Obama Student Loan Plan Wins Support In House

Details

Published on Friday, 10 July 2009

Written by David M. Herszenhorn, NY Times

The chairman of the House Education Committee has dismissed a last-ditch plea from the private student loan industry and is throwing his support behind President Obama's plan to end the role of private banks in the federal education lending systems.

President Obama's plan remains deeply contentious in Congress, and still faces strong opposition from private banks that for decades have earned big profits for handling federal student loans.

But after mulling the issue for months, Representative George Miller, the California Democrat who is chairman of the Education Committee, now plans to introduce legislation next week that would rely on direct government lending to replace the federally subsidized loans made by private banks. Administration officials who have reviewed drafts of the legislation said that it substantially adopts President Obama's proposal.

In a conference call with reporters this week, a number of private-loan industry officials, as well as leaders of some private nonprofit lenders, warned that President Obama's plan would eliminate competition and create chaos for colleges and students that now use private lenders as they are forced to switch to a fully government-run system.

The industry had urged Congress and the White House to consider its own alternative.

But Congressional Democrats, the White House and officials at the federal Education Department have now rejected that plan, contending that it was based on accounting tricks and would pour $15 billion into the banks' coffers that President Obama would direct to the Pell grant program for low-income students.

"It's unfortunate that a small number of lenders are using legislative gimmicks to mask the fact that their proposal would divert $15 billion into their own pockets at the expense of students," Mr. Miller said in a statement. "This cynical stunt is another reminder that our federal student loan programs need major reforms to ensure they operate in the best interests of students and taxpayers."

The president's proposal, first outlined in his initial budget in February, would save the government roughly $87 billion over 10 years, according to the Congressional Budget Office -- money that the White House says should be used to aid impoverished students.

The federal government already makes some loans directly to students, but most federal student loans are handled by private firms even though there is virtually no private capital available for financing the loans. The industry argues that it provides competition and better marketing and servicing of loans.

The administration's view, shared by a number of Democratic lawmakers, is that the private lenders should no longer be paid by taxpayers to operate a virtually risk-free business in which they essentially use taxpayer dollars to originate loans, with repayment guaranteed, and then resell those loans to the Treasury.

Robert Shireman, deputy under secretary of education, said officials had reviewed many proposals from the private student lenders and their supporters and had not been persuaded by any.

"The latest proposal appears to be an effort to grab a billion dollars a year or more that they would be paid for originating loans, which is something that we are able to do in a much more efficient way," Mr. Shireman said. "So the proposal is not a good use of taxpayer dollars, especially when that money could be used to help students."

John Dean, special counsel to the Consumer Bankers Association, who advises private lenders, said administration and Congressional officials seemed to be rejecting the industry plan without full consideration.

"Certain people in the administration are very anxious to push back on any proposal that modifies what the president set out," Mr. Dean said, adding that the lenders wanted to improve President Obama's plan, not supplant it. "If you take a look at it, it is very much an enhancement as opposed to an alternative."

To win support from state and local nonprofit lenders and guaranty agencies, the industry's proposal also set aside $5.5 billion for "borrower assistance and advocacy services." President Obama's proposal had similarly set aside $5 billion for financial literacy and other services that the agencies now provide.

Representative Timothy H. Bishop, Democrat of New York, and a former college financial aid administrator, said the president and Mr. Miller were on the right track.

"We are absolutely moving in the right direction," Mr. Bishop said, "and I think students are going to benefit."

Administration officials have argued that the private student loan companies will continue to be able to compete for lucrative servicing contracts, which will pay them to do much of the back-office work they do now. But the lenders have said that if President Obama's plan is adopted, they will be forced to cut jobs.

Some Republicans have said that in curtailing the role of private lenders, Democrats are trying to expand government.

Senator Lamar Alexander, Republican of Tennessee and a former federal education secretary, said direct government loans were never meant to monopolize student lending.

"This effort by the Obama administration for a Washington takeover of student loans is just one more example of a long line of Washington takeovers of banks, insurance companies, car companies, health care, that I totally object to," he said.

• < Prev
• Next >