• April 23, 2014

Student-Loan Bill's Windfall Shrinks in New Estimate From Congressional Budget Office

A new analysis by Congressional budget analysts shows that President Obama's proposal to end the bank-based system of distributing student loans would save $67-billion over 10 years, more than 20 percent less than the previous year's estimate.

The estimate by the nonpartisan Congressional Budget Office has both budgetary and political implications for Mr. Obama and Congressional Democrats who had hoped to use the earlier budget-office estimate of $87-billion in savings as the basis for an aggressive round of education spending increases.

The new budget-office projection was eagerly cited by private student-loan providers, who still hold out hope that Congress might abandon any major overhaul of the student-loan system if it believes that the disruption would produce insufficient economic benefit.

"The new CBO numbers underscore the danger of basing major reform primarily on long-range projections," said Conwey Casillas, a spokesman for Sallie Mae, the nation's largest student-loan provider.

Along with confronting the political difficulties raised by the new estimate, Mr. Obama and his fellow Democrats face the possibility the number could pose a real legislative obstacle to their education-spending agenda. That's because Congressional rules make passage easier for a bill, such as the student-aid overhaul, that is judged by the budget office to spend less money than it generates.

The legislation, HR 3221, would end the system of subsidizing banks and other loan companies that distribute federal student-loan money, and instead have colleges and their students get loan money directly from the Education Department. The savings from eliminating the subsidies paid to banks would be used to expand aid to colleges and students.

The House passed its version of the measure back in September, distributing the $87-billion across various education programs. About half would be used to increase the value of Pell Grants, the main federal aid program for low-income students. Other beneficiaries would include students needing low-interest loans, community colleges, and minority-serving institutions.

The Senate is expected to begin its consideration of the bill within the next few weeks.

Changing the 'Score'

The budget office included its estimate of the savings from the student-loan bill in a letter Friday to the Senate Appropriations Committee, setting out its assessments of President Obama's budget recommendation for the 2011 fiscal year, which begins in October. The president's plan would increase the national debt by $9.7-trillion over the next decade, or about $1.2-trillion more than Mr. Obama estimated, the office said.

The letter did not identify any specific reasons for downgrading its previous year's estimate of the savings from the proposed student-loan changes. Obama administration officials, however, have been advising colleges to prepare for the 2010-11 academic year by switching now into the Education Department's direct-lending system. They acknowledge that such voluntary switches would naturally reduce the savings that would be credited to any legislation that later mandates the move.

The cost of Mr. Obama's plan to expand Pell—increasing its maximum per-student value each year by the rate of inflation plus one percentage point—would cost $200-billion over 10 years, far more than the amount obtained from the entire student-loan overhaul measure, the budget office said in its analysis.

That analysis raises new doubts about whether Mr. Obama's plan for eliminating the bank-based system "can pay for all the new spending programs in the bill, let alone just the Pell Grant increases," an industry lobby group, America's Student Loan Providers, said in a written statement.

The budget-office estimate is critical because Democratic party leaders in the Senate believe they have only enough support to pass the measure by using a procedure known as reconciliation, in which a bill that reduces overall federal spending can be approved with a simple majority of 51 votes, rather than the 60 necessary for ending a filibuster.

That means the $67-billion, once it takes effect as the official "score" of the student-loan bill, would represent the maximum amount of new spending under the measure. For now, Congress could adopt the $67-billion figure immediately as the bill's score, or continue to use the old $87-billion estimate, but it must use the new figure once it passes a budget outline for 2011, which is expected to occur in the next month or two.

Senate Democrats, however, have been waiting to act on the student-loan bill until they reach an agreement on health-care legislation. That's because reconciliation is a tool that can be used only once during the yearlong budget cycle, and Democrats needing votes for both health care and the student-loan overhaul may want to draft a reconciliation bill that combines both measures.

Another Plan, From Lenders

Banking-industry lobbyists have tried to further impede the student-loan bill by offering their own alternative that would let the companies keep a leading role in distributing the money to students, while still cutting billions of dollars in subsidies.

The new system proposed by the industry, which would expire after five years, was estimated by the Congressional Budget Office as producing $82.5-billion in savings over 10 years. But after being asked by Democrats to assess the plan if its terms were left in place for the full 10 years, the budget office recently produced an estimate of about $78-billion in savings.

