Student Loan Debate Heats Up in Congress

Date: 3/31/2009 3:25 pm

President Obama’s proposed budget, released last month, contains significant changes to federal financial aid policy, including the elimination of the Family Federal Education Loan Program (FFEL) in favor of the Direct Loan Program and increasing the maximum Pell Grants award to $5,500. As the House and Senate began their own budget deliberations last week, it became clear that the backers of the FFEL program will not let the program go down without a fight. Under the FFEL program, the federal government subsidizes private lenders to provide students with federal loans, guaranteeing the lenders a more favorable interest rate and close to zero risk. Under the Direct Loan program, the federal government provides the same loans to students at a significantly lower cost to taxpayers. According to Congressional Budget Office projections, eliminating the FFEL program and managing all of the loans through the Direct Loan program would save approximately $47 billion over five years, money the Obama budget directs to students in the form of grant aid such as increases to the Pell Grant.

As the debate in Congress started, supporters of maintaining the FFEL program began lobbying strongly for the program, framing the issue as one of choice and competition in the market. The Consumer Bankers Association organized an online petition that has so far generated over 4000 signers, including many from the private loan industry and financial aid officers. Supporters of Obama’s proposal argue that ending the FFEL shifts taxpayer dollars away from subsidizing banks and towards making college more affordable and accessible for students. The Institute for America’s Future and USPIRG released a report last week providing state by state data detailing the effect of increasing the Pell Grant for students.