By
DAVID M. HERSZENHORN
and TAMAR LEWIN
WASHINGTON
— Ending one of the fiercest lobbying fights in Washington, the Senate
voted Thursday to force private commercial banks out of the federal student loan market,
cutting off
billions of dollars in profits in a sweeping restructuring of
financial-aid
programs and redirecting most of the money to new education
initiatives.
The
revamping of student-loan programs was included in — if
overshadowed by — the final health care package. The vote was 56 to 43
in
the Senate, with Republicans unanimously opposed. The House was
expected to
pass the bill later Thursday.
Since the
bank-based loan program began in 1965, commercial banks
like Sallie Mae and Nelnet have received guaranteed federal subsidies
to loan
money to students, with the government assuming nearly all the risk.
Democrats
have long denounced the program, saying it fattened the bottom line for
banks
at the expense of students and taxpayers.
“Why are
we paying people to lend the government’s
money and then the government guarantees the loan and the government
takes back
the loan?” said Representative George Miller, Democrat
of
California and chairman of the education and labor committee.
Democrats
celebrated the legislation, a centerpiece of President Obama’s
education
agenda, as a far-reaching overhaul of federal financial aid, providing
a huge
infusion of money to the Pell grant program and offering new help to
lower-income graduates in getting out from under crushing student debt.
Still,
the final bill is less ambitious than the original proposal.
Congressional
allies of the student-loan industry attacked the
overhaul as an over-reaching government takeover. The legislation
substitutes
an expanded direct-lending program by the government for the bank-based
program, directing $36 billion over 10 years to Pell grants, for
students from
low-income families.
“The
Democratic majority decided, well look, while
we’re at it, let’s have another Washington
takeover,” said Senator
Lamar Alexander,
Republican of
Tennessee and a former federal education secretary. “Let’s take
over the federal student loan program.”
Even as
the Democrats’ decision to attach the student-loan
overhaul to the healthcare package virtually ensured its passage, banks
fought
fiercely up to the last minute, prompting some lawmakers like Senator
Ben
Nelson, Democrat of Nebraska, where Nelnet has its headquarters, to
cast their
vote against the overall bill.
Although
private banks will no longer be allowed to make student
loans with federal money, many will continue to earn income by
servicing those
loans.
The Congressional
Budget
Office said the direct-lending approach will save taxpayers
approximately $61 billion over 10 years. Roughly $40 billion of the
savings
will be redirected to higher education. In addition, education programs
will
get an additional $10 billion from the health-care reform package.
The bill
includes some landmark changes, like automatic increases,
tied to inflation, in the maximum Pell grant award. But for individual
students, the increase in the maximum Pell grant — to $5,900 in 2019-20
from $5,550 for the 2010-11 school year — is minuscule, compared with
the
steep, inexorable rise in tuition for public and private colleges
alike.
And
because college costs are rising so quickly, the maximum Pell
grant now covers only about a third of the average cost of attending a
public
university, compared with three-quarters in the 1970s, when the program
began.
So each year, more students graduate with debt of more than $20,000.
The
legislation will make it easier to pay back student loans, by
reducing the share of income that a graduate must devote to loan
payments and
by accelerating loan forgiveness — but not right away. Those who take
out
new loans after July 1,
2014, will
have to devote 10 percent of their income to payments, down
from the current 15 percent, and those who keep up their payments will
have
their loans forgiven after 20 years, reduced from the current 25.
“Income
based repayment is a fantastic addition to the
Senate bill that will allow over a million students to avoid being
crushed by
unmanageable levels of debt,” said Rich Williams, a higher-education
advocate at the U.S. Public Interest Research Group.
With the
new legislation, students will have to take out their
loans through their college’s financial aid office, instead of using a
private bank.
The
original proposal stood to save $87 billion over 10 years by
ending the bank-based program, known formally as the Federal Family
Education
Loan program. But as the Senate delayed in taking up the legislation,
colleges
and universities began shifting to the direct-lending program,
realizing the
savings to the Treasury
up front
and cutting the amount of money available for future spending.
At the
same time, an increase in the number of Americans enrolling
in college and seeking financial aid, as a result of the recession, raised the
projected
costs of the enhanced Pell grant program.
In
addition, to comply with the complex budget
reconciliation
rules, some of the savings from the education changes had to be
redirected to
pay for parts of the health care legislation.
In the
scaled-back, final version, the administration scrapped $8
billion in proposed spending on early-childhood education. It also
mostly
erased a $12 billion “American Graduation Initiative,” which was
announced with fanfare in the fall as an effort to bolster the
workforce by
producing millions more community college
graduates
over the next decade, and building up high-quality free online courses.
Community
colleges, the main provider of higher education for most
low-income Americans, were slated to receive $10 billion under the
administration’s original plan, but will instead get just $2 billion
for
job training.
“I’m
disappointed,” said Eduardo J. Padrón, the
president of Miami Dade College, one of
the nation’s largest community colleges. “For
the first time, we had a president who understood the importance of
community
colleges, and we were validated and recognized for our role in opening
the
doors of higher education.”
Untouched
was the $2.55 billion to historically black and
minority-serving colleges, a priority of the Congressional
Black
Caucus. If the new legislation had not passed, Obama administration
officials say, Pell grants would have had to be cut to about $2,150,
and some
500,000 students dropped from the program.
In
lobbying fiercely against the overhaul, the private banks
argued that it would eliminate jobs, even though the government will
hire many
of the same banks on a contract basis to service the loans and perform
other
back-office administration. Furthermore, the banks said that with the
government as the only lender, students would not get the same level of
service.
David
M. Herszenhorn reported from Washington,
and Tamar Lewin from New
York.
