Student Loan Overhaul Advances
Votes Expected By House, Senate

By Amit R. Paley
Washington Post Staff Writer
Thursday, June 21, 2007

Democrats in Congress are pushing to overhaul the nation's student loan system with legislation that would cut federal subsidies to lending companies by as much as $19 billion, channel most of those savings to student aid and ease repayment rules for borrowers.

The Senate education committee overwhelmingly approved its version of the legislation yesterday, one week after the House education panel took similar action. Senior Democrats predicted that the bills would come to a vote by the end of next month and would be reconciled without significant difficulty.

Momentum for the legislation has grown this year as the $85 billion-a-year industry has come under intense scrutiny. Federal and state investigations have found conflicts of interest among lenders, universities and government regulators. In addition, the Democratic takeover of Congress this year has allowed the party to drive its agenda on student loans for the first time in more than a decade.

"This legislation will help reverse the crisis in college affordability," said Sen. Edward M. Kennedy (D-Mass.), chairman of the education committee. "It will restore balance to our broken student loan system by reducing unnecessary lender subsidies."

The House and Senate measures differ in several respects, but both propose a sweeping overhaul of federal student loan programs. The Senate version would cut subsidies to lenders by $18.3 billion; the House version would cut subsidies by about $19 billion. The bills would direct up to $1 billion to deficit reduction and put the rest of the money into student aid.

The proposals would have borrowers pay no more than 15 percent of their discretionary income for federally backed student loans. They would allow such loans to be forgiven after about 25 years. The Senate measure would gradually boost the maximum Pell grant, the nation's main aid program for low-income students, from $4,300 to $5,400 a year. The House plan calls for a smaller grant increase but would cut in half the interest rates on federally backed student loans, to 3.4 percent.

"This is the biggest single investment in college financial aid since the GI Bill," said Rep. George Miller (D-Calif.), the House education chairman.

Student loan companies attacked the legislation and said subsidy cuts would reduce benefits to borrowers. Lenders also said the reductions would force some companies out of the market.

"The budget cuts would make student loans uneconomical for lenders," Kevin Bruns, executive director of America's Student Loan Providers, an industry group, said in a statement. "One would have to suspend the law of economics to believe these cuts won't be passed on to students and parents in some fashion."

But Miller said in an interview that lenders have told lawmakers privately that they could accept the subsidy cuts, which are about the same as reductions President Bush proposed in his budget this year.

Many Democrats have long decried subsidies to the lending industry as a waste of taxpayer dollars and have promoted direct lending by the government to students. Republicans have generally sided with the lending industry, contending that the companies bring needed competition to the market.

But several key Republicans yesterday supported the Democratic legislation. The Senate committee approved the measure on a 17 to 3 vote, with six of 10 Republicans in favor, including the ranking member, Sen. Mike Enzi (Wyo.).

The partisan split was more pronounced in the House education panel, which approved its bill 30 to 16. Rep. Howard P. "Buck" McKeon (Calif.), the committee's ranking Republican, said he could not support such large subsidy cuts on top of those enacted in a previous Congress.

"The concern is that as we drive lenders out of the business, the ones that are going to be hurt the most are the students that need the help the most," McKeon said last week. He also criticized Democrats for cutting interest rates for graduates instead of directing savings to financial aid for students in college.

White House spokesman Scott Stanzel said the administration was "encouraged by the desire of Congress to follow the president's commitment to focus more federal dollars to students most in need."

Both bills would launch a significant initiative that could lead to a revamping of the loan program. They would create pilot "loan auctions" in which companies would bid to participate in the federal loan program by stating the lowest subsidies they would accept from the government.

Student loan companies oppose the auction proposal and said it would create instability in the industry. But supporters said loan auctions would allow the market to determine subsidy rates instead of having Congress set them arbitrarily. The money saved would then be passed on to students.

"Lenders should compete against each other to participate in the federal student loan program," Kennedy said.

The Senate measure would bar lenders from offering gifts and perks to financial aid officers and prohibit other practices uncovered in investigations led by congressional Democrats and New York Attorney General Andrew M. Cuomo (D). The House overwhelmingly approved a similar bill last month.

Senate Majority Leader Harry M. Reid (D-Nev.) expects to bring the student loan bill to the floor in July, said spokesman Jim Manley. House Speaker Nancy Pelosi (D-Calif.) also plans to bring the legislation to a vote by the end of July, Miller said.

The legislation is protected by a procedural maneuver known as budget reconciliation. That means it does not face the threat of a Senate filibuster, which would require 60 votes to overcome.

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