By glossing over details, the misguided student loan reform that is currently part of reconciliation will cost Democrats seats and create the first exclusive middle class tax.
With noble goals, President Obama proposed student loan reform. A version of that reform is now "in" the reconciliation bill. Aside from claims from the right that this is typical government logrolling, this action will mean bad news for Democrats and the middle class for generations to come.
First student loan reform aims to end the subsidies to banks who use their capital for lending. This is a noble goal, but keep in mind the laws were changed and few of those banks are currently providing the capital. Further, most banks solely provide capital. The origination and service are provided by nonprofit and state agencies that were created by Congress. These agencies employ thousands of people (full disclosure- this group includes myself). The state agencies like the one I work for provide non-tax revenue for the state, much of which is designated for education purposes.
There are easy alternatives:
- Instead of using banks for capital, allow state agencies & nonprofits to get money directly from the Treasury. Under the current bill, the Federal Direct Loan agency does this. This would equal about 90% of the savings under the current bill.
OR 2. Add a line to the current law that says any current FFELP school will have all their loans serviced by the state agencies. Currently, the Federal Student Loans are serviced by one of five servicing agencies. Four of the five are for-profit groups, none are state agencies. This will also allow students to keep their current lenders which means less confusion & defaults. This wouldn’t cost a thing.
There is a another, bigger problem to all of this. Student loans by definition affect the middle class. Most poor college-bound students can get enough in grants and loan forgiveness that they will not have to take out loans. Rich students don’t need loans. So the middle class takes out loans. If this passes under its current form, students will pay much more in interest and fees to the government that will pay for Pell Grants for the poor. To my knowledge, that makes it the first middle-class only redistribution of wealth.
The solution to this: lower the interest rates to equal costs. Sure, you don’t get money for pet projects, but less money in the system might mean colleges & universities need to keep costs down. And that is something they‘ve done worse than health insurance companies.
The fallout from all of this would hit about in August/September as students go back to school and agencies lay off employees. Voters won’t blame the GOP for forcing the issue, but many will blame the Democrats for what truly is an unnecessary burden glommed on to necessary health care reform.