By Charles L. Westmoreland
Last Tuesday, in the midst of a U.S. Senate war over President George Bush’s proposed $948 million budget cut to higher education programs, Sen. Edward Kennedy (D-Mass.) offered the Student Aid Reward Act, a measure he said would give students the resources they need to attend college with rising tuition.
“Today was an important day and it’s time we … try and do something about the explosion of higher education costs,” he said.
Kennedy said the Congressional Budget Office estimates the STAR Act will generate more than $17 billion in additional college scholarship aid without raising taxes.
“This is a win for students, a win for colleges and a win for taxpayers … at a critical time when tuition is exploding,” he said.
The STAR Act encourages colleges to be a part of the Direct Loan Program, a federal program that provides the capital for student loans by deducting money from the U.S. Treasury, which Kennedy said can secure loans at a lower interest rate than private lenders.
Kennedy hopes to push colleges away from using Guaranteed Loans provided by private lenders. Through Guaranteed Loans, banks are promised a minimum interest rate (9.5 percent in most cases) from the federal government, which makes the loan more expensive for taxpayers, he said.
The CBO reported that Direct Loans cut out billions of dollars in subsidies to banks, which could then be used to increase the amount of Pell Scholarships and also estimated that participating colleges would be able to increase Pell Scholarships by $1,000, totaling $5,050 per school year. Representative Thomas Petri (R-Wis.) said that eliminating private lenders, or “middlemen,” as he called them, would save between $7 and $9 billion per year. This approach, he said, would put money in the pockets of students instead of banks.
“Schools would be denying aid to students by going with private lenders,” Petri insisted.
“There is a dividend to be recycled back to colleges and universities to provide further assistance to students,” Representative George Miller (D-Calif.) said. “We’re thinking about how to best serve students and families under current budget restraints.”
Only schools using Direct Loans and students considered “needy” would be eligible for the additional funds. Also, U of L administers the Federal Family Education Loan [FFEL] Program, which falls under Guaranteed Loans. Unless U of L were to switch programs, students at U of L who receive Pell Grants would not get the additional funds.
U of L’s director of the Financial Aid Office Patricia Arauz said that U of L’s system could not switch over to Direct Loans easily.
“We do about $70 million in loans each year, and we will be closer to $80 million next year. We have a highly automated and paperless system for students to use that posts and transfers files and money electronically.”
She said that if U of L were to switch, a new system would have to be implemented.
Kevin Bruns, Public Affairs Representative with America’s Student Loan Providers, a company that represents 80 private lenders, including Sallie Mae, said that trying to coerce schools into switching to Direct Loans is unfair to both students and colleges.
“The bill would pay dividends to any school switching to the Direct Loan Program but that means two schools that are next to each other would offer different amounts of Pell Grants,” he said. “Congress would be treating schools differently.”
Bruns’ prediction could happen here in Kentucky. The only two schools in Kentucky belonging to the Direct Loan Program are the University of Kentucky and Morehead State University. If the STAR Act passes legislation, students eligible for Pell Grants will receive more aid by choosing to attend the UK instead of U of L.
Kennedy and company recognize that Corporate America won’t take the proposal sitting down and that soon, Washington D.C. will feel “political arm twisting” from private lenders.
“[Guaranteed Loan] Programs were set up 40 years ago at a time when the federal government couldn’t get into the business of distributing loans across the country,” Petri said. “Since that time we’ve had a computer and communication revolution and data processing has become efficient and cheap and the Direct Loan gets rid of the overhead cost.”
“One thing students should understand is who is on the other side,” Kennedy added. “Sallie Mae is on the other side and is a formidable group. This will be a hard and difficult battle, make no mistake about it — a real struggle, but this is an obvious way for us to go.
“Sallie Mae will … say this is false savings and that they aren’t there, but we believe the independent studies that the savings are there.”
And it appears Kennedy was right: the STAR Act doesn’t shine as brightly in the eyes of private lenders. Bruns said the savings are a “mirage” because costs are being overlooked.
“The claim of savings isn’t accurate,” he said. “The problem is that the STAR Act is based on budget savings which don’t reflect the reality of the matter. It doesn’t account for the overhead costs of running the program, so the savings may never materialize.”
Bruns said that since 1998, more than 500 schools have switched from the Direct Loan to the Guaranteed Loan Program because of the variety of options available. He said the STAR Act is the response for the decline.
Arauz and Bruns both agree that Pell Grants are not enough to assist students with rising tuition costs, and they believe the STAR Act will do more harm than good.
“[U of L] supports the increase in Pell Grants because it has not been adequate in past years and hasn’t kept up with the cost of living, but colleges benefit from having a variety of lenders,” Arauz said. “Having a choice is wonderful because more competition means students get a better deal. There has always been competition between Direct and FFEL programs, but that is good, that’s what makes programs excel.”
For example, Arauz said the Student Loan People, PNC Bank and National City Bank stopped charging service fees in order to gain an edge on the competition, whereas the Direct Loan Program charges a 3 percent interest rate on the loan up front to pay processing fees.
Arauz said other benefits would be lost if U of L switched programs. The Student Loan People will forgive up to 20 percent of a loan’s original principal yearly to nurses and educators at the elementary and secondary level teaching in certain fields, providing they meet the criteria. Benefits like this, she said, are the result of competition in the private sector.
“I think it is unfair for the government to give incentives to switch programs,” she said. “The government can do whatever it wants if everyone is in the same program.”
Kennedy urges students to stay in touch with members of Congress and the Senate regarding the STAR Act proposal.
“This is enormously important and can make a real difference,” he said. “We have to make this a part of higher education legislation and we need students to speak up on campus.”
Kennedy said that students wishing to express their views can call the Senate at (202) 224-3121 or the House of Representatives at (202) 225-3121.
More information about the STAR Act can be found at http://www.studentaidaction.com.
