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WASHINGTON - As House and Senate negotiators work out differences between the versions of the College Cost Reduction Act passed by each body, Rep. Tom Petri (R-WI) is urging adoption of a key reform as approved in the House bill.
Petri was the sponsor of language adopted in the House Education and Labor Committee on June 13 as part of legislation which would mandate a study and pilot program of a market- based reform of the Federal Family Education Loan (FFEL) program, also known as the guaranteed loan program.
The Petri "Market Mechanisms Study and Pilot" would be the most significant structural reform of the guaranteed loan program in decades. Petri contends that, over the past year, lender scandals emanating from questionable relationships between colleges and lending institutions as well as subsidy abuse have demonstrated that the FFEL program is structurally flawed and in need of serious change. Petri says these scandals stem from the excess funds paid to lenders by taxpayers without regard to market cost.
Under the Petri language, the secretaries of the Treasury and Education departments would be tasked with leading a study group to determine the best market-based reform option and, upon selecting the best model, operate a pilot program for a two year period using up to 20 percent of the loans made under the FFEL program. Participation in the pilot would be voluntary on the part of colleges and lenders, with expected taxpayer savings going back to participating schools as additional grant aid to students.
House conferees were appointed on Tuesday, September 4, and House-Senate negotiations are now underway. Petri says he will continue to urge conferees to include a responsible and effective market-based reform.
Text of Petri Letter to Conferees:
As you are well aware, H.R. 2669, the College Cost Reduction Act, contains sweeping changes to the guaranteed or Federal Family Education Loan (FFEL) program. While not perfect, this bipartisan legislation does provide a unique opportunity to correct critical flaws in the program and to launch reforms to salvage the program's credibility and viability for the twenty-first century.
Over the past year, we have seen scandal after scandal emanating from this broken federal loan program. These disgraces range from the questionable inducement arrangements between lenders and colleges to the egregious exploitation of taxpayer subsidies by student lenders, such as Nelnet. Not surprisingly, these abuses are not isolated events nor did they occur in a vacuum - they are systematic and always divert student aid dollars away from students and taxpayers and into the pockets of lenders.
These scandals are, however, merely symptoms of the archaic and fundamentally-flawed structure of the guaranteed loan program. Any objective observer can see that the program has needlessly hemorrhaged money for years. In addition to the waste associated with these scandals, government and private economists nearly unanimously agree that the FFEL program has cost taxpayers $3-5 billion more per year than the direct loan program.
Much of the recent discussion regarding budget reconciliation has focused on the nature and size of the cuts to federal subsidies to lenders and guarantors. However, the most important piece of this legislation may be the inclusion of a "market mechanisms" or auctions pilot to test how we might best achieve comprehensive reform of the guaranteed loan program. The acrimonious debate surrounding the subsidy cuts confirms that it is not appropriate for Congress to determine lender returns. Rather, the market should do so.
As the sponsor of the "Market Mechanisms Study and Pilot" included in H.R. 2669, I believe that our language is both fair and responsible to all parties - fiscal conservatives, student advocates, and the lending establishment. Unlike the Senate language, it does not prescribe a specific model for market-based reform, but rather tasks a study group led by the Secretaries of the Treasury and Education to review several models and determine which is the best approach for a comprehensive two-year pilot. Participation in the pilot is voluntary on the part of both the schools and the lenders. At the end of the pilot, GAO would conduct a comprehensive review and report back to the Departments and Congress.
This is not a controversial concept. The House language was unanimously adopted as an amendment during mark-up in the Education and Labor Committee and, more recently, the Administration has indicated that it is its preferred model. I believe that this language balances the need to review a variety of market-based reforms while ensuring that a reform model is tested and reviewed following the two year pilot. And despite lobbying from the lenders, they cannot present a compelling reason not to include a voluntary pilot following the required study.
I hope that the 110th Congress will include a responsible, market-based pilot reform to the guaranteed loan program in the budget reconciliation. Should you have any questions regarding the House proposal, please do not hesitate to contact me.
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