WASHINGTON -- Ending one of the fiercest lobbying fights in Washington, Congress voted Thursday to force private commercial banks out of the federal student loan market. The move cuts off billions of dollars in profits in a sweeping restructuring of financial-aid programs and redirects most of the money to new education initiatives.
The revamping of student-loan programs was included in the final health care package. The vote was 56-43 in the Senate, with Republicans unanimously opposed. The House passed the bill later Thursday by a vote of 220-207.
Since the bank-based loan program began in 1965, commercial banks like Sallie Mae and Nelnet have received guaranteed federal subsidies to loan money to students, with the government assuming nearly all the risk. Democrats have long denounced the program, saying it fattened the bottom line for banks at the expense of students and taxpayers.
"Why are we paying people to lend the government's money and then the government guarantees the loan and the government takes back the loan?" asked Rep. George Miller, D-Calif., the chairman of the education and labor committee.
Democrats celebrated the legislation, a centerpiece of President Barack Obama's education agenda, as a far-reaching overhaul of federal financial aid, providing a huge infusion of money to the Pell grant program and offering new help to lower-income graduates in getting out from under crushing student debt. Still, the final bill is less ambitious than the original proposal.
Congressional allies of the student-loan industry attacked the overhaul as an over-reaching government takeover. The legislation substitutes an expanded direct-lending program by the government for the bank-based program, directing $36 billion over 10 years to Pell grants, for students from low-income families.
'Another takeover'
"The Democratic majority decided, well look, while we're at it, let's have another Washington takeover," said Sen. Lamar Alexander, R-Tenn., a former U.S. education secretary. "Let's take over the federal student loan program."
Even as the Democrats' decision to attach the student-loan overhaul to the health care package virtually ensured its passage, banks fought fiercely up to the last minute, prompting some lawmakers, like Sen. Ben Nelson, a Democrat from Nebraska, where Nelnet has its headquarters, to cast their vote against the overall bill.
Although private banks will no longer be allowed to make student loans with federal money, many will continue to earn income by servicing those loans.
The Congressional Budget Office said the direct-lending approach will save taxpayers approximately $61 billion over 10 years. Roughly $40 billion of the savings will be redirected to higher education. In addition, education programs will get an additional $10 billion from the health-care package.
With the new legislation, students will have to take out their loans through their college's financial aid office, instead of using a private bank.
In lobbying fiercely against the overhaul, the private banks argued that it would eliminate jobs, even though the government will hire many of the same banks on a contract basis to service the loans and perform other back-office administration. Furthermore, the banks said that with the government as the only lender, students would not get the same level of service.
