WASHINGTON -- On Tuesday, congressional Democrats announced plans to introduce legislation that would extend the current low interest rates on government-subsidized student loans, responding to the major public relations push from President Barack Obama. But while the issue has ginned up cable news chatter and drawn attention to a host of grassroots student debt relief efforts, it is a relatively minor front in the administration's college affordability battle. In 2010, Obama took a much bolder and largely overlooked step, boosting direct aid to low-income students by eliminating $60 billion in federal money given to banks to provide loans to students.
Consumer advocates had been urging Obama's student-lending reform for decades, but the bipartisan lobbying clout of student loan servicing giants like Sallie Mae had prevented legislation from going anywhere in Congress. Today, nearly two years after the law passed, education access advocates have another target: relief for the millions of graduates drowning in debt. Tackling that problem involves another bruising political battle with banks -- and the White House has instead chosen to focus on affordability programs.
While Republican frontrunner Mitt Romney has publicly supported Obama's plan to prevent the interest rates on federally subsidized Stafford loans from jumping to 6.8 percent from their current level of 3.4 percent, congressional Republicans and conservative interest groups are criticizing the administration for making a mountain out of a molehill. Conservative economics think tank American Action Forum has emphasized that the higher rate would only cost an average of $1,000 more in debt per student over the term of the loan, or roughly $7 a month per student in future payments.
Consumer groups contend that $7 a month is still better than nothing, especially in an election year with low prospects for substantive legislative action, but some of the administration's allies acknowledge that the issue sounds bigger than it actually is.
"From a really wonky policy perspective, I don't think the interest rate piece is a very big prize, but it is a great opportunity to talk about education affordability," said Amy Laitinen, a former policy adviser in Obama's Department of Education who now works as a senior analyst for Education Sector, a nonprofit think tank.
Nevertheless, Obama's 2010 overhaul was a major policy accomplishment. For decades, private lenders like Sallie Mae received massive subsidies from the federal government in exchange for issuing loans to students. Sallie Mae did the actual lending to students, but taxpayers guaranteed the loans against default. If students repaid everything on time, Sallie Mae made a profit. If students couldn't repay, the government -- not Sallie Mae -- took the loss.
"The banks were making money for doing nothing," says Jack Jennings, a former longtime Democratic congressional education staffer. "They wound up with students' names as future customers with no money risk at all."
This system of public losses and private gains worked very well for Sallie Mae shareholders and executives. CEO Albert Lord reaped enormous pay packages, including a year in which he made over $40 million, while the company paid out lucrative dividends on its stock every quarter. All this overhead made private banks a very expensive middleman for the federal government. And for years, consumer advocates pleaded with lawmakers to stop subsidizing Lord and his cohorts and instead issue loans directly to students -- or, better yet, simply offer them direct grants. But reform languished for decades, due in part to Sallie Mae's lobbying blitz.
"They were super powerful," said Laitinen. "The banking industry is bipartisan. They support everybody. It certainly pissed a lot of people off."
The Obama administration only secured student loan reform by attaching it to the health care reform package, using a special legislative maneuver known as reconciliation, allowing the bill to be included with just 51 votes instead of the 60 needed to clear a filibuster. Even that tactic might have failed had the timing not been right: While major student lenders like Sallie Mae and NelNet were not closely involved with the housing market, the financial crash of 2008 had lowered the financial industry's status on Capitol Hill.
"For once, the lobbyists were not able to prevail," said Jared Bernstein, a former economic adviser to Vice President Joe Biden who is now a senior fellow at the nonpartisan Center on Budget and Policy Priorities. "But you have to realize that this was a time when the banking sector had played an integral role in inflating a terribly destructive housing bubble and was in the process of being bailed out. So the idea of ending this middleman role here in the college education space was more well-received than it would have been in other circumstances."
With $60 billion in bank subsidies cut out of the process, $36 billion was redirected to Pell Grants -- money for low-income college students -- alongside another $2 billion to boost community college programs.
"We had been working on that for maybe 15 years," said Gary Kalman, who directs the federal legislative office of the U.S. Public Interest Research Group. "Moving those lender subsidies, which were a complete waste, and getting them into Pell Grants -- to us, that was a big step in terms of what government can do to help students afford college."
That legislative packaging for the reform is often overlooked in Republican demands to repeal Obamacare. If the Supreme Court strikes down the entire health care law, the government will have to slash aid to low-income students in order to reestablish government's lucrative relationship to loan-servicing corporations.
Democrats -- particularly those active in Obama's reelection campaign -- are taking the opportunity to cite policies they've tinkered with on behalf of college students over the past three years: extending Income-Based Repayment, a program that qualifies some 600,000 students to repay their loans in proportion with their salaries; extending the American Opportunity Tax Credit, a measure that allows families below a certain income threshold to write off $2,500 annually per student in college; and preserving the Pell grant maximum. This marketing effort was on display Monday, with Sen. Tom Harkin (D-Iowa) trumpeting these policies as a win for students on a conference call organized by Obama for America.
Obama himself made a similar case Tuesday in an address to college reporters. "We've extended Pell grants to 3 million more students, and we signed a tax credit worth up to $10,000 to help middle-class families cover the cost of tuition," Obama said.
The Income-Based Repayment expansion, for example, was heralded last fall by the administration as part of its broader "We Can't Wait" campaign. The tweak allows future graduates to consolidate their federal loans at a slightly lower interest rate, and allows graduates to pay 10 percent of their discretionary income over 20 years (down from 15 percent over 25 years). Despite the administration's fanfare, IBR only expanded upon a program that dates back to the 1970s and doesn't apply to those who have already graduated.
But higher education experts caution against too much jubilation in a political environment obsessed with austerity. A full $20 billion from the $60 billion in banking savings went to deficit reduction as a concession to Republicans.
"The increases in the Pell grant, which were not fully funded, were relatively anemic," says Mark Kantrowitz, who runs the website finaid.org. "But that's at least better than further cuts."
Pell grants, the largest source of federal financial aid, are specifically targeted to low-income students. "This is an election year," says Kantrowitz. "There are more proposals now that benefit middle-income families than low-income families because they're [middle-income families] more likely to vote." Last year, after a congressional budget standoff and a near-government shutdown, Obama agreed to tweaks that ultimately cut Pell grants by between $1,100 and $1,700 for about 14 percent of recipients.
Despite the administration's current focus on improving federal programs, student loan activists are more focused on the private-sector market. Federal loans max out at $3,500 per year, but graduates complete college with an average of $25,000 in student debt. The remainder is from private banks.
"That's something the president hasn't weighed in on, and I hope that he will," said Laitinen. "The private student loans are really difficult. The interest rates on those are similar to credit cards, but at least with a credit card, you can declare bankruptcy if you're just drowning in debt. You can't even discharge the private student loans in bankruptcy ... If I were giving advice and people were considering taking out a private student loan, I would say put it on your credit card so you can at least declare bankruptcy if it becomes untenable."
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