Digging Deeper Into Lender Profits

Congressional Democrats plan additional cuts to lender subsidies to pay for proposed reduction in student loan interest rate.
January 10, 2007

From the moment it became clear that Democrats would control the 110th Congress, it was assumed that banks and other entities in the guaranteed student loan industry could have a tough time with the new majority. It didn't take long for that prediction to come true.

Although Democratic leaders still aren't saying so officially, financial aid lobbyists said Tuesday that lawmakers have decided how to pay for their plan (estimated at about $6 billion) to cut the interest rate on many student loans in half over five years -- and that the legislation they will introduce this week to do so (H.R. 5) would do so by cutting several subsidies that the federal government now pays to banks, guarantee agencies and other participants in the federal guaranteed loan program.

Among the changes, the Democratic plan would:

  • Reduce the amount that the government reimburses lenders for loans made on or after July 1 that go into default, from 97 cents to 95 cents for every dollar that is not paid back.
  • Ending the "exceptional performers" program, which increases the insurance payments to loan servicers that consistently comply with Education Department regulations.
  • Increase to 1 percent, from 0.5 percent, the one-time fee that lenders must pay the government to consolidate a borrower's loans. (This fee, like some of the other proposals, is described as a fee for lenders, but such costs are sometimes passed on to borrowers.)
  • Reduce to 20 percent from 23 percent, as of July 1, the amount that guarantee agencies retain from the money they recover from borrowers who default. The rate would drop to 16 percent by 2011.
  • Cut by 10 "basis points" (or 0.1 percentage points) the return that lenders receive on federal loans.

These changes, many of which were proposed by President Bush as part of his 2005 budget plan to help pay for an increase in the Pell Grant Program, would come on top of more than $12 billion in cuts made last year as part of the Higher Education Reconciliation Act. Lenders decried those cuts, too, although advocates for students asserted that the money really came out of the pockets of students, rather than lenders.

This round of cuts would seem to cut more deeply and directly into lenders' profits -- and, predictably, brought howls of protest from them.

"These budget cuts, when coupled with those made last year, risk the ability of lenders to invest in technology, enhance customer service, and offer benefits to borrowers," Joe Belew, president of the Consumer Bankers Association, said in a news release Tuesday. "Because these new budget cuts are included in H.R. 5, CBA is unable to support it."

Noting the cuts made last year, he continued: "The offsets in H.R. 5 are exclusively made from cuts in the [guaranteed loan] program. This program, which has been highly reliable and serves students attending 80 percent of all U.S. colleges and universities, cannot sustain annual deep budget cuts without the quality of service to borrowers being hurt.  CBA is advising Members of the House that the new budget cuts in H.R. 5 are not cuts to student lenders but should be viewed as cuts that will impact student borrowers."

A staff member on one of the Congressional education committees confirmed that the cuts listed above were all "on the table," but said it would be premature to assume that they represent a final list.


Be the first to know.
Get our free daily newsletter.


Back to Top