The news media has, 
rightly, been focused on health care reform over the last few weeks. Lost in the buzz over HCR is a significant development concerning the privatization of government operations. Or, more rightly, an end to a privatization scheme that has cost the taxpayer 100’s of billions of dollars over the last 4 decades.
A major reform of the student loan program was slipped through the House with very little fanfare and far less controversy than would have happened if not for the cover of HCR. The changes effectively end private-lender involvement in the student loan program. Lobbyist for the lenders had worked furiously to block the reforms, but now have little hope since the loan program changes were included in the budget reconciliation bill that contains the “fixes” to the Senate health care bill.
The battle over reform of the student loan program began last April when President Barack Obama called for repeal called for an end to the Federal Family Education Loan Program (FFEL) program. The president said the program was, “taxpayers…paying banks a premium to act as middlemen — a premium that costs the American people billions of dollars each year….a premium we cannot afford.”
The FFEL program is essentially a corporate welfare system. Private lenders receive subsidies to originate loans that are guaranteed by the federal government. The private lenders take on no risk, yet profit significantly on these loans.
The president proposed replacing the FFEL program with a direct-lending program where the students will borrow the money directly from the government, thus cutting out the middle-men. As might be expected, the private lenders fought any attempt to eliminate this profitable portion of their operations.
The new direct lending program will be administered through higher education institutions, effectively ending all subsidies to private industry. According to the CBO, the savings from these reforms are expected to amount to $67 billion dollars over the next 10 years.
The major part of the projected savings will fund a long overdue expansion in Pell grants. Beginning in 2013, Pell grants will get an annual increase tied to the rate of inflation. Total costs are projected to be $36 billion.
In addition to the money going to Pell grants, there will be $2 billion over 4 years to help 2-year community colleges. Another $255 million a year will go to historically black colleges and universities. The College Access Challenge Grant program will receive $750 million over 5 years. The CACG program funds efforts by states and other government entities to prepare low-income students for success in higher education. $1.5 billion will be used to lower the cap on loan repayments from 15% to 10% of discretionary income. The remainder of the savings will go towards paying down the Federal deficit.
Overall, this is a huge win for the President’s education agenda. Not only does it end a drain on the Federal budget, it also funnels much needed funding to students. This is a win-win for taxpayers. Here’s hoping this is only the first of many success for the President on education reform.
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