President Obama Signs Health Care and Education Reconciliation Act Into Law

In a second straight victory for the American people, the President signed the Health Care and Education Reconciliation Act into law at Northern Virginia Community College in Alexandria, Virginia.  He was joined by Representatives Bobby Scott and Tom Perriello; the Second Lady Dr. Jill Biden; and House Speaker Nancy Pelosi.

This reconciliation bill improves upon the core health care reforms, which were signed into law last week. I’m not going to go into all the details, since I had a pretty detailed post on this subject last week that included the improvements contained within the reconciliation bill (“What the New Health Care Reform Law Means for You?”).

In addition to making several key improvements in healthcare, this reconciliation bill also contained some much-needed educational reform measures. As the President noted today:

You see, for almost two decades, we’ve been trying to fix a sweetheart deal in federal law that essentially gave billions of dollars to banks to act as unnecessary middlemen in administering student loans.  So those are billions of dollars that could have been spent helping more of our students attend and complete college; that could have been spent advancing the dreams of our children; that could have been spent easing the burden of tuition on middle-class families.  Instead, that money was spent padding student lenders’ profits.

By cutting out the middlemen, American taxpayers will save $68 billion over the next 11 years. No longer will taxpayers be underwriting these loans and assuming all the risk while the banks get to keep all the interest collected. This amounts to a huge giveaway to the banks at taxpayer expense. This reconciliation build ends this subsidy, once and for all.

As it stands today, the federal government provides 80 percent of college loan financing for the “private” market.

Here’s a little more background:

Under the Federal Family Education Loan Program (FFELP), the US government has been providing subsidies to private companies making student loans ever since 1965. Every independent agency that has calculated the cost of the FFELP, from the Congressional Budget Office to Clinton’s Office of Management and Budget to George W. Bush’s Office of Management and Budget, has found that direct lending could save the government billions of dollars annually. But the mills of Congress grind slowly, and it has taken until now for this reform to work its way through the system.

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the FFELP, which privatized the banks’ profits while socializing losses by imposing them on the taxpayers. The loans continued to be “originated” by the banks, which meant the banks advanced credit created as accounting entries on their books the way all banks do. Contrary to popular belief, banks do not lend their own money or their depositors’ money. Commercial bank loans are new money, created in the act of lending it. The alleged justification for allowing banks to charge interest although they are not really lending their own money is that the interest is compensation for taking risk. The banks have to balance their books, and if the loans don’t get paid back, the asset side of their balance sheets can shrink, exposing them to bankruptcy. When the risk is underwritten by the taxpayers, however, allowing the banks to keep the interest is simply a giveaway to the banks, an unwarranted form of welfare to a privileged financier class at the expense of struggling students.

The short of it all is that if a student loan defaults, the federal government will use your tax dollars to cover the bank loss. So the banks are essentially not taking any risks, but benefiting by collecting the interest on these loans.

Some of you may have also been a bit surprised to learn that banks don’t actually lend their own money, but create money. Here’s an example of fractional-reserve banking and how it works:

In this example, when I am granted a $100,000 loan, the banker actually created $100,000 of new money in the form of credit, in the form of bookkeeping money, which is just as good as coins and paper money.

The banker is not afraid to do this. My cheques to payees will give them the right to draw money from the bank. But the banker knows very well that nine-tenths of these cheques will simply have the effect of decreasing the money in my account, and of increasing it in other people’s accounts. He knows very well that a ratio of bank reserves to deposits of 1/10 is enough for him to meet the requests of those who want pocket money. In other words, the banker knows very well that if he has $10,000 in cash reserves, he can lend $100,000 (ten times the sum) in bookkeeping money.

In technical terms, the capacity for a bank to lend 10 times the amount of paper money it has in its safe is called fractional-reserve banking. The origin of this system goes back to the Middle Ages.

As noted by the President today, it should come as no surprise that “Sallie Mae, America’s biggest student lender, spent more than $3 million on lobbying last year alone” to protect these huge tax payer subsidies. It probably wouldn’t come as surprise to folks that banks have also discovered ways to “game the system.”

Under the FFELP, banks actually profit more when students default than when they pay back their loans. Delinquent loans are turned over to a guaranty agency in charge of keeping students in repayment. Pre-default, guaranty agencies earn just 1 percent of the loan’s outstanding balance. But if the loan defaults and the agency rehabilitates it, the guarantor earns as much as 38.5 percent of the loan’s balance. Collection efforts are also much more profitable than efforts to avert default, giving guaranty agencies a major incentive to encourage delinquencies. In 2008, 60.5 percent of federal payments to the FFELP came from defaults. An Education Department report issued last year found that only 4.8 percent of students who borrowed directly from the government had defaulted on their loans in 2007, compared to 7.2 percent for the FFELP; and the gap widened when longer periods were taken into account.

These sorts of abuses are only the tip of the iceberg. You can read more about the corruption that has taken place between colleges and lenders here.

Thanks to this reconciliation bill, the cost savings ($68 billion) realized by eliminating these corporate welfare subsidies will be poured back into making college more affordable for students and strengthening our higher education institutions.  Per the President today:

…we will reinvest a portion of those savings to upgrade our community colleges, which are one of the great, undervalued assets in our education system…to help open the doors of higher education to more students, we’ll also reinvest part of that $68 billion in savings in Pell Grants, one of the most popular forms of financial aid…we’re going to restore a measure of fairness to how students repay their loans…Right now, if you’re a borrower, you don’t have to spend more than 15 percent of your income on loans.  But starting in 2014, you won’t have to pay more than 10 percent of your income in repaying your student loans…We’re also going to give students an incentive to do what’s right — if you pay your loans on time, you’ll only have to pay them off for 20 years.  And you’ll only have to pay them off for 10 years if you repay them with service to your community, and to our country, as a teacher or a nurse or a member of our Armed Forces…Finally, we’ll reinvest some of the $68 billion in savings to strengthen our Historically Black Colleges and Universities and Minority Serving Institutions…

The reforms in this bill are significant, but they’re just part of a broader effort to strengthen our entire higher education system.  We’re putting college tuition tax credits in the pockets of millions of students from working families to help them pay for college.  We’ve taken steps to simplify the federal college assistance form -– called the FAFSA -– because it shouldn’t take a PhD to apply for financial aid.  And we’re helping ensure that America’s high school graduates are ready for college.  All of this is paid for.  We’re redirecting money that was poorly spent to make sure we’re making investments in our future.

These educational reforms are a first step in America reclaiming the top spot in having the highest proportion of college graduates in the world. This administration has set an ambitious goal of claiming this top spot by 2020. Today marked a great first step!

You can read the President’s full transcript here.