Opposition to financial aid reform ramps up

After months of smooth sailing, student loan reform is entering stormy waters.

Earlier this month, the U.S. House of Representatives overwhelmingly passed legislation that would effectively overhaul federal student loans by eliminating subsidies to banks and placing the industry firmly in the federal government's control. But the bill could face stronger opposition in the Senate, where Republicans could ally with conservative Democrats to block its passage. 

Advocates said the bill, which is being called the biggest overhaul of student loans in 35 years, eliminates an unnecessary middle man by dissolving the Federal Family Education Loan program, which provides three-quarters of all federal loans by subsidizing ones given by private lenders. Instead, the Department of Education would loan the money directly to students. If passed, the bill would save the government $87 billion. 

"This plan would end the billions upon billions of dollars in unwarranted subsidies that we hand out to banks and financial institutions — money that doesn't do anything to make your loans any cheaper," President Barack Obama said to students during a health-care rally in the Comcast Center earlier this month. "Instead we're going to use that money to guarantee access to low-cost loans no matter what the economy looks like."

 But conservative opponents of the legislation said the plan would amount to another government takeover and could kill thousands of jobs. The loan industry claims 35,000 jobs would be lost, according to TIME magazine.

"I think the underlying bill is flawed. I think it is a rush to a government takeover; it is going to add to our deficit," Rep. John Kline (R-Minn.), the top Republican on the House's education committee, said during debate on the House floor. "Let's take advantage of the private sector; let's see if there is a way that we can strengthen it and encourage it ... and look at the program before we push precipitously the entire industry into the hands of the government."

All but six Republicans voted against the bill in the House, and similar solidarity could be expected in the Senate, where five Democrats have already said they will vote against the bill. However, the House passed the bill using a technique called reconciliation, meaning it can't be filibustered.

The $87 billion saved will instead expand other federal aid programs and provide $50 million to the Department of Education, intended to help colleges make the transition. The House bill invests $40 billion to increase the maximum annual Pell Grant award — a federal grant that provides need-based aid to help low-income students pay for college and does not have to be repaid by recipients — from its current value of $5,350 to $5,550 in 2010 and $6,900 by 2019. 

"With student debt at record levels and loan default rates on the rise, the House just passed legislation that will provide real annual increases in student grant aid, reducing the need to borrow," said Lauren Asher, president of the Institute for College Access and Success. 

Beginning in 2011, the grant will be linked to match rising costs-of-living by linking it to the Consumer Price Index — a measure of inflation used by the U.S. Bureau of Labor Statistics.

And the need for financial aid is growing.

New figures from the U.S. Department of Education show that the total amount of money borrowed by students and received by universities in the 2008-2009 academic year increased by about 25 percent from the year before — totaling about $75 billion.

"Making all federal loans through the Direct Loan program will also make it easy for borrowers to distinguish federal student loans from risky private loans," Asher said. "This bill is a win for students and families."

The Senate's version of the legislation hasn't been written yet. But objections could also be raised to provisions in the House bill that would make spending on Pell grants mandatory and limit Congressional control over the program.

If the student financial aid bill is approved by the Senate, it will land on Obama's desk. The president has been a long-time supporter of reforming the federal financial aid system and is expected to sign the bill into law.

"We will take this battle for America's students and America's working families to the Senate," Obama said. "And then I intend to sign this bill into law. Because that's the change you worked for.  That's the change you voted for. "

mlang@umdbk.com