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Student Loan Overhaul Approved by Congress

WASHINGTON — Ending one of the fiercest lobbying fights in Washington, Congress voted Thursday to force commercial banks out of the federal student loan market, cutting off billions of dollars in profits in a sweeping restructuring of financial-aid programs and redirecting most of the money to new education initiatives.

The revamping of student-loan programs was included in — if overshadowed by — the final health care package. The vote was 56 to 43 in the Senate and 220 to 207 in the House, with Republicans unanimously opposed in both chambers.

Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to lend money to students, with the government assuming nearly all the risk. Democrats have long denounced the program, saying it fattened the bottom line for banks at the expense of students and taxpayers.

“Why are we paying people to lend the government’s money and then the government guarantees the loan and the government takes back the loan?” said Representative George Miller, Democrat of California and chairman of the Education and Labor Committee.

Democrats celebrated the legislation, a centerpiece of President Obama’s education agenda, as a far-reaching overhaul of federal financial aid, providing a huge infusion of money to the Pell grant program and offering new help to lower-income graduates in getting out from under crushing student debt. Still, the final bill is less ambitious than the original proposal.

Congressional allies of the student-loan industry attacked the overhaul as an overreaching government takeover. The legislation substitutes an expanded direct-lending program by the government for the bank-based program, directing $36 billion over 10 years to Pell grants, for students from low-income families.

“The Democratic majority decided, well look, while we’re at it, let’s have another Washington takeover,” said Senator Lamar Alexander, Republican of Tennessee and a former federal education secretary. “Let’s take over the federal student loan program.”

Even as the Democrats’ decision to attach the student-loan overhaul to the health care package virtually ensured its passage, banks fought fiercely up to the last minute, prompting some lawmakers, like Senator Ben Nelson, Democrat of Nebraska, where Nelnet has its headquarters, to cast their vote against the overall bill.

Although private banks will no longer be allowed to make student loans with federal money, many will continue to earn income by servicing those loans.

The Congressional Budget Office said the direct-lending approach would save taxpayers about $61 billion over 10 years. Roughly $40 billion of the savings will be redirected to higher education. Education programs will get an additional $10 billion from the health care package.

The bill includes some landmark changes, like automatic increases, tied to inflation, in the maximum Pell grant award. But for individual students, the increase in the maximum Pell grant — to $5,900 in 2019-20 from $5,550 for the 2010-11 school year — is minuscule, compared with the steep, inexorable rise in tuition for public and private colleges alike.

And because college costs are rising so quickly, the maximum Pell grant now covers only about a third of the average cost of attending a public university, compared with three-quarters in the 1970s, when the program began. So each year, more students graduate with debt of more than $20,000.

The legislation will make it easier to pay back student loans, by reducing the share of income that a graduate must devote to loan payments and by accelerating loan forgiveness — but not right away. Those who take out new loans after July 1, 2014, will have to devote 10 percent of their income to payments, down from the current 15 percent, and those who keep up their payments will have their loans forgiven after 20 years, reduced from the current 25.

“Income-based repayment is a fantastic addition to the Senate bill that will allow over a million students to avoid being crushed by unmanageable levels of debt,” said Rich Williams, a higher-education advocate at the U.S. Public Interest Research Group.

With the new legislation, students will have to take out their loans through their college’s financial aid office, instead of using a private bank.

The original proposal stood to save $87 billion over 10 years by ending the bank-based program, known formally as the Federal Family Education Loan program. But as the Senate delayed in taking up the legislation, colleges and universities began shifting to the direct-lending program, realizing the savings to the Treasury up front and cutting the amount of money available for future spending.

At the same time, an increase in the number of Americans enrolling in college and seeking financial aid, as a result of the recession, raised the projected costs of the enhanced Pell grant program.

In addition, to comply with the complex budget reconciliation rules, some of the savings from the education changes had to be redirected to pay for parts of the health care legislation.

In the scaled-back, final version, the administration scrapped $8 billion in proposed spending on early-childhood education. It also mostly erased a $12 billion “American Graduation Initiative,” which was announced with fanfare in the fall as an effort to bolster the work force by producing millions more community college graduates over the next decade, and building up high-quality free online courses.

Community colleges, the main provider of higher education for most low-income Americans, were slated to receive $10 billion under the administration’s original plan, but will instead get just $2 billion for job training.

“I’m disappointed,” said Eduardo J. Padrón, the president of Miami Dade College, one of the nation’s largest community colleges. “For the first time, we had a president who understood the importance of community colleges, and we were validated and recognized for our role in opening the doors of higher education.”

Untouched was the $2.55 billion to historically black and minority-serving colleges, a priority of the Congressional Black Caucus. If the new legislation had not passed, Obama administration officials say, Pell grants would have had to be cut to about $2,150, and some 500,000 students dropped from the program.

In lobbying fiercely against the overhaul, the private banks argued that it would eliminate jobs, even though the government will hire many of the same banks on a contract basis to service the loans and perform other back-office administration. Furthermore, the banks said that with the government as the only lender, students would not get the same level of service.