The federal direct student loan program will increase the amount of direct federal loans and lower their costs to college students, if a bill in Congress is passed. Should the legislation pass, then this will be the biggest change to college financial aid programs since their creation in the 1960s.
The bill, called the Student Aid and Fiscal Responsibility Act, will take the direct student loans out of the hands of profit-making companies and make them direct federal loans to students. Private lenders will still be able to lend other types of loans to students.
The bill was recently passed in the House of Representatives by a vote of 253-171 on Sept. 17 and is currently being debated in the Senate. Reforming student aid has been a top priority since President Obama declared that the United States should lead the world in the rate of college degrees earned by 2020.
Right now, in the current system, the federal government makes the loan money available to banks and lenders. Then the banks and lenders lend the money and make a profit. The federal government insures the loans so there is no risk to the banks.
Under the proposed bill, the government would cut out the middleman, thereby increasing the amount that can be lent.
If passed, legislation would provide $40 billion over 10 years to increase the maximum annual Pell Grant scholarship to $5,550 and insure that it would increase annually, strengthen the Perkins Loan Program and make it easier for students to apply for financial aid by simplifying the FAFSA form.
It would also spend $10 billion on community colleges, $8 billion over 10 years to strengthen early childhood education and provide $4.1 billion to repair schools and colleges damaged by Hurricanes Katrina and Rita, among other things.
“This legislation makes important investments to help make college affordable and accessible for all eligible tudents. It will help us transform our student aid programs so that they finally operate in the best interests of students not banks- and help relieve the burdens of overwhelming debt,” Melissa Salmanowitz, spokeswoman for the Education and Labor Committee, said in an email.
Haley Chitty, director of communications for the National Association of Student Financial Aid Administrators, said in an email, “Congress estimates th-at this [direct loan program] will provide nearly $90 billion in savings that can be used to increase student aid and pay down the deficit. Assuming schools can make a smooth transition into the direct loan program, there shouldn’t be any interruption in students’ access to loans.”
Those opposed to the plan to end lending through the FFEL program say that the direct loan program will eliminate jobs and competition. Republican leaders said that the legislation is a federal takeover of the student loan industry. Some question whether the government can do better than the bank industry.
“Today’s vote was about expanding the size and scope of the federal government through tens of billions of dollars in new entitlement spending and the elimination of choice, competition, and the innovation of the private sector,” Rep. John Kline (R-Minn.), senior Republican on the Education and Labor Committee, said to the press on Sept. 17.
Dr. Mary Harris, chair of the business department, said, “This is not a total takeover of the industry so there will still be some competition.”
“Private lenders will be against it because they will have to lay people off and that’s no surprise,” Harris said. “In theory everything sounds good but it will be interesting to see if it will work as it’s supposed to. It does seem that the government is making things easier and helping more people go to college.”
Now that the House has their student aid bill passed, attention turns to the Senate, who has yet to draft their final version of the bill. “We hope to have a bill marked up this fall,” Bergen Kenny, press secretary for Senator Tom Harkin, said in a phone interview.
“There is a possibility that the Senate will combine this student aid legislation with the highly controversial health care package, making it less likely that it will pass,” Chitty said. If the Senate doesn’t have to combine the student aid bill with health care legislation, it will be more likely to pass, but it still remains unclear if the Senate will have enough votes to pass the bill.”