The House of Representatives approved legislation Wednesday that would slash payments to lenders and use the savings to cut interest rates and increase grant funds for students. Although debate over the budget reconciliation measure devolved into partisan nastiness that evoked the worst of the British Parliament, in the end 47 Republicans joined 226 Democrats to vote for the bill. The 273-149 tally, though, fell short of the margin needed to override President Bush's threatened veto.
Passage of the "budget reconciliation" legislation, H.R. 2669, was never in doubt. The Democrats who control Congress have rallied behind it as a defining effort to make college more affordable for low- and middle-income American families, constantly referring to it, with arguably inflated rhetoric, as the "single largest effort to help students pay for college since the G.I. Bill."
“This bill is a remarkable step forward in our efforts to help every qualified student go to college,” said Rep. George Miller (D-Calif.), chairman of the House Education and Labor Committee and author of the legislation. “With this bill, we are saying that no one should be denied the opportunity to go to college simply because of the price.”
When Miller's committee drafted and passed the bill last month, Republicans on the committee, including their leader, Rep. Howard P. (Buck) McKeon (D-Calif.), had many nice things to say about the measure, even though all but three of them voted against it.
On the House floor Wednesday, though, the knives came out. Republican leaders harshly criticized the legislation for directing too little of the nearly $19 billion in savings to the Pell Grant Program and too much to a plan to cut the interest rate in half over five years on many student loans; for creating numerous new "entitlement" programs, instead of using the budget savings to cut the deficit; and for slashing subsidies for loan providers "down to the bone," as Rep. Ric Keller (R-Fla.), put it.
McKeon tried to put Democrats on the spot by proposing an alternative bill that would have increased funds for the Pell Grant Program -- the favorite of college officials -- far more over five years than the Democrats' version would. Democrats beat back the measure, which would have cut less from loan providers, put more funds toward deficit reduction, and enacted tougher provisions on college costs.
Near the end of the debate, which was restricted by House rules that limit how budget measures can be challenged and altered, Republicans (from the very top, through the office of House Minority Leader John Boehner (R-Ohio), made an additional charge in an effort to undermine the legislation: that a provision creating a new loan forgiveness program would "allow virtually anyone who works for the federal government or a non-profit organization – including Members of Congress and lobbyists working for non-profit entities -- to have their student loans forgiven at the expense of American taxpayers," as a "GOP Leader Alert" sent out by Boehner's office described it..
“The Democrats’ proposal is outrageous and irresponsible," Boehner said. "Democratic leaders last year promised they would work in a bipartisan manner to rein in runaway entitlement spending in Washington if put in charge of Congress, and would seek to limit Congressional perks and privileges. Instead, they have brought legislation to the floor that would create nine entirely new entitlement spending programs and allow Members of Congress, lobbyists, and others to receive new financial benefits at taxpayer expense."
That accusation, and the Republicans' tactics brought angry denunciation from Miller, the bill's author, and led to alternating applause and catcalls as speakers from the two sides took aim at one another.
Ultimately, though, after Democrats rebuffed a Republican attempt to send the bill back to the Education and Labor Committee on a party-line vote, dozens of Republicans cast votes for passage of the measure. Knowing that it was going to pass, they presumably had little interest in having to explain to parents and students in their districts why they opposed legislation that its supporters characterize as the most pro-student bill in four decades.
Among other things, the legislation would:
- Increase the maximum Pell Grant to $5,200 by 2011-12.
- Cut the interest rate on federally subsidized student loans in half, to 3.4 percent, by 2012-13.
- Institute a system of “income-based repayment” for borrowers, in which their student loan payments would be capped at a manageable percentage of their income and their debt canceled after 20 years of repayment.
- Raise the amount that working students can earn -- through the “income protection allowance” -- without reducing their financial aid awards.
- Lift the annual and aggregate limits on how much individual students can borrow from the federal loan programs, with the goal of reducing borrowers’ dependence on private (and typically more expensive) loans.
- Forgive up to $5,000 in loans, and otherwise easing the loan repayment burden, for students who enter public service fields and fulfill other national needs.
- Create a new grant program for students who are planning to be teachers.
- Create a new program ($500 million over five years) for institutions that serve large numbers of Hispanic, American Indian and other minority students. This new provision, added to the legislation very late in the game, just before committee members voted on it, would allow for the provision of funds to “predominantly black” institutions -- those that meet a variety of standards, including having at least 40 percent of their enrolled students be black.
College officials like most if not all of those provisions, too, but they have been troubled by one of the bill's other major thrusts -- its aim to make higher education more affordable by limiting what colleges and universities charge to students. Most of Washington's higher education associations withheld formal support for the bill when it was considered at the committee level, but some slight changes that Democratic leaders made to the college cost provisions in recent days were enough to persuade most of the college groups to throw their (sometimes qualified) support behind the measure this week.
Student loan companies, however, continue to strenuously oppose the legislation, which would cut lender profits on new federal loans by 0.55 percentage points, reduce the proportion of their collections that guarantee agencies can keep to 16 percent from 23 percent, and double the fee that lenders pay the Treasury when consolidating loans to 1 percentage point from 0.5 percentage point, among other things.
Lending groups argued, as they have repeatedly, that cuts of that magnitude would hurt students and potentially diminish the profitability of lenders enough to drive some loan providers, particularly small and nonprofit ones, out of the student loan market, a prospect many observers play down.
Negotiating Ploy or Real Threat?
But in the midst of Wednesday's House debate came the related news from Sallie Mae that the would-be purchasers of the country's biggest student loan provider were reconsidering their offer because the budget legislation in the House and a comparable measure in the Senate might make the deal untenable for the buyers. In April, two private equity firms, JC Flowers & Co. and Friedman Fleischer & Lowe, and two banks, JPMorgan Chase & Co. and Bank of America, offered to pay $25 billion to take the company private.
Specifically, Sallie Mae said in a proxy statement filed with the Securities and Exchange Commission (see page 63) that the investors had informed Sallie Mae officials that the "current legislative proposals pending before the House and Senate" could pose a serious enough threat to the company's financial future to violate a clause in the deal that lets a party out of it (for a hefty fee) if there are "material adverse" changes in conditions.
So the investors appear to be saying that they believe the House and Senate budget legislation could inflict "materially" more damage on Sallie Mae and other lenders than what Sallie Mae and the prospective buyers understood the risks to be at the time the sale was announced in April. At that time, President Bush had already proposed major cuts in lender profits, and Sallie Mae had in other SEC filings made clear that other changes were possible.
Sallie Mae officials said in their announcement Wednesday that the company "strongly disagrees with this assertion, intends to proceed towards the closing of the merger transaction as rapidly as possible and will take all steps to protect shareholders' interests."
Company officials declined to comment on the development, but other observers engaged in speculation aplenty. Some wrote it off as saber rattling designed to get Congress to back off from some of its proposed cuts; others speculated that the buyers might be truly worried that provisions in the Senate legislation that would require lenders to compete at auction for the right to provide loans would further undermine profitability, or that proposals in the Senate bill that would limit the role of guarantee agencies would eat into Sallie Mae's substantial revenues from providing services to guarantors. Another possibility: The would-be investors looking for a reason to lower the value of their bid for the company.
The Sallie Mae announcement added just a bit of extra intrigue to the weeks ahead, when the Senate, possibly as soon as this month, will take up its version of the budget reconciliation legislation, the next step in what is certain to be a contentious and grueling process on the march to a compromise between the two chambers that can be signed by President Bush.