Democrats Outline Compromise Student-Loan Bill, With $36-Billion for Pell Grants

March 18, 2010

Congressional Democrats on Thursday outlined their final agreement on legislation to overhaul the student-loan system, promising annual inflation-adjusted increases in the maximum Pell Grant and billions of dollars in additional aid for higher education.

The proposal, which followed months of delays, was seen by Democrats as part of a strategy to help ensure passage of President Obama's health-care legislation, a process capped this week by several days of concentrated negotiations to draft a plan for combining both bills into a single measure. That measure is expected to face final votes in the coming week in both the House of Representatives and the Senate.

The student-loan portion of the plan would end the bank-based system of distributing federally subsidized student loans, and instead would have the Education Department give all loan money directly to colleges and their students.

The change was estimated last year to save the government $87-billion over 10 years. Delays since then left lawmakers facing a new estimate of about $67-billion over 10 years, prompting Democrats to cut some of the benefits contained last September in a House-passed version of the bill, including money for community colleges and for additional loans for low-income students.

The final plan, outlined on Thursday, would use $36-billion of those savings to increase the maximum value of a Pell Grant, currently scheduled to reach $5,550 in the coming academic year, by the rate of inflation each year for the next 10 years. The Obama administration had asked Congress to approve an annual increase equal to the rate of inflation plus one percentage point.

The plan also includes $255-million a year to help historically black colleges, as outlined in the House bill. It includes $750-million over five years for College Access Challenge grants, which would support state efforts to enroll and graduate underrepresented students, down from $3-billion over 10 years in the earlier House version. And it includes $2-billion over four years to help community colleges, despite suggestions last week that the money would be cut altogether.

The Democratic bill also includes $1.5-billion over 10 years to finance the Obama administration's proposal to limit the mandatory monthly payments on a federally subsidized student loan to 10 percent of discretionary income, down from the current 15 percent, and to forgive the loan entirely after 20 years instead of the current 25 years.

Banking on North Dakota

The legislation contains provisions apparently designed to ensure votes from wavering Democrats. As outlined in the House version, the compromise plan would give nonprofit loan providers in several states the right to participate, along with for-profit loan companies selected through a competitive process, in helping the Education Department distribute loan money to students.

A new element, included in the plan issued on Thursday, would give a specific right to the Bank of North Dakota to issue federally subsidized student loans, meaning that it would be the only lender remaining outside of the Education Department's direct-lending system.

The Bank of North Dakota is a state-owned lender that Democratic aides described as representing the type of nonprofit entity they want to encourage. Critics of the loan bill suggested the provision was designed to win the support of a key Democrat, Sen. Kent Conrad of North Dakota, chairman of the Senate Budget Committee.

Other elements of the plan might also deal with concerns from critics in both parties. The plan would give $10-billion of the savings from ending the bank-based system of student loans directly to the U.S. Treasury for deficit reduction. And $9-billion more would be used to help offset costs in the health-care portion of the combined legislation.

The plan issued on Thursday also would include $50-million to help colleges make the transition to the Education Department's direct-lending system, and $50-million to help loan companies avoid job losses due to the transition.

Education Secretary Arne Duncan and the chairmen of the two education committees in Congress, Sen. Tom Harkin of Iowa and Rep. George Miller of California, planned to discuss the agreement publicly later Thursday.