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WASHINGTON -- The House approved major student loan reforms Friday by a vote of 292 to 97. Rep. Tom Petri supported the bill, which would boost college financial aid by about $20 billion over five years. The College Cost Reduction Act pays for itself by reducing federal subsidies paid to lenders in the college loan industry. It also includes $750 million in federal budget deficit reduction.
The bill, or "conference report," was the result of negotiations concluded Wednesday by House and Senate conferees tasked with reconciling differences in the versions of the bill approved by the separate legislative bodies.
"For many years, I have spoken out against the excess subsidies that taxpayers pay to lenders in the guaranteed loan program," Petri said. "In fact, taxpayers spend $3 billion to $5 billion each year on unnecessary subsidies that could be better applied as direct aid to students. The status quo on lender subsidies is inefficient, wasteful, and unacceptable - and I applaud the efforts made in this bill to redirect these resources primarily as Pell Grants and interest rate reductions."
Petri did, however, have concerns about the bill. He was the sponsor of a provision in the House-passed legislation to require lenders to bid for the rights to originate a loan and receive a taxpayer subsidy. Currently, the program lacks such competition and is considered by many government and private economists to be inefficient. For the past 40 years, Congress, not the market, has set the subsidy rate which has led to unnecessary and wasteful spending.
The auction proposal survived the conference negotiations, but not in the form Petri preferred.
"While I have long championed market-based reforms to the guaranteed loan program, I am concerned that the prescriptive approach included in the final bill could potentially endanger the prospects for long-term, comprehensive reform," Petri said. "We had an opportunity to seriously study and pilot a pragmatic market-based reform, but I'm not sure this proposal will live up to the occasion."
"Nonetheless, I am heartened that Congress has finally recognized the need for fundamental reform of the guaranteed loan program in this year's budget reconciliation process," he said.
Petri further noted that the bill applies a small portion of its savings toward improving "income-contingent" student loans which are repaid at rates which vary depending on the borrower's income.
"Earlier this year, I introduced the IDEA Act (H.R. 2465), to make key changes to our current, limited income-contingent loan repayment program. The bill would make this repayment model accessible to all borrowers and better address the growing debt burdens which our students are graduating with," Petri said.
"Some of my colleagues may be surprised to learn that this repayment model was actually developed by free-market economist Milton Friedman as the optimal way for all students, no matter their income, to repay their student loans," he said.
The College Cost Reduction Act includes several provisions included in his legislation to improve the income-contingent program, Petri said, such as a 15 percent cap on adjusted income payments and moving the floor on repayment from 100 to 150 percent of the poverty level.
"These are positive first steps toward implementing a viable income-contingent repayment program, and I hope my colleagues will consider cosponsoring the IDEA Act to develop a loan repayment system for the 21st Century," Petri said.
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