New bill would give control of student loans to federal government

Published on October 5, 2009 by AlumniUnit   ·   No Comments

This month, the House voted in favor of the biggest overhaul of college aid programs since their creation in the 1960s – a bill to oust private lenders from the student loan business and put the government in charge. The bill still must pass the Sen­ate.

The Student Aid and Fiscal Responsibility Act of 2009 fulfills nearly all of President Barack Obama’s campaign promises for higher education by ending sub­sidies for private lenders, boost­ing Pell Grants for needy stu­dents and creating grant programs to improve communi­ty colleges and college gradua­tion rates, among other things.

Last week while visiting Brewbaker Technology Magnet High School in Montgomery, Rep. Bobby Bright, D-Montgom­ery, said he was among the mem­bers of the House who voted in favor of bill H.R. 3221 because, he said, it will end predatory stu­dent loan lending.

“I have always believed that education is the great equaliz­er,” Bright said. “More impor­tantly, helping students that need the help. This bill … is a his­toric investment in education, from early childhood all the way through college. It is also fiscally responsible, as it ends subsidies to private lenders and invests some of those savings into needed deficit reduction.”

If it passes the Senate, colleges and universities nationwide would all go to a government di­rect-lending program for stu­dent loans, which would mean that students would receive their student loan disburse­ments directly from the federal government rather than a bank of their choice.

“The choice before us is clear. We can either keep sending these subsidies to banks or we can start sending them directly to students,” said the bill’s spon­sor, California Democratic Rep. George Miller, chairman of the House Education and Labor Committee.

Yet the money also would be spent on things that don’t help pay for college, such as construc­tion at K-12 schools and new pre­school programs.

It would also invest $2.55 bil­lion in historically black col­leges and universities to help students stay in school and grad­uate at HBCUs and minority-serving universities such as Ala­bama State University in Mont­gomery, according to Bright.

While the bill awaits consider­ation by the Senate, colleges have the option of not using di­rect lending in favor of using the Federal Family Education Loan Program, also known as FELP, to administer student loans. Un­der FELP, students can choose the banks that handle their loans, state financial aid offi­cials said.

Buddy Jackson, director of financial aid at Faulkner Uni­versity in Montgomery, said stu­dents should have a choice. The bill’s passage could also mean more than 4,000 colleges and uni­versities nationwide having to move from the FELP system to direct lending and it could be costly for universities to make the switch, he added.

“It’s going to take away a lot of the support we’ve had from pri­vate lenders who can straighten out problems more quickly for schools,” he said.

About 85 to 90 percent of Faulkner students use some type of student loan, Jackson said.

“The system is working fine,” he said.

Turning control over to the government would save taxpay­ers an estimated $87 billion, ac­cording to the Congressional Budget Office. About $40 billion in the savings would go toward Pell Grant scholarships to in­crease them from $5,550 to $6,900 by 2019, helping make college more affordable for students.

While the measure would in­crease Pell Grants, it would do nothing to curb college costs, which have risen much faster than Pell Grants have.

In addition, the CBO said that when administrative costs and market conditions are consid­ered, the savings from switching to direct government lending could be much lower, $47 billion instead of $87 billion.

Republicans warned that in­stead of saving the government money, as Democrats promise, the bill could wind up costing the government more money.

“Unfortunately, the numbers just don’t add up,” said Minneso­ta Rep. John Kline, senior Re­publican on the Education Com­mittee.

As consumers, college stu­dents probably wouldn’t notice much difference in their loans, which they would get through their schools. However, officials at several colleges worry they may not be able to make the switch to direct government loans in time for next year, and Education Department officials said this week that they do not intend to extend the deadline.

More schools administer fed­eral loans through the subsi­dized loan program than from the government’s direct loan program. Private lenders made $56 billion in government-backed loans to more than 6 mil­lion students last year, com­pared with $14 billion in direct loans from the government.

In Alabama, there are current­ly 39 universities and colleges that use FELP, including Au­burn Montgomery and Faulkner University in Montgomery, ac­cording to the Kentucky Higher Education Assistance Authori­ty, or KHEAA, which adminis­ters Alabama student loans.

Only 12 universities in Alaba­ma currently use the govern­ment’s direct lending, which in­cludes Alabama State University, Auburn University and the University of Alabama, according to KHEAA.

Republicans argued that it is wrong to put the government in near-total control of student lending.

Many also worry about job losses in their districts. Private lenders employ more than 30,000 people whose jobs depend on the subsidized loan program, and the industry said many would be laid off.

Sallie Mae, the biggest student lender, has about 8,500 employ­ees in the program and probably would lay off about 30 percent of those workers. It still will have contracts to service federal loans.

Its employees have held a se­ries of town hall meetings and petition drives to involve local leaders in Pennsylvania, Flori­da, Delaware, New York and In­diana.

Democratic Rep. David Wu of Oregon said lenders still could make all the loans they want.

“What will not happen any­more is making those student loans with taxpayer subsidies,” he said.

Michael Reynolds, director of student financial services at Au­burn University, said Auburn switched this summer from the FELP system to direct lending because the university saw it was in the best interest of stu­dents.

Reynolds, who served as admi­nistrator of the Alabama Stu­dent Loan Program from 1995 to 1999 before joining Auburn Uni­versity, said the university went to FELP in 2001 because the economy was good and lenders were offering incentives in a competitive market where stu­dents saw a reduction in loan fees along with other benefits.

Then the economy tanked and the FELP program became a problem because banks began having problems with making student loan money available, Reynolds said.

When the money doesn’t come in on time, students don’t have the funds they need to buy books, pay for transportation costs, and food, he said.

Dorenda Adams, director of financial aid at Alabama State University, said ASU this sum­mer also went to direct lending after students faced those exact circumstances last year.

“We had serious problems with students getting their loan money at least a month later be­cause private lenders didn’t have the money,” she said.

“We have a lot of needy stu­dents, so this will be beneficial to them. With direct lending they get their money much soon­er, and it’s guaranteed in a time­ly manner so they can buy books, and other educational ex­penses.”

Until the bill passes, Reynolds said universities across the na­tion will debate the merits on moving to solely government di­rect lending, and some are very passionate about keeping the FELP program as an option.

“This is really debatable,” he said. “People get really passion­ate about this. The bottom line is we are in this for the students, and we can’t let passion for a program get in the way of the high education dreams for stu­dents.”

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Tags: 2009, African Americans, alabama state university, asu, barack obama, black college, budget, Colleges, economy, FELP, Finance, HBCU, sallie mae foundation, student aid