With supporters citing lower costs to taxpayers and opponents alleging the start of an inefficient government monopoly, the Student Aid Reward Act (STAR) must garner more bipartisan partners if it is to dance through Congress.
If the recently introduced bill passes, colleges and universities would be encouraged to provide financial aid loans using the Direct Loan Program, rather than the Federal Family Education Loan Program. The government would allocate more money for student aid – such as in the form of Pell Grants – to schools that agree to switch, using the money that will be supposedly saved from dropping the direct loan program.
“At a time when our federal government is facing an extreme deficit, this is a win-win bill for students, families and taxpayers,” Congressman George Miller (D-CA), one of the bill’s authors, said in a statement.
The bill is currently in the House Committee on Education and Labor.
The DLP keeps loans cycling within the federal government by giving out money to students directly from the U.S. Treasury and using private companies to service and collect payments. Meanwhile, FFELP finances the same type of loans as DLP, but receives financing from private lenders and banks instead of the government, which does, however, provide subsidies. Additionally, with FFELP the federal government guarantees the loans against default and guarantees return to the banks.
Four schools in the UC system currently operate on the Federal Family Education Loan Program, while the remaining six, including UCSB, use direct loans, said Nancy Coolidge, legislative analyst for the UC Office of the President.
Coolidge said the bill might face stiff resistance from lobbyists.
“There is a group of FFEL lenders that feel like they have been squeezed enough,” Coolidge said
By giving students loans more directly from the U.S. Treasury, supporters say, the government can cut out the “middle man” and save money from the subsidies that private lenders and banks would have pocketed. This money – an estimated $10 billion – could go back to students in the form of Pell Grants or other financial aid programs.
Originally introduced to Congress by Miller, Senator Edward M. Kennedy (D-MA), Senator Gordon Smith (R-OR), and Representative Tom Petri (R-WI), the bill has been met with mixed reaction.
While its proponents focus on cut costs and more direct funding from the government to students, opponents say STAR may eliminate many of the services and counseling benefits provided from private lenders as part of their competitive offers.
Tom Joyce, vice president of corporate communications for private lending company Sallie Mae which is against the act, said approximately 600 schools have tried the Direct Loan Program and left due to dissatisfaction with the service and financial flexibility.
“This is an attempt to prop a failed system up with taxpayer money,” Joyce said of STAR. “Like most government-run monopolies, it will be slow and inefficient.”
Included in this argument is the effect on interest rates, which banks and lenders must fight over to gain customers.
“With competitive loans, you get better rates; direct lending limits the competition, thereby limiting the benefits to students,” Joyce said.
Joyce said Sallie Mae is beginning to talk with legislators about the effectiveness of the legislation.
“We want to show the value of the private sector,” Joyce said.