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Bill Would End U.S. Subsidy For Lenders of College Aid

By Nick Anderson
Washington Post Staff Writer
Thursday, September 17, 2009

The federal government would end its four-decade practice of subsidizing private lenders that make college loans under a bill the House took up Wednesday that would steer tens of billions of dollars in savings to student aid over the next decade.

Republicans and the lending industry say the bill would engineer a risky shift in higher-education finance that could prove costly to taxpayers and diminish quality of service to borrowers. But Democrats and the Obama administration say the government could save an estimated $80 billion by ending a subsidy system that they contend benefits banks rather than students.

Democrats, in the majority, predicted easy passage on a largely party-line vote Thursday for a bill that also promotes various education initiatives from preschool to college. Hurdles may emerge when the Democratic-led Senate takes up its version in the fall. Some senators have raised concerns about the magnitude of the proposed shift in federal lending programs that would occur next summer, affecting thousands of colleges and universities. But President Obama considers the legislation key to his education agenda, and education experts predict a student loan bill eventually will clear Congress.

Terry W. Hartle, senior vice president of the American Council on Education, which represents about 2,000 public and private colleges, universities and related organizations, called the bill "the biggest redesign in the structure of federal student aid that I have ever seen. . . . Many, many students will benefit from it."

Currently, the federal government supports college lending in two major ways. Under the Federal Family Education Loan Program, which dates to the 1960s-era Great Society, it subsidizes banks and other entities that lend students money at favorable rates, and it guarantees lenders against loss if students default. Under the William D. Ford Federal Direct Loan Program, launched in the early 1990s, the government itself is the lender.

Education Department data show that 4,463 postsecondary schools participated in the public-private program in the past academic year, accounting for about $74 billion in loans. The direct lending program had 1,742 participating schools in the same span, with $22 billion in loan volume. If the House bill becomes law, new lending under the government-guaranteed program would end. Essentially, the government would become the sole originator of federal loans.

The core of the bill would transfer about $40 billion in savings to the Pell Grant program, which aids low- and moderate-income students. The maximum yearly award would rise from $5,350 per student to $5,550 next year and eventually to $6,900 in 2019, with the grants indexed to inflation starting in 2011. That would enable Democrats to claim a breakthrough for college affordability at a time of economic worry for many Americans.

"This is a can't-miss opportunity to do the right thing," said Rep. George Miller (D-Calif.), chairman of the Education and Labor Committee and chief architect of the bill. "Let's remember whose voices really matter here. It's time to listen to our students and our families."

But Republicans say the bill could backfire. "It is another government takeover, in this case of a $100 billion loan industry," said Rep. John Kline (Minn.), ranking Republican on the committee. He drew a parallel to the health-care debate, in which an expanded federal role is also at issue. "It's Congress stepping in and choosing the public option instead of the private option, the private-public partnership," Kline said. Two Republicans on the committee support the bill; most are opposed.

For Obama, the bill offers a rare opportunity to launch education programs yet maintain that taxpayers will have no additional expense. "We are making the system more efficient, and making it more effective for students," said Melody Barnes, director of the White House Domestic Policy Council. The Congressional Budget Office has said the proposed spending would be offset by savings from the lending overhaul. Republicans call that finding questionable.

Among the provisions Democrats inserted into the bill are $10 billion to help community colleges, $8 billion to help states improve early-learning programs for children from birth to age 5, $4 billion to modernize and renovate public schools, $3 billion to bolster college access and completion, and $2 billion for historically black colleges and universities and other institutions serving minorities.

The lending industry has been on the defensive in recent years. President George W. Bush's administration asserted that some federal subsidies were unneeded, and a Democratic-led Congress in 2007 cut them by about $20 billion. In the past year, the credit crunch has hobbled many lenders and forced the government to take steps to prop up the market to ensure loans flow to students.

A group of lending industry leaders in July proposed eliminating subsidies but keeping a role for private lenders as loan originators. The CBO last week found that such an approach would save about $13 billion less than the House Democratic bill, a conclusion the industry disputes.

Industry leaders warn that the federal government may prove an unreliable lender. "If the Department of Education, in its monopoly, didn't do a good job, the schools and students wouldn't have someplace else" to obtain loans, said John F. Remondi, vice chairman and chief financial officer of Sallie Mae, based in Reston. "Our view is, what's kept them honest to this point in time has been the competition from lenders like ourselves."

Staff writer Michael D. Shear contributed to this report.

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