A Common-Sense Solution for Shoring Up Pell Grants in 2012

The debt ceiling legislation that Congress approved this month provided a one-time infusion of $17 billion for the Pell Grant program, spread between fiscal years 2012 and 2013. But as we’ve previously reported, the program is not out of the woods yet. Congressional appropriators still need to find at least another $1.3 billion to maintain the current maximum grant of $5,550 in the 2012 fiscal year, which starts in October.

Finding the money to cover this gap may not be as difficult as it seems. President Obama has offered a proposal that would not only provide the bulk of the savings needed but would also be of great help to millions of student loan borrowers. Unfortunately, the student loan industry’s Republican friends in Congress may stand in the way of this common-sense proposal.

As readers of Higher Ed Watch well know, the Democratic-controlled Congress last year eliminated the Federal Family Education Loan (FFEL) program and shifted to 100 percent direct lending. While the transition has gone remarkably smoothly, more than six million borrowers have found themselves with student loans under both federal programs, creating an administrative burden for these individuals as well as for the Department of Education.

Such borrowers must make at least two separate payments each month to the Education Department, which runs the Direct Loan program, and to the companies that hold their FFEL loans — increasing the likelihood of confusion and error. “The repayment process for these borrowers involves complicated record-keeping and making payments to multiple student loan holders, putting these students at greater risk for default due solely to the administrative complexity of the repayment process,” the Department wrote in a document outlining its “Pell Grant Protection Plan.“

For its part, the Education Department must continue making subsidy payments to lenders for FFEL loans it can just as well service itself.

To remedy these problems, President Obama introduced a “debt conversion” proposal as part of his 2012 fiscal year budget request. Under this plan, the U.S. Department of Education would encourage borrowers with FFEL loans to convert them to the Direct Loan program if they have loans under both programs. Borrowers who make this switch would receive a 2 percent reduction in their loan balances.

The proposal would not only simplify the repayment process for these borrowers, and ease the administrative burden for the Education Department, but it would also generate substantial savings that would be used to help shore up the Pell Grant program for the coming year. According to the Congressional Budget Office, the plan would save $1.8 billion under the current credit reform rules (or $1.25 billion under the Republican-favored “fair value” accounting method) by eliminating subsidies that would be paid to private lenders holding their FFEL loans.

While the plan seems like a no-brainer  to us, it landed with mostly a thud on Capitol Hill. Sen. Sherrod Brown (D-OH) has introduced legislation in the Senate to implement it, and Rep. Tim Bishop (D-NY) recently unveiled a companion bill in the House of Representatives. But House Republican leaders apparently have little interest in pursuing it.

This shouldn’t come as a surprise, considering GOP lawmakers’ long-time allegiance to the student loan industry and rigid ideological opposition to direct lending. But if House Republicans are truly interested in restoring fiscal discipline in Washington, they should recognize the insanity of continuing to subsidize private lenders for a job that the government can do itself at a much cheaper cost, no matter how you calculate it.

For the sake of Pell Grant recipients and student loan borrowers, let’s hope they have a change of heart.