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House Democratic Student Loan Bill Said To Target Lenders January 10, 2007

Posted by notapundit in Congress, Politics, US News.

WASHINGTON (Dow Jones)–Higher lender fees, lower risk guarantees and smaller profit margins are all part of a House Democratic plan that would also cut student loan interest rates, according to a source familiar with the plan.

The Consumer Bankers Association reacted quickly to the plan, warning that the rate cuts would be bad for students. Rumors about the package have been circulating in Washington.

An aide on the House Education and Labor Committee said the proposals are being considered but that no decisions have been made. The aide predicted a final version of the bill could be completed as early as Friday.

House Democrats plan to bring the bill to the floor for a vote on Jan. 17. It would, over the next four years, cut from 6.8% to 3.4% the federally subsidized student loan interest rate for students from low-income families.

Because excess profits from federally subsidized students loans are returned to the government, the rate cut is expected to cost the Treasury roughly $6 billion over five years.

Senate Democrats have proposed covering the cost by pushing more students into direct loan programs, saying that cutting out private-sector middlemen would save money.

The source familiar with the House plan said all of its proposals to offset the cost of the interest rate cut were targeted at lenders.

The bill would reduce the federal guaranty for student loans from 97% to 95%, it would reduce the guaranteed minimum return on loans by 10 basis points and it would double the lender-paid loan origination fees on student consolidation loans from 0.5% to 1%, the source said.

The bill also would reduce the percentage of fees retained by student loan guaranty agencies from 23% to 20% in 2007 and to 16% by 2011. The agencies get a percentage of the fees to compensate them for collection efforts on defaulted loans, the source said.

But Consumer Bankers Association President Joe Belew said Democrats are mistaken if they think these costs will be born by lenders.

“This program…cannot sustain annual deep budget cuts without the quality of service to borrowers being hurt,” he said.

Belew said he is telling lawmakers that the provisions are “not cuts to student lenders but should be viewed as cuts that will impact student borrowers.”

The House Education Committee aide said discounted that idea.

“Any proposal will ensure that lenders are able to participate and ensure a reasonable rate of return,” the aide said.

Rep. Howard McKeon, R-Calif., however, noted that lenders already saw their profits cut by $12 billion in last year’s budget bill and that further cuts could force some banks out of the market.

Even worse, banks aren’t likely to make much of a fuss, instead they would quietly leaving borrowers with no where to turn.

“They aren’t going to make a big hullabaloo,” said McKeon, who was chairman of a small regional bank before being elected to Congress.

By John Godfrey, Dow Jones Newswires


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