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H.R. 1010 - The Student Aid Reward (STAR) Act

Increase Pell Grants, Reduce the Deficit, No Added Taxpayer Cost
Legislation by Rep. Thomas E. Petri (R-WI)

What is the STAR Act?
How do the Federal Student Loan Programs Work?
How Will the STAR Act Reduce Wasteful Spending and Increase Pell Grant Aid?
Lender Myths vs. Budget Facts
News & Resource Center

What is the STAR Act?

"[The STAR Act] comes from my long-standing belief that we have a fundamental obligation to our constituents to ensure that we eliminate waste, fraud, and abuse in government spending wherever it exists." - Rep. Petri (3/28/06)

The bipartisan Student Aid Reward (STAR) Act was introduced by Congressmen Tom Petri (R-WI) and George Miller (D-CA) on February 13, 2007, in the House of Representatives.
A companion bill is sponsored by Senators Edward M. Kennedy (D-MA) and Gordon H. Smith (R-OR) in the Senate.
This legislation provides over $10 billion in additional college scholarships to undergraduate and graduate students - at no additional cost to taxpayers.
Additionally, the STAR Act would devote one-quarter of the savings, over $3 billion, towards deficit reduction - at no additional cost to taxpayers.

How do the Federal Student Loan Programs Work?

[Under FFEL], "the Federal Government assumes almost all of the risk for the [student] loans... These problems lead to unnecessary costs for taxpayers and prevent the program from achieving the efficiencies the market is designed to provide." - President Bush's FY 2006 Budget

"(CBO) estimates that loans made under FFEL program have higher budgetary costs to the government than direct loans do." - CBO Paper, "Subsidy Estimates for Guaranteed and Direct Student Loans, November 2005

Currently, the federal government has two main student loan programs: the Federal Family Education Loan program (FFEL) and the Direct Loan (DL) program. In the FFEL program, private banks provide the capital to make loans, while the federal government guarantees the loans against default and guarantees returns to the banks. In the Direct Loan program, the federal government acts as the lender and provides the money for loans through the sale of U.S. Treasury bonds.

Taxpayer Subsidy on Student Loans (per $100 loan)

Fiscal Year 2005 2006 2007

FFEL $16.87 $10.74 $7.59

Direct Loans $3.08 $3.67 $1.70

While the FFEL and DL programs deliver the same loans and interest rates to students, the DL program is less costly to taxpayers because it eliminates the need for a middleman, cuts out unnecessary subsidies and secures capital at lower rates. As a result, the DL program offers taxpayers considerable savings of up to $3 for every $100 lent.

How Will the STAR Act Reduce Wasteful Spending
and Increase Pell Grant Aid?

"The STAR program would reserve more money for student aid and inject competition into the current lending scheme." - New York Times Editorial, July 18, 2005

The STAR Act calls upon the Secretary of Education to determine which program is more efficient. Schools would then be rewarded with additional scholarship funds for utilizing the more efficient of the two student loan programs. The competition will encourage the federal loan programs to improve the efficiency of their operations. Schools, students, and taxpayers would all be the beneficiaries.

Lender Myths vs. Budget Facts

"Another critical tenant of this program is that it is budget neutral. Any reward payments to schools are contingent upon actual taxpayer savings that year. We are confident that these savings not only exist, but amount to several billion dollars annually. Both the CBO and OMB continue to confirm this year after year." - Rep. Petri (3/28/06)

Myth #1

Lenders: The Direct Loan program has never achieved a surplus.

Fact: Neither has the FFEL program for that matter, but the DL program has come far closer than FFEL ever has to breaking even. While their loans continue to cost taxpayers three times as much, the lenders are, surprisingly, trying to use FFEL's fundamental weakness as a criticism of the DL program. The Congressional Budget Office most recently found that the STAR Amendment would provide savings of $13.4 billion over the next 10 year.

Taxpayer Subsidy on Student Loans (per $100 loan)

Fiscal Year 2005 2006 2007

FFEL $16.87 $10.74 $7.59

Direct Loans $3.08 $3.67 $1.70

Myth #2

Lenders: The GAO and CBO agree that budget data does not capture all federal costs.

Fact: The GAO, CBO, and OMB agree, however, that no matter these unaccounted costs, this same budget data has never shown FFEL as being equally as or more efficient than the DL program. Furthermore, OMB has started to include administrative costs into its subsidy calculations over the past two years while the numbers continue to show FFEL as the more expensive program.

Myth #3

Lenders: The current loan structure emphasizes choice and competition.

Fact: There is no market competition in the FFEL program. All lenders are guaranteed the exact same subsidies, regardless of their costs, efficiency, etc. Lenders compete among themselves for market share, but not to the benefit of taxpayers.

Myth #4

Lenders: STAR would discriminate against students who attend a FFEL school.

Fact: STAR would encourage both schools and students to participate in the more cost- effective loan program for taxpayers because the savings generated under the program would provide additional Pell Grant aid for recipients. This means more financial aid for students - something both schools, students, parents, and taxpayers can all agree on.

News and Resource Center

Fact Sheets:

Federal Student Loans: An Introduction

About the STAR Act

Lender Myths vs. Budget Facts

Recent Press Releases:

Petri Student Loan Amendment Blocked (3/30/06)

Rep. Tom Petri Unveils Legislation (3/15/05)

Recent Dear Colleague Letters:

As Seen on 60 Minutes 2 (May 18, 2006)

As Seen on 60 Minutes (May 8, 2006)

The Bipartisan STAR Act (May 4, 2006)