S-4097-119
Placed on Senate Legislative Calendar under General Orders. Calendar No. 539.
Sponsored by Lisa Murkowski (R-AK)
What it does
This bill would amend the Higher Education Act of 1965 to exclude state-based education loan programs from the federal rules governing "preferred lender arrangements." To qualify for the exemption, a state program must be run by a state agency, authority, or nonprofit; use no federal funding, insurance, or guarantees; offer interest rates and fees at least as favorable as federal Direct PLUS loans; and require that borrowers first be informed of their federal loan options — including income-driven repayment, forgiveness, deferment, and tax benefits — before accepting a state loan.
Who benefits
Students who may access lower-cost state loan products without their college being subject to federal preferred lender disclosure requirements. State agencies and nonprofit lenders that run state-based loan programs, who would face fewer federal compliance burdens. Colleges and universities in states with robust state loan programs, which would have more flexibility to promote those options. Borrowers in states like Alaska, Rhode Island, and others with established state loan authorities that offer competitive rates.
Who is hurt
Students who may receive less standardized disclosure about state loan terms compared to what federal preferred lender rules currently require. Private lenders who compete with state loan programs and who remain subject to preferred lender rules. Federal loan program administrators, whose programs may see reduced uptake if state alternatives become more prominently promoted. Borrowers who may not fully understand the trade-offs between state loans (which lack federal income-driven repayment and forgiveness options) and federal loans, despite the required disclosure.
Supporters argue
Supporters argue that state-based loan programs — run by public agencies and nonprofits, not private lenders — were never the intended target of preferred lender rules, which were designed to prevent conflicts of interest between schools and for-profit lenders. They contend that applying those rules to state programs discourages schools from promoting lower-cost, state-backed alternatives to expensive federal PLUS loans, and that the bill's built-in consumer protection requirement — mandatory disclosure of all federal loan options before a borrower can accept a state loan — preserves the core safeguard while removing an unnecessary regulatory barrier.
Opponents argue
Opponents argue that preferred lender rules exist precisely to ensure students receive transparent, comparable information before committing to any non-federal loan, and that exempting state programs — even with a disclosure requirement — creates a weaker, less standardized protection. They contend that state loan programs, unlike federal loans, do not offer income-driven repayment or Public Service Loan Forgiveness, meaning students steered toward them could face worse outcomes if their financial circumstances change, and that the disclosure requirement in the bill may be insufficient to ensure borrowers fully understand what they are giving up.
Constitutional context
This bill operates under Congress's Spending Clause authority (Art. I, §8, cl. 1) to attach conditions to federal education funding. Under South Dakota v. Dole (1987), such conditions are permissible if they are unambiguous, related to the federal interest, and do not cross the line from incentive to coercion. By narrowing the conditions attached to federal higher education funding, Congress is well within its authority to define the scope of those conditions.
Checks and balances
Congress gains no new power here — it narrows an existing federal regulatory requirement; the Department of Education retains authority to enforce remaining preferred lender rules, and states retain authority to design and operate their own loan programs within the bill's qualifying criteria.
Historical precedent
The Higher Education Opportunity Act of 2008 established the current preferred lender arrangement rules in response to documented conflicts of interest between colleges and private lenders, but did not specifically address state-based nonprofit loan programs.