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Just Another Government Takeover: the Student Aid & Fiscal Responsibility Act (H.R. 3221)

In September, House Democrats passed H.R. 3221, the Student Aid and Fiscal Responsibility Act. To date, the Senate has not taken any legislative action or signaled when it plans to consider the bill. The legislation fulfills President Obama’s call to abolish the Federal Family Education Loan (FFEL) program and replace it with a system of government-run lending directly from the U.S. Treasury. This job killing government takeover of student lending generates approximately $87 billion in savings and earnings for the government – the bulk of which Democrats plan to spend on an array of new and expanded entitlement programs. However, several recent analyses from the nonpartisan Congressional Budget Office (CBO) have cast doubt on Democrats’ claims that the bill would reduce the federal deficit – instead, CBO has uncovered billions in hidden spending.

Eliminating Choice, Competition, and Innovation from Student Lending

The legislation eliminates the longstanding FFEL program – a public-private partnership that has leveraged hundreds of billions in private capital to help families pay for college for more than 40 years – and replaces it with the government-run Direct Loan program, which will rely on federally-established contracts to provide the bare minimum in services to students and families. It prohibits new FFEL program loans from being made after July 1, 2010, less than one year from today.

Elimination of the FFEL program will harm students, schools, and our economy. Even today, over half of all colleges and universities have chosen to remain in the FFEL program despite Democrats’ overt attempts to phase it out and recent efforts by the Department of Education to coerce schools into the Direct Loan program. Their reasons include technological innovation, borrower choice, and customer service – among others. Even as these benefits will be lost for borrowers and institutions of higher education, the U.S. economy will suffer as well, with job losses that could total in the tens of thousands.

The parallels to the health care debate are ominous. Just 16 years ago, the Direct Loan program was created as a “government option” to promote competition. Today, Democrats in Congress are preparing to eliminate the private sector’s role altogether and force everyone into the government run program.

New and Expanded Entitlement Spending 

The legislation redirects tens of billions of new earnings and supposed cost savings to Pell Grants and a number of other initiatives, including massive new entitlement programs that do not directly benefit students or expand access to higher education. These include: 

  • New early learning program to develop and fund state programs – cost, $8 billion;

  • Extension of “temporary” funding for Minority Serving Institutions – cost, $2.6 billion;

  • New College Access and Completion Fund to improve information sharing and promote student persistence and completion – cost, $3 billion;

  • A re-created Perkins loan program that will operate as yet another direct loan model administered by institutions – program size, $6 billion per year;

  • New school construction and renovation funding for K-12 and postsecondary facilities – cost, $6.6 billion; and

  • New community college initiative that overlaps with existing job training programs administered by the U.S. Department of Labor – cost, $7 billion.

Other Financial Aid Changes 

H.R. 3221 makes several other changes to federal financial aid programs, despite the fact that just last year, Congress completed a bipartisan overhaul of the Higher Education Act. These include:  

  • Elimination of restrictions that prevent individuals convicted of drug possession from receiving taxpayer-funded financial aid;

  • Changes to the need analysis formula, which Republicans believe fail to do enough to fundamentally simplify our system of financial aid programs; and

  • A move to variable interest rates for subsidized Stafford loans, keeping the system unnecessarily complex for borrowers in an effort to cover a broken political promise to “cut interest rates in half.”

Hidden Costs: Billions in Dubious Savings and Masked Spending 

Democrats claim their legislation would reduce the federal deficit. However, a close look at H.R. 3221 reveals fuzzy math and a plan that could ultimately cost taxpayers billions.

On July 27, 2009, CBO wrote a letter to Senator Judd Gregg (R-NH) showing that when market risk is taken into account, the supposed savings generated by H.R. 3221 would plummet by $33 billion. This was followed by a September 9, 2009 letter from CBO to Rep. John Kline (R-MN) showing Democrats’ plan to expand the Pell Grant program would cost $11.4 billion more than originally estimated. Finally, even the official CBO score of the proposal reveals an extra $13.5 billion in so-called discretionary spending that would result from enactment of H.R. 3221. Taken together, these analyses expose a plan that would not reduce the deficit, as Democrats claim, but would actually cost taxpayers close to $50 billion over the next 10 years.