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Archive for Friday, September 18, 2009

New student loan plan drops bank subsidies

September 18, 2009

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— The House of Representatives on Thursday passed legislation that would make the biggest changes in federal student loans in decades, driving banks out of the business and relying on an existing government program to provide that crucial source of college financing.

The bill, passed on a party-line vote of 253-171, would save $87 billion over 10 years by abolishing subsidies to banks that have been criticized as excessive, supporters said.

Most of the money saved would be used to increase the amount of aid given to low-income students in the form of Pell Grants.

“The choice before us is clear,” said Rep. George Miller, D-Calif., lead sponsor of the bill. “We can either keep sending these subsidies to banks, or we can start sending them directly to students.”

Below are some questions and answers about the legislation, which now goes to the Senate, which is expected to pass it:

How would the bill affect student loan recipients?

The bill would change the source of federal college loans in some cases but not their size. Currently, a student can obtain low-interest loans that are guaranteed and subsidized by the U.S. government either from a federal program or from a bank. The bill would end those subsidies to banks. All federal loans would be offered by and repaid to the government program. The bill also would simplify the complex federal application form for financial aid.

Q: Would the bill affect interest rates?

A: Yes. It would block a scheduled increase in subsidized loan rates from 3.4 percent in 2011 to 6.8 percent in 2012. Instead, beginning in 2012, the rate would be variable, linked to the rate on U.S. Treasury bills, but would never be higher than 6.8 percent.

Q: How would the bill save money?

A: By ending subsidies to banks and no longer guaranteeing loans by those banks, the government would save about $87 billion over 10 years, according to the Congressional Budget Office.

Q: What would happen to that money?

A: The biggest chunk — $40 billion — would go to the Pell Grant program for low-income students. Smaller amounts would be allotted to education initiatives such as grants to improve preschool education, renovate school buildings, improve community colleges and curb college drop-out rates, as well as programs to support historically black colleges and universities.

Q: How would the bill affect Pell Grant recipients?

A: They could get more money. The bill would increase the maximum annual award from $5,350 in 2010 to $6,900 by 2019. In subsequent years, the grant ceiling would be automatically increased 1 percentage point more than the rate of inflation.

Q: When would these changes take effect?

A: The bill would take effect July 1, 2010, so most students would not see the impact until the 2010-11 academic year. However, some college officials are worried that they will not be ready to make the necessary administrative changes in time if the bill does not soon become law.

Q: Does President Barack Obama support the bill?

A: Yes, although he supported bigger changes in college financial aid. Obama proposed boosting and making Pell Grants an entitlement that would protect low-income recipients from year-to-year fluctuations in congressional funding. But the House did not accept the proposal because members believed it was too costly.

Q: If the bill would save money, why did some lawmakers oppose it?

A: Many conservatives see the bill as a “government takeover” of the student loan business, akin to the Democrats’ proposal to establish a new government health insurance option that would compete with private insurers. Others worry that the proposed change is unnecessarily abrupt, and that problems would be better addressed by reforming the program rather than abolishing the role of banks. And some fear layoffs at lending institutions, such as Sallie Mae, the biggest student lender.

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