Congress Passes Higher Education Funding Overhaul

Published September 1, 2007

In July, Congress passed legislation to overhaul federal student aid programs for higher education.

The House of Representatives voted 273-149 on July 11 to approve the “College Cost Reduction Act of 2007,” which increased funding for federal financial aid programs by $18 billion while cutting federal subsidies for private lenders.

Specifically, the legislation cut rates for federal student loans and increased funds for grant programs and loan forgiveness. The Senate approved similar legislation a week later.

“The good news is that Congress and the Bush administration have identified wasteful spending that can be cut as part of the reauthorization of the federal government’s main higher education spending programs,” said Dr. J.D. Foster, a senior fellow in economics and fiscal policy at The Heritage Foundation, a free-market research group in Washington, DC. “But the bad news is that Congress used most of the savings to increase other spending, including the creation of nine new entitlements in the House bill.”

Missed Opportunity

Foster argued legislators missed an opportunity to use the savings to cut taxes.

“Neither the House bill nor its companion legislation in the Senate includes a dime of tax relief. This is the wrong tack to take,” Foster explained. “A significant portion, if not all, of the savings should be returned to taxpayers in the form of education-oriented tax relief, such as an expansion of the higher education deduction.”

Subsidy Cuts

Neal McCluskey, a policy analyst with the Cato Institute’s Center for Educational Freedom, applauded the House’s decision to trim subsidies for private lenders.

“There is one welcome part of the bill–it would trim subsidies to lenders,” McCluskey said. “Sallie Mae and other lending companies don’t deserve a dime of taxpayer money, so a tiny bit of justice is served by making their arrangement a little less cushy.

“Unfortunately, the good news ends there,” McCluskey continued. “By using so much of the savings from the subsidy cuts to fund loan forgiveness for ‘public servants’ as well-remunerated as prosecutors, and slash already-low interest rates on many federal loans, the bill would enable colleges to raise their prices without making themselves more expensive to students, driving tuition rates even higher than their already astronomical levels.”

Uncertain Prospects

McCluskey says in the end students will not benefit from the increased subsidies.

“The bill would drive higher education’s unbridled tuition inflation even higher, just as federal aid has done for decades,” McCluskey explained. “But that’s not lawmakers’ concern. As long as middle- and upper-middle-class parents and students think Washington is trying to make college more affordable for them–and will vote accordingly–federal politicians will have accomplished their goal.”

At press time, it remained unclear whether the legislation would become law.

President George W. Bush threatened to veto the measure because it “fails to target aid to the neediest students currently in college and creates new mandatory federal programs and policies that are poorly designed and would have significant long-term costs,” according to a statement released by the White House.

Dan Lips ([email protected]) is an education policy analyst at The Heritage Foundation in Washington, DC.