POLITICS
12/06/2014 07:30 am ET Updated Dec 06, 2014

Tom Harkin Wants To Take Money From College Students To Pay Reviled Loan Contractors

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An outgoing Senate Democrat wants to take federal money from low-income college students to pay student loan contractors, whose tactics toward borrowers have been criticized by consumer advocates, federal regulators and the U.S. Department of the Treasury.

Sen. Tom Harkin (D-Iowa), chairman of the Senate education committee and the appropriations subcommittee in charge of federal education expenditures, has proposed taking $303 million from the Pell grant program to increase revenues for some of the nation’s biggest student loan specialists, according to a July 24 version of a 2015 fiscal year spending bill now being negotiated by congressional leaders.

Student advocates and congressional aides largely missed Harkin’s move last summer -- partly because the full text of the spending bill wasn’t publicly released until six weeks after Harkin’s subcommittee approved it. They only noticed it in recent days as congressional negotiators work off his bill in the rush to finalize discussions on the federal government’s 2015 spending plans.

The government's spending authority expires Dec. 11. A government shutdown could follow unless Democrats and Republicans reach a deal. Congressional negotiators may eventually decide to spare the Pell program from cuts.

The Pell program is the nation’s largest source of grant aid for college students, according to the White House, and is meant for students from low- and middle-income households. Three of every four students who took out Pell grants during the 2012-13 award year had household incomes of $30,000 or less, according to the Department of Education. Nearly 8.9 million students are forecast to receive on average $3,826 from the program during the 2015 fiscal year, White House budget documents show. The neediest students can receive a maximum of $5,830.

The program has a surplus that the Congressional Budget Office in April predicted will evaporate and turn into a deficit by the 2017 fiscal year, which begins October 2016. Some analysts have said they fear the deficit will come sooner. Harkin wants to use that temporary pot of money to enable the Education Department to increase pay for student loan companies that collect borrowers’ monthly payments.

Student advocates said they’re outraged.

“I am appalled that Senator Harkin would put servicers -- who profit by hundreds of millions of dollars a year -- over the needs of low-income students,” said Alexandra Flores-Quilty, vice president of the United States Student Association. “Taking funding out of Pell and using it to pay private student loan servicers goes directly against the interests of students.”

Harkin has also floated the possibility of taking $2 billion out of the Pell program to use for other federal programs, according to Democratic and Republican congressional aides. Harkin reportedly dismissed concerns that such a move would affect students, according to Politico.

It was unclear Friday whether congressional negotiators were still discussing the $2 billion cut. Student advocates warned that if it were to occur, the Pell program would face a $3.6 billion deficit in the fiscal year beginning next October and the likelihood of deep cuts.

For Harkin, a longtime liberal who retires from Congress in January after a 30-year Senate career, the move risks damaging his reputation as an advocate for college students struggling to afford rising tuition.

“Senator Harkin has built a legacy on being a champion for students trying to afford college. We'd be deeply disappointed to see his subcommittee abandon its support for the Pell grant and jeopardize the aspirations of millions of low-income young people,” said Jennifer Wang, policy director at Young Invincibles, an advocacy organization that represents 18 to 34 year-olds.

Susannah Cernojevich, a spokeswoman for Harkin, didn’t return calls or emails seeking comment. Harkin’s office said negotiations over spending plans were ongoing.

The Education Department, which owns or guarantees nearly 90 percent of the more than $1 trillion in outstanding student loans, outsources the work of interacting with borrowers to companies such as Navient Corp., the former servicing unit of student loan giant Sallie Mae, and Nelnet Inc. The department spent $678 million on loan servicing in the fiscal year that ended in September 2013, budget documents show.

But amid an era of stagnant wages and increasing loan burdens, federal policymakers are concerned that the Education Department’s loan servicers aren’t devoting enough resources to helping borrowers. In the federal government’s main student loan program, nearly a quarter of loans, or 23 percent, are either delinquent or in default, according to the Education Department. The delinquency totals likely would be higher if borrowers weren’t postponing payments.

