NAICU Washington Update

Obama's Student Aid Budget Plan: Policy Meets Process and Politics

March 18, 2009

In 1992, newly-elected President Bill Clinton proposed a student aid plan that would have the federal government lend its money directly to student loan borrowers instead of lending private capital through banks, then would use the money saved to fund a massive new national service program. 

In the end, it didn't quite work that way.  He had to settle for a direct loan program that helped pay for deficit reduction, rather than increase student aid, and a national service plan that moved on a separate track.  Even during his political honeymoon, that new president ran into the rules and realities that forced him to take a more traditional path to get his ideas implemented.

Sixteen years later, Barack Obama is proposing an even more ambitious budget for student aid -- a transition to direct lending for all student loans, with the savings used to fund a Pell Grant entitlement, a six-fold expansion in Perkins loans, plus $500 million per year for governors to improve college completion by at-risk students.  And now, some of the procedural and policy hurdles that stood in Clinton's way could complicate Obama's efforts as well.

At the center of the story is the balance of powers within Congress -- which committees control which policies and programs -- and whether budget reconciliation legislation, developed in the 1980s for deficit reduction, should instead be used to restructure programs and policies.

Budget Reconciliation

As deficits grew in the late 1970s, budget reconciliation was created as a tool to cut entitlement spending by making reduced spending a greater goal than funding for any individual program.  To do that, Congress adopted special budget reconciliation debate rules -- most importantly, prohibition of a Senate filibuster, that meant a bill needed only 51 votes to pass, not the 60 votes typically needed to cut off debate.

Until about a decade ago, budget reconciliation regularly served its deficit reduction purpose as originally intended.  Nearly every reconciliation bill over the past 25 years has lead to some cutbacks in the student loan program, since student loans are the only education program that is an entitlement - that is, an automatically funded federal program.

But increasingly over the past decade, Congress has used budget reconciliation as a tool to get around Senate rules for a super-majority (those 60 votes needed to cut off debate).  President Bush's massive 2001 tax cut bill was done through reconciliation -- a procedural move that angered many Democrats.  Then in 2007, Democrats used the budget reconciliation process to move money from the student loan program to Pell Grants. 

Now that the Democrats are in charge, some congressional leaders see these precedents as a way to reshape the budget to their liking without having to go through the messy and distasteful deal-making that would otherwise be required (as was the case, for example, in Democrats' amassing the necessary 60 Senate votes for passage of the president's stimulus package).

Stage One: Budget Committee

The House typically takes the lead in moving budget proposals, which then go to the Senate.  The biggest question facing Budget Committee Chairman John Spratt (D-S.C.) is whether to employ the reconciliation process to grease passage of the student aid proposal, as well as reforming for health care and energy policy.  Traditional student loan lenders are forcefully weighing in against the idea, convinced that the only way to save the bank-based student loan program is to fight reconciliation.

In the Senate, Budget Committee Chairman Kent Conrad (D-N.D.), and Ranking Member Judd Gregg (R-N.H.) are united in their bipartisan opposition to using the reconciliation process to implement any of the Obama budget proposals -- especially health care reform and his "cap-and-trade" energy policy to reduce pollution.   Both Conrad and Gregg believe the budget process should be used for deficit reduction, not policy changes.

However, if this proposal moves forward without reconciliation, it could take a very long time.  The regular legislative process has no deadlines, open opportunities for amendments in both chambers, and no protection against a filibuster in the Senate.

Stage Two: Education Committee

If the budget committees relent and use budget reconciliation to enact the president's student aid proposals, they would send formal instructions to the education committees to find savings in their programs of jurisdiction. The instructions can be very broad, simply setting a deficit reduction target, or very specific, giving detailed legislative language on program changes.  As we saw in the 2006 and 2007 higher education budget reconciliation bills, the deficit reduction target can be very small ($750 million) while immense amounts ($20 billion) can be moved among programs.

So far, House Education and Labor Committee Chairman George Miller (D-Calif.) is the only chairman publicly supporting budget reconciliation to enact the Obama student aid proposal.  He believes that given the current credit crisis, colleges are going to switch to direct lending anyway.   Miller also sees a need for fast action on a package.  The savings realized when colleges switch to direct lending must be transferred to the Pell and Perkins loan programs through a package of statutory changes soon.  Otherwise, if colleges evolve toward direct lending on their own, the savings will go toward deficit reduction, and will be unavailable for a Pell Grant entitlement and new Perkins program, as occurred with Clinton's direct lending plan.

The bulk of the policy work on any student aid changes will be done in the education committees.  This includes how to structure a Pell Grant entitlement program; how to move all loans to Direct Loans; whom to include as loan servicers and default managers; how to structure a new Perkins Loan program; and what to do with a block grant to states for college completion. 

In addition to the legislative work, Miller also has to manage member interests, interest groups, and other outside players before reaching a consensus on any new legislative language.  Those with strong opinions and various champions among the committee's members include student groups, lenders, guaranty agencies, public institutions, private institutions, minority-serving institutions, and others.

In the Senate, Health, Education, Labor and Pensions Committee Chairman Ted Kennedy (D-Mass.) has been unusually silent about Obama's student aid proposal, since he has been primarily focused on health care reform plans.

Stage Three: Appropriations Committee

House Appropriations Committee Chairman David Obey (D-Wis.) could actually be the key factor in resolving whether to restructure the student aid programs through reconciliation.  If Pell Grants become an automatically funded entitlement, he would no longer retain jurisdiction over setting the maximum grant through annual appropriations.  Obey justifiably takes great pride in having delivered substantial increases in the Pell Grant recently.  Moving the program from the discretionary side to the entitlement side of the budget would require a blessing from the House appropriations committee. 

Will the President Get into the Procedural Battle?

President Obama met with Spratt and Conrad this week to discuss how to move forward on his budget proposal.  So far, the president has tried to leave procedural questions to Congress, but some in the administration are increasingly concerned that, without reconciliation, many aspects of their reform agenda could be ground up and lost in the congressional sausage-making - including student aid, health care, and energy initiatives.

Leadership conversations have been going on in both chambers since the president's budget plan was released.  These conversations will culminate in the House Budget Committee's draft of its FY 2010 budget resolution the week of March 23, which then goes to the House floor for a vote before the April 3 Easter recess.  The Senate usually trails a week behind the House, meaning that we don't expect a final congressional plan on the budget until the end of April. 

So the fate of the president's student aid budget could be determined largely off stage in the next several weeks, in the obscure procedural churnings of Capitol Hill.

MORE News from NAICU