On September 22, 2009 the House passed the Student Aid and Fiscal Responsibility Act (SAFRA), President Obama’s ambitious plan to save $87 billion for the federal government by funding student loans directly, instead of through private lenders.

The Department of Education has been guaranteeing billions in student loans for decades, delivering easy profits with no risk to big private lenders like Sallie Mae and Citicorp through the FFEL program. Since 1994 however the Department of Education has been lending directly to students as well, and despite efforts by George Bush to hamstring the program on behalf of the banks, direct lending is already available at schools that account for 96% of all federal student loans.

But the federal government is now buying up most of the loans from private lenders as well. When the liquidity crunch hit in 2008, the Congress passed ECASLA to bail them out, and since that time the Department of Education has purchased over a hundred billion dollars in student loans from them. Sallie Mae made $21 billion in FFEL loans in 2009, and then sold $18.5 billion to the government through ECASLA.

See the list of the biggest private student loan originators, including Sallie Mae, CitiBank, BofA, Wachovia, Wells Fargo, PNC and other banks that have already received billions in bailouts and subsidies from the federal government.

According to Dan Madzelan, Acting Assistant Secretary of the Department of Education, the 2008-2009 academic year produced $82 billion in guaranteed Stafford and PLUS loans. The federal government’s Direct Lending program originated 26% of them, while private lenders originated 74%. But many bank-issued loans were quickly sold to the government, who now own 82% of those loans. And the “compromise” floated by Sallie Mae would have the government buy all private FFEL loans from private lenders within 100 days.

So what exactly is it that these middle-men bankers do that is worth $8.7 billion a year, money that could be going to students?

Well, that’s a good question. According to the NY Times, “President Bush’s budget reports that in 2006 for every $100 lent by private lenders, the cost to the government of subsidies, defaults and other items was $13.81, while the same amount lent through the direct loan program cost the government $3.85.”

(For more on how Sallie Mae and others jack up fees to extract maximum payment from the federal government when they go into default, see David Brancaccio’s amazing PBS Now! segment on “forbearance” from last year. Because the debt can’t be discharged in bankruptcy, students spend the rest of their lives paying off a burden of debt that can double in the process.)

SAFRA was included in the Senate’s 2009 reconciliation instructions, so it only needs 50 votes to pass, although it would probably have to be rewritten somewhat in order to pass the Byrd rule. But the details of the bill would remain essentially the same:

Community Challenge Grant Program: Grants made to community colleges on a competitive basis for programs that ensure more students graduate with the skills they need to perform high wage jobs in high-demand industries. Many of the programs that are being slashed in state budget crises are the ones that offer vocational training — at a time when unemployment is high, enrollment is soaring and demand is at its peak. $630 million per year, through FY 2013.

Community College reconstruction: $2.5 billion in 2011 to construct, renovate and repair facilities, creating high wage construction jobs in the process. Funds must be used by states to supplement, not supplant, existing funding and cannot exceed 25% of the cost of the reduced interest or matched funds (see AACC).

K-12 Modernization and Repair: $2.5 billion in 2011 for grants to states for the modernization, renovation, or repair of public schools, including early learning facilities and charter schools. Supplemental Grants for Louisiana, Mississippi, and Alabama based on each state’s share of infrastructure damage inflicted on public school facilities in those states by Hurricane Katrina or Rita in 2005

Expanding online education: Competitive grants available to eligible colleges, workforce programs or other entities to expand access to free, high-quality, online training, and high-school and college courses. $50 million is made available for each over FYs 2010-2019.

Increase Pell Grants: The maximum amount for the need-based Pell grants offered in 2008-2009 was $4,731. The American Recovery and Reinvestment Act raised that to a badly needed $5,350 for 2009-2010. SAFRA would increase the maximum award to $5550 for 2010-2011 up to $6,900 by 2019, and adjust it for cost-of-living increases by indexing it to the Consumer Price Index plus 1 percent. It would also convert the annually appropriated portion of Pell Grants to a mandated amount, for a total or $46.7 billion through 2019 per the CBO report. (See the NASFAA)

Direct Student Lending: Converts all new federal student lending to the Direct Loan program beginning July 1, 2010 and ends the FFEL program of subsidizing private lenders. However, private lenders will still have a role in the Direct Loan program. They will be able to enter into a competitive bidding process to service student loans just as they do now, by financially educating borrowers and preventing loan defaults. Nelnet, one of the largest student lenders, increased their revenues from servicing by 13% in the fourth quarter of 2009 after winning a contract to service direct loans. In addition, private lenders will still service and collect interest on the loans they already hold.

Transition to Direct Lending: Provide $50 million in FY 2010 to provide schools with resources and assistance in transitioning into the Direct Loan program. The Department of Education has more information on how it will transition schools to the Direct Lending program. They will be able to use the same on-site system currently used to administer Pell Grant scholarships.

Perkins Loan Reform: Eliminate the current Perkins Loan program and introduce a new loan type, the Federal Direct Perkins Loan, under the existing Direct loan program. Make $6 billion available annually beginning in the 2010-11 award year for a new “Federal Direct Perkins Loan” program that would be administered in much the same way as unsubsidized Stafford loans.

Asset Cap: Impose an asset cap of $150,000 beginning on July 1, 2011, that would prohibit receipt of a Pell Grant or a subsidized Stafford Loan, increased each year by a percentage equal to the estimated percentage change in the Consumer Price Index.

Early Learning Challenge Fund: Invests $1 billion each year in competitive grants for the development of early learning systems for children from birth to age 5. Creates jobs and develops an effective, qualified, and well-compensated early childhood workforce.

Additional Funding for HBCUs and HSIs: Invests $2.55 billion in Historically Black Colleges and Universities and Hispanic-Serving Institutions through 2019.

College Access and Completion Fund: $600 million annually for FYs 2010 to 2014, to be divided as follows:

  • 25% for the College Access Challenge Grant Program.
  • 50% for State Innovation Completion Grants, new competitive matching grants for states to develop innovative plans for college completion.
  • 23% for College Access and Completion Innovation Fund, federal discretionary grants for innovative access and persistence activities as well as teaching financial literacy and default aversion.
  • 2%t for evaluation

As Ben Miller of the Quik and the Ed notes, it’s not clear that money in the Innovation Fund that goes to financial literacy and default aversion is necessary, given that this is a function that will be performed by servicers under the Direct Student Lending provisions. It looks like much of it is designed to pay off powerful state guarantee agencies, who have been non-functioning “milddle man” in the system created by the FFEL program for quite some time.

On the plus side, per Tim Ranzetta of Student Lending Analytics, the money would create (or sustain) 4,000-5,000 jobs over the next 4 years — which deflates the claim that the guarantee agencies would sustain huge job losses in the switch to Direct Lending.

Veterans: Forgive any federal student loans for members of the military that are borrowed for the term in which they are then called to active duty. Allows veterans who attend private colleges in states with a zero or very low basic tuition benefit to shift the unused portion of the maximum fee benefit to help cover costs of the veteran’s actual tuition.

For more, see the CRS Summary of the Full Text of H.R. 3221 and the CBO Score.