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

March 07, 2010

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."