U.S. House passage seen for student loans overhaul

The U.S. House of Representatives is expected to approve a bill on Thursday that would cut banks and private lenders out of a large slice of the $92 billion student loan market.

If subsequently approved by the Senate, the bill would likely be signed by President Barack Obama, marking the biggest shift in higher education finance in 35 years and a setback for Sallie Mae (SLM.N) and other lenders.

U.S. Secretary of Education Arne Duncan told Reuters in an interview that he was optimistic about passage. The bill has been endorsed by the administration. A House leadership aide said debate on it will start on Wednesday.

Duncan said private firms would still have a role as servicers of government student loans under the bill.

He criticized an alternative proposal being promoted by lenders, including Sallie Mae, which would preserve a role for them in originating government-guaranteed loans, while also providing them with a steady stream of fee income.

"To invest in banks right now, rather than students, that just doesn't make sense to me," Duncan said at a Capitol Hill news conference where he urged approval of the legislation.

Some Republican lawmakers have attacked the bill as an unjustified government takeover of an industry that has served students well, but at least one Republican favors it.

Appearing at the news conference with Duncan, Republican Representative Thomas Petri pressed for passage of the measure, which he called "long overdue and certainly welcome."

Jaret Seiberg, policy analyst at investment research firm Concept Capital in Washington, D.C., said: "We believe the odds favor enactment of this legislation in 2009."

KILLING FFELP

The House education committee approved the bill in July. It would shut down the Federal Family Education Loan Program (FFELP) and shift most student lending into the Direct Loan program run by the Education Department.

Besides Sallie Mae, other lenders with a stake in the outcome include Student Loan Corp (STU.N) (C.N), SunTrust Banks (STI.N) and Nelnet Inc (NNI.N).

Since the 1970s, FFELP has formed the core of a lucrative business model used by private lenders of government-guaranteed student loans. The profitability of the FFELP model fell sharply when the Bush administration cut subsidies to lenders.

FFELP lenders were embarrassed by a 2007 scandal in which some were found to have given money and gifts to college financial aid officers to drum up business.

They also took a devastating hit in the financial crisis of the past year, when the secondary market for student loans froze up, forcing Congress to step in with an emergency bailout so that college students would be able to go to school.


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