House Passes Student Loan Overhaul

States Cut Aid to College Students as Demand BoomsAP Graphics
Struggling with budget shortfalls that reach into the billions, several states nationwide are making deep cuts in college financial aid programs, including those that provide a vital source of cash for students who most need the money.

Struggling to come up with the cash for college? The Obama administration wants to cut out the middle man from federal student loan programs and give students the chance to borrow directly from the federal government, specifically the U.S. Treasury. That's the thrust of a bill that was approved by the House today.

For the past 35 years, the federal government has subsidized loans made by private banks to students through the Federal Family Education Loan program, guaranteeing loans up to 97 percent and allowing lenders to reap the profits. The Student Aid and Fiscal Responsibility Act -- touted as the largest investment in higher education ever -- shuts down that program, replacing it with a direct loan program run by the Education Department.

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"Today the House made a clear choice to stop funneling vital taxpayer dollars through board rooms and start sending them directly to dorm rooms, "Rep. George Miller, D-Calif., Chairman of the House Education and Labor Committee, said in a statement. "This vote was a historic triumph for America's students, families and taxpayers -- and will ensure that their interests never again take a backseat to lenders and big banks."

But how much will the bill actually save taxpayers? While proponents claim the switch to the direct loan program will save $87 billion over the next 10 years, the Congressional Budget Office has put out a conflicting report that puts the number as low as $47 billion.

The Democrats backing the legislation plan to use those savings to fund several reform initiatives included in the bill, such as investing $40 billion to increase Pell Grant scholarships, strengthening the Perkins loan program, increasing investments in community colleges and streamlining the federal student aid application form.

Conservative critics, however, say the bill is further evidence that the Obama administration is ushering in an unprecedented level of big government.

"Democrats have had their sights set on a government takeover of student lending for more than a decade, and they're capitalizing on the economic downturn to make it happen," Rep. John Kline, R-Minn., and the ranking Republican on the House Education Committee, said in a statement.

Republicans also note that private sector jobs would be lost as banks would be forced to cut their employees.

"We have unemployment that's at 9.7 percent. I'm sure it's going to go over 10 percent. More than 30,000 private sector jobs are directly affected by what you're going to do… I don't understand at a time of economic difficulty you want to do something that's going to put more people out of work," Rep. Dan Burton, R-Ind., explained yesterday.

Minnesota Republican Congresswoman Michele Bachmann went further today in a blog post on saying, "another month, and another attempt by the Obama Administration to take over a successful portion of the private sector. Banks, cars, and now student loans. I'm beginning to see a trend here...If nothing else, this bill tells us one thing -- if the government can't succeed on its own merits, they'll eliminate the competition. That should concern us all."

But it's worth pointing out, proponents of the legislation say, that students are facing more and more challenges in this economic climate, trying to secure loans they can afford. And earlier in the week, the Education Department cited the downturn in the economy for rising student loan default rates.

The President addressed the bill today during a health care rally in College Park, Md. He said the bill would help simplify financial aid forms and make more money available to more students. "Because you voted for change in November, we're going to bring change in the House of Representatives today. And then we will take this battle for American schools and America's working families to the Senate and then I intend to sign his bill into law. Because that's the change you voted for. That's the change we're going to deliver."

Administration officials insist that this is not a "government takeover," but rather a major part of the President's overall education agenda.

"We've been subsidizing the private lending industry to provide a service that can be provided more efficiently in a better way," the President's Director of Domestic Policy, Melody Barnes said this afternoon. "We need to form a public private partnership that allows for the best use of federal dollars and also raise a result that is more reassuring to and more steady and more stable for American families."

Speaker Nancy Pelosi also spoke out in favor of the bill today. "Education was one of the three pillars that President Obama had in the budget that we passed on his 100th day in office… our three pillars for economic recovery were investments in education, investments in new energy policy for creating new green jobs, and the investments, of course, in health care. We've done our energy bill , our climate change legislation. Today we are doing the education piece," Pelosi said today.

The bill now moves to the Senate, where it is expected to face an uphill battle.