Beneficiaries of Sallie Mae, Nelnet fight Obama’s Student-Aid Proposal

President Obama’s budget proposal to eliminate government subsidies for the student loan industry has run into stiff bipartisan resistance from lawmakers who have received thousands in campaign contributions from private lenders.

Rep. Buck McKeon (Calif.), the top Republican on the House Education and Labor Committee, received $20,000 in donations from private lenders Sallie Mae and Nelnet, the most of any lawmaker during the last campaign cycle.

McKeon argues Obama’s proposal is a “government takeover” of the $85 billion student aid industry that would only grow the country’s budget deficit. The Republican has supported private lending firms because they have provided students with more choices and serve as a “critical backstop” for the public lending program, said Alexa Marrero, spokeswoman for Republicans on the House Education and Labor Committee.

“The issue here is making sure that we have programs and resources in place” for college students who need aid, Marrero said.

Rep. Paul Kanjorski (D-Pa.), who with $18,000 in contributions had the second-highest fundraising total from the private student loan industry, also opposes Obama’s plan to have the federal government provide loans to students. He said the best way to provide aid to students would be to find a balance between public and private lending.

“Our students would benefit the most, if we could use the best practices developed from both lending in the private sector and through direct lending in the public sector,” Kanjorski said in a statement.

Nelnet and Sallie Mae, the country’s largest student lender, have traditionally been big campaign donors. Sallie Mae gave out more than $583,000 to lawmakers and political action committees in 2008, dividing the funds nearly equally between the parties. That’s the highest total of any company in the finance/credit sector, which includes credit card companies American Express, Visa and MasterCard, according to the Center for Responsive Politics. NelNet gave out $142,000 in political donations.

Still, it’s unclear whether these efforts will draw enough votes to defeat or water down a budget eliminating subsidies for private student loan providers.

Powerful lawmakers who have received contributions from the lenders have yet to take strong positions on the issue, including House Minority Leader John Boehner (R-Ohio), Majority Leader Steny Hoyer (D-Md.) and Majority Whip James Clyburn (D-S.C.). Boehner took in $15,000 from Sallie Mae and Nelnet in the last cycle, the fifth-most in the House.

Both Sallie Mae and Nelnet are now gearing up with other groups to defend their subsidies. Trade groups have released a survey of student loan companies suggesting that about 35,000 jobs would be lost directly as a result of the elimination of the private student loan industry.

“As part of the proposal, everything would be coordinated through the national government,” said Brett Lief, president of the National Council of Higher Education Loan Programs.While the Obama administration expects that the shift from subsidized private loans to direct federal lending would save taxpayers $4 billion a year, McKeon has derided the plan as a “government takeover” that would add to the federal deficit and limit students’ choices.

Obama’s plan has bipartisan support from other powerful members.

Both Rep. George Miller (D-Calif.), the chairman of the House Education and Labor Committee, and Rep. Tom Petri (R-Wis.) have praised the president for trying to find savings for students and the government. The Obama administration projects savings of up to $47.5 billion over the next 10 years due to direct student lending.

“In today’s economy, we must do everything we can to make sure that the federal student aid programs that students and families depend on are as reliable and efficient as possible,” Miller said in a statement.

Petri said that Obama is smart to end student loan incentives that amount to “entitlements for financial institutions.”

“For years I have argued that direct loans managed by the Education Department, by eliminating the subsidized middlemen, have proved to be a far better deal for the taxpayers while providing the exact same loans to students,” he said.

Though Hoyer hasn’t weighed in on the proposal, one of his aides told reporters last week that student loan reform could be attached to a budget reconciliation bill, a move that would make it easier to get through the Senate. Reconciliation measures can’t be filibustered and require only a simple majority to pass in the upper chamber. Since Obama announced his budget plan last month, a key centrist Democrat, Sen. Ben Nelson (Neb.), and several senators in the GOP leadership, including Lamar Alexander (Tenn.) and John Cornyn (Texas), have come out against the proposal for more direct government lending.

During last year’s credit freeze, a handful of private firms stopped lending to students, prompting the Bush administration and lawmakers to provide them with emergency funding.

If lawmakers and the administration kill the program, Sallie Mae and other companies are likely to go down with it, said Matthew Snowling, managing director of FBR Capital Markets.

“Over 10 years, they’re proposing creating $50 billion in savings, so it’s fair to assume it guts the FFEL [Federal Family Education Loan] program,” Snowling said.

The unanswered question, he said, would be how the government could handle the processing of loans for approximately 6 million students.

“It’s a pretty … major shift in a short amount of time,” Snowling said.  (The Hill)

Click here to download a PDF of a chart about donations to lawmakers campaigns from student loan companies. 

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Obama’s plan calls for major changes that need to be done in a very short span of time. That in itself is quite risky.