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Obama’s student loan plan moving forward with health bill

Would cut funds to private lenders, boost grant money

By Nick Anderson and Alec MacGillis
Washington Post / March 19, 2010

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WASHINGTON — President Obama moved closer to achieving one of his top policy goals yesterday as congressional Democrats joined forces behind a bill that would cut funding to private student lenders and redirect billions of dollars in expected savings into grants to needy students.

The bill, which was released yesterday afternoon, has long been overshadowed by the rancorous health care debate, but it is moving swiftly now and may benefit from a legislative maneuver that packages it together with Obama’s health care plan. The two initiatives at the centerpiece of the president’s domestic agenda could pass simultaneously in what is expected to be a largely party-line vote.

The student loan bill would end a program begun in 1965 that relies on banks and other financial institutions to lend students money for college while the government assumes virtually all the default risk. The government would vastly expand its own lending to fill the void.

Republican opponents have criticized the move as an unnecessary government takeover of a successful program, but Obama administration officials have argued that the change would amount to nothing more than removing the middlemen from transactions that allowed lenders to pocket billions of dollars in profit at the expense of taxpayers.

The rates would remain unchanged for most borrowers. Nonpartisan congressional budget analysts estimate the savings at more than $60 billion over the next decade, most of which would go to the popular but oversubscribed Pell grant program for the nation’s burgeoning numbers of students from low- and moderate-income families.

“This legislation offers the most sweeping changes to the federal student loan program in a generation,’’ Representative George Miller, a Democrat from California and chairman of the House Education and Labor Committee, said in a statement. “This is really about making a simple choice. Congress can either continue the longstanding boondoggle that rewards banks with tens of billions of dollars in subsidies at the expense of families and taxpayers — or we can invest that money directly in students and America’s world economic leadership.’’

For years, the industry has weathered attacks through strong political connections and support from many college administrators who favor private lenders over the direct government lending program begun in the early 1990s. But a confluence of factors has thrown the industry on the defensive. The most important is a several-billion-dollar shortage of funds for federal Pell grants.

Democratic congressional aides said the legislation would allocate about $13.5 billion to help fill the shortage and more than $22 billion over the next decade to enlarge the maximum annual award to $5,975 by 2017, from the current $5,550. As a result, several higher-education groups have moved from neutral on the lending issue to supportive of Obama’s proposal. Federal grants reduce somewhat the pressure on colleges and universities to provide aid.

Major industry players say they also want changes in the program, just not what Democratic leaders propose. They say subsidies can be cut while preserving a role for private lenders in originating loans. Executives with SLM Corp., also known as Sallie Mae, say employees have pressed Democratic lawmakers to reconsider the legislation.