College-loan fight looms for banks in Congress
By Kevin Drawbaugh 2 hours, 40 minutes ago
WASHINGTON (Reuters) - Student loan giant Sallie Mae and some of the nation's biggest banks are bracing for a fight in the Democratic-led Senate over a problem facing many middle-class voters -- how to pay for college.
In hearings expected to start early next month, Sen. Edward Kennedy (news, bio, voting record) will seek support for legislation he introduced on Monday directly threatening Sallie Mae and big student lenders such as Citigroup, Wells Fargo, Wachovia, Bank of America, JPMorgan and Nelnet.
The Massachusetts Democrat -- an old liberal lion brought back to committee leadership power in November's elections -- wants to reward colleges for steering more students to direct government loans instead of the government-guaranteed loans that furnish handsome profits for Sallie Mae and the banks.
The Kennedy proposal hits the lenders "in the pocketbook," said Mark Kantrowitz, a consultant and author who runs a Web site, FinAid.org, devoted to student financial aid issues.
"Diverting loan volume into direct lending means the banks will have less income ... and be forced to compete," he said.
Direct loans are cheaper, Kennedy said in a statement, citing estimates from
President George W. Bush's 2007 budget.
The lending industry disputes such figures and defends the cost and efficiency of the loans that private-sector lenders make under the Federal Family Education Loan Program (FFEL).
"This is a very successful program. It's in every congressional district. Students are getting better rates. It just doesn't make sense to cut the FFEL program," said Kevin Bruns, head of lender group America's Student Loan Providers.
Sallie Mae Chief Executive Tim Fitzpatrick put it more bluntly on January 18 in a teleconference with market analysts in which he said direct loans have fallen short of expectations.
"Unfortunately, Sen. Kennedy has attempted to smear the integrity of Sallie Mae, the student loan industry, and the financial aid professionals. I'm certainly personally disappointed in his baseless and insulting attacks," said the Sallie Mae CEO, according to a teleconference transcript.
BATTLEGROUND SHIFTS
The two sides have squared off before over this issue, but in some ways, things look different this time around.
Kennedy now chairs the Health, Education, Labor and Pensions Committee that oversees student loans.
The House has already approved a bill to halve interest rates on many student loans to 3.4 percent over five years. Kennedy's bill proposes that and additional steps.
It also would boost funding for federal Pell grants, which are given to students and need not be repaid; let students cap their loan payments at a percentage of income; forgive loans after 25 years; allow students to consolidate loans; cut direct loan fees; and widen the tuition tax deduction.
Outside Washington, New York Attorney General Andrew Cuomo is looking into allegations that college financial aid officers have been getting perks -- such as sporting event tickets -- in exchange for listing certain companies as preferred lenders.
Virginia-based Sallie Mae said last week it is cooperating with the Cuomo inquiry. People familiar with the probe said it is certain to spread to other lenders.
Student loan group Nelnet said separately last week it agreed to settle with the
Department of Education to resolve a dispute over certain loan payments. Kennedy said the Nelnet "scandal has cast a black mark on the student loan industry."
Legal troubles like these put the industry on the defensive just as it confronts the Kennedy bill, Kantrowitz said.
Another new development is a drop in the stock price of Sallie Mae, known formally as SLM Corp., in an otherwise bullish market. SLM shares closed on Thursday at $45.41 on the
New York Stock Exchange, down from $55 a year ago.
In other ways, the student loan debate is unchanged.
U.S. college costs continue to rise, with the average, in-state expense of attending a public four-year college approaching $13,000 a year, up 35 percent since 2002. Private college costs are averaging about $30,000 a year.