Screw College Loans

While moves by Democrats in Congress to rebuff President Obama’s tax cut and climate change proposals are capturing the headlines, the president’s former colleagues on Capitol Hill are also taking aim at his calls for major changes in the way the federal government doles out student loans.

Senate Budget Committee Chairman Kent Conrad (D-N.D.) and House Appropriations Chairman David Obey (D-Wis.) are opposed to provisions in Obama’s budget plan that would remove private banks from the federal student loan program and transfer the expected savings — $94 billion over a decade, according to the CBO— to a new program that would instead guarantee Pell Grant funding for eligible students.

Lobbyists tracking the debate said Conrad and Obey’s objections center largely on Obama’s proposal to take the popular Pell Grant program out of the annual appropriations process – with all the political horse-trading that implies — and instead guarantee that the program will be paid for based on a set formula.

“In both cases, I think it’s the creation of a new entitlement” that worries the lawmakers, Terry Hartle of the American Council on Education said. “Senator Conrad looks at this — as the chairman of the Senate Budget Committee — that given the deficit problem, we shouldn’t be creating new entitlements. Congressman Obey says, ‘I’ve looked after Pell for many years. It’s an important program under my jurisdiction and I don’t want to lose control of it.’”

In a statement Wednesday, Conrad said his budget plan would create a reserve fund to allow for increases in Pell grants in line with those proposed in Obama’s budget. However, he nixed the idea of a new entitlement and made no reference to the so-called 100 percent direct-lending proposal.

Obey’s office did not return phone calls from POLITICO seeking comment. In the past, he has supported some direct federal lending to students.

White House budget director Peter Orszag made note of the entitlement rebuff as he told reporters on Wednesday that he welcomed the overall congressional approach on education. He also noted Congress’s nod to a reserve fund potentially allows making the Pell Grant mandatory.

In an unusual twist, the CBO’s scoring of Obama’s budget may ultimately give the White House the upper hand in the battle with Conrad and Obey. The CBO report last week was generally viewed as a severe blow to Obama’s budget priorities, but the congressional office’s findings were actually a boon to the president’s education plans. Its estimate that Obama’s proposal removing banks from the federal student loan system would save $94 billion over 10 years was roughly double the $47.5 billion that the president’s team projected. Those savings, if they can be achieved, would effectively come out of the pockets of banks that currently are administering and making the loans.

“The monies saved by going to direct lending are enormous, and it may make this decision inevitable,” Hartle said. “The game changer was CBO estimated savings significantly higher than what the Office of Management and Budget predicted….You get close to $100 billion, and it’s a huge amount of money in any fiscal environment, and particularly now.”

There apparently would be no significant impact on the loans received by students, although there are some fears of glitches occurring in a single federal system that services everyone.

So-called 100 percent direct lending by the federal government was proposed by President Clinton in 1993 and in each following year of his presidency. Congress ultimately allowed some federal lending, but forced the Education Department to essentially share the market with commercial banks and private firms. In the last year or two, schools have moved towards the federally run program because of concerns that private-sector lenders could have problems related to the credit crunch.

Conrad is under some pressure from his home state to preserve a role for banks in the federally backed student loan program.

“If the president’s proposal goes through, that will deeply affect the Bank of North Dakota,” according to Julie Kubisiak, the director of student loans at the state-owned bank. She said the bank’s entire advisory board, consisting of the governor, attorney general and other officials, have written to the state’s Congressional delegation opposing the change.

Kubisiak said last week she planned to be in Washington Monday to urge Conrad and others to hang on to at least part of the current system. She disputed assertions that the federal lending program would be substantially cheaper than the bank-run system. “I really don’t see where they’re going to come up with the savings,” she said.

The bank official said the student loan unit employs 55 people in North Dakota, but that not all would necessarily lose their jobs even if the federal program ends. “We would still maintain our state guarantee program,” Kubisiak said. Employees would also be needed to service previously issued loans, some of which extend for 30 years.

Despite the home-state pressure for Conrad, criticism of the so-called 100 percent direct lending proposal has been slower to develop and less intense than in past years, Hartle said.

One of the nation’s largest originators and holders of federally-guaranteed student loans, the Student Loan Corporation, kept silent for three weeks about Obama’s budget, which was released on February 26. Last week, it finally issued a statement opposing the plan.

“Eliminating the [bank-based] program would limit choice for students and families, and would be less efficient and more costly to taxpayers at a time when the nation is experiencing severe economic stress,” Michael Reardon, the company’s CEO and president, said.

Another big player in the student loan industry, Sallie Mae, took a surprisingly conciliatory stance towards the president’s proposal to end bank-initiated lending. Analysts said the company may look to bid on an expanded contract to manage the federal government’s lending program if it becomes the sole provider of federally subsidized loans.

At least one Democrat, Sen. Blanche Lincoln (D-Ark.), is already on the record opposing Obama’s plan, saying 98 percent of federally-backed student loans in Arkansas are initiated through the private sector.

Hartle called the current Pell Grant system a “quasi-entitlement” because students know they will get a grant, but the amount depends on how many other students apply. He said Obama’s proposal to transfer savings from direct lending is attractive because it would eliminate the annual uncertainty. “This would provide a level of stability and predictability in the Pell Grant program that has been sorely lacking since it was created in 1972,” he said.

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