Published Online: June 16, 2009
Published in Print: June 17, 2009, as Battle Brews on Obama College-Lending Proposal

Battle Brews on Obama College-Lending Proposal

President Barack Obama’s proposals to significantly reshape the two main federal college-access programs—Pell Grants for low-income students, and higher education loans—are generating debate in Congress and in the education community.

Mr. Obama is seeking to scrap the Federal Family Education Loan Program, or FFELP, under which the government subsidizes private lenders to make federal student loans. ("President's Education Aims Aired," Feb. 28, 2009.)

Under his plan, which is part of the administration’s proposed fiscal 2010 budget, all loans beginning in July 2010 would originate under the government’s direct-lending program, in which students borrow from the U.S. Treasury. The interest rates for both programs are generally set by Congress. Subsidized undergraduate loans will be offered at an interest rate of 5.6 percent beginning July 1 of this year. Right now, colleges can choose which program to offer.

The savings projected under Mr. Obama’s plan would be used to help provide steady, annual increases for Pell Grants, which provide financial help for low-income students.

The proposal comes as state institutions, private universities, and families are feeling the pinch of the sputtering economy, Secretary of Education Arne Duncan told reporters last week.

“Going to college has never been more important, and it’s never been more expensive,” Mr. Duncan said. President Obama’s plan would allow the government to tell low-income students, “if you work hard, if you do the right thing, you are going to college,” the secretary said.

Thirty-one states cut their fiscal 2009 budgets for higher education, according to a report released this month by the National Governors Association and the National Association of State Budget Officials. And some states are experiencing shortfalls in their so-called 529 plans, which help families save for college.

Changes to Pell Grants

Projected annual savings from the Obama plan vary: The Office of Management and Budget puts the estimate at about $40 billion, and the Congressional Budget Office, at $94 billion.

The savings would be used to help pay for a technical—but significant—change to the Pell Grant program. Its funding would become a mandatory, rather than a discretionary, part of the budget, making grant aid much more predictable for students, proponents say.

The size of an individual Pell Grant would rise at a steady rate each year, linked to the U.S. Consumer Price Index, plus 1 percent. Right now, the maximum Pell grant is $4,731; next school year, it will be $5,350.

The proposal would help preserve the purchasing power of the grant, which has diminished since its inception in the 1970s, as appropriations have not kept up with increased college costs, said Edie Irons, a spokeswoman for the Institute for College Access and Success, in Berkeley, Calif.

And it would give low-income students a better idea of how much money they could expect to receive under the program, she said.

The change would help high school students—and their counselors—plan better, said Sandra Gilbert, a guidance counselor at Highland Park High School in Highland Park, Ill.

“You would at least know what’s coming down the pike,” she said. “Kids start thinking about applying a year before they’re going to college, so it would be very nice if they had a picture of what they could afford.”

Alternative Proposal

But supporters of the government-subsized loan program are worried about President Obama’s plan to use savings from the elimination of that program to pay for the change to the Pell program.

Preserving competition between the direct-lending and FFELP programs—as well as between different FFELP lenders—would mean more choice, and more user-friendly service, for colleges and students, said Kevin Bruns, the executive director of America’s Student Loan Providers, a coalition in Washington that represents student lenders.

Some lenders, led by Sallie Mae, a private-sector student lender based in Reston, Va., have put forth an alternative proposal.

It would allow companies that now act as lenders to originate loans through the direct-lending program. They would be paid a fee for “servicing” a loan—being the point of contact for the student—until it was repaid. If borrowers defaulted on the loans, the companies would share in the risk, along with the government.

Such a proposal may be easier to implement than the president’s plan because Sallie Mae and others have years of experience in servicing loans and making sure they don’t go into default, said Martha Holler, a spokeswoman for the company.

There’s some question about whether the direct-lending program could absorb all student loans in the time frame President Obama has proposed, she said. The Sallie Mae plan, she said, could be implemented “with the flip of a switch.”

But Barmak Nassirian, the associate executive director of the Washington-based American Association of Collegiate Registrars and Admissions Officers, said the alternative proposal would likely be more helpful to entities such as Sallie Mae than it would be to students. Lenders often use FFELP as a way to market private loans and other financial services, he said.

The program has “really devolved into corporate welfare,” Mr. Nassirian said. He expects that the president’s proposal would have the potential to provide more grant aid than Sallie Mae’s.

Rocky Patch

The Federal Family Education Loan Program has run into some trouble in recent years.

In 2007, New York state Attorney General Andrew M. Cuomo uncovered questionable student-loan practices and allegedly improper ties between colleges and student-aid lenders. ("Student-Loan Controversy Is Drawing Wide Concern," May 2, 2007.)

Just last year, Congress had to create a temporary program to make sure FFELP loans would still be available despite problems in the credit markets.

The House Education and Labor Committee expects to move a bill on student lending sometime this summer, said Rachel Racusen, a spokeswoman for Rep. George Miller, D-Calif., the panel’s chairman.

Rep. Miller thinks the president’s proposal “sets an extremely high bar” in terms of savings that could be passed along to low-income students, Ms. Racusen said. But she said Rep. Miller is open to looking at all options, including the Sallie Mae proposal. His ultimate goal is to make student loans “more dependable and cost-efficient,” she said.

Sen. Edward M. Kennedy, the chairman of the Senate Health, Education, Labor, and Pensions Committee, “completely supports the president’s proposal,” an aide to the senator said.

Although Mr. Kennedy is willing to consider alternatives, he is looking at them in the context of how much they’ll benefit students, the aide said.

Vol. 28, Issue 35, Pages 18,21

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