House Bill Would Overhaul Student Loan Program, As Defaults Rise

By Staff
August 7, 2009

Backers of a bill inching through Congress aim to take the middleman out of the student loan business. Introduced by Rep. George Miller (D-CA), the Student Aid and Fiscal Responsibility Act of 2009 (HR 3221) hit Capitol Hill this summer amid concern about mounting student loan defaults, chronicled in recent months by the Boston Globe and the Wall Street Journal.

Also known as HR 3221, the bill on July 21 passed out of the Education Committee, chaired by Miller, on a largely party line vote of 30 to 17, reports The Hill.

The measure would supplant the current system of student loans companies sponsored by SLM Corp. (Sallie Mae) with a Direct Loan program funded by the federal government. The Education Department would choose lenders according to how well they serve customers, offer financial counseling, and avert loan defaults.

HR 3221 has already drawn fire from House Republicans who see it as an intrusion of the government into the lending arena. "I, for one, am not comfortable with the idea of the federal government acting as a profit-making bank," Rep. Brett Guthrie (R-Ky.) was quoted as saying by The Hill. For his part, the committee's Ranking Member Rep. John Kline (R-Minn.) saw the legislation as part of a pattern of federal takeovers of sectors once left to private enterprise, lamenting, "Is there any industry not on the verge of federalization?"

Meanwhile, the nonpartisan Congressional Budget Office projects that HR 3221 would save the government $87 billion over 10 years. Some $40 billion of that sum would fund increases in Pell Grants for students. The Direct Loan program would start in 2010, under the legislation.

Recent years have seen an upsurge in student loan defaults. The Boston Globe reported an increase in defaults on federal loans, which comprise four fifths of all U.S. student loans, from 4.6 percent in 2005 to 6.9 percent in 2007. In the smaller private student-loan market, meanwhile, Sallie Mae faced defaults on 3.4 percent of its 2008 loans, twice the rate of failure that lender dealt with two years earlier, according to the Wall Street Journal. And all that was occurring before the current recession kicked in.

"Economic downturns affect people's ability to pay off all kinds of debt," Lauren Asher, then acting president of the Project on Student Debt, a Berkeley, CA research and advocacy group, told the Globe, "and you have more people with student loans than ever before."

President Obama has thrown his political weight behind getting banks out of the student loan business. "We have a student loan system where we're giving lenders billions of dollars in wasteful subsidies that could be used to make college more affordable for all Americans," Obama was quoted as saying by the Washington Post.

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