The budget office's new $67-billion estimate of the value of the president's student-aid overhaul is not comparable to either of the estimates of the industry plan, Democrats said, because they are based on different economic assumptions such as the number of colleges already participating in the direct-lending system at the time of the changeover.

"Regardless of which score you use," said Rachel Racusen, spokeswoman for Rep. George Miller, Democrat of California and chairman of the House education committee, "CBO has made this fact clear: Tens of billions of taxpayer dollars are being wasted on subsidies to banks that could be used to help hard-working students pay for college."

Comments

1. atana09 - March 08, 2010 at 09:23 am

Well 67 billion in savings is still a substantial amount worthy of consideration. And although the savings might be lost due to such as Pell grant increases that is a necessary and temporary sacrifice. Due to poor decisions linked to the lobby pressure of the educational debt industry Pells and other non loan aid have not kept up with the inflation of collegiate costs for more than a decade. And that is insufferable for the poorer students especially since that explosion of college costs is closely linked to the rise of the education for debt scheme.

And its quite ironic that Conwey Casillas the representative for SMC is trying to undermine reform via stated concern about long range cost assessments. The industry she represents has propagated a massive bubble, now past some 580 billion in debts, which they have massively over leveraged. To the extent that Casilla's own company was recently downgraded to poor bond status because of their long term mishandling of their cash flow. And these are the people who are trying to criticize long term assessments by the government. The same people who have created a massive speculators bubble which when it blows, and it will happen, will become another financial disaster in an already weakened economy. And all the abusive powers granted to these companies to crush students and families who cannot pay them...will not abate the impending collapse of the edudebt bubble.

The irony of course is the industry that Conwey Casillas shills for only exists because of governmental abrogation and lobbyists co-opting of a system which once did work for the benefit of students and families. And now even though there is a ground swell of public support for reform, they continue to lobby, buy, and mislead in an attempt to keep a massive corporate sugar, cake and champagne binge going. Despite the detrimental costs to higher education and the public. And despite the fact that having made billions of profits by co-opting what should have been a public system-they have brought it to the edge of a disasterous financial cliff. But hey better sacrifice another generation of students (or academic lemmings) so these companies can keep up the rigged game.

2. mush9902 - March 08, 2010 at 11:23 am

That's right.

3. jaysanderson - March 08, 2010 at 11:36 am

I'm for this effort, but I would prefer the administration stop overstating the benefits of their programs. Give us the facts and let us decide for ourselves. The president seems to have a very low opinion of citizens of this country.

4. 11132507 - March 08, 2010 at 01:20 pm

jaysanderson - if you characterize what the Administration is doing as "overstating the benefits," then what about the pro-FFELP opposition, who are using the typical "big bad government monopoly takeover" teabagger scare tactics? I haven't heard any talk so far about student loan death panels, but I'm sure that's next. The biggest problem, in my opinion, of Obama's presidency so far is like most Dems, when Republicans lie and fight dirty, he takes the intellectually sound, emotionally mature high road...and gets the living daylights kicked out of him. So overstate away, I say.

5. rferneyhblog - March 08, 2010 at 04:08 pm

Consider this:
1. ED plans to spend the savings on other things: Pell grants and a whole host of other initiatives. So, from a taxpayer perspective - there is actually no savings at all.

2. ED will borrow from Treasury to make the loans, Treasury will borrow from China. Almost $500 billion additional spending/debt over the next 10 years.

3. ED has already contracted with existing lenders to service these loans. Many billions in service fees every year - forever. Call it subsidy, special allowance, service fees, ... its the same thing.

So, this bill is actually going to COST the taxpayers almost 1 Trillion over the next 10 years.

6. 22288906 - March 26, 2010 at 10:42 am

rferneyhblog,

Your points 1, 2 & 3 are well taken. However, this bill is not going to cost taxpayers almost $1 Trillion MORE over the next decade. The CBO's estimates obviously took the servicing fees into account when determining the savings that direct lending would produce.

The reality is that the banks were being paid fees to produce loans as if the bank was taking the full risk of default -- which was obviously not the case since these were "government guaranteed loans" the banks were making. If the government was the party taking the risk on the loan, why not just make the loan directly, cutting out the excessive risk-adjusted fees that the banks were charging?

That is what has occured here.

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