Lawmaker Proposing End to Student-Loan Subsidies, Backing Obama

OBAMA FOR USA. House Education Committee Chairman George Miller will introduce legislation today that would end federal subsidies for student-loan providers, backing President Barack Obama’s plan.

Lenders such as Sallie Mae failed to persuade Miller, a California Democrat, to let them continue marketing federal student loans, a House Democratic committee aide said yesterday on a conference call with reporters. The aide asked not to be identified because the legislation hadn’t yet been introduced.

Miller favors Obama’s plan in part because it would save $87 billion, which would be $15 billion more than savings in an alternative proposal from a coalition of student-loan providers, the aide said. The group, including Sallie Mae, Citigroup Inc.’s Student Loan Corp. and Nelnet Inc., said last week that their proposal would result in savings similar to Obama’s plan.

Obama and Miller seek to end a 16-year-old arrangement under which the government runs competing college loan programs. The 43-year-old Federal Family Education Loan Program subsidizes and guarantees loans made by private lenders. A second program, created in 1993, enables the Education Department to make loans directly to students.

Miller’s plan, like Obama’s proposal, would eliminate the loan-guarantee program and switch all new federal loans to the direct-lending program, according to a committee fact sheet. Both plans would let companies compete for loan-servicing tasks such as processing payments and collecting on defaulted loans.

Reston, Virginia-based SLM Corp., known as Sallie Mae, is the biggest U.S. provider of student loans, followed by Stamford, Connecticut-based Student Loan Corp. and Nelnet, based in Lincoln, Nebraska. Sallie Mae made $24.2 billion in student loans last year, 74 percent of them federally guaranteed.

Savings Estimate

The nonpartisan Congressional Budget Office estimates that Obama’s plan to switch to federally funded direct student lending, instead of guaranteeing loans by private companies, would save $87 billion over 10 years. The administration has said the savings would be directed into other programs including Pell Grants to help low-income families afford college.

Obama’s student-loan plan, proposed as part of his budget for the fiscal year beginning Oct. 1, must move through Miller’s panel and a Senate committee that oversees education policy.

Congressional Republicans oppose Obama’s plan, saying it would create a government monopoly over college loans. Some Democrats also have raised concerns that the plan could lead to job losses and disrupt lending at more than 4,000 schools that would have to switch to the direct-loan program.

Last week, more than 30 House Democrats urged Miller to consider other proposals that would preserve some aspects of the federal loan-guarantee program instead of eliminating it. The lawmakers’ letter didn’t endorse a specific alternative.

Alternative Proposal

The Sallie Mae-led coalition, whose 30 members also include state agencies and nonprofit groups such as Knoxville, Tennessee-based Edsouth, proposed its alternative plan July 7. The group said its proposal would save more than 35,000 jobs, ensure that students have uninterrupted access to financing and, like Obama’s plan, save $87 billion over 10 years.

Like Obama’s proposal, the coalition’s plan would end federal subsidies to student-loan providers. Unlike Obama’s plan, the alternative would let private lenders continue to market federal student loans, which they would then sell to the government. The group’s proposal also would let schools, instead of the government, decide which companies service their loans.

The alternative plan probably wouldn’t save more than $72 billion over 10 years, the committee aide said.