Back in September, the Daily reported that the U.S. House of Representatives had passed the Student Aid and Fiscal Responsibility Act of 2009, which would drastically reform the student loan system (How a federal financial aid overhaul could affect ‘U’ students, 9/24/09). The bill — which is strongly supported by the Obama administration — was intended to improve efficiency, expand lending and Pell grant programs, which would streamline the process of applying for financial aid and generally ease the burdens of college students everywhere.

Naturally, it’s currently bogged down in the U.S. Senate, where legislation has long gone to die. One problem is that there are 289 other House bills waiting for consideration in the Senate, which has been struggling to overcome Republican filibusters on everything from confirming presidential appointments to extending unemployment insurance. The other problem comes from several Democratic senators representing bank-friendly states who seem dead set on weakening the bill’s central proposals that would both save the federal government money and expand student services.

The legislation’s major proposed changes deal with the provision of federal loans. Currently, federal student loans work in two ways. The more complicated one is the Federal Family Education Loan Program, which involves private lenders as middlemen. The government provides private lenders with capital, subsidizes the interest rate and then guarantees the loan.

In return for the subsidies, which amount to $4.5 billion annually, the private lenders provide the added service of…. er…

(Awkward silence.)

Well, actually no one is really sure what value the banks add to the transaction except for pocketing taxpayer money. Writing in the online magazine Slate in 2007, Michael Kinsley pointed out that the government already guarantees debt — its own borrowing to finance the budget deficit — for a considerably lower interest rate than it does for those it helps to subsidize under the FFEL program. What would make sense then is for the government to cut out the middleman and directly loan out its own money. After all, that $4.5 billion could fund roughly 900,000 additional Pell grants for needy college students.

Actually, the other major government loan program, Federal Direct Loans, already uses this mechanism. The student aid legislation that passed the House in September effectively cancels the FFEL program and makes all loans direct loans, then allocates the projected net $80 billion in savings over the next 10 years to expanding funding for Pell Grants and improving community colleges.

Let’s see: the feds cut out inefficient subsidies and use the savings to provide resources poor students desperately need. Who could possibly object?

The first group consists of the usual Republican free-market blowhards who object to a “government takeover” of the student loan market. This contention is hogwash, as the government is only taking over the government student loan program. No law prevents private lenders from offering their own student loans — they just wouldn’t get federal subsidies to do so. That sounds pretty free-market to me. Besides, the government still will bid out for private banks to collect and administer its loans, so it’s not like private banks are completely getting cut out of the loop.

The other opposition group consists of more familiar suspects — the private lending agencies that make a killing at the government feeding trough. They couldn’t stop the House bill improving education, but now that it’s cooling its heels in the Senate, they’re lobbying their states’ senators ferociously to try to water down the bill’s death sentence for the FFEL program.

These firms tend to be concentrated in a few states with loose banking laws, like Nebraska, where Democratic Senator Ben Nelson — yes, the same one who nearly stopped health care reform — has been pressing on behalf of his constituents like Nelnet, a lending agency in Lincoln, Nebraska. Of course the Lincoln Journal Star noted in 2007 that Nelnet also received $278 million in subsidies of highly questionable legality. But since the firm donated heavily to Nelson and other Nebraska polls, that makes it okay, right? Delaware is another state with loads of private student lenders, like Sallie Mae. Not surprisingly, as The Hill, a newspaper specializing in covering Congress reports, the state’s two Senators, Democrats Ted Kaufman and Tom Carper, have also been lobbying to weaken the proposal.

So Michigan students, roughly 14,000 of you took out federal loans last year, and about 3,400 received Pell Grants. Maybe it’s time for you to call your senators and remind them who they really represent — especially if you are from Delaware or Nebraska. Help your fellow scholars out and get the Student Aid and Fiscal Responsibility Act of 2009 passed into law.

Patrick O’Mahen can be reached at pomahen@umich.edu.

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