Sen. Edward Kennedy, D-Mass., thought the way financial aid was distributed in the country wasn't quite right. So, as members of Congress are apt to do, Kennedy and several other Congressmen wrote a bill to fix it.
Kennedy, Sen. Gordon Smith, R-Ore., and Congressmen Tom Petri, R-Wis., and George Miller, D-Cali., co-wrote the Student Aid Reward Act of the Higher Education Bill, which was introduced Tuesday.
There are two possible forms for an undergraduate or graduate student loan to take, Kennedy said in a press release. The first is the direct avenue, where the federal government personally provides loans to students. The second avenue is the guaranteed route, where organizations like banks provide loans which on which a 9.5 percent return is paid out of the federal government's budget.
The authors of the act are proponents of the direct route.
"There's a dividend to be paid by using the directness of the student loan program," Miller said, adding that if the money spent on guaranteeing student loans were to be put into direct students loans, nearly $18 billion would be made available.
Petri agreed that the savings created from switching to the direct loan program would be substantial.
"It's hard to believe that it's the cost of operating the guaranteed program that could be saved if we switched to the direct program," Petri said of the potential savings.
The federal government was also leaving itself open for exploitation under the current system, a Kennedy aide said.
"The lenders have come up with a trick," the aide said. "[With] loan payments made by students before 1993, lenders have taken these loans and recycled them."
The result is that the federal government is required to pay the return for old loans.
"It's a loophole within a loophole," the aide said. "It makes the loan for the taxpayer more expensive."
This year's Higher Education Bill is likely to include an emphasis on the use of direct loans in addition to guaranteed loans, Kennedy said. In the past, much financial aid had been provided through subsidized loans granted through private banks and lenders - a system that guarantees that the government will provide a rate of return on the loan.
"We have had virtually no competition from any other source," Kennedy said. "Today, we introduce legislation that will allow direct loan programs to compete with Sallie Mae programs, which also provide student loans."
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