Student loan reform has big Iowa implications

In 2008, students graduated from Iowa’s Regent universities with loans averaging $28,174 tagged to their futures, the second highest average among all 50 states. While the health care provisions in the final, amended version of the Health Care and Education Reconciliation Act of 2010 received top billing and consumed the lion’s share of media and political attention, the bill also contained significant relief for students who borrow to obtain a higher education.

By academic year 2020-2021, the Department of Education estimates Iowa’s students will receive an additional $291 million in Pell Grants due to the changes in the new law. In addition to raising the ceilings on Pell Grants, the educational initiatives of the health care law will also make loan payments more manageable for students with unmanageable debt upon graduation; increase investments for community colleges; and extend supports for historically black colleges and universities and other minority-serving institutions.

The Obama Administration, citing reports from the non-partisan Congressional Budget Office, said all of these reforms could be done at no additional costs to taxpayers, and the $68 billion price tag could be fully paid for by ending government subsidies that were being paid out to private financial institutions making guaranteed federal student loans. As a result of the savings and investments in this new law, the CBO estimates Iowa and its students are expected to receive more than $299 million by academic year 2020-2021 in additional benefits for higher education.

In Iowa, the largest dispenser and consolidator of student loans is Iowa Student Loan, which employs 315 people. Steve McCullough, president and CEO of Iowa Student Loan, told Radio Iowa’s Matt Kelley that he was not concerned about the change in federal policy’s impact on employment numbers. “We don’t see any impact in our employment base at this point because at the same time we may be losing some work with the banks and credit unions, we’ll be gaining some work in terms of customer service work for the federal government,” McCullough said.

“Students should still be able to get loans in the same qualification criteria,” McCullough said. “We’re also going to continue to work with the banks and credit unions in the state of Iowa to make sure that private student loans, supplemental student loans, are available for those who can’t get enough money through the federal government programs.”

GOP opposition

Since the student loan reform initiatives were passed as amendments and inevitably couched into the final version of the bill, the final vote went along party lines, with the minority Republicans primarily rejecting the shift from the private industry to a government-run loan agency. Although Iowa’s delegation mirrored these voting patterns, U.S. Sen. Chuck Grassley, R-Iowa, not only took issue with this fundamental shift but argued the bill will inevitably place a tax on students. He fears the new laws will eliminate thousands of bank jobs nationwide.

Asked to clarify how the new reforms will amount to a “tax” on college students, Grassley’s press-secretary, Beth Pellett Levine, told The Iowa Independent in an e-mail that the revenue to pay for this new spending is based on a Congressional Budget Office estimate using a methodology that the CBO says is incomplete.

“In reality, when additional factors are considered, it turns out this revenue isn’t likely to appear and this new spending will just add to the deficit,” she said. “However, if one accepts the assumption that the government will make money off interest payments from students, Congress should just lower the interest rate rather than overcharging all students in the first place to pay for benefits like improved loan repayment terms as well as to fund part of health care reform.”

“This bill partially funds Pell Grants, makes some existing loan repayment provisions more generous, and creates a new program to encourage low-income students to attend college that seems duplacitive of the successful federal TRIO programs that Sen. Grassley has long supported,” Pellet Levine added. “Sen. Grassley has always supported Pell Grants and other forms of student aid but, with the new law, either the federal government will be overcharging all students with student loans to pay for benefits for a few students or, as CBO has admitted, the funds to pay for this new spending may not be there at all and this spending will just add to the deficit. Sen. Grassley does not like either scenario, as either students or taxpayers are on the hook.”

It’s worth noting that not all conservatives agree. President George W. Bush proposed similar reforms as part of his annual budget proposal during three years of his tenure. Last August, The Weekly Standard blasted the current system of guaranteed loans as “a textbook example of crony capitalism or (if you prefer) corporate socialism.”

‘Pulled the plug on Sallie Mae’

The three Democrats vying for the right to take on Grassley this fall did not share his take on preserving the current system of keeping the student loan program in the private sector.

“The guaranteed loan program was hugely profitable for private lenders at the expense of college students and federal taxpayers who guaranteed the higher interest student loans against default,” Tom Fiegen of Clarence told The Iowa Independent in an e-mail. Fiegen said the new reforms were a clear win-win for working class college students and the federal taxpayers.

Moreover, Fiegen took issue with Grassley and other critics of direct student loans, claiming that they’re either blinded by ideology or they have received too many contributions from private lenders.

“Sen. Grassley, of all people, should applaud the reduction of billion of dollars of college student loan costs,” Fiegen said. “The private lenders making guaranteed student loans are akin to the defense contractors who took a $14 dollar hammer and sold it to the government for $300. With the savings, additional student loans and college aid will create more teaching and support jobs on our college campuses, offsetting any job loss in private lending. I for one would rather have more college instructors and professors than loan processors.”

Roxanne Conlin of Des Moines echoed Fiegen’s praise and rebuff of Grassley’s criticism of the new law, calling the reforms “a great improvement in educational financing saving billions by cutting out the middleman and putting the money saved into direct aid to college students.”

“Sen. Grassley’s criticism is ridiculous and not based in fact. He is parroting Republican talking points instead of supporting Iowa’s students,” Conlin said. “This program will help students afford college and is a fiscally responsible approach to solving the troubled student loan program.  These reforms will cut out big banks and allow students to receive loans at reduced interest rates and without exorbitant bank fees. Sen. Grassley has voted against students 11 times and is simply out of touch with Iowa families struggling to improve their lives through higher education.”

Claiming Grassley was reading a different script on how the new law will affect college borrowers, Bob Krause of Fairfield praised the reforms and took aim at Grassley’s criticism as well.

“This shows, sadly, how removed that Sen. Grassley has become from ordinary Iowans,” Krause told the Iowa Independent in an e-mail. “There is no tax on college students. To say that there is, is the same as his assertion that health care reform would ‘pull the plug on Granny.’”

It is surprising, Krause said, that Sen. Grassley would come out in support of the old system that was “so subject to kick-backs, waste, fraud and abuse,” referencing the Sallie Mae leveraged buyout in 2008.

“In reality, we have ‘pulled the plug on Sallie Mae,’ for loan underwriting and that deserved to occur,” Krause said. “This is a very reasonable step since the federal government provides the money for the loans. Why have a middleman to create the kick-backs, waste, fraud and abuse that GAO audits found that the old system was famous for? Sallie Mae was an effective monopoly working for its owners and not the students.”

A scandal surrounding Iowa Student Loan hit closer to home last year when the U.S. Department of Education ordered the private, non-profit student lender to repay the federal government $2.4 million of excessive subsidies that it had procured through fraudulent practices between 2004 and 2006.

Moreover, federal government officials ordered Iowa Student Loan to repay $15.76 million last year for using illegal cash inducements to public universities in Iowa as a means of target marketing college students by closing out its competitors.