WASHINGTON Ending one of the fiercest lobbying fights in Washington, the Senate voted Thursday to force private commercial banks out of the federal student loan business, cutting off billions in risk-free profits in a sweeping restructuring of financial-aid programs that was included in if overshadowed by the health care package. The House was expected to concur later Thursday.
For 45 years, commercial banks like Sallie Mae and Nelnet have made loans under the bank-based loan program, receiving guaranteed federal subsidies to loan money to students, with the government assuming nearly all the risk.
Democrats have long denounced the program as a form of corporate welfare that fattened the bottom line for banks at the expense of students and taxpayers.
There is no service that is being provided by the banks any more, said Representative George Miller, Democrat of California and chairman of the education and labor committee. The lenders ran out of services to provide to justify their costs.
The legislation substitutes an expanded direct-lending program by the government for the bank-based program, directing $36 billion over 10 years to Pell grants, which are aimed at students from low-income families.
Overall, the Congressional Budget Office said, the new lending approach will save taxpayers approximately $61 billion over 10 years. Roughly $40 billion of the savings will be redirected to higher-education. In addition, education programs will get an additional $10 billion from the health-care reform package.
But allies of the student-loan industry attacked the overhaul as a government takeover of the federal student loan business.
The Democratic majority decided, well look, while were at it, lets have another Washington takeover, said Senator Lamar Alexander, Republican of Tennessee and a former federal education secretary. Lets take over the federal student loan program.
The student-loan legislation, a centerpiece of President Obamas education agenda since he took office, was approved by the Senate Thursday afternoon, by a vote of 56 to 43, with Republicans unanimously opposed. The House, which already approved the legislation on Sunday, was expected to give it final approval later Thursday. .
Even as the Democrats decision to attach the student-loan overhaul to the healthcare package virtually ensured its passage, the banks fought fiercely up to the last minute, prompting some lawmakers like Senator Ben Nelson, Democrat of Nebraska, to cast their vote against the overall bill.
And while Democrats and the White House hailed the legislation as the most far-reaching overhaul of federal financial aid programs in a generation, the final bill is far less ambitious than the administrations original proposal.
For individual students, the increase in the maximum Pell grant to $5,900 in 2019-20 from $5,550 for the 2010-11 school year is minuscule, compared with the steep, inexorable rise in tuition for public and private colleges alike.
The administration also scrapped $8 billion in proposed spending on early-childhood education. And it mostly erased a $12 billion American Graduation Initiative, which was announced with fanfare in the fall as an effort to bolster the workforce by doubling the nations college-completion rate.
Community colleges, slated to receive $10 billion under the administrations original plan, will instead get just $2 billion for job training.
Im disappointed, said Eduardo Padron, the president of Miami Dade College, one of the nations largest community colleges. For the first time, we had a president who understood the importance of community colleges, and we were validated and recognized for our role in opening the doors of higher education. The fact that we will not be able to fund that to the extent we wanted is very sad.
The private banks had lobbied fiercely against the overhaul, arguing that it would eliminate jobs, even though the government will hire many of the same banks on a contract basis to service the loans and perform other back-office administration.
But while supporters praised the shift to direct lending as a major achievement, the weak economy and the protracted legislative process conspired to gut much of the administrations ambitious education package.
The original proposal stood to save $87 billion over 10 years. But as the Senate delayed in taking up the legislation, colleges and universities began shifting to the direct lending program, realizing the savings to the Treasury up front and cutting the amount of money available for future spending. At the same time, an increase in the number of Americans enrolling in college and seeking financial aid, as a result of the recession, raised the projected costs of the enhanced Pell grant program.
In addition, to comply with the complex budget reconciliation rules, some of the savings from the education changes had to be redirected to pay for parts of the health care legislation.
The bill includes some landmark changes, such as automatic increases, tied to inflation, in the maximum Pell grant award.
But for individual students and their families, the student-loan legislation will not have a profound impact.
There will be some changes; they will have to take out their loans from the colleges financial aid offices, instead of using a private bank. And they will see very small increases in the amount of the maximum Pell grant they can receive.
But because college costs are rising so quickly, the maximum Pell grant $5,550 for the next academic year now covers only about a third of the typical cost of attending a public university, compared to three-quarters in the 1970s, when the Pell program began.
It's thanks to this type of financial aid that I'm in college and its good to see that President Obama cares about college students and its good to see that we now get the loans directly through the government rather than subsidizing corporate welfare queens. 
