Showdown Looms on Student Loans

Congressional Democrats took a bold step on Wednesday to fulfill their campaign promises: finalizing legislation that would cut the interest rate on federally subsidized student loans in half and provide a major boost to the maximum Pell Grant. The measure, which is expected to be approved in the House and Senate today and tomorrow, would also create a groundbreaking pilot auction program in which lenders would have to compete for the right to make federal loans for parents and graduate students.

By including the interest rate cut and the auction proposal, Democrats are calling the Bush Administrations bluff essentially daring the White House to veto a bill that would make college more affordable for millions of students from middle income families.

The dispute between the Bush Administration and Congressional Democrats centers on how best to use excess subsidies that the government provides lenders to participate in the Federal Family Education Loan (FFEL) program. Democrats in the House of Representatives have pushed for Congress to use the subsidy cuts to cover the costs of slashing the student loan interest rates in half. The White House, to the dismay of the loan industry, supports the subsidy cuts. But Administration officials insist that the savings should be used solely for increasing spending on Pell Grants, which go to low-income students.

The final budget reconciliation bill that Democrats unveiled on Thursday would accomplish both purposes. The legislation would increase the maximum Pell Grant, which is currently $4,310, to $5,400 over five years. It would also cut subsidized Stafford loan interest rates to 3.4 percent from 6.8 percent over four years. [To see a copy of Congressional Budget Office’s analysis of the plan’s costs and savings, click here.]

Our Political Read

We think a veto is unlikely, or if occurs, will be overridden.

There were three main reasons given by the Administration in its June veto threat: (1) House embrace of a number of small entitlement programs; (2) House embrace of an interest rate reduction for student loan borrowers instead of increased grant aid to Pell recipients; and (3) fast implementation of a House aucton proposal. But the overriding reason was the House investment in cutting student loan borrower interest rates in half instead of increasing grant aid.

Stripped in conference committee, however, was House support for the relevant small entitlement programs. And the conference committee also replaced the House auction proposal with the Senate’s. (Disclosure: Higher Ed Watch staff played a large role in helping to draft the House auction proposal) The issue of contention thus appears to be narrowed to the conferees retained reduction in student loan borrower interest rates. We don’t think that enough to prompt a veto, especially given the conference report’s big boost in funding for Pell Grant recipients. If there is a veto, we don’t think the votes are there to sustain it.

In January 2007, the House of Representatives voted on a smaller package of lender subsidy cuts in order to finance cutting subsidized undergraduate borrower interest rates in half. During consideration of that bill, the Congressional minority echoed the Administration’s concern that saved funds should finance increased Pell Grant aid instead of cheaper loans. And yet the bill passed 356–71 — a margin substantial enough to sustain a veto. That bill never made it to the President’s desk, because the Senate decided to consider student aid in tandem with a full reauthorization of the Higher Education Act and as part of the budget reconciliation process. But that January vote remains instructive.

The pending conference agreement cuts deeper into lender subsidies than the January leglislation, but not much deeper than the President proposed in his subsequent February 2007 budget. And the conference agreement devotes the vast majority of those additional lender subsidy cuts to grant aid.

But even more important, given the Administration’s weakened present political standing, we have great difficulty imagining Congressional Republicans walking the plank to vote against middle class student loan borrowers and their families. Especially when that vote stands in stark contrast to their January vote in support of middle class student loan borrowers. It wouldn’t just be easily portrayed as an “anti-middle class, flip flop.” It would appear as an “anti-middle class, flip-flop done in blind fealty to President Bush.” We don’t think voters would be happy with that come November 2008.

Bank on enactment.