House Backs Increasing Student Loans
Republicans, Senate Proposal Lean More Toward Grants

By Amit R. Paley
Washington Post Staff Writer
Thursday, July 12, 2007

House Democrats pushed through legislation yesterday that would boost government-subsidized student loans and other college financial aid by $18 billion over the next five years, despite strong opposition from Republican lawmakers and a White House veto threat.

The legislation, passed in a 273 to 149 vote, would cut interest rates on federally backed student loans in half and increase Pell grants for low-income students. It would pay for the measures by slashing subsidies to lending companies by about $19 billion over five years and use about $1 billion of remaining savings to reduce the federal deficit.

"This is what Americans are saying at home: They are worried about paying for their education," Rep. George Miller (D-Calif.), chairman of the House education committee, said in an interview. "This bill responds to that in a very big way."

Lending companies said the subsidy cuts would drive many of them out of business and prevent them from passing benefits on to students. In a sign of the challenging political climate for the lending industry, however, most Republican opposition centered instead on how Democrats proposed to spend the money. Several GOP lawmakers said more should go to reduce the deficit rather than finance new programs.

"This might possibly be the single most fiscally irresponsible bill to come to the floor this year," said Rep. Jeb Hensarling (R-Tex.), chairman of the Republican Study Committee, an influential group of House conservatives. "It is all part of a Democrat tax-and-spend program."

Passage of the legislation fulfills one of the six campaign promises made last fall by House Democrats: to reduce interest rates on federal Stafford loans, which are open to low- and middle-income families, from 6.8 percent to 3.4 percent over five years.

Democrats consider the interest rate cuts a winning political issue. "This is especially important for strengthening the middle class," House Speaker Nancy Pelosi (D-Calif.) said.

The Senate version of the legislation, expected to come to a vote this month, does not contain interest rate cuts but devotes more money to direct Pell grants.

House Republicans also offered a plan yesterday to substitute increased Pell grant funding for the interest rate cuts. They said they favor that approach because more of the money would be targeted to lower-income students, whereas interest rate cuts benefit middle-income borrowers as well.

The White House has said the president's advisers would recommend he veto the House legislation in its current form. But Education Secretary Margaret Spellings signaled support for the Senate version, which she called a "a good, strong step forward."

"I think there's the prospect for a deal on higher education this year," she said in an interview Tuesday with Washington Post editors and reporters.

Congress began offering lenders subsidies in the 1960s to encourage them to lend to students. The subsidies, which totaled about $7 billion last year, take the form of direct payments linked to interest rates and government insurance on defaulted loans.

Loan industry groups said the subsidy cuts would be particularly harmful to small lenders. In addition, Sallie Mae disclosed yesterday that private investors are citing the subsidy cuts as a possible reason to back out of a deal to take over the Reston-based lender.

"Today is a sad day for most student loan borrowers and their families," Joe Belew, president of the Consumer Bankers Association, said in a statement. "Under the terms of the bill, loan costs will go up for more than 6.5 million borrowers, many of whom are middle-income Americans already struggling to meet the rising cost of college."

But Michael Dannenberg, director of the education policy program at the New America Foundation and a former Democratic aide on the Hill, said loan companies would remain profitable.

"I think this is a case of the boy who cried wolf," he said. "The truth is that the student loan industry is one of the most lucrative industries in America."

The legislation includes other provisions to overhaul student loan programs. It would prevent borrowers from paying more than 15 percent of their discretionary income for federally backed student loans and allow loans to be forgiven after two decades. It also includes special loan forgiveness provisions for such public servants as teachers and firefighters.

Rep. Virginia Foxx (R-N.C.) said lawmakers who supported the bill were "taking away personal responsibility from people and giving them out-and-out payments for loans that they take out."

"We should call this the new Democratic welfare bill," she said.

Miller said the changes were necessary to make college affordable to all Americans. "We have an obligation to make sure that students have the maximum opportunity to take advantage of a college education," he said.