Senator Conrad’s Choice on Student Loan Bill

It was nearly a year ago that President Obama proposed eliminating federal subsidies for student loan companies and using the savings to fund the Pell Grant program for low income college students. While the House of Representatives adopted much of the President’s proposal last September, the Senate has yet to even publicly release a companion bill, let alone vote on one. This delay is about to become a problem for supporters of the legislation, and Senator Kent Conrad, not exactly a friend to student loan reform, is about to have a lot more influence over the bill’s fate.

On January 26^th the Congressional Budget Office (CBO) will update its “baseline” estimate of federal program costs, including those for student loan programs and Pell Grants. CBO measures all new legislation considered by the Congress against its baseline estimates to determine how much the legislation will save or cost compared to current law. Normally, CBO uses the baseline it calculates every March for this purpose, but as the Senate gets ready to take up a companion bill to the House-passed Student Aid and Fiscal Responsibility Act, Senators must decide whether the March 2009 baseline still provides a meaningful estimate of the bill’s costs.

The CBO for its part looks set to provide Congress with two sets of estimates — one using the March 2009 baseline and the other using the January 2010 baseline — for any student aid bill that moves through the chamber. It will be up to the Senate Budget Committee chairman, Kent Conrad (D-ND), to decide which one will be used. (The Congressional Budget Act of 1974 gives the chairman this responsibility and authority.) Senator Conrad hasn’t been a big supporter of the bill, mainly because the Bank of North Dakota generates a lot of business and revenue through federal payments under the Federal Family Education Loan program (FFEL), which would be terminated under the proposed reforms.

A budget issue like this one would normally be of little concern to anyone except a few Capitol Hill budget experts. The student aid bill, however, hinges on a favorable estimate from CBO. The March 2009 baseline showed some $87 billion in savings would be achieved over 10 years by eliminating FFEL and making all federal student loans through the Direct Loan program — savings that can be redirected in a budget neutral manner to other education programs, including Pell Grants.

The alternative estimate done with CBO’s January baseline will certainly be less favorable to the bill’s supporters and, unfortunately, hand a legitimate argument to the legislation’s opponents. Specifically, the new spending programs will cost more and proposed savings will be less. The Pell Grant proposal in the House bill will cost at least $10 billion more than it would have last March. Increased college enrollment among Pell-eligible students and higher inflation expectations make that all but certain. The loan proposal savings could be significantly lower given that FFEL loan volume accounts for less than 60 percent of federal loans made this year, down from 70 percent under CBOs 2009 estimates. Schools have been leaving the FFEL program over the past year due to the program’s uncertain future, the credit crisis, and the Obama Administrations push for schools to make the switch to direct lending. In other words, fewer schools are left to switch to direct lending and generate the savings at the core of the legislation.

Of course, the really interesting wrinkle in this development is that Senator Conrad will have to choose which estimate to use: the estimate using an outdated 2009 March baseline that is favorable to the bill’s supporters (i.e. President Obama and most Senate Democrats), or the estimate based on the most up-to-date information about the true costs and savings of the bill that is favorable to Republicans and opponents. Senator Conrad, as many know, fancies himself a fiscal watchdog. Which set of numbers will he choose? Which numbers will Senate Democrats want him to use? How about his friends at the Bank of North Dakota?

Senate Democrats have no one but themselves to blame for the increasingly complicated state of student aid reform. They chose to put the bill off for so long that it will now be subject to more doubt and confusion over any spending and savings. Democrats have needlessly opened themselves up to attacks from Republicans that they are “cooking the books” on student loan costs. The irony, of course, is that Senate Democratic leaders delayed the bill until health care reform was locked up so that they could then use a “fast-track” procedure — budget reconciliation — to pass a student aid bill. They may soon regret that strategy.