Sarah Bloom Raskin, deputy treasury secretary, has questioned why the Education Department’s loan servicers have allowed some 7 million borrowers to default on their loans, given the generous repayment plans that exist in the federal student loan program.

The U.S. Department of Justice accused Navient of deliberately cheating as many as 60,000 active-duty troops out of as much as $60 million. Navient neither admitted nor denied wrongdoing.

Consumer groups and student advocates have accused the Education Department’s contractors of misleading borrowers about their repayment options and mistreating them when they request help.

Even President Barack Obama has questioned the companies’ commitment to helping student loan borrowers manage their obligations, when he declared in June that the Education Department would renegotiate its contracts “to make it clear that these companies are in the business of helping students, not just collecting payments, and they owe young people the customer service, and support, and financial flexibility that they deserve.”

Harkin has largely avoided criticizing the Education Department.

Rather than investigate allegations of wrongdoing or punish instances of documented misdeeds -- actions the Education Department has largely declined to take -- the Obama administration decided this year to increase loan servicers’ pay in the hopes that the promise of more money would lead them to improve their treatment of borrowers.

In its annual budget request to Congress, the Obama administration in March requested an additional $42 million to pay the Education Department’s student loan servicers for the 2015 fiscal year. The administration wants Congress to authorize up to $772 million to be spent on loan servicing activities, an increase from past years driven by the skyrocketing growth of federal student loans. Some 40 million borrowers collectively owe $1.1 trillion, nearly double the amount owed in 2008, according to the Education Department.

For the first time in recent years, Congress has to authorize the entire sum that the Education Department can spend on its loan servicers. A 2010 law that annually set aside hundreds of millions of dollars for new, smaller not-for-profit loan servicers so they could snatch business from companies such as Navient and Nelnet was repealed in December 2013.

The Education Department had been using most of that money to pay its larger contractors, bucking the wishes of Congress. For example, in 2013, the department had $386 million available to spend on not-for-profit servicers. Only about a quarter of that, or $99 million, actually went toward smaller firms, budget documents show.

Dorie Nolt, an Education Department spokeswoman, declined to comment.

The Obama administration asked Congress to authorize new spending to replace the loss of the not-for-profit set-aside. It didn’t request that Congress tap funds in the Pell grant program to pay for it.

Enter Harkin.

His solution is to take $303 million out of the Pell program, and give $269 million of it to the Education Department so it could pay its student loan servicers. The money would go to a general pot of funds used to pay Navient and Nelnet, among others.

“It makes no sense to cut grants to students in order to pay loan servicers millions of dollars,” said Chris Hicks, an organizer who leads the Debt-Free Future campaign for Jobs With Justice, a Washington-based nonprofit.

Vincent Morris, a spokesman for the Senate Appropriations Committee, declined to comment.

Student advocates said they’re worried that Harkin’s move will set a dangerous precedent for the incoming Republican-led Senate. They argued that if Democrats are willing to raid Pell funds to pay for other programs, Republicans surely will do the same.

Funding for the Pell program historically has been rocky, especially in recent years. Budget authority has fluctuated from $17.3 billion for the 2006 fiscal year, to $42 billion for 2011, to $28.9 billion for 2014, according to the Education Department.

Pell grants act like an entitlement program, in that eligible students are entitled to funds regardless of the money available. Money unused from a fiscal year create a surplus that’s available for subsequent years; annual deficits, which occur when demand outstrips available funding, are generally covered by funds meant for future years.

At the moment, the program has about a $4.4 billion surplus as a result of unused funding from previous years. Assuming Congress doesn’t alter the amount of money it makes available for Pell grants, the Congressional Budget Office estimates that the surplus will become a deficit by 2017.

If annual deficits persist, and Congress doesn’t make more money available, the federal government would have to curb the amount of assistance available to future low-income students.

“Any cuts to Pell Grants will leave a legacy of failing to support students,” Hicks said of Harkin.

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