Possible Reprieve for Lenders

The U.S. Senate began debate Wednesday on budget reconciliation legislation that would shave billions of dollars from the profits of student loan providers and use the funds to expand need-based aid for students. But lenders are banking on an amendment -- likely to come up for a vote today -- that would reduce the cuts to for-profit loan companies by several billion dollars (exactly how many billion is in dispute).

The Higher Education Access Act, as the budget measure (S. 1762) is called, is a wide-ranging bill that would increase the maximum Pell Grant to $5,100 next year and to $5,400 by 2011, and pour billions more into a new "Promise Grant" program for needy students; institute a system of “income-based repayment” for borrowers, capping their student loan payments at a manageable percentage of their income; raise the amount working students can earn without reducing their financial aid awards, and increase the family income level under which a student is automatically eligible for the maximum Pell Grant, among other things.

Like a parallel bill in the House and President Bush's 2008 budget request, the Senate legislation would pay for the various spending increases through a series of cuts in payments to student loan providers. The cuts would total about $18.3 billion, which lenders have decried as significant enough to chase many smaller lenders out of the Federal Family Education Loan Program (though they've done a lot of similar decrying about past cuts over the years).

To back up their assertions, student loan lobbyists were quick to jump on a new analysis by Mark Kantrowitz, publisher of Finaid.org, which concluded: "The proposed subsidy cuts, especially those passed by the House, represent a severe cut in profits for education lenders. The cuts are severe enough that they may leave many smaller lenders unprofitable.... This may be contrary to Congress's intent to focus public dollars on students while still allowing education lenders to retain a reasonable level of profit."

Lenders have been making such arguments for months as it becomes increasingly clear that for the second year in a row, Congress is poised to squeeze billions out of their profit margins. As they have stepped up their lobbying efforts, they have apparently found some sympathetic ears, in the persons of Sens. Ben Nelson (D-Neb.) (home to Nelnet, a leading lender) and Richard Burr (R-N.C.), who plan to introduce an amendment today that would ease the potential pain of for-profit lenders.

Specifically, the amendment would impose a cut of 0.35 percentage points in the "special allowance payments" (or subsidies) that for-profit loan companies like Sallie Mae and Bank of America receive on each federally guaranteed loan they provide, instead of the 0.5 percentage points that the Senate bill would impose. The amendment would bring the subsidy cut for for-profit lenders in line with the 0.35 point cut that the Democratic-sponsored bill would impose on state and nonprofit lenders. Supporters of the amendment said it would ease the cuts to lenders by between $2.5 billion and $3 billion.

"Nelson-Burr is a reasonable compromise that increases need-based aid for low-income families while avoiding increasing loan costs for millions of families and doing irreparable, significant harm to the public-private FFEL program which 8 out of 10 institutions of higher education rely on," Nelson said in a description of the amendment given to reporters. The statement goes on to say that the amendment would still cut $15.65 billion in cuts to lenders, "which would permit lenders to continue to offer borrowers high quality service and a level of valuable discounts through waived origination fees and lower interest rates."

Backers of the amendment insist that although the measure would reduce the cuts to lenders -- and therefore the "savings" produced by the legislation -- by about $2.5 billion, it would somehow not result in any less money being available for students. While the underlying Democratic bill uses as its starting point for Pell Grants the 2007 maximum grant of $4,310, the amendment assumes that Congress will, through its appropriations process for 2008, raise the maximum grant to $4,600, and uses that figure as its starting point.

"Some have speculated that the Nelson/Burr amendment would set aside fewer funds for Pell Grants," a lobbying document circulated by lenders said. "This is misleading: the amendment does not degrade the amount dedicated to Pell Grants, rather uses a different baseline from which calculations are made."

That argument struck some student loan observers as fuzzy math; how, they wonder, can the measures let lenders keep more of their funds without somehow reducing the money available for other purposes in the bill?

"They're assuming that money is going to come into the Pell Grant Program from another source," said Luke Swarthout, higher education advocate for the U.S. Public Interest Research Group. "But you can only spend a dollar once. You can either give it to Sallie Mae or you can give it to students. Whatever other money might come into student aid doesn't change the fact that with this amendment, you've taken money away from students and given it to banks." An analysis by Swarthout concludes that Sallie Mae would gain as much as $800 million over five years as a result of this amendment, while Nelnet would earn an extra $160 million.

An assessment of the amendment's fiscal impact, or "score," produced by the Congressional Budget Office suggests that the measure would reduce funds for the Promise Grants by $4.2 billion over five years, which would appear to challenge the lenders' view that students would not be hurt.

Sources on all sides of the student loan issue predicted that the vote on the amendment, which could come as soon as today, would be close. The lenders clearly see this as their last, best hope to stave off even bigger cuts, and they have cranked up their powerful lobbying machine to bring it about. A Dow Jones Newswire article said that Enzi planned to oppose the amendment because he feared it would unravel overall support for the underlying legislation; if true, opposition from such an influential Republican could doom the measure's chances. But several Democrats are expected to cross party lines to support it.

The back and forth over the potential cuts to lenders was the most significant development on a day in which relatively little else of substance happened once it became clear this morning that the Senate would take up the student aid legislation. That occurred because the Senate's all-night sleepover in its consideration of a Defense Department policy bill ended in a stalemate over a call to wind down the Iraq war, and Democratic leaders pulled the defense bill off the floor.

Democrats, stung by that defeat, had lined up Sen. Edward M. Kennedy (D-Mass.), sponsor of the higher education budget bill, to quickly bring that measure to the floor because it is virtually certain to pass and they wanted a legislative triumph. The measure, drafted with significant input from Sen. Michael B. Enzi (R-Wyo.), the top Republican on the Senate Health, Education, Labor and Pensions Committee, was approved by that panel by a vote of 17 to 3.

Perhaps senators were drained by their Senate slumber party, but Wednesday's discussion about the student aid bill lacked much in the way of drama or sparkle, filled mostly with speeches about the importance of education for American society and the significant ways the legislation would help American families and students.

Although Kennedy and Enzi both vowed during Wednesday's debate that the Senate would take up a companion legislation to renew the Higher Education Act along with the college aid budget measure, it was not clear whether that would be in a matter of hours, days or weeks.

Deliberations over the budget measure continue today at 10 a.m.