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Student Loan Bill Scorecard

March 24, 2010

Apologies, in advance, to those who think the news media have a tendency to report on complex situations as if they were horse races.

Books will probably be written about the legislation Congress is poised to enact to transform the federal student loan programs. But while the historians do their work, here's a look at which institutions, people and other players will be helped, hurt and otherwise affected by the measure -- and how it positions them for the future.

Winners

The Obama administration. President Obama, Education Secretary Arne Duncan and their Congressional allies met (in large part) their two biggest goals in the student loan legislation: bringing all federal student lending (and the revenues it generates) under their control and using some of the projected savings to invest heavily in the Pell Grant Program to help needy students (see next entry). That's a clear victory, and its importance for Bob Shireman, the deputy under secretary of education who masterminded the administration's strategy and was integral in the initial creation of the Direct Loan Program as a Congressional staff member in the early 1990s, cannot be overstated. This culminates a nearly 20-year campaign to squeeze lenders out of the federal loan-making process, and advocates for students believe that it opens the way to other changes (such as improving the terms for borrowers, strengthening bankruptcy protections, etc.) that lenders have long fought.

The administration's triumph is far from complete. Many of its other goals -- most notably a desire to impose more accountability demands on colleges and state higher education officials in exchange for an influx of funds (through the American Graduation Initiative and the College Access and Completion Fund), and to simplify the financial aid application process -- were thrown overboard when the budget and political calculations changed. As a result, the legislation leaves student aid reform for another day. And the administration's months-long delay in getting the loan legislation passed wound up costing it (and students and colleges) tens of billions of dollars that could have been used to bolster other programs and priorities, as changes in budget projections saw the funds that could flow to education drop from about $80 billion in the House-passed version to about half that in the final iteration of the measure.

But prying lenders from the loan making process and putting the Pell Grant Program on more solid footing amid unprecedented demand are no small feats.

Low-income students who receive Pell Grants. Strengthening and securing the financial future of the federal government's bedrock financial aid program was the Obama administration's primary goal in proposing this legislation (along with ending lending through the lender-based Federal Family Education Loan Program). Yes, the endpoint is far from what the administration initially envisioned: The Education Department long ago abandoned its original plan to make the program a federal entitlement (which was too expensive), and changes in the federal budget outlook forced Democrats to cut back on what the legislation will direct toward Pell, as the maximum grant will rise to $5,975 (up from the current $5,350), compared to $6,900 under the version of the bill the House passed in September. (The House-passed legislation would have tied annual increases in the maximum grant to changes in the Consumer Price Index plus 1 percentage point, while the final legislation will tie it to inflation alone, and not for the entire 10-year window of the bill.) But the administration and its allies in Congress largely achieved their objective of ensuring that the maximum Pell Grant will rise with inflation (assuming Congressional appropriators continue to do their part to fund the program's base level).

Historically black and other minority colleges. As Congressional Democrats and the White House took out their knives to cut spending on the student loan portion of the budget bill to fall under the $61 billion total that the legislation would save, they jettisoned a bunch of things: $8 billion for early childhood education, and billions more to keep the student loan interest rate at 3.4 percent, support community college programs and facilities, and massively expand the Perkins Loan Program. But amid all those cuts, historically black, Hispanic and other minority-serving colleges did not lose a penny of the $2.55 billion that the original House legislation set aside for them.

Private colleges. Unlike minority-serving colleges and two-year institutions (see below), independent nonprofit colleges didn't get any direct institutional support in the legislation. But given how vociferously they opposed elements of the Obama plan and the House-passed version of the measure, they were pleased with the final product. They balked initially at the administration's plan to pour billions into community colleges, and aggressively fought the White House's idea of letting states distribute all $3 billion of the proposed College Access and Completion Fund, which the colleges said would have required them to submit to state regulation (which they are loath to do) to compete for any of the funds. They and other colleges lobbied successfully to ensure that some of the Access and Completion Fund money would have flowed directly to competing institutions, but they were happy to see the Access and Completion Fund disappear entirely from the final measure. Private institutions also disliked the administration's plan to remake the Perkins Loan Program to reward institutions that enrolled and graduated large numbers of low-income students -- but that language, too, was a casualty of the late pruning of the legislation. In the end, the independent institutions got largely the bill they would have wanted initially, with lots of money for Pell Grants and no meaningful additional regulation.

