Congressional Democrats and the Obama administration on Thursday outlined their final agreement on legislation to overhaul the government's student-loan system, with the savings providing annual inflation-adjusted increases in the Pell Grant and billions of dollars in additional aid for higher education.
After months of delays, the proposal was approved by Democratic leaders as part of a strategy to help ensure passage of President Obama's health-care-reform legislation. The House of Representatives is expected to approve the combined student-aid and health-care plan this weekend, followed by the Senate.
Democrats celebrated the student-loan agreement as a victory for colleges over loan companies. Those private lenders had lobbied Congress for years, right up through this final week of deliberations, in a bid to preserve elements of a program that has provided them with hundreds of billions of dollars in federal subsidies over more than four decades.
"We are choosing to spend scarce education resources on students and families," said Sen. Tom Harkin of Iowa, chairman of the Senate's education committee, "and not on subsidies to big banks and Sallie Mae."
The legislation would end the bank-based system of distributing federally subsidized student loans, and instead would have the Education Department give all loan money directly to colleges and their students.
Many private loan companies have already abandoned the bank-based system, prompted both by tougher economic conditions and the seeming inevitability of the legislation over the past year. And almost all of the nation's colleges are either using the Education Department's direct-lending method or have taken steps to make the transition.
But Sallie Mae, the nation's largest provider of student loans, has fought to the end. As late as Tuesday, it bused about 300 employees of its Pioneer Credit Recovery debt-collection division from operations in upstate New York to protest outside the Buffalo offices of two Democrats, Sen. Kirsten Gillibrand and Rep. Louise McIntosh Slaughter.
Company officials have said the bill will force worker layoffs while costing taxpayers more in the long run, through effects that include lower-quality debt-collection efforts.
$36-Billion for Pell Grants
The agreement announced on Thursday by Democrats, however, included an estimate from the nonpartisan Congressional Budget Office showing the elimination of the bank-based system and its subsidies will save the government $61-billion over 10 years.
The biggest chunk of that estimated savings, $36-billion, would be used to increase the maximum Pell Grant (see chart). That maximum, now scheduled to reach $5,550 in the coming academic year, would increase by the rate of inflation over most of the next 10 years. The Obama administration had asked Congress to approve an annual increase equal to the rate of inflation plus one percentage point. The final agreement eliminated the additional percentage point and delayed the start of the annual increases until 2013.
Even with the additional money, it's not clear that Congress has set aside enough money to meet its promises under the Pell Grant program, as rising college enrollment is predicted to drive up demand. Congress approved a $19-billion budget for the Pell Grant program in the last fiscal year, and another $17-billion in the economic-stimulus measure approved last year. And yet more than $13-billion of the amount contained in Thursday's agreement would be dedicated to paying off accumulated budget shortfalls in the program.
The final agreement also includes $255-million a year to help historically black colleges, matching language in the version of the bill approved last September by the House of Representatives. The agreement also includes $750-million over five years for College Access Challenge grants, which support states and other governments in efforts to prepare more low-income students to enroll and succeed in college, down from $3-billion over 10 years in the House version.
And despite suggestions last week that money for community colleges would be cut altogether, the bill includes $2-billion over four years to help two-year institutions. The House version had $10-billion for that purpose.
The Democratic bill also includes $1.5-billion over 10 years to finance the Obama administration's proposal to increase assistance to borrowers eligible for income-based repayment of a federally subsidized student loan by limiting their mandatory monthly payments to 10 percent of discretionary income, down from the current 15 percent, and by forgiving their loans entirely after 20 years, instead of the current 25 years. The House version did not include any money for those provisions.
The bill eliminates $9-billion that had been approved in the House version to reduce the interest rate on federally subsidized loans in 2012-13 and subsequent years. That rate is now due to drop to 4.5 percent for the 2010-11 academic year and 3.4 percent the following year, but then rise to 6.8 percent after that.
The compromise reached Thursday also eliminated a provision in the House version to spend $8-billion on early-childhood-education programs.
As had been the case throughout the past year, the agreement on the student-loan bill was overshadowed nationally by the accompanying agreement on the health-care legislation. The health-care bill has been the signature legislative priority of Mr. Obama.
After the House acted last September on the student-loan bill, the initiative was held up in the Senate by the recognition that it could win approval only under special rules for "budget reconciliation" measures. Under that process, a measure that reduces total federal spending can pass the Senate with a simple majority of 51 votes rather than the 60 votes needed to end a filibuster.
And because the reconciliation process can be used only once in this year's budget cycle, Democrats held back the student-loan bill while they finished work on the health-care bill, in the event that both measures needed the reconciliation process and would therefore be merged into one bill. That is how the final strategy developed this week.
During those months of waiting, the Congressional Budget Office revised its projection of savings under the student-loan bill downward, from $87-billion last year to the $61-billion estimate this week, in part because so many colleges have now voluntarily left the bank-based system.
And the administration and Democrats agreed to take another $9-billion of the bill's estimated savings to help make the combined package with the health-care bill meet the budget-reconciliation requirement of a net reduction in federal spending.
Loan companies still fighting the legislation said that the $9-billion transfer is another example of money that the Democrats have cost college and students by refusing to accept the lenders' suggestion of an alternative plan that would have reduced but not eliminated federal subsidies to lenders.
"Should students be paying for their neighbor's medical costs?" the industry lobby group America's Student Loan Providers said in a statement. "Separate consideration of student-loan reform is imperative to ensure that legislation that minimizes job losses and reinvests savings in higher education can be considered."
Mr. Harkin put the blame back on the banking industry and its mostly Republican allies, saying their threat of a filibuster in the Senate forced Democrats to use the slower budget-reconciliation process.
Democrats, partly to address the industry's arguments, also included $50-million in their plan to help colleges make the transition to the direct-lending system, and $50-million to help loan companies avoid job losses.
And yet another provision appeared specifically designed to ensure the support of a key Democrat, Sen. Kent Conrad of North Dakota, chairman of the Senate Budget Committee. That element would give a specific right to the Bank of North Dakota to issue federally subsidized student loans, meaning that it would be the only lender still collecting subsidies for issuing federally backed student loans.
The Bank of North Dakota is a state-owned lender that Democratic aides described as representing the type of nonprofit entity they want to encourage. But later in the day, after growing criticism, Mr. Conrad issued a statement saying he wanted the language eliminated.
"Often, facts are the first victim in an overly heated partisan environment," he said. "And rather than see the excellent reputation of the Bank of North Dakota damaged, I have asked to have the provision removed."
Libby Nelson contributed to this article.