How Special Interests Crippled Education Reform

When Congress passed the health care bill, with it came a momentous education reform. Signed into law by President Barack Obama, its intention was to help relieve the ever-rising burden imposed by soaring college fees and tuition rates.

This reform was funded by ending a government subsidy to big banks in the business of student loans. Under the previous system, the government ensured that student lenders would always make money; if students defaulted on their loans, the government would pay the money to the student lenders. In a CBS 60 minutes report, think tank expert Michael Dannenberg characterized this as:

a socialist-like system,” he says. “It’s not as if this private entity is assuming any risks. No, no, no. The law makes sure that this so-called private entity has virtually no risk.”

Unfortunately for students, this lucrative government-funded industry did relatively little to benefit them. Take a look at Sallie Mae, perhaps the biggest player in the student loan industry. Sallie Mae’s loans carry a variable interest rate, which right now appears to be 10.55%. In addition it charges a disbursement fee of 3%; other banks have similar fees.

Such practices can make already high student debt astronomical. Take Brit Napoli, who originally borrowed $38,000. According to the CBS report, that loan has ballooned to $71,000. College graduate Lynnae Brown’s $60,000 loan has jumped to an astounding $262,383 after she fell behind in payments.

Education reform was intended to help people like Brit Napoli and Lynnae Brown. Subsidies for big banks and corporations like Sallie Mae were ended. Money for poor people to attend college was expanded. Money was even saved by ending these government subsidies.

The special interests fought every step of the way. They lobbied. They waved cash at Senators. They argued that their jobs were at stake (therefore the bill would “take away jobs”), and that teenagers deserved more choices. In the end, they succeeded in vastly weakening the original ambitions embodied in education reform.

The original bill envisioned a rise in maximum Pell Grants – federal money for low-income students to attend college – from $5,350 today to $6,900 in 2019. Interest on federal student loans was to remain relatively low: 3.4% past 2012 (compare that with Sallie Mae’s 10.55%). Money was to be invested in early childhood education, community colleges (the American Graduation Initiative) and a College Access and Completion Fund. Federal Perkins loans were to be reformed “to reward institutions for their success in graduating low-income students.”

By the time special interests were done with the bill, almost all of this was gone. That increase in Pell Grants – it’s now only up to $5,975, a paltry $62.50 per year. In other news, Harvard College increased its tuition by $1868 for the 2010-2011 year (for a total cost of $50,724).

As for federal student loans: in 2013 the interest rate goes right back up to 6.8%. Investment in community colleges was cut by 80%. Reform of Perkins loans, investment in early childhood education, and the College Access and Completion Fund were scrapped altogether.

This is not to say that education reform has been a miserable failure. Without it, things would be far worse. The maximum Pell Grant would have decreased to $2,150 – or 4.2% the cost of attending Harvard for one year. Community colleges still get some money. Investment in historically black colleges hasn’t been cut. The government will no longer protect lenders who prey on unsophisticated students.

But boy did the special interests succeed in gutting a wonderful bill. The saddest part, moreover, is that their efforts were all pointless. All the lobbying, all the money thrown at Senators like Ben Nelson (Neb.) and Kent Conrad (ND) – it only served to delay the bill. The government subsidies which Sallie Mae so desperately protected are gone. In the end, the only thing the special interests were able to do was make college more unaffordable for millions of poor Americans.



A Close Call With Education Reform

Several months ago I wrote about the Student Aid and Fiscal Responsibility Act, a bill which aims to make college more affordable.

The bill does this through several mechanisms. Firstly, it expands federal Pell Grants, which are government grants to low-income college students. These individuals would not be able to attend college without such types of aid (although an average Pell Grant these days would cover barely more than one-tenth the cost of attending a place like Harvard). The bill also sets Pell Grants to rise year after year, in line with inflation. President Barack Obama perhaps best explains the significance of this reform:

...we are also changing the way the value of a Pell Grant is determined.  Today, that value is set by Congress on an annual basis, making it vulnerable to Washington politics.  What we are doing is pegging Pell Grants to a fixed rate above inflation so that these grants don't cover less and less as families' costs go up and up.  And this will help prevent a projected shortfall in Pell Grant funding in a few years that could rob many of our poorest students of their dream of attending college.  It will help ensure that Pell Grants are a source of funding that students can count on each and every year.

Unfortunately, if the bill does not pass, this year's Pell Grants will be cut by more than half. In a bad recession and with ever-rising college tuition prices, this would severely impact a large number of Americans. Many individuals seeking to better their lives through college would be deeply hurt. Some might be forced to drop out. Others might have to add on yet more crushing student debt, forced to take exorbitant loans from private lenders.

The good news is that the Student Aid and Fiscal Responsibility Act also reforms the system of student debt. I previously wrote that under the current system:

...the federal government encourages banks to loan money to students. These loans are guaranteed and subsidized by the government.

Unfortunately, private banks are not in the business to help students. Many private student loans can be compared to sub-prime mortgages; they charge exorbitant interest rates, add numerous fees (e.g. the origination fee), and often take advantage of vulnerable, low-information customers. Moreover, under Republican banking reforms, student debt cannot be wiped away through bankruptcy.

Federal loans are different. Because the government is not out to make a profit, government loans (e.g. Stafford loans, Ford Direct student loans) generally carry lower interest rates and no fees.

Such a change, moreover, would reduce the deficit. The federal government would no longer refund private lenders if students defaulted, saving about $87 billion.

A bill which makes college more affordable, reduces student debt, and screws over the banks - it sounds too good to be true. What mad creature in Washington wouldn't support such a reform?

There are, in fact, two such creatures. Firstly, a number of Republican oppose the Student Aid and Fiscal Responsibility Act because of philosophical concerns. The reform substantially expands the role of government in education, which goes against the tenets of conservatism.

Secondly, banks and private lenders oppose the bill, for obvious reasons. These special interest groups have mounted an intense lobbying campaign, arguing that they can give more choices to 18-year-olds. They also give Senators something rather more important than choices: money.

A number of senators responded to this incentive. At least six Democrats - Bill Nelson (Fl.), Tom Carper (Del.), Blanche Lincoln (Ark.), Jim Webb (Va.), Mark Warner (Va.) and Ben Nelson (Neb.) - wrote a letter expressing opposition to the bill because of job losses by banks. Yesterday Senator Kent Conrad of North Dakota attempted to kill the bill, arguing that it did not fit budget reconciliation requirements. As of Thursday morning education reform appeared in trouble.

By the evening, however, a determined push by more supportive Democrats ended in progress for the law. Under the tentative agreement, it will be passed along with health care reform under Senate reconciliation.

Education reform is still by no means certain. There is still much time for banking lobbyists to kill reform with nobody noticing. With the public inattentive, a failure would have very little political consequence.

Yet a failure would have dramatic real-life consequences. The costs of college would continue to rise inexorably. Government education grants would be cut in half. Private student lenders would continue to prey upon unsophisticated teenagers, burdening them with astronomic, unfair loans. Millions of Americans would be left unable to attend college - unable to reach the American Dream.

This bill would not end these problems - it would not address the fundamental catalysts behind ever-rising college tuition. But perhaps, if it survives the assault by the banking community and becomes law, it will represent a beginning.

P.S. If you as the reader support the Student Aid and Fiscal Responsibility Act, please call your senator, briefly voice your support for this reform, and go on with your day. Senators listen to the calls of their constituents. It is high time college became less expensive and more affordable, and a tiny step like this may yield urgent reform. Their numbers can be found at this useful site (although its purpose is somewhat different from education reform).




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