Pending Legislation Will Overhaul Student Loans

With a 253 to 171 vote last week, the Democratic-led House of Representatives easily passed landmark legislation that would bring an end to the Federal Family Education Loan Program (FFELP), the program initiated by the Higher Education Act of 1965 to offer college students federally guaranteed student loans via private lenders.

Currently, the government pays these private FFELP lenders a subsidy for the federal student loans they originate. A second federal student loan program — the Federal Direct Student Loan Program, begun in 1992 — issues federal student loans directly to borrowers through the U.S. Department of Education, with no third-party involvement from a bank or other FFELP lender.

Should the House bill pass the Senate and become law, the FFEL program will be dismantled and all federal student loans will become Federal Direct loans, made directly through the federal government rather than through third-party FFELP lenders and banks.

Expanding Pell Grants, Ending Government Subsidies to Banks

Supporters of this legislation, known as the Student Aid and Fiscal Responsibility Act of 2009 (H.R. 3221), say that the elimination of FFELP subsidies will generate $87 billion in savings to taxpayers over the next decade.

President Obama has been a vocal backer of the bill, maintaining that FFELP subsidies funnel government money to banks and away from students.

“Ending this unwarranted subsidy for big banks is a no-brainer for folks everywhere,” Obama said on Monday in a speech at Hudson Valley Community College in New York.

The author of the bill, Representative George Miller of California, echoed this sentiment. With its vote to pass the measure and make the government the direct issuer of all federal student loans, said the Democrat and chairman of the House Education and Labor Committee, “the House made a clear choice to stop funneling vital taxpayer dollars through boardrooms and start sending them directly to dorm rooms.”

The bill allocates $80 billion of this estimated savings to fund several education initiatives at what supporters say is no additional cost to taxpayers.

This allocation includes an investment of $40 billion to expand the federal Pell Grant program, which targets low-income students, increasing the maximum annual Pell Grant award. The bill would also set aside $10 billion for the nation’s community colleges to strengthen job-training and adult-education programs; $2.5 billion for historically Black colleges and universities, as well as minority-serving institutions, to boost graduation rates; $4 billion for school modernization, renovation, and repair projects across the country; and $8 billion for various early education programs.

In a criticism of the bill, Representative John Kline from Minnesota, ranking Republican on the Education and Labor Committee, noted that the legislation only covers the cost of some of these initiatives for five years, after which taxpayers will be facing either program cuts or increased taxes in order to continue funding these initiatives.

Moreover, Kline revealed, the nonpartisan Congressional Budget Office has recently acknowledged that the proposed Pell Grant expansion will actually cost $11.4 billion more than originally projected — an amount that isn’t covered by the current $80 billion allocation within the student loan bill.

Passed by House, Student Loan Bill Goes to Senate

The Student Aid and Fiscal Responsibility Act now awaits a Senate vote. In his speech this week at Hudson Valley Community College, Obama assured listeners that the bill would clear the Senate and reach his desk to be signed into law.