Losers

Private sector lenders. Four years ago, it would have been hard to envision that the then-dominant FFEL Program, in which about 80 percent of colleges participated, would soon be on the verge of extinction. But that was before Attorney General Andrew M. Cuomo blackened the eye of many private sector lenders, Congress cut deeply into the lenders' subsidies, and the financial markets' collapse led the federal government to provide about two-thirds of the loan capital that banks were lending to students. Those developments weakened the lenders' support on Capitol Hill and strengthened the arguments of Shireman and other department officials that the industry was on "life support." So the prospect of taking tens of billions of dollars in student loan repayments that now flow to lenders and redirecting them into Pell Grants and other purposes overcame concerns about the prospect of job losses and the risks that might ensue from having the government be the sole provider of federally backed loans.

Hard as Sallie Mae and other leading lenders fought against the legislation, and much as they were vilified by department officials and other critics during the course of the debate, the student aid bill will not be the death of them. Several of them have huge contracts with the Education Department to "service" Direct Student Loans, and as college prices continue to rise, so, too, will demand for the non-federal (or private) student loans that are the companies' real cash cows. But their days as a major force on Capitol Hill are probably over.

Open courseware movement. The House-passed version of the legislation would have created a $500 million grant program to colleges, work force programs or other entities to develop free, high quality online training and education courses. Like other elements of the American Graduation Initiative, this was dropped from the final version of the legislation. This won't necessarily affect the steady drift toward online learning, though.

State policy makers. The administration's original vision, and the House legislation, would have given states hundreds of millions of dollars a year to award to colleges or other entities in their states that developed innovative approaches to retaining and graduating students. The money was part of the Obama administration's higher education reform and college completion goals, and the idea was popular with the foundation and policy crowd that is helping to drive these agendas. The final version of the legislation does little on these fronts.

Bipartisanship on higher education policy. This died in the House of Representatives quite a while back, but the Senate had kept up at least a pretense of cooperation and collaboration through several recent pieces of higher education legislation. The parties walked in lockstep over the health care legislation to which the student loan measure was bound, though, and not a single Republican supported the loan bill. With the death of Sen. Edward M. Kennedy, a Democratic standard bearer who nonetheless had an ability to work across the aisle, an heir to that role has not emerged. One caveat to this trend: Now that the poisonous argument over the existence of two loan programs has run its course, is it possible that a major division between the parties will fade?

A unified higher education lobby. Given the diverse interests of the various sectors of higher education, Washington's college associations have long been a fractious lot at best. But the wide divisions between them were laid bare at various points during the yearlong consideration of the student loan overhaul. Community college leaders bristled at what they saw as other college groups' lukewarm embrace of (if not outright opposition to) a bill that had huge benefits for them, and tensions also flared over the administration's plan to reshape the Perkins Loan Program, which has long favored more established colleges and universities over younger institutions.

Mixed Bag

Student borrowers. As monumental a change as the shift to 100 percent direct lending is, it has little to no direct implication for student borrowers, because they've never had the option of choosing which loan program they borrow from (their colleges make that choice). But two other aspects of the final legislation will affect students -- one negatively, one positively. Omitted was an estimated $3 billion that would have kept the interest rate that borrowers pay on their federally subsidized loans at 3.4 percent past 2012, when the rate is currently set to rise back up to 6.8 percent. But added very late in the process were provisions -- part of President Obama's 2011 budget proposal -- that would expand the new income-based repayment program that caps a borrower's loan payments at a certain proportion of his or her annual income.

Community colleges. Looking at the final legislation, two-year institutions seem like winners, since they will benefit from the bill's provision of $2 billion to finance a Department of Labor job training program created in last year's economic stimulus measure that was never funded. And the colleges succeeded in their last-minute scramble to get some direct institutional support out of the bill. But given that last September's House bill would have directed about $10 billion their way, to back up President Obama's American Graduation Initiative, and that many of the institutions had been counting on that money to help them meet burgeoning enrollments amid severe cutbacks in state support, the student aid legislation has to feel like a bronze medal, at best.

 

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