Senator Says Feds’ Student Loan Takeover Will Fund Obamacare

A law passed with the recent health care overhaul legislation makes the federal government the primary originator of student loans for higher education, eliminating the subsidies paid by the government to private student loan providers who previously had been involved in the lending process.

But according to Sen. Lamar Alexander, (R-TN) the real purpose of the Obama administration’s plan is to “overcharge 19 million students on their student loans, to help pay for the Democrats’ health care bill,” he told reporters.

The Student Aid and Fiscal Responsibility Act (SAFRA) passed along with the health care overhaul bill, called the Patient Protection and Affordable Care Act.

“Today Congress voted to stop wasting billions of taxpayer dollars to subsidize big banks, and start investing that money directly in our students and families,” Rep. George Miller (D-CA), the chairman of the House Committee of Education and Labor, said in a press statement at the time.

In a Wall Street Journal editorial, Secretary of Education Arne Duncan argued the current system benefits banks while adding unnecessary costs to taxpayers.

Ed. Dept. Backing
“Under the current FFEL [Federal Family Education Loan] program, banks make loans to students. While those students remain in school, the federal government pays the interest on their loans; otherwise the interest accrues. Once the borrowers leave school or graduate, the lending agency collects on the loans. But if the student defaults, my department pays back the loan—plus the interest owed. The FFEL program, in short, is a great deal for bankers but a terrible one for taxpayers.”

Under the new system, all new federal student loans will originate through the Direct Student Loan program, moving the loans out of the FFEL program. The Committee on Education and Labor estimates the new program will enable 500,000 students to keep their Pell grants, avoiding the 60 percent cut that was previously expected.

The Congressional Budget Office estimates SAFRA will save $61 billion dollars over the next 10 years. The additional funds generated would then be used to help fund additional benefits for students, such as increasing the maximum Pell grant to $5,550.

Money for Other Programs
Opponents argue the new law nationalizes the student loan market and was a political maneuver designed to help pass and fund health care reform.
 
In a March 18 statement discussing SAFRA, Sen. Alexander said, “This is how it will work: The federal government will borrow money at 2.8 percent and then lend it to students at 6.8 percent—spending the difference on health care and new government programs. In Tennessee, 200,000 students have student loans, so what this latest takeover means is that those Tennessee students will, on average, pay $1,700-1,800 more in interest over 10 years—to pay for the Democrats’ health care bill.

“The government—instead of using that money to reduce costs for students who are borrowing the money—will use it to pay for more government programs. According to the preliminary CBO estimate produced this morning, the new bill will take $9.1 billion over 10 years from students’ interest payments to pay for this health care takeover.”

Matthew Glans (mglans@heartland.org) is legislative specialist in insurance and finance at The Heartland Institute.