The New York Times and Washington Post are reporting that an agreement has been reached to include a federal takeover of student loans as part of the forthcoming reconciliation package. The New York Times reports:
Democratic Congressional leaders struck a tentative agreement on Thursday that breathes new life into President Obama’s proposed overhaul of federal student loan programs. The deal would bundle the bill into an expedited budget package along with the Democratic health care legislation, which would allow for both measures to be passed by the Senate on a simple majority vote.The bill would end government payments to private, commercial student lenders, leaving the government to lend directly to students. It would also redirect billions of dollars to expand the Pell grant program for low-income students, and to pay for other education initiatives.
The Washington Post notes:
Both proposals, stuck in Congress for nearly a year, are gaining new momentum as Democrats contemplate facing voters in November without having delivered on any of Obama’s major policy objectives.
Key Senate Democrats initially balked at combining the health-reform bill with a measure that overhauls the nation’s student-loan program, but on Thursday they had warmed to the idea.
But, as Heritage wrote last year, this federal takeover, originating with the House SAFRA bill, would be a bad deal for students and taxpayers:
[The proposal] would end the FFEL program in 2010, shifting all student aid lending into the federal government’s Direct Loan program and the Federal Direct Perkins Loan program. This proposed change is premised on the belief that ending subsidies to private-sector lenders will reduce government costs and that the federal government will administer student loans more efficiently than private lenders do.
In July, CBO Director Douglas W. Elmendorf acknowledged that the original CBO projection did not adjust for the cost of market risk of increasing defaults that the federal government will assume with the shift to direct lending. In addition, there is a danger that taxpayers’ costs could balloon if the federal government proves less efficient in administering and collecting loans than current private-sector lenders, which have an incentive to administer and collect loans efficiently in order to maximize profits.
There are also concerns that the elimination of FFEL and shift toward direct loans would lead to worse service for borrowers. Right now, college students have the opportunity to originate loans with the federal government through the Direct Loan program; however, most borrowers choose to take loans from the private-sector providers. If the federal government is given responsibility for making and administering all loans, there the quality of service in loan administration could be poor, presenting challenges for borrowers and colleges.