Student Loan Industry Struggles Amid Controversy The federal government pays lenders big subsidies to loan money to students at below market rates. But with the recent turmoil in the student loan industry over conflicts of interest, lawmakers have voted in committee to cut billions in subsidies to lenders. Now there a controversy over proposals to raise the amount of aid for needy students.
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Student Loan Industry Struggles Amid Controversy

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Student Loan Industry Struggles Amid Controversy

Student Loan Industry Struggles Amid Controversy

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STEVE INSKEEP, Host:

As NPR's Larry Abramson reports, they're not too thrilled about that.

LARRY ABRAMSON: Originally, back in the 1960s, that was meant to ensure lenders would actually loan money to kids with no credit history. But Robert Shireman of the Project on Student Debt says that's not really necessary anymore.

ROBERT SHIREMAN: 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.

ABRAMSON: President Bush supports cutting those subsidy rates but the industry is trying to fight the perception that it is raking in exorbitant profits.

KEVIN BRUNS: No abnormal profits are being made on student loans.

ABRAMSON: Kevin Bruns of the industry group America's Student Loan Providers says lower profits will simply drive out some companies. The cut in subsidies won't directly affect student payments, but Kevin Bruns says students will pay more if frustrated lenders cut discounts that they offer.

BRUNS: Many lenders offer discounts off the interest rate for electronic payments, for payment on time. Many lenders will knock off two or three percent of their principal upon graduation. Many lenders will pay the upfront fees for the borrower.

ABRAMSON: But advocates for student say those discounts are often a ruse, bound up so tight in red tape, they rarely materialize. Michael Dannenberg is with the New America Foundation, a Washington think-tank.

MICHAEL DANNENBERG: What the Congress is talking about doing is taking these lender subsidies and shifting it all into increased grants and cheaper loans, so it'll be guaranteed to go to students. Why do we have to rely on the middleman banks for their generosity?

ABRAMSON: In fact, 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.

DANNENBERG: 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.

ABRAMSON: Kevin Bruns of America's Student Loan Providers says the auction would backfire. He says it would give the upper hand to lenders who don't have students' best interests in mind.

BRUNS: Perhaps less interested in investing in service, is less reliable, when they come in and low ball to get the market share. An auction creates that problem where everything is based on price.

ABRAMSON: Larry Abramson, NPR News, Washington.

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