House Passes Bill to End Bank-Based Lending

September 17, 2009

The U.S. House of Representatives voted 253 to 171 today to abolish bank-based student lending, passing a bill that would end subsidies to student-loan companies and use the projected $87-billion in savings to expand aid to students and colleges.

The bill (HR 3221), which would shift all student lending to the government's direct-loan program, would provide $10-billion in grants to community colleges, $8-billion for early-learning programs, and $3-billion for grants aimed at improving college access and completion rates. The bill would also increase the maximum Pell Grant by a set amount each year, while expanding the Perkins Loan program from the current $1-billion to $6-billion a year, and overhauling its structure.

Passage of the bill comes as a blow to the student-loan industry, which has pushed a counterproposal that that would allow banks and other lenders to continue making student loans and sell them to the government for a fee. Under the House-passed bill, lenders could compete for the right to service student loans but could no longer originate them.

Before voting on the bill, lawmakers rejected, 265 to 165, a Republican-sponsored amendment that would have created a nonpartisan commission to develop a new private-sector model for student lending. The amendment would have allowed the loan industry to continue to originate loans and sell them to the Education Department while the commission studied the issue.

The House did adopt several noncontroversial amendments, including ones that would give top priority to veterans and dislocated workers in the awarding of certain grants.

The bill now moves to the Senate, where some moderate Democrats—including Ben Nelson of Nebraska, whose home state is headquarters to the lending giant Nelnet—have raised concerns about potential job losses in their states. Lenders hold out hope that the Senate will revisit recent cost estimates of the Democratic plan and an industry alternative and take a different approach.

On Tuesday the vice chairman and CEO of Sallie Mae, the nation's largest lender, put the odds of Congress's killing bank-based lending at only 25 percent.

"I like our facts enough to be hopeful," he said at a the Barclays Capital Investor conference, according to the Student Lending Analytics blog.

But the sponsor of the House bill, Rep. George Miller, a Democrat of California, said yesterday that he is confident the Senate will pass the bill. He predicted a House-Senate conference on the measure in the coming weeks.

"I think the chances are very very good," said Mr. Miller, who is chairman of the House education committee, in a conference call with reporters. "We'll see them in conference early this fall."