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More Bad News for Lenders

More Bad News for Lenders
February 16, 2007

An old idea is about to resurface in Washington -- potentially adding to the woes the student loan industry is facing in the Democratically controlled 110th Congress.

Sen. Edward M. Kennedy (D-Mass.) is poised to introduce legislation that would require banks and other lenders to compete for the right to make federally guaranteed student loans, with the goal of identifying those who could offer the loans at rates that would cost the government the least, and using the savings for other efforts to make college more affordable for students. A Kennedy spokeswoman said Thursday that "we hope to introduce a bill soon.... This is something Senator Kennedy has been watching closely." Other details about the proposal, which was first reported Thursday by Bloomberg, were hard to come by.

But similar proposals in the past -- from Kennedy and other Democratic politicians -- offer some guidance about what the head of the Senate's education committee may be contemplating. The Clinton administration proposed a pilot program to test an "auction based" approach to setting student loan interest rates in 1998 -- which Kennedy sought to incorporate into the Higher Education Act renewal that year -- and Sen. John Kerry, in his 2004 run for president, proposed paying for a major expansion of the AmeriCorps service program by setting student loan rates at auction.  

More recently, a former Kennedy aide, Michael Dannenberg, who is now director of education policy at the New America Foundation, laid out the rationale for forcing banks to compete for the right to make government-guaranteed loans in an op-ed in The Washington Post. The essay, co-written with Philip Longman, a fellow at the foundation, noted that the government already auctions off Treasury debt and other assets, and estimated that abandoning the system by which the government sets a minimum subsidy it will pay lenders on the loans they offer to students could save the U.S. treasury $15 to $20 billion over five years, based on the 4 percent to 7 percent premium that officials in Missouri earned when the state loan agency there sold off a portion of its portfolio.

The Kennedy spokeswoman cited the Missouri loan sale and a similar one in Illinois as inspiration for the senator's own proposal, saying he Senator "sees this as an opportunity for the federal government to make similar premiums."

Banks, predictably, sounded alarms as word of the Kennedy proposal spread, reiterating arguments they have made about past proposals for a student loan auction. John Dean, counsel to the Consumer Bankers Association, said such a plan would cause major complications because of some of the unusual traits of student loans. Because students typically take out loans in multiple years, borrowers and colleges alike could find themselves having to change the lenders they do business with every year. And lenders, if forced to offer their loans at the lowest possible price, might have to cut services for students and investments in technology, he said.

The bankers' group's objections this time around are likely to mirror those it offered in response to Kerry's like proposal in 2004.

The student loan industry is on the defensive in the new political environment so far, being barraged from one side with White House and Congressional proposals to slash lender profits to pay for other student aid priorities in the federal budget, and from the other with Congressional inquiries into various forms of alleged abuse or improprieties.

 

 

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