Student Loan Industry Struggles Amid Controversy

A bill before Congress would cut billions in federal subsidies for the student loan industry and increase the amount of money available for needy students – with funding coming from the pockets of lenders. The industry is under assault after reports of unethical financial relationships between universities and private lenders.

Loan industry defenders say the bill would favor lenders who don't have students' best interests in mind. Student advocates say money that now goes to lenders should be re-routed toward students.

"What Congress is talking about doing is taking these lenders subsidies and shifting it all to increase grants and cheaper loans so they'll be guaranteed to go to students," said Michael Dannenberg of the New America Foundation, a Washington think tank.

The federal government pays lenders big subsidies to loan money to students at below-market rates. Originally, in the 1960s, that was meant to ensure that lenders would loan money to kids with no credit history.

Robert Shireman of the Project on Student Debt said that isn't necessary anymore.

"Certainly over the past 10 to 20 years, the programs have matured to the point where getting capital into the federal student loan program has not been a problem," Shireman said.

Congress appears to agree. Lawmakers have voted in committee to cut billions in subsidies to lenders. Lenders would still get a guaranteed rate of return, and they'd still have a nearly complete government guarantee that protects them against default. But they would make a lot less on those loans.

President Bush supports cutting the subsidy rates. But the industry is trying to fight the perception that it rakes in exorbitant profits.

"No abnormal profits are being made in student loans," said Kevin Bruns, of the industry group America's Student Loan Providers. He said lower profits will drive out some companies.

Many lenders now offer discounted interest rates in exchange for electronic payments or on-time payments. Some will also knock off 2 percent or 3 percent of the principal on graduation or pay upfront fees for the borrower.

Bruns said that while the cut in subsidies won't affect student payments directly, students will pay more if frustrated lenders cut those discounts.

But those discounts are often a ruse, bound up so tight in red tape that they rarely materialize, Dannenberg said.

He said the student loan industry is very healthy and doesn't need the government's support, listing for example the multibillion-dollar buyout of Sallie Mae, the nation's largest student-loan company, by a group of private investors.

Dannenberg wants to go further in cutting subsidies. He supports the idea of having a loan auction, which would undergo a test under the Senate bill.

"One way for an auction to work is that the banks would have to bid against one another in order to secure this sure source of profit that taxpayers create," Dannenberg said.

Bruns said the auction idea would backfire by giving the upper hand to lenders who don't have students' best interest in mind.

He said a less reliable lender who is not as interested in investing in service could win the auction by low-balling to get the market share.

"An auction creates that problem where everything is based on price," Bruns said.

Some Republicans share those concerns and oppose cutting subsidies too deeply. But as news reports roll in about conflicts of interest between colleges and lenders, sympathy for this industry is at low ebb.

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