strategies to tackle underlying issues could impede institutional efforts to improve financial accountability and support students.

Overall, H.R. 713 aims for financial accountability in higher education institutions by introducing penalties tied to student loan repayment performance. While its focus on large endowment institutions is evident, the selective approach raises concerns about fairness and effectiveness in addressing the broader issues of student debt management.