Student Aid Reward (STAR) Act Bill Summary

Students who need loans to pay for college can turn to two federal sources. The first – the Direct Loan program – offers students loans directly through the U.S. Treasury. The second loan program – the Federal Family Education Loan (FFEL) program – offers students loans through private lenders and banks, who receive subsidies from the federal government to participate in the program.

The two programs provide the same loans and interest rates to students, but the FFEL program costs billions of dollars more each year. Instead of subsidizing banks, the Direct Loan program takes advantage of the government’s ability to secure capital at a lower rate, eliminates the “middlemen” in the FFEL program (private lenders and guaranty agencies), and avoids billions of dollars in unnecessary subsidies to banks.

The STAR Act encourages colleges and universities to use the more efficient of the government’s two loan programs. It calls upon the Secretary of Education to determine which program is more efficient. Colleges and universities would then be rewarded with additional need-based scholarship funds for utilizing the more efficient of the two student loan programs. This competition will encourage the federal loan programs to improve the efficiency of their operations. Schools, students, and taxpayers will all be the beneficiaries. The Congressional Budget Office estimates that the STAR Act will generate $30 billion in savings – including billions in additional need-based scholarships for students – at no cost to taxpayers.