Despite opposition from private banks and conservative lawmakers, the House passed the Student Loan and Fiscal Responsibility Act (SAFRA) today in a 253-171 vote.
The legislation would shift federal student lending entirely into the hands of the government -- a momentous change from the current system, where private banks disburse about 75 percent of such loans. Eliminating the Federal Family Education Loan program, through which private lenders receive government guarantees on money to students, greatly diminishes the role of the private sector in federal aid.
Initially, the Congressional Budget Office projected that a switch to 100 percent direct lending would generate up to $87 billion in savings over the next decade. Pursuant to that figure, SAFRA designates a whopping $40 billion to Pell Grants for low-income students; early education, community colleges and historically black colleges and universities are also among the bill's beneficiaries.
Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee and sponsor of the bill, claims the legislation will also reduce entitlement spending by $10 billion.
Republicans and private lenders beg to differ.
"The goals of this legislation do not match the reality of what is being proposed," said Rep. John Kline, R-Minn., the committee's ranking member. Kline called the bill a "job killer" that will expand the deficit rather than reduce it. Leading up to the vote, he issued several press releases warning of "hidden costs" and increases in entitlement spending.
The summer bore witness to an ongoing debate (subscription) about the bill's effects. At the request of Sen. Judd Gregg, R-N.H., CBO scored the legislation again, adjusting for the possibility of higher default rates on student loans. Under the new analysis, savings dropped to $47 billion.
Both Republicans and banks assert that student default rates will go up and customer service levels will go down under a direct lending scheme.
If SAFRA becomes law, Sallie Mae, a top private lender, projects that 20 to 30 percent of their workforce related to the Federal Family Education Loan program will be cut and that 26 different office locations will shrink to five or six. Originally a government-sponsored enterprise created to buy and service student loans, Sallie Mae now serves 10 million students and parents.
The lending giant suffered a blow last Friday when CBO released an analysis (subscription) indicating that their alternative proposal -- one that would preserve a role for banks in originating federal student loans -- would save $13 billion less than the Miller bill. Without comparable savings sanctioned by the CBO, it will be more difficult to sell the alternative proposal in the Senate.
Miller and other Democratic leaders flatly dismiss the criticisms coming from lenders and GOP lawmakers. On Tuesday, Education Secretary Arne Duncan, House Speaker Nancy Pelosi, D-Calif., and other lawmakers joined Miller to marshal support for the student aid measure with a press conference on the Hill.
Flanked by students holding signs that read "subsidize students, not banks" and "we love SAFRA," Miller called the legislation fiscally responsible and said it would present no cost to the taxpayer. This is a cradle-to-career investment, Duncan said.
For students, the difference between a federal loan from a private bank or a direct loan from the government is largely irrelevant: It's six of one, half a dozen of the other. With the return of the school year, activism in support of SAFRA sprouted on campuses nationwide, much of it focused on debt reduction and investments in education.
Money for college infrastructure and early education are two of the reasons Ben Henderson, a senior at the University of Arizona at Tempe, supports the bill. Henderson, director of the Arizona Student Association on his campus, is on academic scholarship but felt the need to get involved anyway. ASA held a kick-off event last week to educate students on the Miller bill that was attended by 100 people; this week, students filled out cards describing their struggle with debt and their support for the bill, which Henderson brought to their local congressman.
In coordination with U.S. PIRG, the United States Student Association and Campus Progress, students around the country built "walls of debt" to symbolize the barrier graduates face under the burden of heavy loans. Paper "bricks," featuring the debt level of individual student signers, were delivered to local congressional offices. About 7,500 students participated, PIRG said.
Now, Sallie Mae and other private lenders must take the fight to the Senate, where their chances look distinctly better. Several Republican senators have already come out against the proposals, and not all Democrats can be counted on to back it. In an echo of the fight over health care reform, the student loan debate in the upper chamber is likely to pit critics who call it a government takeover against proponents pushing more affordable access.