The measure would force private commercial banks out of the federal student loan market, cutting off billions of dollars in profits for the institutions. Students will take out their loans through their college's financial aid office, instead of using a private bank.
The banks would no longer get fees for acting as middlemen in federal student loans. The government would use the savings to boost Pell Grants and make it easier for some workers to repay their student loans. In addition, some borrowers could see lower interest rates and higher approval rates on student loans.
Since the bank-based loan program began in 1965, commercial banks such as Sallie Mae and Nelnet have received guaranteed federal subsidies to loan money to students, with the government assuming nearly all the risk. Democrats have long denounced the program, saying it fattened the bottom line for banks at the expense of students and taxpayers.
The revamping of student loan programs was included in the final health care package passed by Congress on Thursday. The House approved the bill by a vote of 220-207, hours after the Senate passed it by a vote of 56-43. No Republicans in either chamber voted for the bill.
The legislation, an Obama domestic priority that was overshadowed by the health care issue, has widespread reach. About 8.5 million students are going to college with the help of Pell Grants.
Congressional allies of the student loan industry attacked the overhaul as an over-reaching government takeover that will kill banking jobs. The legislation substitutes an expanded direct-lending program by the government for the bank-based program, directing $36 billion over 10 years to Pell grants, for students from low-income families.
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