Student loan reform passes with health bill

The bills were combined to allow reconciliation.

By Wes Duplantier

Published March 23, 2010

When the president signs the health care bill passed Sunday by Congress, he will also sign into law an overhaul of the student loan industry.

The loan industry reform, previously known as the Student Aid and Fiscal Responsibility Act, passed the House in September. It was combined with the Senate health care bill to help the measure pass.

A budget resolution passed in the House and Senate last year instructed Congress to use reconciliation to pass any measure that reduces the federal deficit by $1 billion over five years.

Under the new bill, the federal government would make loans directly to students and collect the interest paid on them. The Congressional Budget Office estimates the switch to direct lending would save the government $61 billion over the next decade and would reduce the federal deficit by $19 billion.

George Cendana, president of the United States Student Association, a national student advocacy organization, said his group believes the bill makes many improvements to the student lending system.

"The USSA is extremely excited about this bill as it moves through Congress," Cendana said. "We believe it is one of the most revolutionary pieces of legislation of the decade. It changes priorities about where our tax dollars go."

The reform bill would scrap the Federal Family Education Loan Program. Under that program, the government subsidizes private lenders to make loans to students. The lenders, often banks, then collect interest fees on the loan payments and face no risk because the government insures the loans against defaults.

Student lenders will not be forced entirely out of business. They will compete to earn fees from the government for servicing the loan, which is the actual collection of payments from the borrower.

Industry groups who have supported the health care reform bill have fought against this legislation. America's Student Loan Providers, a trade group, opposes this legislation because they said it would increase the federal debt.

"One of the advantages of using private capital is that you don't add to national debt," spokesman Kevin Bruns said. "The government (under the new bill) would have to go out and get the money somewhere, so they would have to go out and borrow it."

Other groups were concerned about the short time in which university financial aid departments must switch to the new system. The bill sets a July 1 deadline for the change.

The bill allocates $50 million to assist schools nationwide with the transition, but Haley Chitty, spokesman for the National Association of Student Financial Aid Administrators, said his group is still worried.

"We have some concerns about the proposal to eliminate the Federal Family Education Loan Program and schools' ability to switch to direct loans," he said. "This is especially important for smaller institutions who don't have as many staff or resources."

The switch and its deadline would most acutely affect smaller schools because they have less staff available to make the changes. Student Financial Aid Director James Brooks said in September, MU would not be affected by the direct-lending changes because the school has been giving students direct government loans for several years.

MU students would be affected by increases in Pell Grants. Under the new bill, the grants would increase from $5,350 this year to $5,975 per year in 2017. According to the Project on Student Debt, 15 percent of MU students receive federal Pell Grants.

"Increases in Pell Grants directly decrease how much students will have to borrow," Project on Student Debt spokeswoman Edie Irons said. "That will also help decrease the amount of debt they have after graduation."