News & Politics

Loan Wolf


College students are now facing the deepest cut to federal student aid in the program’s 40-year history. On July 22, the House Committee on Education and the Workforce approved, along strict party lines, a bill that puts the squeeze on loans, grants, and other forms of assistance—to the tune of $11 billion.

H.R. 609 is a step toward the overdue eighth reauthorization of the Higher Education Act (HEA), which covers federally guaranteed student loans, Pell Grants, and the other kinds of financial aid that a majority of the nation’s college students rely on. The full Congress is expected to consider the bill when it reconvenes in September.

“From our perspective, this is a pretty disastrous bill,” says Kate Rube of the State PIRG’s Higher Education Project. “The intent of the HEA is supposed to be about opening college doors for access. This would be the largest cut ever to those programs.” Most of the actual trimming, it’s true, would come from lender subsidies, including from finally closing a loophole that had the government guaranteeing bankers an overly generous rate of return on certain loans. Student borrowers will feel the bite, though, through new loan fees and interest rate hikes, both of which Rube says could cost the average student as much as $6,000 more over the repayment period. The need-based Pell Grant, which at 5 million recipients annually is the biggest federal student-grant program, is getting moderate increases spread over the next six years, falling far short of what collegians need to keep pace with rising tuition costs.

The real problem, say Democrats and student advocates, is that the $11 billion savings is going toward reducing the $325 billion–plus government shortfall, not toward helping students. “The savings are going to deficit reduction. That’s the number one problem with this bill taking more money out of the system than ever before,” says Daniel Weiss, the chief of staff for Congressman George Miller, ranking Democrat of the Committee on Education and the Workforce.

Behind the current bill stands a familiar story of cozy relationships between Republican legislators and business lobbyists, in this case the phenomenally profitable financial institutions that lend to students. According to an investigation last summer by the Chronicle of Higher Education, money is playing an ever bigger role in the politics of higher ed. Lenders and for-profit colleges contributed nearly four times as much to the leaders of the House education committee during this HEA reauthorization cycle as they did during the seventh reauthorization, in 1997–1998. As of 2003, Sallie Mae was both the largest student lender and the second most profitable company in the Fortune 500. They gave $185,000 to the members of the committee in 2003–2004, making the company the committee’s single largest donor by far.

While the lenders weren’t able to keep all subsidy cuts out of H.R. 609, they won a major victory with the scratching of the bipartisan Petri-Miller amendment. Mentioned earlier in this space when it was introduced as the STAR Act, this provision would reward schools that use direct loans rather than go through lenders. President Bush’s own budget numbers say that lending money directly costs the federal government just 92 cents for every $100, compared to $12 in subsidies and fees for every $100 lent by Sallie Mae et al. Committee Democrats calculate that a moderate increase in the percentage of schools using direct loans, from the current 25 percent to 44 percent over the next 10 years, would save at least $17 billion. The amendment would have allowed schools to pass this money on to their students as higher Pell Grants, without costing taxpayers a cent.

“It is really hard to understand why anyone wouldn’t support this type of legislation,” says Rube of the amendment. “This bill blows the cover on the student loan industry and the outrageous subsidies they get from the government.”

Some might wonder why middlemen should be skimming any profits at all from something as essential to our country’s future as higher education. When President Clinton introduced the direct loan program in 1993, he intended it to fully replace the guaranteed student loan system. If all schools switched to direct loans today, $60 billion would be saved over the next 10 years. That could be enough to raise Pell Grant funding, currently at $12.9 billion, by almost 50 percent, and reverse the slide in college access for lower-income kids.

It’s nice to dream. But at the end of this month and the beginning of September, it will be time to take action. When Congress comes back for the fall session, it will be considering both the House version of the bill and the Senate’s, which is expected to be somewhat more favorable to students. That will be borrowers’ chance to head off some of the new fees and rate hikes.

“Students and their parents really need to weigh in with their congressmen and representatives and say we need a bill that helps students,” says Daniel Weiss of Congressman Miller’s office. “The best thing is a phone call directly to a member’s office.”

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