Archive for Tuesday, November 28, 2006

Student loans to get new scrutiny in Democratic Congress

November 28, 2006

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— One lucrative corner of the banking community has been so well-connected in the Republican-controlled Congress that a powerful committee chairman once assured its members that the industry's interests were in "two trusted hands."

Now that Democrats are about to take control of Congress, that industry - the bankers and financiers who make college student loans - will have to contend with a lawmaker who has compared it to the greedy usurers Jesus drove from the temple of Jerusalem.

"It's time to throw the money-changers out of the temple of higher education," thundered Sen. Edward M. Kennedy, D-Mass., who is in line to become chairman of the Senate committee that oversees education programs.

Within the student-loan industry, the impending transfer of party control is producing waves of anxiety - in part because Democrats have promised that one of their first acts will be to cut interest rates on student loans.

Having worked hard over the last decade to make Republican friends in high places, bankers are moving quickly to open wider avenues of communication with ascendant Democrats, such as Rep. George Miller, D-Calif., incoming chairman of the House Education and Workforce Committee, who got a last-minute, post-election invitation to address a student-loan trade meeting this week.

Cutting interest rates

Democrats want to cut the rate that students pay on federally backed loans from 6.8 percent to 3.4 percent. The idea was part of a six-item agenda Democrats ran on in the midterm elections. But the cost to the Treasury would be substantial: an estimated $18 billion or more over five years.

The interest-rate cut could be made without touching the subsidies the government pays to companies for lending money to college students. But those subsidies are a possible target, nonetheless. Some Democratic lawmakers see them as excessive.

"Lenders are obviously concerned because when you say something is going to cost $18 billion, the next question is 'How are you going to pay for it?'" said John Dean, a lawyer for the Consumer Bankers Assn.

Thomas Kiley, a spokesman for Miller, said: "We plan to examine lenders' profitability to determine whether there are excessive profits that should be put to better use helping students and parents pay for college."

About 8.5 million students and parents pay for college with federal student loans every year. The $67 billion borrowed in 2005-06, which includes both direct loans from the government and federally backed loans through private lenders, is the largest source of federal financial aid for college.

A senior House Democratic leadership aide said the cost of the plan probably would be whittled to $2.6 billion by authorizing only a one-year reduction.

Budgeting rules

Whatever the cost, the loan-rate bill will be an early test of another Democratic campaign promise: to reinstitute budget rules that would require new spending to be offset by cuts in other programs, or by revenue increases. Democratic aides say it is not yet clear how the cost of the rate cut would be offset.

Republicans argue that cutting interest rates is a misplaced priority because it would not affect what they believe is a more fundamental problem: the rising cost of college.

"The interest rates shouldn't be the major issue here. Rather, the principal - the amount of money students are forced to borrow because of skyrocketing costs - should be," said Steve Forde, a spokesman for Republicans on the House education committee. "Unfortunately, House Democrats don't see it that way and are taking a Band-Aid approach."

Democrats promoted two other ideas during the campaign - increased tax breaks for tuition payments and larger direct grants for poor students - but neither directly addresses the issue of the rising cost of higher education.

Neglecting Democrats

Lenders are facing new political exposure because for years they have invested much more heavily in building relationships with Republicans than they did with Democrats. Among the indicators of that investment:

¢ Almost 80 percent of the money given to members of the House education committee by advocates for the student-loan industry and for-profit colleges went to Republicans in the 2003-2004 campaign cycle, according to an analysis by the Chronicle of Higher Education.

¢ In the 2006 election cycle, the largest single corporate source of donations to the National Republican Congressional Committee was a student-loan company, Nelnet, whose employees and political action committee gave $153,000.

¢ Employees of Sallie Mae, a company that finances student loans, gave more than any other entity to Boehner's political action committee, providing more than $122,000 since 1998, according to an analysis early this year by the nonpartisan Center for Responsive Politics, which monitors fundraising.

Republicans deny that their legislative agenda has been influenced by those contributions.

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