US student loan bill advances, Bush will sign

WASHINGTON (Reuters) - The U.S. Senate on Wednesday unanimously approved legislation aimed at stabilizing the student loan market and heading off what lenders warn could be a shortage of loans in coming months as millions of college students lock in their finances before heading to school.

The bill would temporarily allow the U.S. Education Department to inject liquidity into the secondary market for student loans, which seized up recently after investors were spooked by the subprime mortgage crisis.

The department would be empowered until mid-2009 to buy federally guaranteed loans that lenders are unable to sell as securitized debt. Many lenders depend on selling such debt to raise money for new loans.

The bill would also let the Education Department funnel capital for loans to state guaranty agencies under a "lender of last resort" program -- not only for students, but for entire colleges, if they face loan shortages from other sources.

The House of Representatives was expected to vote in favor of the bill, possibly as soon as Thursday. The White House said on Wednesday that President George W. Bush supports the legislation and will sign it.

Loan providers such as Sallie Mae (SLM.N: Quote, Profile, Research), Bank of America Corp (BAC.N: Quote, Profile, Research), Citigroup (C.N: Quote, Profile, Research), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) and many others in the $85-billion industry would be affected.

Sallie Mae said the bill would give the Education Department "at no cost to taxpayers, the flexibility to implement a comprehensive, equitable solution to the credit crunch in the student loan capital markets."

The company urged the Education Department to move as quickly to write regulations to implement the bill as Congress had in adopting it. Sallie Mae, known formally as SLM Corp, is the nation's largest student loans provider.

The industry has also been shaken by the recent exit of some lenders from the federally guaranteed student loan program after the government slashed subsidies paid to lenders. The cuts reduced the profitability of making such loans.

Most U.S. student lending goes through the guaranteed loan program. Dozens of lenders, accounting for about 14 percent of federally guaranteed student loans issued, have dropped out, but many more lenders are still active in the business.

UNCERTAINTY FOR STUDENTS

The situation is causing concern among lenders and lawmakers about whether enough loans will be available this summer, typically the peak season for student lending.

"The full scope of the problem isn't clear yet, but we can't afford to wait for a full-blown crisis before we act," said Massachusetts Democrat Edward Kennedy, chairman of the Senate education committee and sponsor of the Senate bill.

Some critics of the student loan industry have expressed skepticism about the severity of any crisis for students, while acknowledging lenders face problems.

Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, said a "frenzy" had been created by lenders' warnings about a potential loan shortage. "We have no evidence that anybody is being denied loans right now," Nassirian said.

Stephen Burd, senior research fellow at think tank New America Foundation, said some lenders were having financing problems. "We just don't think the government should let the loan industry define the terms of the intervention."

In addition to pumping liquidity into the secondary market, the bill would let students borrow more money under the federal loan program; give parents of students more time to repay federal college loans; and ensure that parents hit by the mortgage crisis can still qualify for college loans.

The Senate added an amendment to the bill that would make more federal grant money available to about 100,000 students.

The student loan industry was embarrassed last year by revelations of kickback schemes and conflicts of interest among some lenders and colleges. The scandal threw the industry on the defensive just as Democrats determined to reform the loan system took over Congress after the November 2006 elections.

US student loan bill advances, Bush will sign
Thu May 1, 2008 6:03pm EDT
By Kevin Drawbaugh