Banks may lose federal student loan business

The U.S. House of Representatives on Thursday passed legislation that would make the biggest changes in federal student loans in decades, driving banks out of the business and relying on an existing government program to provide that crucial source of college financing.

The bill, passed on a party-line vote of 253-171, would save $87 billion over 10 years by abolishing subsidies to banks that have been criticized as excessive, supporters said.

Most of the money saved would be used to increase the amount of aid given to low-income students in the form of Pell Grants.

“The choice before us is clear,” said Rep. George Miller (D-Calif.), lead sponsor of the bill. “We can either keep sending these subsidies to banks, or we can start sending them directly to students.”

The bill now goes to the Senate, which is expected to pass it. Here are some questions and answers about the legislation:

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How would the bill affect student loan recipients?

The bill would change the source of federal college loans in some cases, but it would not change their size.

Currently, a student can obtain low-interest loans that are guaranteed and subsidized by the U.S. government either from a federal program or from a bank. The bill would end those subsidies to banks. All federal loans would be offered by and repaid to the government program.

The bill also would simplify the complex federal application form for financial aid.

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Would the bill affect interest rates?

Yes. It would block a scheduled increase in subsidized loan rates to 6.8% in 2012 from 3.4% in 2011.

Instead, beginning in 2012, the rate would be variable. It would be linked to the rate on U.S. Treasury bills but would never be higher than 6.8%.

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How would the bill save money?

By ending subsidies to banks. The government would save about $87 billion over 10 years, according to the Congressional Budget Office.

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What would happen to that money?

The biggest chunk -- $40 billion -- would go to the Pell Grant program for low-income students.

Smaller amounts would be allotted to education initiatives such as grants to improve preschool education, renovate school buildings, improve community colleges, curb college dropout rates and fund programs to support historically black colleges and universities.

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How would the bill affect Pell Grant recipients?

They could get more money. The bill would boost the maximum annual award to $6,900 by 2019 from $5,350 in 2010.

In subsequent years, the grant ceiling would be automatically increased one percentage point more than the rate of inflation.

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When would these changes take effect?

The bill would take effect July 1, so most students would not see the effect until the 2010-11 academic year.

However, some college officials are worried that they would not have enough time to make the necessary administrative changes if the bill does not soon become law.

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Does President Obama support the bill?

Yes, although he supported bigger changes in college financial aid.

Obama proposed increasing Pell Grants and making them an entitlement that would protect low-income recipients from year-to-year fluctuations in congressional funding. But the House did not accept the proposal because members believed it would be too costly.

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If the bill would save money, why did some lawmakers oppose it?

Many conservatives see the bill as a “government takeover” of the student loan business, akin to the Democrats’ proposal to establish a new government health insurance option that would compete with private insurers.

Others worry that the proposed change is unnecessarily abrupt and that problems would be better addressed by reforming the program rather than abolishing the role of banks.

And some fear layoffs at lending institutions such as Sallie Mae, the biggest student lender.

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janet.hook@latimes.com