SAFRA Passes House

SAFRA, the student loan bill to end the privatization of loans already backed by the government, passed the House just now by a vote of 253-171. 6 Republicans (Buchanan, Cao, Johson (IL), Petri, Platts, Ros-Lehtinen) voted yes; 4 Democrats (Boyd, Herseth Sandlin, McMahon, Kanjorski) voted no. Considering that Stephanie Herseth-Sandlin is from the wholly owned banking state of South Dakota, that's impressive party unity, probably because it's indefensible not to be for this bill. As Gail Collins explains today:

It would simplify the federally guaranteed loan system, save an estimated $87 billion over 10 years and use that money to increase aid to low-income students, improve community colleges and raise standards for early childhood education.

Let us stop here and recall how the current loan system works:

1) Federal government provides private banks with capital.

2) Federal government pays private banks a subsidy to lend that capital to students.

3) Federal government guarantees said loans so the banks don't have any risk.

And now, the proposed reform:

1) The federal government makes the loans.

Wow. You really do wonder why nobody came up with this idea before.

Given all of the other profit centers that the banking industry has opened up, and the clear logic of the bill, maybe they figured they can't stop this one. If it runs into trouble in the Senate, it could easily move through reconciliation since the whole point of it is to end wasteful subsidies to the private lending market, which expand the deficit. I think there will be 50 votes for this, as Pell Grants are popular, the private loan market serves no purpose whatsoever, and another part of the bill offers challenge grants for early childhood education, another broadly popular priority.

So I believe we are going to see this change in higher education. And millions of college-age students, many of whom supported Barack Obama in record numbers, will recognize this almost immediately in higher Pell grants, cheaper loans and simpler forms. Savvy play, as well as a good policy.

At Least Education Reform Seems To Be Moving Swimmingly

There actually is one area of President Obama's agenda which could be plausibly described as a government takeover. That would be his plan to streamline the student loan market, eliminate the middlemen who provide no service, and allow students to borrow from the government directly, with the massive savings from that plowed into Pell Grants to help more kids go to college. If Obama were this swift with the middlemen in the insurance industry he'd be praised on the left as another FDR. As such, Sallie Mae and the others in the private student lending market, who get subsidies to do what the government can do on their own for much cheaper, don't have the power and influence to stop their own destruction.

Educational institutions currently have two ways to offer federal loans to students. In the Federal Family Education Loan (FFEL, pronounced "fell") program, the government pays subsidies to banks and lenders to dole out money to borrowers and reimburses companies up to 97% of the cost of any loan that is not paid back. The second way is the direct-loan program, created in 1993 as an alternate option, in which the government cuts out the middle man, lends money directly and gets all the profits. If the Student Aid and Fiscal Responsibility Act (SAFRA) passes both houses of Congress, the approximately 4,500 colleges and universities that are currently signed up for FFEL will have to abandon the program and start using the direct-loan option by July 1, 2010.

The House will likely pass the bill this week, and if it runs into trouble in the Senate, it could easily move through reconciliation since the whole point of it is to end wasteful subsidies to the private lending market, which expand the deficit. I think there will be 50 votes for this, as Pell Grants are popular, the private loan market serves no purpose whatsoever, and another part of the bill offers challenge grants for early childhood education, another broadly popular priority. We're going to see change - we can actually believe in! - in higher education. And the students who supported Barack Obama in record numbers will recognize this almost immediately. Savvy play.