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Scattered Thoughts on Student Aid

February 19, 2007

The value and usefulness of Congressional hearings are often inversely proportional to the breadth of their scope; the narrower and more focused they are, the more likely that they shed some light.

So it did not bode well for Friday's hearing before the Senate Health, Education, Labor and Pensions Committee that it merely tried to explore the entire federal student aid system, a topic as sprawling and diffuse as the aid system itself. Nor did it help that in putting the witness list together for its first higher education hearing of the 110th Congress, the committee, perhaps in search of a public relations splash, seemed to emphasize style as much as substance. The result was that it prominently featured a television talk-show host with high Q ratings but limited knowledge of how the financial aid system really works.

In part, the scattershot nature of the hearing stems from the broad legislative agenda of Sen. Edward M. Kennedy (D-Mass.), the committee's chairman. A few weeks into the new Congress, Kennedy has already introduced several sweeping pieces of legislation, and others are clearly on the way as Democrats try to resuscitate efforts to renew the Higher Education Act, which petered out in the 109th Congress.

The various bills from Kennedy aim to increase grant aid, reduce borrowers' student loan burdens by tying repayment to their incomes, step up regulation of lenders, and reshape the playing field of the government's two competing student loan programs -- and all of those topics got some discussion in the wide-ranging discussion at Friday's hearing.

Kennedy's premise is that Americans' growing inability to afford a higher education is affecting every aspect of their lives, from whether they go to college at all to the career choices that those who do make after they leave. "In a word, it’s a crisis that’s tarnishing the American dream for millions, and we in Congress can’t ignore it any longer," Kennedy said in his introductory remarks.

The panel's "star" witness was Suze Orman, the personal finance guru whose late-night talk show on CNBC focuses on consumer issues. Orman's overarching theme, based on the students and parents who call in to her show, was that many Americans are ignorant about the ins and outs of paying for the increasingly important commodity of higher education, and that too many end up crushed by student loan debt as a result. “Shame on colleges for what they are charging, shame on the big business behind these student loans and what they are charging and how much money they are making off our children’s future," Orman said. "Shame on all of them.”

Orman advocated much better financial education for young people, a point on which the other panelities agreed. But Orman's stance led her in some odd directions, too. She took issue with the widely held view that increased competition in the student loan industry is better for students, a concept the other witnesses uniformly embraced.

"When there are choices, there is confusion," Orman said, suggesting that student and families get so overwhelmed by information about competing loan options that they just "do nothing." Consumers would be better off with fewer loan options, she said, a seemingly unusual stance for a consumer advocate. "We always lose when others are competing over our business," she said.

Another consumer advocate, Tamara Draut, director of the economic opportunity program at the nonprofit Demos group and author of Strapped: Why America's 20- and 30-Somethings Can't Get Ahead ( Doubleday, 2006), decried the "dept for diploma" system that is increasingly requiring Americans to go into hock to finance their college educations.

"The federal financial aid system is failing on its basic premise" of making college possible for academically capable Americans regardless of their economic need, Draut said. She trumpeted Demos's Contract for College proposal, which aims to provide sufficient financial aid for every educaitonally prepared college student through a reshuffled mix of grant aid (more), loans (less) and work study.

Draut asserted that the rising price of college has been driven most directly by a decline in state support, a view shared by Sandy Baum, a Skidmore College economist and senior policy analyst at the College Board, who also testified Friday.

But Baum disagreed with Draut's statement that the $19,000 student loan debt accumulated by the average undergraduate is a sign that the financial aid system is broken, given how significant the payoff of a college education is. Baum acknowledged that there are too many students with excessive loan debt, but she said efforts to minimize student debt should be focused on the 15 percent of student borrowers who have more than $30,000 in accumulated debt. "The typical student isn’t the problem. It’s the growing minority of students who have the issues," Baum said.

The fourth and final witness, Jon Oberg, a longtime Education Department researcher whose more recent claim to fame was helping to blow the whistle on a practice in which some lenders were profiting (improperly, the department has now concluded) from an interest rate loophole in federal student loan programs, encouraged Kennedy to push ahead on his various legislative efforts to reform the federal guaranteed student loan program, and to step up Congress’s oversight of the behavior of lenders.

He said he believed that a soon-to-be-introduced bill that would require lenders to compete at auction for the right to originate federal loans would generate billions of dollars in new funds that could be used for grant programs, though he said it was not entirely clear that such an approach would generate more funds than would President Bush’s proposal to cut a half-percentage point off the subsidy that lenders earn on each federal loan.

And he encouraged Kennedy to ask the U.S. Justice Department to review the Education Department's decision to let lenders who profited from the interest rate loophole keep profits for which the government had already reimbursed them through last summer. "Congress has an opportunity to exercise oversight on it," Oberg said.

 

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