A Leap Forward

The U.S. House of Representatives Committee on Education and Labor took a huge step forward today by approving, on a mostly party line vote, landmark legislation that would eliminate the Federal Family Education Loan Program (FFELP) and use a large share of the savings to significantly increase spending on Pell Grants. The bill would require that as of July 1, 2010, all federal loans be made by the federal government through the Direct Loan program.

We can not overstate the significance of the committee leaders’ accomplishment. Despite fierce opposition from the student loan industry and their allies in the financial aid world, the committee passed a bill that would eliminate all of the unnecessary middlemen from the process of originating and guaranteeing federal student loans. This change would substantially simplify the federal student loan program and redirect federal funds out of the pockets of lenders and into the hands of the students who need the help the most.

The measure is far from perfect. We have already stated our dissatisfaction with a provision in the bill that would provide a set-aside for all existing non-profit student loan agencies to service the loans of up to 100,000 borrowers in their home states. Non-profit lenders that wish to continue to service loans in the future should have to compete for a contract from the U.S. Department of Education, like all other student loan providers.

As we said yesterday, if the Democratic Congressional leaders are intent on keeping the proposal in the measure, they should at least bar lenders that have been found to have deliberately overcharged the government or acted against the best interests of students from participation.

We were also disheartened that the committee overwhelmingly approved an amendment to the bill that would further weaken the “90-10 rule,” a key consumer protection provision. The rule requires for-profit colleges and trade schools to receive at least 10 percent of their revenue from sources other than federal student aid in order to participate in the government’s financial aid programs.

The amendment, which was sponsored by Rep. Rob Andrews (D-NJ), would extend by an extra year (from two to three) the amount of time that schools can be out of compliance with the law before being penalized. It also would temporarily exempt from the 90-10 calculations any new money that the colleges receive from the legislation’s expansion of the Perkins Loan program, as well as extending an existing exemption for federal student loan limit increases that were approved as part of the Ensuring Continued Access to Loans Act last year.

At a time when the Obama administration is looking to rewrite federal student aid rules to improve the integrity of the programs, it doesn’t make any sense for Democratic Congressional leaders to try and gut the few consumer protection provisions left that are aimed at protecting students from unscrupulous schools.

But those concerns should not overshadow the significance of yesterday’s action. As we said earlier, the House education committee took a major step forward in ending FFEL. Hopefully, the Senate Committee on Health, Education, Labor and Pensions will soon follow suit.