The biggest government takeover to date is likely to be approved by the House today.
Thank goodness.
The Student Aid Fiscal Responsibility Act will end government subsidies for loans made by private lenders such as Sallie Mae and Citigroup, cutting out the middleman and making the loans directly to students. Profits that formerly went to private lenders will be used to increase Pell Grant scholarship amounts, reduce interest rates on need-based federal student loans, provide more access to the Perkins loan program and invest in programs aimed at college access and completion.
The change, if approved by the Senate, is expected to save taxpayers $87 billion over 10 years.
Supporters of the bank-based student loan industry have little ammunition in their bid to save the Federal Family Education Loan program. With government backing most of its risk, the student loan industry grew rich and powerful as student debt ballooned. An investigation by the New York attorney general uncovered widespread improprieties in 2007, including kickbacks paid to universities by some lenders. When the economy faltered, the private loan industry required a government rescue.
Weakened by scandal and the credit crunch, the private lenders are now pushing their own version of an overhaul, but it would save the government $13 billion less than the takeover, according to the non-partisan Congressional Budget Office.
And when the U.S. Department of Education released loan default rates on Monday, showing the percentage of student borrowers who were required to begin repayment in fiscal year 2007 and defaulted within two years, it was students in the private loan market with the highest rate. Students who borrowed through the bank-based FFEL program defaulted at a rate of 7.2 percent, compared with a 4.8 percent rate for students who borrowed directly from the government.
U.S. Reps. Mark Souder and Mike Pence are on record as opposing the Student Aid Fiscal Responsibility Act. In July, Souder said the shift to direct lending “creates a huge bank, the largest in the world” and that lawmakers who support the takeover think “that profit is somehow a dirty word.”
It’s tough to justify profits for a company like Sallie Mae, which lost $213 million in 2008 but paid its chief executive more than $4.6 million in cash and stock and its vice chairman more than $13.2 million in cash and stock. Other executives netted bonuses of up to $600,000.
Sallie Mae, which employs about 2,300 workers in Indiana, is the largest college loan provider and a key player in the powerful student loan industry lobby. The Reston, Va.-based SLM Corp. reportedly spent $2 million in the first half of this year lobbying against the government takeover.
The student loan industry flourished by collecting handsome fees off government-backed loans – hardly the model of bold enterprise and ingenuity. Congress should approve the student aid bill without hesitation, confident that it will benefit taxpayers, students and higher education.
