House approves government takeover of student loan program

House approves huge changes to student loan program
By Daniel de Vise, Washington Post Staff Writer
Monday, March 22, 2010
Mar. 23, 2010

The student aid initiative, which House Democrats attached to their final amendments to the health-care bill, would overhaul the student loan industry, eliminating a $60 billion program that supports private student loans with federal subsidies and replacing it with government lending to students. The House amendments will now go to the Senate.

By ending the subsidies and effectively eliminating the middleman, the student loan bill would generate $61 billion in savings over 10 years, according to the nonpartisan Congressional Budget Office.

Most of those savings, $36 billion, would go to Pell grants, funding an era of steady and predictable increases in the massive but underfunded federal aid program for needy students. Smaller portions would go toward reducing the deficit and to various Democratic priorities, including community colleges, historically black colleges and universities, and caps on loan payments.

The bill's greatest impact would fall on the more than 6 million students who rely on Pell grants to finance their education. Pell, launched in 1973, once covered more than two-thirds of total costs at a public university. It now covers about one-third.

The student aid measure was initially framed as a boost to the Pell program. Now it is seen as its salvation. Democratic leaders say that without a massive infusion of cash, the maximum grant could be scaled back by more than half to $2,150 and at least 500,000 students could be dropped from the program.

"So if this legislation did not pass, you would see catastrophic cuts to the Pell grant program, effectively slamming the door shut for hundreds of thousands of students, if not millions, who rely on the Pell grant program to go to school," said Rich Williams, higher education associate for U.S. PIRG, the federation of state Public Interest Research Groups.

Late Sunday, Arne Duncan, the U.S. education secretary, said, "Tonight's vote in the House is a big victory for America's students."

Democratic leaders and student advocates hailed the aid package as simple, smart reform: Under the current Federal Family Education Loan program, the government effectively assumes the risk for loans issued by private lenders, who then pocket the subsidies.

"You're taking billions of dollars in wasteful subsidies to student lenders and banks, and you're recycling that money on behalf of families and students to help pay for their college education," said Rep. George Miller (D-Calif.), chairman of the House Education and Labor Committee.

House Republicans and lending industry lobbyists oppose the measure, calling it an unnecessary government takeover and envisioning a bumbling bureaucracy replacing efficient private-sector loan operations.

"Instead of making student loans more affordable or preserving choice, competition and innovation in the loan program, Democrats are taking money from struggling students' pockets to help pay for a government takeover of health care," said Rep. Brett Guthrie (Ky.), senior Republican on the House subcommittee that oversees higher education.

The federal government has subsidized private student lending since 1965 and began lending directly to students in the 1990s. The movement to end the subsidies is rooted partly in allegations of past corruption: In 2007, the private lending industry was assailed for overcharging the government and offering colleges incentives to steer students to their loans.

Although subsidized lending has faltered in the sour economy, the industry has fought eliminating the program, led by Reston-based SLM Corp., better known as Sallie Mae.

In a final push, the loan industry accused Democrats of taking money from students in the dual-purpose bill, which diverts $9 billion in college aid funding toward overall deficit-reduction savings. Democrats said that money was offset by education investments authorized under health-care reform.

The higher-education industry has generally supported student lending reform. Any boost to the Pell program translates to more tuition dollars. The Washington Post Co. is a player in that industry as owner of Kaplan Inc., a for-profit higher-education provider.

In its first iteration in the summer, the student aid bill was a standalone measure that delivered a substantially larger savings -- $87 billion -- for Pell and other Democratic education initiatives.

The figure dropped to $61 billion, chiefly because colleges have begun switching to direct government lending, anticipating that the law will change. Some private loan companies have retreated from the program as well, both because of harsher lending conditions and the looming changes. The volume of subsidized loans shrank from $61 billion in fiscal 2009 to $50 billion in fiscal 2010, according to a preliminary industry estimate. But direct government lending rose from $21 billion to $30 billion. Some of the savings promised in the bill are, in effect, already realized.

Ambitions are diminished in the revised legislation, released last week.

The amount directed at Pell grants would drop from $40 billion to $36 billion, and a portion of the smaller amount would go toward closing an unexpected shortfall in the grant program, oversubscribed because of the recession. The annual Pell grant would rise to $5,975 by 2017 from the current $5,550, and for the first time, it would be linked to the consumer price index. In the original House bill, the Pell target was $6,900.

Community colleges would get $2 billion, down from $10 billion in the original bill. More than $20 billion in initiatives for early education, K-12 school modernization and student loan interest-rate reduction would be eliminated. But a $2.6 billion investment in historically black colleges would survive. The new bill also includes a $1.5 billion initiative that would cap a borrower's monthly loan payments at 10 percent of income, down from 15 percent.

Student loan and health-care retooling were combined in one bill after Democrats lost their filibuster-proof supermajority in the Senate. Democrats then steered both measures into the budget reconciliation process, which requires only a simple majority. Congressional rules allow only one reconciliation bill.