Senate Approves Overhaul of Student Loan Program

By Amit R. Paley
Washington Post Staff Writer
Friday, July 20, 2007

The Senate overwhelmingly approved a wide-ranging overhaul of student loan programs early today that would pay for more than $17 billion in grants and other student aid by slashing subsidies to lending companies.

Democrats and student advocates said the legislation, which passed in a 78 to 18 vote, would help millions of Americans pay for college in a time of steady and often steep tuition increases. But lenders and some Republicans said the measure would hurt students by making it unprofitable for many companies to issue such loans.

The bill now heads to a conference to reconcile differences with a version the House passed last week.

The action on Capitol Hill comes as the $85 billion-a-year student loan industry has become a target for the Democrat-led Congress and the subject of a nationwide investigation into questionable business practices.

"The question is: Are you going to support the students or are you going to support the banks?" Sen. Edward M. Kennedy (D-Mass.), chairman of the education committee, said during debate.

Lending companies said the legislation was a backdoor effort to drive some companies out of business and force borrowers to use a federal program, strongly supported by Democrats, in which the government lends directly to students.

The measure would cut subsidies to lenders by about $18 billion over five years and boost student aid by $17.4 billion during that period, with the rest of the savings used to reduce the federal budget deficit. The biggest aid increase would raise the maximum annual Pell grant, the nation's main aid program for low-income students, from $4,300 to $5,400 a year by 2012.

The House-passed bill would cut the interest rate on some federal loans in half, which House Democrats promised to do in their campaigns last fall, but the version that the Senate approved omits any such provision. Under the Senate version, subsidies would be cut about $1 billion less than under the House-passed bill.

The White House has threatened to veto the House measure, in part because it wanted more money to go toward Pell grants instead of interest-rate reduction. In previous weeks, administration officials have had encouraging words for the Senate version, which resembles proposals in President Bush's budget. This week, the administration warned that some provisions in the Senate version went too far, but officials stopped short of a veto threat.

The Senate and House versions contain provisions that would make it easier for students to repay loans. Under both bills, students would not have to spend more than 15 percent of their discretionary income on payments for federally backed student loans. Also under both bills, such loans would be forgiven after about two decades. The measures also include more generous loan-forgiveness options for public servants such as teachers and police officers.

Some Republicans said such proposals would unnecessarily increase the federal debt and encourage irresponsible borrowing. "This incentivizes people, I suggest perversely, to borrow money to go to college rather than working," said Sen. Jeff Sessions (R-Ala.).

Mark Kantrowitz, publisher of the Web site and an expert on student loans, wrote in an analysis circulating on Capitol Hill yesterday that the proposed subsidy cuts were too large and might reduce competition in the industry.

"While this will leave larger lenders like Sallie Mae profitable," Kantrowitz wrote, referring to the Reston-based lending giant, "these cuts are severe enough to significantly reduce their profits and may leave smaller lenders unprofitable."

Henry Howard, president of the U.S. Education Finance Group, a Miami-based lender, said the cuts would make it difficult to provide benefits to borrowers. As a result, he said, some borrowers might be forced to pay as much as $38,000 more on a $60,000 loan. Howard warned that "many students and parents will only be able to borrow under the one-size-fits-all direct loan program," a reference to the federal government's direct lending.

But Democrats and consumer advocates said lenders would continue to thrive even with reduced subsidies.

"We shouldn't shed any tears for the private loan companies and their executives," said Sen. Tom Harkin (D-Iowa). "They are doing quite well."

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