One of President Obama’s most ambitious plans for both education and the budget was the transition from a system of government subsidized student loans using bankers as middle men to direct student lending.  But as the Hill notes this morning, the Senate can only move one reconciliation bill until they pass a new budget resolution.  If they try to “fix” health care and don’t pass student loan reform at the same time, it will be another year until they can take it up.

Colleges across the country are already slashing programs and hiking tuition in the wake of state budget crises.  They desperately need the $4.7 billion that student loan reform will bring to them in 2010 alone.

Background

In September, the House passed H.R. 3221, the Student Aid and Financial Responsibility Act  (SAFRA). It put an end to private lending, which the Congressional Budget Office has said will save $87 billion over 10 years.

Anticipating that they might have a rough time getting 60 votes in the Senate, the White House pressed Harry Reid to include student loan reform under the 2009 reconciliation instructions, just as they did health care reform. So SAFRA only needs 50 votes to pass the Senate. But that also means that when the Senate deals with health care reform, they must also deal student loan reform — or it gets put off until the next year’s budget reconciliation.

Colleges across the country can’t wait another year for relief. On March 4, there were student demonstrations in 30 states — 100 in California alone — protesting tuition hikes and program cuts.

Enter the Lobbyists

Tony Podesta, Jamie Gorelick and other lobbyists working on behalf of the big student lenders such as Sallie Mae, Citicorp, JP Morgan and BofA, want to kick the can down the road.  Working through Senators like Blanche Lincoln and Mark Pryor, they claim that moving to direct student lending would be too chaotic before next year — which coincidentally happens to guarantee the student lenders another year and $8.7 billion in government-subsidized profits in “middlemen” fees.

But the government’s Direct Lending program is already up and running at the colleges that are responsible for 96% of all the student loans in the country, and originated 26% of all federal student loans last year.  The Department of Education has a program ready to make the switch, and collges will be able to use the same on-site system currently used to administer Pell Grant scholarships.

Now that most student lenders are immediately selling the bulk of their loans to the government anyway, the need for their services as originators is questionable at best. Sallie Mae originated $21.7 billion in government subsidized loans last year — but also sold $20.5 billion in loans to the government.  The GOP claim that the student lenders perform an important function by using their own money and sparing the government’s resources has long since ceased to be true.

Furthermore, the “Sallie Mae compromise” being pushed by lobbyists — which Bob Casey recently submitted for a CBO score — would have the government buy up all of the loans  that lenders originate within 100 days. (See Stephen Byrd’s Five Reasons To Opppose the Community Proposal)

So what is the private student lending industry doing for their $8.7 billion a year?

Well, Sallie Mae used their government money wisely:  they spent $3.48 million on lobbying in 2009, and $3.2 million in 2008 to protect their sweet deal.  Industry PACS and employees also made $2.1 million in political contributions.

They’re also really good at jacking up penalties and fees before they sell loans in default to the government, often doubling the amount of the original loan — which students are then on the hook for. (See David Brancaccio’s excellent program on forbearance for Now PBS.)

And according to the New York Times, “President Bush’s budget reports that in 2006 for every $100 lent by private lenders, the cost to the government of subsidies, defaults and other items was $13.81, while the same amount lent through the direct loan program cost the government $3.85.”

And then there’s the much-touted “default aversion” services they provide.  But as Ben Miller observes, “default rate among students already receiving these services in the FFEL Program, is much higher than students in the Direct Loan Program that do not get this support.”

The Fictional 35,000 “Lost Jobs” Claim

In addition to the claim that a switch to direct student lending would be too “chaotic,” lobbyists are fear-mongering about 35,000 job loss — a figure the Hill article quotes.

But as Pedro de la Torre writes in the Nation, that figure comes from a survey conducted by the National Council of Higher Education Loan Programs — an association for student loan companies.  The estimate claims that there are 30,000 jobs in the entire industry, and then throw on another 5,000 in associated jobs for good measure.

“Rather than indicate expected job losses, the survey reflects the number of individuals employed by FFEL organizations,” writes de la Torre. “No one, not even the lenders, expects that all the people currently employed by a participating lender will lose their job.”

Tim Ranzetta of the independent Student Lending Analytics estimates that more realistically,  “the number of U.S. based jobs related to federal student loans is likely to range from a net increase of 300 jobs to a net loss of 4,750 over the next several years.” Pedro de la Torre puts the number “between 170 net US jobs lost under the worst interpretation, and 1,870 US jobs gained under the best.”  And that does not factor in the jobs that would be saved or created by money going to state education programs with the passage of SAFRA.

Student lending reform could have passed the Senate long ago, but because it had to wait on health care, the lobbyists have had plenty of time to chip away at the Senate and make inroads for their “compromise,” which would carve out billions to preserve their role as expensive and unnecessary middlemen.   In addition to Lincoln and Pryor, they are targeting Bob Casey and Arlen Specter of Pennsylvania, Ben Nelson of Nebraska, Tom Carper of Delaware and Tim Johnson of South Dakota  — as well as others from states with powerful student lending interests.   The complete list can be found here.

If  SAFRA passes, many of the savings that result from this transition will immediately begin to flow to programs like early education, K-12 and community college reconstruction and modernization, and ensuring that more students graduate with the skills they need to perform high wage jobs in high-demand industries. Starting in 2011, SAFRA will also increase both need-based Pell grants and Perkins loans.

Nancy Pelosi and Harry Reid need to act quickly to pass a reconciliation-friendly version of SAFRA through the House that will meet the Byrd rule, so that the Senate can pass it along with any other bills in reconciliation. Thankfully, this means the ACORN provision goes bye-bye.

The Students, Not Banks campaign will feature a petition to Harry Reid, Nancy Pelosi and members of Congress, asking them not to forget about student loan reform this year.

It will also focus on calling wavering Senators, asking them to commit to supporting students — not bankers. Students and educators from across the country are invited to blog on FDL’s reader blog, the Seminal, about what is happening to their schools and their communities in the wake of the budget.  These diaries will be featured on FDL’s front page.

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