First Thoughts on Student Loan Reform Bill

At Higher Ed Watch, we have spent most of the day eagerly awaiting the release of legislation that the Democratic leadership of the House Committee on Education and Labor has written to overhaul the federal student loan programs. Based upon news releases and press reports we had read over the last 24 hours, we had very high hopes for the bill.

Unfortunately now that we have begun to read the legislative text, we have decidedly mixed feelings about it. We are very pleased that Rep. George Miller, the California Democrat in charge of the committee, has followed President Obama’s lead in proposing to end the Federal Family Education Loan (FFEL) Program and thereby eliminate unnecessary middlemen from the process of originating and guaranteeing federal student loans. Instead, as of July 1, 2001, all new federal loans would be made by the U.S. Department of Education through the Direct Loan Program.

We are also happy to see that a substantial share of the savings produced by shutting down FFELP would be used to significantly increase spending on Pell Grants and other high-need and chronically underfunded education programs.

However, we are sorely disappointed to see that the committee has included a set-aside for nonprofit student loan agencies to service federal student loans that is nearly identical to a proposal that the Education Finance Council (EFC), which represents these lenders, has been quietly shopping to a select group of Congressional offices in recent weeks. The legislation would essentially give each and every one of EFC’s members a no-bid contract to service the loans of up to 100,000 student loan borrowers in their home states.

We are having a hard time finding a public policy justification for that provision, given that it doesn’t seem to provide any benefit to borrowers or taxpayers. We understand that there are political tradeoffs that have to be made to win support for the bill, as is the case with all legislation. However, the history of the FFEL program is replete with these types of political tradeoffs and set asides, which have only made the program administratively cumbersome, inefficient, and vulnerable to waste and abuse. [And as faithful readers of Higher Ed Watch know, these non-profit loan providers are no stranger to scandal.]

Stay tuned tomorrow for more thoughts and questions as we work our way through the rest of the 181-page bill.