Twice each
decade, lawmakers overhaul this system. They get the
chance again soon. Debate begins early next year on
loan provisions of the Higher Education Act.
Opponents of direct loans want the Clinton-era
program eliminated. At a recent education
conference, Rep. Peter Hoekstra, a Michigan
Republican, was blunt: "We should put a stake
through its heart." However, Democratic Sen.
Edward Kennedy of Massachusetts wants to strengthen
the direct-loan program so that it can compete more
aggressively against private banks. Sen. John
Edwards, a North Carolina Democrat, would wipe out
the FFEL program and switch all schools to direct
loans. At current interest rates, he says, his plan
would save up to $4 billion a year. "We have to
use taxpayer money efficiently," Edwards told
U.S. News. "That money shouldn't be
used to provide subsidies to lenders but to get kids
in college."
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This tension has persisted
ever since President Clinton signed the direct-loan
plan into law in 1993 and positioned it to replace
the FFEL program. Supporters thought schools would
flock to the new system. Within five years, direct
loans had captured 34 percent of the business, an
alarming development to private lenders.
By
then, Sallie Mae was on a war footing. First, it
reinvented itself. Originally a government-sponsored
enterprise, Sallie Mae got approval to privatize in
1997, which allowed it to originate its own loans
and acquire other companies. The new company quickly
bought its two major rivals and improved its
loan-processing services to compete better against
the direct-loan program. Along with other companies,
Sallie Mae began offering discounts on fees and
interest rates that the government was not allowed
to match.
At the same time, Sallie Mae stepped up
its lobbying presence in Washington and began
scoring big. In 1999, its lobbyists persuaded
lawmakers to create a new interest-rate formula that
boosted the company's profits, allowing it to
offer further discounts to schools. Then, last year,
Sallie Mae got Congress to eliminate a planned
interest-rate reduction that would have curbed the
company's profits and reduced student-borrower
debt. That change may cost taxpayers $8 billion by
2011, say education and banking lobbyists.
Sallie Mae cemented its political ties with campaign
donations. The company and its employees poured
large sums of money into the coffers of Republicans
and Democrats alike, according to the Center for
Responsive Politics, a Washington watchdog group.
Its "soft money" donations alone--those
not restricted by federal contribution limits, until
outlawed last year--jumped to $552,000 in the 2002
election, a 10-fold increase over 1998. Others in
the student loan industry also cranked up their
giving, pouring tens of thousands of dollars into
congressional campaigns.
Sallie Mae is well
positioned as Congress prepares to debate the
student loan provisions of the Higher Education Act.
Some of its campaign gifts went to important members
of budget, appropriations, and education panels, all
of which deal with the student loan program. The
company's political action committee and its
employees were the second-largest donor to last
year's re-election campaign of Rep. Howard
"Buck" McKeon, a California Republican and
chairman of a key House education panel. They gave
him $11,500. McKeon has been a speaker at Sallie Mae
events, and the company has paid for his travel to
Las Vegas and Panama City, Fla.
