House Committee on Education and Labor
U.S. House of Representatives

H.R. 3221, the Student Aid and Fiscal Responsibility Act, fulfills President Obama’s call to abolish the Federal Family Education Loan (FFEL) program and replace it with a system of government-run lending directly from the U.S. Treasury. This job killing government takeover of student lending generates approximately $87 billion in savings and earnings for the government – the bulk of which Democrats plan to spend on an array of new and expanded entitlement programs. However, several recent analyses from the nonpartisan Congressional Budget Office (CBO) have cast doubt on Democrats’ claims that the bill would reduce the federal deficit – instead, CBO has uncovered billions in hidden spending.

Eliminating Choice, Competition, and Innovation from Student Lending

The legislation eliminates the longstanding FFEL program – a public-private partnership that has leveraged hundreds of billions in private capital to help families pay for college for more than 40 years – and replaces it with the government-run Direct Loan program, which will rely on federally-established contracts to provide the bare minimum in services to students and families. It prohibits new FFEL program loans from being made after July 1, 2010, less than one year from today.

Elimination of the FFEL program will harm students, schools, and our economy. Even today, approximately three-quarters of all colleges and universities have chosen to remain in the FFEL program despite Democrats’ overt attempts to phase it out. Their reasons include technological innovation, borrower choice, and customer service – among others. Even as these benefits will be lost for borrowers and institutions of higher education, the U.S. economy will suffer as well, with job losses that could total in the tens of thousands.

The parallels to the health care debate are ominous. Just 16 years ago, the Direct Loan program was created as a “government option” to promote competition. Today, Democrats in Congress are preparing to eliminate the private sector’s role altogether and force everyone into the government run program.

New and Expanded Entitlement Spending

The legislation redirects tens of billions of new earnings and supposed cost savings to Pell Grants and a number of other initiatives, including massive new entitlement programs that do not directly benefit students or expand access to higher education. These include:

• New early learning program to develop and fund state programs – cost, $8 billion;

• Extension of “temporary” funding for Minority Serving Institutions – cost, $2.6 billion;

• New College Access and Completion Fund to improve information sharing and promote student persistence and completion – cost, $3 billion;

• A recreated Perkins loan program that will operate as yet another direct loan model administered by institutions – program size, $6 billion per year;

• New school construction and renovation funding for K-12 and postsecondary facilities – cost, $6.6 billion; and

• New community college initiative that overlaps with existing job training programs administered by the U.S. Department of Labor – cost, $7 billion.

Taking Advantage of the Financial Crisis to Push Partisan Goals

Democrats say over and over again that the student loan program is on “life support” and needs to be ended. This is a red herring. They’ve been trying to eliminate FFEL for at least 15 years, and they see the economic crisis as their opportunity.

• The FFEL program was a stable source of capital – in good economic times and bad – for more than 40 years. Private capital dried up in the FFEL program along with the rest of the financial services industry. The government stepped in to stabilize the markets and add liquidity throughout the economy. Yet student lending is the only place they’re seeking a permanent government takeover.

• The Direct Loan program was once on “life support,” yet Democrats didn’t see the need to abolish it. In 1997, Congress was forced to pass emergency legislation to bailout the Direct Loan program when it could not provide consolidation loans to borrowers.

Other Financial Aid Changes

H.R. 3221 makes several other changes to federal financial aid programs, despite the fact that just last year, Congress completed a bipartisan overhaul of the Higher Education Act. These include:

• Elimination of restrictions that prevent individuals convicted of drug possession from receiving taxpayer-funded financial aid;

• Changes to the need analysis formula, which Republicans believe fail to do enough to fundamentally simplify our system of financial aid programs; and

• A move to variable interest rates for subsidized Stafford loans, keeping the system unnecessarily complex for borrowers in an effort to cover a broken political promise to “cut interest rates in half.”

Hidden Costs: Billions in Dubious Savings and Masked Spending

Democrats claim their legislation would reduce the federal deficit, even going so far as to consider enacting the plan through a maneuver called “budget reconciliation,” which speeds passage of legislation designed expressly to rein in entitlement spending. However, a close look at H.R. 3221 reveals fuzzy math and a plan that could ultimately cost taxpayers billions.

On July 27, 2009, CBO wrote a letter to Senator Judd Gregg (R-NH) showing that when market risk is taken into account, the supposed savings generated by H.R. 3221 would plummet by $33 billion. This was followed by a September 9, 2009 letter from CBO to Rep. John Kline (R-MN) showing Democrats’ plan to expand the Pell Grant program would cost $11.4 billion more than originally estimated. Finally, even the official CBO score of the proposal reveals an extra $13.5 billion in so called discretionary spending that would result from enactment of H.R. 3221. Taken together, these analyses expose a plan that would not reduce the deficit, as Democrats claim, but would actually cost taxpayers close to $50 billion over the next 10 years.

Republicans Have Better Solutions

Republicans have a better way forward that will: 1) maintain stable access to loans while saving money for taxpayers, 2) drive down the deficit, and 3) chart a path toward comprehensive student lending reform in the future.

• A bipartisan solution to maintain student access to loans in an unstable economy already exists – it’s the Ensuring Continued Access to Student Loans Act (ECASLA). Republicans will extend ECASLA through 2014, aligning it with our other financial aid programs recently reauthorized under the Higher Education Act. This is projected to save taxpayers more than $13 billion in the next five years. 
   
• This $13 billion will be used for deficit reduction - a significantly higher contribution to paying down our deficit than Democrats have proposed. With this year’s deficit projected at an astounding $1.6 trillion, we need to save all we can.

• Republicans want to avoid this type of student loan uncertainty in the future. That’s why we’re calling for an independent commission to study the issue.

o    The Commission will report to Congress with recommendations on a new model for student lending that uses private capital, generates competition to ensure choices for borrowers, and prevents waste, fraud, and abuse.

o    This study will look at key factors such as customer service, outreach activities, default prevention, and financial literacy enhancement.

o    It will also examine key financial concerns such as how to ensure stability in times of economic disruption and how to use market forces in the financing structure.

o    Finally, it will look at key structural issues, such as how to best focus benefits on the students who need them, and whether it’s possible to integrate loan repayment into tax withholding, as is done in other countries.

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