Student lenders look toward next fight in Congress

The $85-billion student loan industry is looking toward its next battle in the U.S. Congress -- one that could be for its very survival -- as President George W. Bush on Thursday signed legislation slashing federal subsidies to the troubled sector.

As important as the bill-signing ceremony was to lenders and to their critics, what comes next could be even bigger.

Should Democrats make major gains at the polls next year, they are likely to mount a direct challenge to the federally guaranteed student loan program that is central to the business models of most lenders, say some industry analysts.

That could come in the form of expanded auctions requiring lenders to bid for market share. A pilot program along these lines is included in the bill Bush just signed into law.

Or it could come through the resurrection by Democrats of a proposal, dropped this year in a political compromise, to reward colleges for steering students toward direct loans from the Department of Education and away from guaranteed loans made under the Federal Family Education Loan Program (FFELP).

Or, depending on the outcome of the presidential race, it could be an even more fundamental challenge to major FFELP lenders such as Sallie Mae, Citigroup, Bank of America Corp, JPMorgan Chase & Co and others.

Illinois Sen. Barack Obama and former North Carolina Sen. John Edwards, both Democratic presidential contenders, favor eliminating subsidies to FFELP student loan firms and promoting direct government loans. Connecticut Sen. Christopher Dodd, also a candidate, favors mandatory lender auctions.

Odds favor a second blow to the student loan industry, should a Democrat win the White House, said Jaret Seiberg, an analyst at financial services firm Stanford Group Co.

Some experts disagree and foresee little change ahead.

The likelihood of a radical overhaul is pretty slim, said Frederick Hess, director of education policy studies at the American Enterprise Institute, a think tank.

LOANS TO FIGHT POVERTY

To pay for a university education, U.S. students count on many resources -- savings, scholarships, grants that need not be repaid. But these funds have failed to keep pace with rapid college cost inflation. So most students today borrow money.

The government started lending money to poor students in the 1950s. Loan programs multiplied and grew over many years to cover all students, confusing policy objectives by adding college choice to the original goal of access.

The biggest loan program today is FFELP, providing millions of students with bank loans guaranteed, up to a point, by Washington. There are also direct loans made by the federal government and private bank loans with no government strings.

Led by Sallie Mae, FFELP lenders are big businesses that have diversified into private loans and loan processing. The industry says it is cost-efficient and provides valuable services to borrowers that the government does not.

But as their profits and operations have grown, FFELP lenders have gained critics, too.

The federal student loan system for years has been rife with taxpayer waste and inefficiency, said Michael Dannenberg, education policy director at the New America Foundation.

This year marked a turning point, with the critics and their Democratic allies gaining the upper hand on the industry, which has been closely allied to Republicans.

The politics of all this had been strongly in the favor of the FFELP going back to 1994, but that does seem to be changing, said Andrew Rudalevige, professor of political science at Dickinson College in Pennsylvania.

With the Democrats in ascendance, you now have more receptivity to arguments that ... the for-profit sector has been lining its pockets, he said. There are plenty of people out there who think that you should just get rid of the FFELP program altogether and go to direct lending.

The subsidy cut law enacted by Bush will hurt FFELP, said Tom Deutsch, associate director of the American Securitization Forum, an industry group.

People in the industry do view it as an attempt to reduce the level of (loan) originations in the FFELP program in favor of the government direct loan program, he said.

But looking beyond the perennial debate between FFELP and direct loans, some experts said they hope for a wholesale review of a confusing system stitched together over 50 years.

Stepping back and saying, let's rationalize this -- so you don't need a college degree just to apply for college aid -- would be probably the most important thing we could do, said Sandy Baum, economics professor at Skidmore College.