House Passes Overhaul Plan on Student Aid
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By DIANA JEAN SCHEMO
Published: July 12, 2007
WASHINGTON, July 11 — The House on Wednesday approved far-reaching changes in student aid programs, voting to cut $19 billion in federal subsidies to student lenders over five years, while increasing grants for needy students and halving interest rates on federally backed loans with the savings.
The bill passed 273 to 149 in a sometimes raucous debate, with 47 Republicans joining Democrats, who took control of Congress this year on promises to help the middle class with the escalating costs of higher education.
The bill marks a stark reversal of fortune for the student loan industry, which for over 10 years had largely enjoyed unflagging support under the Republican majority. Investigations by Congress, the news media and the New York attorney general bruised the standing of lenders, exposing systems of paying colleges commissions to win business, offering college officials free trips and other perks.
While President Bush opposes some elements of the bill, it is widely expected that a broad overhaul of student aid will become law this year. Mr. Bush himself has proposed cutting government subsidies to lenders by $16 billion. And the Senate is expected to pass legislation later this month that would reduce these subsidies by $18.3 billion, while increasing the maximum Pell grant, the nation's major assistance program for low- and middle-income students, more swiftly than the House bill does.
Pointing to increases in college costs that have outpaced inflation by nearly 40 percent over the last five years, Representative George Miller, Democrat of California and chairman of the Education Committee, likened the legislation to the G.I. Bill, which began government financing of higher education in exchange for military service in 1944.
"That took us to the first place in the world, and we've been there for 50 years," Mr. Miller said. "This is about a new investment for the next generation."
House Republicans criticized the bill as creating a panoply of nine entitlement programs, which they branded "welfare programs." They offered a substitute that would have largely focused on increasing Pell grants, without cutting interest rates. The substitute was defeated 231 to 189, in a largely party-line vote.
Representative Howard P. McKeon of California, the ranking Republican on the Education Committee, said the bill approved on Wednesday "overreaches by creating new entitlement spending for every conceivable constituency in higher education." Mr. McKeon also criticized it as "extracting too much blood" out of the federally backed student loan program, which he called "a success by all measures."
But Representative Tom Petri, Republican of Wisconsin, who voted for the bill, called the federal loan program "fundamentally and structurally flawed."
"Congress has no business setting lender returns," Mr. Petri said.
Student lenders, who had lobbied heavily against the bill, predicted that it would drive some lenders out of business, and reduce services and discounts offered to borrowers. A group of private bidders planning to buy Sallie Mae, a publicly traded company that is the nation's largest student lender, warned the loan company that both the House and Senate bills might cause the $25 billion deal to fall through, according to a press release from Sallie Mae.
The release also said that Sallie Mae "strongly disagrees with this assertion" and would move to close the deal as rapidly as possible.
But a report by the Congressional Research Service found that small and medium-sized lenders would probably be hardest hit, and would face difficulties competing with industry giants like Sallie Mae. The report said Sallie Mae would likely be able to handle the cuts unscathed.
As well as cutting lender subsidies, the bill reduces the share the government would guarantee in the event of student default. It halves the interest rate on federally backed loans gradually over the next five years, to 3.4 percent from 6.8 percent, and would limit monthly payments to 15 percent of the borrower's discretionary income.
The bill raises the maximum Pell grants by $500 over the next four years, to a total of $5,200 by 2011. It also grants $5,000 in loan forgiveness for police, firefighters, prosecutors and other public servants, and a complete release from student loans for public servants after 10 years. It would also provide for complete forgiveness of federal student loans after 20 years for economic hardship.
Mr. Bush has threatened a veto over the loan-forgiveness provisions as creating new entitlement programs, and said more of the savings from the cuts in lender subsidies should go to increasing the size of Pell grants.
The Senate version of the legislation is similar to the House bill, but includes more generous increases in Pell grants. Senate aides on both sides of the aisle said they doubted that Mr. Bush would follow through with a veto after the two bills have been reconciled.
Both measures also require the federal Education Department to set up a pilot program to auction off the right to make student loans, giving the business to the lender that would charge the least.
Advocacy groups for student borrowers praised the legislation. Michael Dannenberg, director of the New America Foundation's education policy program, called Wednesday's bill "an important first step toward getting politicians out of the business of writing subsidized lender profit rates into law." The group was the first to pitch auctions as a way to set lender subsidy rates.
has threatened to veto the bill due to this provision.
