House Bill Would Push Private Lenders Out of Federal College Loan Business

September 17, 2009 - 7:44 AM
Bill would kill subsidized student loans
Washington (AP) - The House is poised to vote to push private lenders out of the federal college loan business and massively expand the government's own lending program.
 
Lawmakers debated a student aid bill Wednesday that has widespread support, including from the White House. The measure is expected to win passage Thursday and go next to the Senate.
 
Proponents of putting the government in charge of all federal loans say it would save an estimated $87 billion, though this figure has been disputed.
 
The money would boost Pell Grants for needy students and pay for a new college completion fund, community college reforms and more college aid for veterans.
 
"No student in this great country of ours should have to mortgage their future to pursue their dreams," said the bill's sponsor, California Democratic Rep. George Miller, chairman of the House Education and Labor Committee.
 
Yet the money also would be spent on things that don't help pay for college, such as construction at K-12 schools and new preschool programs.
 
And while the measure would increase Pell Grants, it would do nothing to curb college costs, which rise much faster than Pell Grants do.
 
Changes in federal student aid would fulfill a campaign promise by President Barack Obama and transform a long-standing partnership between the government and the private sector.
 
Republican critics argue it is wrong to put the government in near-total control of student lending.
 
"Ask yourselves whether another government takeover is what we need right now," said Minnesota Rep. John Kline, senior Republican on the Education Committee.
 
Many also worry about job losses in their districts.
 
The measure would end the subsidized loan program under which private lenders made $56 billion in loans backed by the government to more than 6 million students last year, compared with $14 billion in direct loans from the government. Private lenders employ more than 30,000 people whose jobs depend on the subsidized loan program, and the industry says many would be laid off.
 
Sallie Mae employees have been trying to involve local leaders in the issue and recently held a series of town hall meetings and petition drives in Pennsylvania, Florida, Delaware, New York and Indiana.
 
Sallie Mae, the biggest student loan provider, has about 8,500 employees in the program. It still will have contracts to service federal loans but would probably lay off about 30 percent of those workers.
 
Democratic Rep. David Wu of Oregon said lenders still could make all the loans they want. "What will not happen anymore is making those student loans with taxpayer subsidies," he said.
 
As consumers, college students probably wouldn't notice any difference in their loans, which they would get through their schools. Broadly speaking, the bill doesn't do much to make loans cheaper or help pay them off.
 
It does keep interest rates for some federal loans -- those based on need -- from jumping from 3.4 percent currently to 6.8 percent as scheduled in 2012. Interest rates for most other loans would remain at 6.8 percent.
 
Under the measure, Pell Grants would rise slightly more than inflation over the next decade, increasing on average by about 2.6 percent yearly, according to the bill's sponsors.
 
The bill marks the first time lawmakers have ever agreed to a long-term annual increase in the program. Pell Grants have always depended on annual spending bills and on occasion have stayed flat or been cut when lawmakers came under pressure to reduce spending.
 
However, the bill does not actually change the situation. Obama originally proposed to take Pell Grants out of lawmakers' hands entirely, making the program an entitlement like Social Security and Medicare, which would have cost an estimated $117 billion -- more than lawmakers have to spend.