A bipartisan group of senators and house representatives, most
notably Sen. Ted Kennedy, D-Mass., have unveiled a proposal to
increase federal student aid by overhauling the way in which
student loans are distributed.
If passed, the legislation, which is being proposed by Sen.
Gordon Smith, R-Ore., Congressman Tom Petri, R-Wisc., and
Congressman George Miller, D-Calif., along with Kennedy, would all
but eliminate the role of lenders in student loan distribution,
instead drawing funds directly from the U.S. Treasury to issue
loans.
The proposal, dubbed the Student Aid Reward Act or the STAR Act,
comes as a response to “the explosion of cost for higher
education.” Its passage “would be a win for students,
colleges and tax payers and this is obviously a critical
time,” Kennedy said Tuesday to a group of student reporters
over the phone.
Under the current system, students receive funds from major
lenders that are guaranteed a minimum rate of return regardless of
the interest rate paid by the student. The federal government is
then responsible for making up any difference between the
students’ interest rates and the lenders’ minimum rates
of return, said Jason Delisle, a Petri office legislative
assistant.
The STAR Act, if passed, would weaken the role of major lenders
such as Sallie Mae, instead providing students with loans directly
from the U.S. Treasury, leaving students to pay back loans directly
to the federal government. The responsibilities of loan
administration would be contracted out to major lenders.
“There’s an opportunity to help by taking a really
hard look at these programs and eliminating waste,” Petri
said.
Distributing loans with the help of lenders is an outdated
approach, as advances in technology have made data processing
simple and cheap, Petri said.
According to the Congressional Budget Office, the proposal would
generate more than $17 billion in additional college scholarship
aid over the next 10 years.
“You could save the whole social security system with that
much money,” Petri said.
The likelihood for the proposal to pass, however, has been met
with skepticism.
“The federal government has just historically not favored
direct loan programs over loan guarantees because the U.S.
government just doesn’t compete to any significant degree
with the banking industry,” said Thomas Schwartz, a political
science professor. “We don’t take over the banking
business.”
“Republicans especially loathe to create new bureaucracies
that create new programs, they’d rather have private sectors
to do it,” Schwartz said.
Kennedy said that the proposal’s passage depends heavily
on student support.
“What the students have to do on campuses is to develop
activities that will persuade colleges to go with it,”
Kennedy said, referring to an increase in campus activism focused
on student aid. “You can let the president down at the White
House know that this is something you guys are interested
in.”
Universities have, for the most part, opted against direct loan
programs in the past because major lenders provide financial
incentives to these institutions of higher learning for their
business, Petri said.
The prospect of a direct student loan program is expected to be
met with heavy opposition from major lenders.
“The banks and Sallie Mae are a very formidable
group,” Kennedy said. “We can’t underestimate the
power of the other side.”
The proposal will be a major part of a larger higher education
act that will be introduced to Congress in the coming months.