thomas petri

President Obama's plan of increasing access to college takes another step forward today as the House passed Student Aid and Fiscal Responsibility Act (SAFRA) on strong bipartisan vote of 253 - 171. Chairman Miller, a strong advocate for young Americans, introduced this bill in committee.

While the bill provides more funding for Pell grants and community colleges, a total of $87 billion over 10 years, it does so without increased spending. Rich Williams, Higher Education Associate for the US PIRG, explains that SAFRA is tied closely with the ongoing transition of the Federal Family Education Loan (FFEL) program to the Direct Lending (DL) program. "Many of the largest universities have already made the switch to DL," says Williams. "SAFRA is paid for in full by ending wasteful subsidies to banks and lenders – but while the Department of Education intends to phase out the FFEL program in the near future, without action on SAFRA this year the budget savings will be lost to students forever."

According to a statement released by National Direct Student Loan Coalition:

Presently, over 1,700 institutions are successfully participating in Direct Lending, a program with an enviable track record for the past 15 years. The Department of Education has demonstrated its ability to administer the Federal Direct Loan program, to assist schools transitioning and to prepare for the move to 100% direct lending.

Direct Loan schools report, and national statistics confirm, that the U.S. Department of Education providessuperior service to students, families, and schools, and their “Late Stage Delinquency” default prevention program has resulted in a decrease in their cohort default rates. In fact, the cohort default rate in Direct Lending remains significantly lower than in FFELP.

Pedro de la Torre III, Campus Progress Senior Advocacy Associate, was also upbeat about the bill's passage but noted that "language attacking ACORN was included in the bill at the last minute. We think this is unfortunate because it has nothing to do with student aid, and because ACORN does some very good and important work. Hopefully this language will be removed before this legislation is passed through Congress."

On the prospects of the bill in the Senate, de la Torre is positive but warns that "lenders are working hard to either stop or water down the bill. If young people continue to take action in support of college affordability, we expect a strong bill to pass. The key votes will be from conservative democrats, especially those from states with strong state-affiliated lenders or guarantee agencies." Williams agrees, noting CT, CO, MO, MT, ND, NM, NY, OH, PA, VT as particularly key states. Williams suggests that passage in the Senate could be trickier because, Senators, when compared to Representatives, have longer and deeper relationships with the lending community. Moreover, the climate on The Hill is engulfed with health care debate. Still, interested parties are weighing in on this bill's future.

The voice from the right concerning this bill has been about jobs and the government takeover of the student loan industry. Writing today in response to SAFRA's passage in the House, Rep. Michelle Bachmann argued:

Ending private sector competition in the student loan industry and making the Direct Loan program the sole provider will kill jobs, and greatly expand the control of the federal government. The Federal Family Education Loans (FFEL) program has been the overwhelming choice for student and parents for the past 40 years. In fact, 78% of all new federal student loans from 2007-2008 were administered through this program. Yet, the government wants to end it. It doesn't make any sense.

Williams tells me that the default rates for FFEL is higher than for DL. Through FFEL, lenders are able to secure very low interest rates and at almost no risks. As Williams tells me, "Student loans don't qualify for bankruptcy, so it is the taxpayers who must repay the lender when a student defaults on a loan." The problem with this is that lenders have no skin in the game, allowing them make loans to riskier borrowers. So, to Bachmann's point, it isn't about whether or not someone uses the program, but how well the program operates. And to claims of a government takeover, let's let her Republican colleague, Rep. Thomas Petri, who has been a champion on this issue for over a decade, do the explaining:

Despite what you have been hearing from those in the lending community, the fact is that currently we have two federal student loan programs that provide the exact same student loans to borrowers, and schools choose to participate in either one or the other. FFEL is a federal program -- private lenders make the loans with two separate subsidies from the federal government: a guaranteed interest rate and a guarantee against default losses.

The Direct Loan Program uses the proceeds from the wholesale auction of Treasury securities to the private sector to fund loans to students, and all servicing and bill collection is handled by private companies operating through performance-based contracts. The loans are delivered to students through the same system that universities use to disburse Pell Grants.

Over the years the FFEL program has proven to be fraught with scandal, an unreliable source of funds, and it costs billions of dollars more for taxpayers. By originating all new loans under the Direct Loan Program, we are not favoring government over the private markets. Rather, we are eliminating the federal guaranteed program which for years has been a gravy train for lenders and guaranty agencies, and moving in favor of the Direct Loan Program which is structured in the interests of students and taxpayers.

...in the interest of students and taxpayers. I like that.