Preventing Financial Exploitation in Higher Education Act
- Bill Number
- H.R. 713
- Origin Chamber
- House
- Congress
- 119th Congress, Session 1
- Policy Area
- Education
- Status
- Introduced
- Latest Action
- 2025-01-23: Referred to the Committee on Education and Workforce, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.
- Last Updated
- 2025-07-21T19:44:15Z
AI-Generated Summary
Purpose of the Legislation
The "Preventing Financial Exploitation in Higher Education Act" (H.R. 713) aims to hold certain wealthy colleges and universities accountable for poor outcomes in federal student loan repayment by their graduates. It introduces financial penalties based on high rates of loan defaults, delinquencies, or underpayments, and increases taxes on institutions with large endowments that raise tuition faster than inflation. The goal is to discourage practices that lead to excessive student debt while protecting federal loan programs.
Key Provisions
- Penalties for Loan Performance (Section 2): Adds a new section (454A) to the Higher Education Act of 1965, requiring "covered institutions" (those with endowments of $2.5 billion or more) to pay penalties to the U.S. Department of Education if their students have high rates of loan issues. Penalties are calculated as a percentage of the outstanding principal and interest on affected loans and phase in over time:
- Cohort Default Rate (CDR): Percentage of borrowers who default (fail to repay) within a set period after leaving school. Threshold starts at 11% in fiscal year 2025 (30% penalty) and decreases to 6% by 2030 and beyond (20% penalty).
- Cohort Delinquency Rate: Percentage of borrowers 31–360 days late on payments. Threshold starts at 10% in 2025 (28% penalty) and decreases to 5% by 2030 (18% penalty).
- Cohort Underpayment Rate: Percentage of borrowers making payments but whose loan balances are growing (e.g., due to interest outpacing payments) without being delinquent or in default. Threshold starts at 9% in 2025 (26% penalty) and decreases to 4% by 2030 (16% penalty).
- These rates apply to federal Direct Loans used for attendance at the institution. Penalty payments do not change borrowers' loan status or obligations.
- Compliance Requirement (Section 3): Amends program participation agreements under the Higher Education Act, requiring institutions to agree to these penalty rules to receive federal student aid.
- Tax Increase on Endowments (Section 4): Amends Section 4968 of the Internal Revenue Code to raise the excise tax on net investment income for "disqualified large applicable educational institutions" (those with $2.5 billion or more in assets not used for exempt purposes) from 1.4% to 25%, starting in taxable years after December 31, 2025. This applies if average tuition for full-time students exceeds an inflation-adjusted base (average tuition in 2025, adjusted annually using cost-of-living changes). New institutions get adjusted rules based on their first full year.
Significant Changes to Existing Law
- Introduces the first direct financial penalties on institutions tied to student loan delinquency and underpayment rates (beyond just defaults), targeting only wealthy schools with large endowments—a new accountability measure not previously in federal law.
- Expands the existing 1.4% endowment tax (enacted in 2017) by tying a massive increase (to 25%) to tuition hikes above inflation, creating a disincentive for rapid fee increases at elite institutions.
- Requires explicit agreement to these rules for federal aid eligibility, strengthening enforcement through existing student aid frameworks.
Potential Impacts
- On Government Agencies: The Department of Education gains authority to collect penalties, potentially increasing revenue for federal programs and reducing losses from bad loans. The IRS would administer higher endowment taxes, boosting federal tax receipts (estimated impacts depend on compliance but could be substantial from large institutions).
- On Citizens (Students and Borrowers): Indirect benefits through potential improvements in institutional practices, such as better career services or financial counseling to reduce defaults and delinquencies. No direct relief for borrowers, as penalties do not forgive or alter their loans. Could lead to stabilized or lower tuition at affected schools over time.
- On Institutions: Wealthy universities (e.g., Ivy League or similar) face significant financial risks, possibly prompting investments in student success programs or tuition restraint to avoid penalties and taxes.
- On International Relations: No direct impacts, as the bill focuses on domestic higher education and federal loans.
Main Stakeholders Affected
- Institutions of Higher Education: Primarily elite private universities with endowments over $2.5 billion (e.g., Harvard, Yale), which must monitor loan outcomes and control tuition to avoid penalties and taxes.
- Students and Borrowers: Graduates from these schools, whose loan repayment behaviors indirectly influence institutional penalties; they may see improved support but face no changes to personal loan terms.
- Federal Government: Department of Education (enforces penalties and calculates rates) and IRS (collects taxes), benefiting from added revenue and oversight tools.
- Taxpayers: Gain from recovered funds via penalties and taxes, potentially reducing the overall cost of federal student aid programs.
Notable Legal, Constitutional, or Political Implications
- Legal: Establishes clear definitions for new rates (e.g., delinquency as 31–360 days late; underpayment as growing balances despite payments), but relies on the Secretary of Education's determinations, which could lead to disputes or litigation over calculations. Institutions might challenge penalties under administrative law if seen as arbitrary.
- Constitutional: Potential equal protection concerns, as penalties target only wealthy institutions (not public or smaller schools), though this likely passes scrutiny as a rational classification for accountability. No free speech or due process issues apparent.
- Political: Promotes fiscal responsibility in higher education by penalizing "exploitation" at affluent schools, appealing to concerns over rising tuition and student debt. Could spark debates on fairness to elite institutions versus protecting working-class students, influencing future education policy.
This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.
Sponsor
Rep. Van Duyne, Beth [R-TX-24]
Recent Actions
- 2025-01-23: Referred to the Committee on Education and Workforce, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.
- 2025-01-23: Referred to the Committee on Education and Workforce, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.
- 2025-01-23: Introduced in House
- 2025-01-23: Introduced in House
Bill Versions
- Preventing Financial Exploitation in Higher Education Act — issued 2025-01-23 — PDF (14 pages)