Groups Hope To Keep Private Lenders' Role In Student Loan Market
July 07 2009 - 11:25AM
Dow Jones News
A group of firms led by SLM Corp. (SLM), and a subsidiary of
Citigroup Inc. (C) released a plan Tuesday that seeks to retain a
significant role for private lenders in the student loan
marketplace.
The backers of the plan hope to convince lawmakers to take up
their proposal rather than a plan put forward by the Obama
administration that would end all private origination of student
loans and use only a small panel of financial firms to service all
student loans in the future.
Administration officials have argued the Obama proposal would
provide certainty that funding will be available to students, and
save nearly $90 billion over the next decade by ending unnecessary
public subsidies paid to banks.
Critics have questioned the amount of savings it would generate,
and said it would needlessly end an income stream for banks at a
time when they are suffering through a severe economic
downturn.
The alternative plan released Tuesday is supported by student
lending giants SLM Corp., better known as Sallie Mae, Citigroup
subsidiary Student Loan Corp., PNC Financial Corp. (PNC) and
SunTrust Banks Inc. (STI). It also has the support of a large group
of not-for-profit lenders, regional banks and guaranty
agencies.
The groups hope to be able to convince House Education Committee
Chairman George Miller, D-Calif., of the merits of their
alternative. Miller, who is seen as being the point man on any
reforms of the student lending market, has held hearings on the
issue, but has yet to introduce any legislation outlining
reforms.
There has been speculation he may do so in the coming weeks.
The coalition of lenders, servicers and guaranty agencies sent a
letter Tuesday to all 535 members of Congress outlining their
plan.
It would continue Treasury funding of all student loans as
envisaged by the Obama proposal.
The crucial difference would be that it would allow individual
colleges to maintain panels of private sector and not-for-profit
lenders that would originate and service loans.
Firms would be paid an annual subsidy by the Treasury for
servicing the loans. The public funds to pay the subsidy would be
considered discretionary federal spending meaning Congress would
have to set its level each year.
An existing default fee of 3% that servicing firms must pay to
the federal government in the event of a student defaulting on a
loan would continue, which the backers of the alternative plan said
would both raise revenue for the Treasury and lead to lower default
rates by students.
Lenders active in student lending say they don't make
significant earnings off the loans themselves, but they present the
opportunity to strike up relationships with students to whom they
can then cross-sell other financial products.
They have aggressively argued against the Obama plan as it would
end their role in loan origination.
-By Corey Boles, Dow Jones Newswires; 202-862-6601;
corey.boles@dowjones.com