July 11, 2007

WASHINGTON - The House approved major student loan reforms Wednesday by a vote of 273 to 149. Rep. Tom Petri (R-WI) supported the bill, which would boost college financial aid by about $18 billion over five years. The College Cost Reduction Act, H.R. 2669, pays for itself by reducing federal subsidies paid to lenders in the college loan industry by $19 billion. It also includes $750 million in federal budget deficit reduction.

"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 called the bill a major victory toward comprehensive reform of the Guaranteed Loan Program, with the inclusion of his proposal to move toward an auction procedure which could result in loan rates set by the market instead of by a political process, with the government's savings going to higher student aid.

"It includes an amendment that I offered and which was unanimously adopted in Committee to study and implement a pilot program using market-based reforms, such as auctions, to bring down the cost to taxpayers in the guaranteed loan program. The reason we find ourselves needing to redirect these subsidies in the first place is due to the fact that Congress sets subsidy rates blindly and irresponsibly, not based on any market considerations," he said.

"As a free market Republican, I believe Congress has no business setting lender returns. Other mechanisms, such as auctions, will actually capture market demands to obtain the optimal rate for taxpayers and for lenders. Given the tremendous waste, fraud, and unethical relationships that have been uncovered in this program over the last six months, it is clear that the guaranteed loan program is fundamentally and structurally flawed. This study and pilot program are key to comprehensively reforming this program to ensure it serves students and taxpayers," 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 Petri's 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.

The following is Rep. Petri's full statement:

Thank you, Mr. Chairman. I would like to share an alternative Republican viewpoint on the College Cost Reduction Act that we are considering this morning. Traditionally, Republicans have stood for fiscal-responsibility and competition to ensure a good return on taxpayer investment in federal programs. I believe that this bill, while not perfect, is something that any Republican who stands for these principles should support.

For many years, I have spoken out against the excess subsidies that taxpayers pay to lenders in the guaranteed loan program. Government and private economists, including those in the Office of Management and Budget, the Congressional Budget Office, the Government Accountability Office, and the Treasury Department, have all confirmed the significant inefficiencies in the program due to the arbitrary and capricious nature in which lender subsidies have been set over the last 40 years.

In fact, these scorekeepers have found that taxpayers spend $3-$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 effort made in this bill to redirect these resources primarily as Pell Grants and interest rate reductions. The 55 basis point subsidy cut and 2 percent guarantee reduction included are a step in the right direction towards redirecting these taxpayer subsidies back to their intended recipients: students.

This bill also contains two other critically-important provisions that largely have been overlooked in this debate. First, it includes an amendment that I offered and which was unanimously adopted in Committee to study and implement a pilot program using market-based reforms, such as auctions, to bring down the cost to taxpayers in the guaranteed loan program. The reason we find ourselves needing to redirect these subsidies in the first place is due to the fact that Congress sets subsidy rates blindly and irresponsibly, not based on any market considerations.

As a free-market Republican, I believe Congress has no business setting lender returns. Other mechanisms, such as auctions, will actually capture market demands to obtain the optimal rate for taxpayers and lenders. Given the tremendous waste, fraud, and unethical relationships that have been uncovered in this program over the last six months, it is clear that the guaranteed loan program is fundamentally and structurally flawed. This study and pilot are key to comprehensively reforming this program to ensure it serves students and taxpayers. I would like to thank the Chairman and the Committee for their strong support for this important effort.

Further, this bill applies a small portion of the savings towards improving income-contingent student loan repayment. Earlier this year, I introduced the Income-Dependent Education Assistance (IDEA) Act, H.R. 2465, to make key changes to our current, limited income-contingent loan repayment program. My bill would make this repayment model accessible to all borrowers and better address the growing debt burdens which our students are graduating with. Some of my conservative 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.

The College Cost Reduction Act includes several provisions included in my legislation to improve this program, 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 towards implementing a viable income-contingent repayment program, and I hope my colleagues will consider cosponsoring my IDEA Act to develop a loan repayment system for the 21st Century.

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