A long-awaited bill introduced in Congress on Wednesday could spell the beginning of the end for private lenders in the federal student loan system. Get ready for another partisan battle.
The legislation sponsored by Rep. George Miller, a Democrat from Northern California who heads the House Education and Labor Committee, closely resembles the plan offered by President Obama. Both plans would eliminate the subsidized interest payments and default guarantees made by the government to banks and other lenders that generate loans under the Federal Family Education Loan (FFEL) program. All new loans would instead be issued under the existing federal Direct Loan program and paid by the U.S. Treasury starting in 2010.
Despite the partisan bickering that’s sure to come, the upshot of the bill is that having the government make all student loans directly would save students money. The Congressional Budget Office estimates that the switch would save $87 billion over 10 years. Here’s how most of the savings would be spent:
- $40 billion would be put toward bolstering Pell Grants (which don’t have to be repaid) given to low-income college students. The annual maximum amount would grow from $5,550 in 2010 to $6,900 by 2019.
- $12 billion would go toward enhancing the nation’s community-college system, which Obama discussed in a speech in Michigan on Tuesday.
- Another $10 billion would be set aside for early childhood education programs.
- $1.2 billion would be devoted to historically black colleges and “minority-serving institutions.”
Banks and many Republicans in Congress oppose the switch, arguing that it would give the government a monopoly over the student loan industry as well as reduce choices for families and schools. Some Democrats are wary too, about the possibility of steep job losses in the growing private student loan industry. Private lenders made about $56.7 billion in government-backed loans during the 2008-9 school year, compared with $20.1 billion from the Direct Loan program.
As with other contentious legislation, this bill could make its way through the House unscathed but get mired in the Senate. In May, Sen. Lamar Alexander, a Tennessee Republican, called such a plan “another Washington takeover.” Stay tuned.
Landon Hall – A freelance writer in Silicon Valley, Landon was a reporter, sports writer and editor at The Associated Press in Portland and New York City from 1997-2006.