Congress Prepares for Fight Over Higher Ed Loan Reform

According to today's New York Times, private lenders are gearing up to fight Obama's proposal to end the Family Federal Education Loan (FFEL) program, which subsidizes corporate lenders at the highest possible interests rates, in favor of the more efficient (and cheap) Direct Loan program run by the government:

The private student lending industry and its allies in Congress are maneuvering to thwart a plan by President Obama to end a subsidized loan program and redirect billions of dollars in bank profits to scholarships for needy students.

The plan is the main money-saving component of Mr. Obama’s education agenda, which includes a sweeping overhaul of financial aid programs. The Congressional Budget Office says replacing subsidized loans made by private banks with direct government lending would save $94 billion over the next decade, money that Mr. Obama would use to expand Pell grants for the poorest students.

But the proposal has ignited one of the most fractious policy fights this year.

One one side are the corporations, who don't want to lose out on their government dole (even as they openly admit that private capital and a true free market won't provide adequate student aid via lending), Republicans who see this as an unnecessary expansion of government (even though the government is already massively subsidizing the private sector in this area), and Democrats who receive large donations from private lenders or whose states house the actual lending companies.

The companies themselves have already taken out some big guns, hiring lobbyists with deep professional (and familial) ties to the administration:

Because it would make spending on Pell grants mandatory, limiting Congressional control, powerful appropriators are balking at it. Republicans say the plan is proof that Mr. Obama is trying to vastly expand government. Democrats are divided, with lawmakers from districts where lenders are big employers already drawing battle lines.

At the same time, the private loan industry, which would have collapsed without a government rescue last year, has begun lobbying aggressively to save a program that has generated giant profits with very little risk.

“The administration has decided that it wants to capture the profits of federal student loans,” said Kevin Bruns, executive director of America’s Student Loan Providers, a trade group that is fighting Mr. Obama’s plan.

To press its case, the nation’s largest student lender, Sallie Mae, has hired two prominent lobbyists, Tony Podesta, whose brother, John, led the Obama transition, and Jamie S. Gorelick, a former deputy attorney general in the Clinton administration.

Here's what you need to know on this issue: The President's plan will save billions over the next decade by cutting out a middle man that isn't willing or able to lend money without massive government support in the first place. Money saved by cutting out those middle men will be funneled back into the Pell Grant program, providing more grant aid to need students without decreasing the availability of loans to other students. Contrary to the assertions of Republicans, the program doesn't kill private student lending, it merely removes the government subsidies those companies have received for decades. Conservatives who support government efficiency and a reduction in wasteful spending should support the President's proposal. Furthermore, those private lending companies will still receive government contracts to pay for back-end services in administering and tracking loans:

At the Wilkes-Barre event, Mr. Lord of Sallie Mae acknowledged his industry’s reliance on the government. “I don’t see private capital financing student loans, certainly any time soon,” he said.

Even as lenders fight the president’s plan, Sallie Mae and others are bidding for work that will remain if it is adopted — contracts for loan servicing and other back office operations.

The president’s plan would use the money from direct lending to help increase Pell grants and make them mandatory, with annual increases tied to inflation, providing a much-needed measure of certainty for students.

Here's a list of the top recipients of campaign donations from the private lending industry. These are the Senators most likely to stand in the way of Obama's reforms on this issue: