Though it was overshadowed by the aerobic hula-hoopla regarding the health care provisions of the bill, the budget reconciliation legislation that passed the House of Representatives late Sunday marks dramatic and positive changes in student loan legislation. Though many critics of President Barack Obama assumed his ideas about reform in the student loan industry had fizzled after legislation failed to move last fall, Democratic leaders added provisions to the health care bill and passed what some have called a dramatic reconstruction of student loans.
This latest legislation on the student loan industry is essentially a government takeover of the formerly quasi-private student loan industry. But, before that GOP fear-phrase scares the (Glenn) Beck out of you, remember that the legislation seeks to eliminate private banks as intermediaries, as well as with the inflated fees the federal government has been paying them for the service. The Congressional Budget Office estimates that restructuring will save taxpayers around $61 million over a decade.
The trajectory of governmental legislation on student loans began in 1958 when President Dwight D. Eisenhower signed into law the National Defense Education Act. Some of this funding created the National Defense Student Loan Program. The program provided money to colleges and universities, who then loaned funds to students. In order to expand the successful program, the Higher Education Act of 1965 allowed the federal government to switch from directly providing loans to merely guaranteeing loans made by private banks. This switch allowed the program to change from appearing as expenditure in yearly federal budgets to being listed as an investment. At the time, this distinction was necessary to promote federal programs that helped students secure funding for college but later served only as a means for private lenders to collect exorbitant fees for performing functions the government already does well — administering and collecting monies.
In 1993, a law signed by President Bill Clinton aimed to replace private student loan guarantees with direct government funding to eliminate the fees being paid to the private lenders. In 1992, the federal government was paying $6 billion for $15 billion in student loans. But the phase-out motion was later replaced when Congress opted to let the private lenders compete with the direct loan program. As Slate’s Timothy Noah explained, “”For the next decade and a half, the private lenders were winning, mainly because Sallie Mae leveraged its profits from guaranteed student loans by romancing members of Congress for more favorable terms — i.e., more costly to the taxpayer — while romancing college financial aid officers for more business.””
This bill is a positive movement for both students and government. To eliminate an industry that was being rewarded with taxpayer money for performing a service the federal government can do itself is exactly the kind of cost-cutting a suddenly-more-limited budget requires. For all their talk about fiscal responsibility, Republicans should recognize the positive aspects of a provision that both increases Pell Grant funding to needy students and will save over $60 million.
Current legislators were right to eliminate the privilege of private lenders to collect government funding for a function the federal government can perform itself, especially as the privilege only existed to push through legislation nearly half a century ago.
Obama is set to sign the bill into law, including both sweeping health-care and student-loan reform, later today. After over a year of Kodak moments in the White House garden and not much noticeable progress, Obama deserves a hearty fist-bump for completing this legislation that so clearly promotes the interest of the thousands of college students who helped elect him.
