Washington
The Democratic leaders of Congress spent much of Thursday rallying support for their proposal to halve the interest rate on federal student loans, and told college lobbyists they would pay for the cut by trimming the profits of the largest student-loan providers.
Lawmakers plan to introduce the bill, which would gradually reduce the student-loan interest rate to 3.4 percent from 6.8 percent over five years, in the U.S. House of Representatives today and bring it to a floor vote next Wednesday.
In the push for support on Thursday, key Democrats from the House and the Senate attended a news conference held by student groups and liberal advocacy organizations touting the plan. They also urged the higher-education lobbyists -- some of whom have expressed misgivings about the proposal -- to come behind it.
Late Thursday, the American Council on Education sent a letter, on behalf of itself and 16 other associations, to Rep. George Miller, the California Democrat who is chairman of the House Committee on Education and Labor, supporting the bill. “We look forward to working with you to ensure its passage and to making significant progress towards our shared objective of achieving a $5,100 Pell Grant this year,” wrote David Ward, the council’s president.
In their meeting with college lobbyists, aides to the Democratic leaders revealed how the lawmakers plan to pay for the proposal, which they said would cost the government about $5.9-billion over five years. Nearly one-third of the money needed to pay for the interest-rate cut would come from savings generated by reducing the profit margin that the top private lenders receive on federal loans.
In the guaranteed-loan program, the government assures lenders a rate of return that is separate from -- and, over the last decade, usually higher than -- the rate students are charged. Under the Democratic plan, the top 1 percent of lenders, who hold 90 percent of the loan volume, would see the guaranteed rate reduced by one-10th of a percentage point. For example, the current rate that lenders are guaranteed is 7.72 percent. Under the proposal, the rate would drop to 7.62 percent.
The lawmakers said that about 30 lenders would be affected, including Sallie Mae, which is the nation’s largest student-loan provider, and Citibank, Wells Fargo Bank, and Bank of America.
Loan-industry officials wasted no time attacking the proposal. “This penalizes the lenders that have shown the deepest commitment to the program by their size,” John Dean, a lawyer for the Consumer Bankers Association, said on Thursday.
Critics of the student-loan industry said that limiting the rate reduction to the largest lenders is a savvy move, as it will protect Democrats from one of the Republicans’ main lines of attack. “This insulates the Democrats from charges that their proposal will force small lenders out of the loan program,” said a student-loan analyst, who did not want to talk publicly until the bill was formally unveiled.
Other Proposed Changes
In addition to the cut in the rate of return that the top lenders receive, Democrats plan to propose making changes in the guaranteed-loan program, effective July 1, that would:
- Reduce the amount of money that the government reimburses most lenders for loans that go into default, from 97 cents to 95 cents of every dollar that is unpaid.
- Eliminate a program in which the government fully reimburses lenders it deems “exceptional performers” for loans that are not repaid. The Education Department awards that designation to lenders that it believes provide the most reliable service to students. Those lenders tend to be large ones like Sallie Mae, Citibank, and the National Education Loan Network, a major for-profit student-loan provider based in Nebraska that is commonly known as Nelnet.
- Increase to 1 percent, from 0.5 percent, the one-time fee that lenders in the guaranteed-loan program must pay the government when making student loans.
- Reduce to 20 percent, from 23 percent, the amount that guarantee agencies can keep for themselves from the money they recover from borrowers who default. The proportion would drop to 16 percent by 2010.
In a written statement, Kevin Bruns, executive director of America’s Student Loan Providers, a group formed by loan-industry officials to advocate on their behalf, said that changes “of this magnitude” would “jeopardize the features of the program” that students, parents, and colleges value, such as the ability of lenders to offer generous discounts to borrowers who consistently make their payments on time.
He noted that Congress had cut the payments that lenders receive from the government to make student loans by $8-billion last year, as part of legislation pushed by Republicans to reduce the federal budget deficit (The Chronicle, February 2, 2006).
“Congress cannot cut the guaranteed-loan program twice in 12 months and not have it affect borrowers,” Mr. Bruns said. “Proposing to hit the loan providers again may be good politics, but it’s the students and families they serve who would ultimately pay the price.”
The Consumer Bankers Association has also warned that cuts in federal subsidies to lenders could ultimately come back to harm student-loan borrowers (The Chronicle, January 10).
But Democrats and advocates for students defended the planned cuts, noting that most of them had previously been proposed by the Bush administration and Congressional leaders. For example, President Bush had called for cutting the amount of money that the government reimburses lenders for defaulted loans as part of his 2006 fiscal year budget request (The Chronicle, February 8, 2005). The Senate, meanwhile, passed a budget-cutting bill more than a year ago that would have eliminated the Education Department’s program for rewarding lenders it deems exceptional (The Chronicle, December 21, 2005).
The Democrats also pointed to a report put out by financial analysts at Citigroup on Wednesday that said the proposed cuts would be “manageable” for Sallie Mae. The analysts actually characterized the news as positive for Sallie Mae because the proposed cut in the rate of return for top lenders was less severe than they had initially feared it would be.
Meanwhile, at the news conference organized by student groups and liberal advocacy organizations on Thursday, Sen. Edward M. Kennedy said the profits that private lenders make from student loans are “a sham” and “a scandal.”
Mr. Kennedy, a Massachusetts Democrat who is chairman of the education committee in the Senate, said his party’s leaders would turn to expanding the Pell Grant program after they pass the rate cut through Congress.
“We must end corporate welfare in the student-loan programs and repeal the outrageous federal subsidies that still exist for government-guaranteed loans,” Senator Kennedy said. “It’s time to throw the money changers out of the temple of higher education.”
Student leaders, citing their own debt, said that the crushing loan burden that students are taking on is dissuading them from considering entering some of the country’s most important professions.
“The joy that comes from teaching does not pay the bills,” said Anthony Daniels, an Alabama A&M University graduate student who is chair of the National Education Association’s student program.
Josh Keller contributed to this report.
Background articles from The Chronicle: