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Bush Proposes 50 Basis Point Cut From Student Lender Subsidy February 5, 2007

Posted by notapundit in US News, White House.
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WASHINGTON (Dow Jones)–U.S. President George W. Bush is proposing a 50-basis-point cut in student lender rate subsidies and increasing lender risk as part of a plan to save the government $95 billion in entitlement spending by 2012.

The proposal would affect Sallie Mae (SLM), Student Loan Corp. (STU) and Nelnet (NNI).

Sallie Mae and other student lenders came out against similar proposals earlier this year, warning that cutting the margins will hurt students.

“Our margin on a guaranteed student loan is 50 basis points, so it is a razor-thin margin,” Sallie Mae spokesman Tom Joyce said last month.

Bush is also asking for another $5.5 billion hike in premiums paid to the Pension Benefit Guaranty Corp., a follow-up to legislation he signed into law last year that would weaken in the near-term pension funding rules.

The premium hike would bring those premiums closer to what a private financial institution would charge for insuring the same risk, according to the White House.

“These reforms would improve PBGC’s financial condition and safeguard the future benefits of American workers,” the budget document said.

The bulk of the savings in that plan, $66 billion, would come from changes to Medicare, including increased Medicare premiums for upper-income Americans.

Details of the Medicare proposal were leaked this weekend and Democrats have already begun to criticize it.

“Rather than trying to solve our health care crisis by lowering costs and covering more people, the President’s plan will make the crisis worse by raising costs and failing to cover those who need it most – our nation’s children,” Senate Health, Education, Labor and Pension Committee Chairman Edward Kennedy, D-Mass., said.

Kennedy and the Democratically controlled Congress is far more likely to propose cuts in subsidies to health insurers if they decide to seek out savings in Medicare.

But Kennedy and other Democrats had already begun looking to subsidies to student lenders to finance education spending increases they prefer.

Under the Bush Administration plan, the government would pay lenders $13.5 billion less over the next five years, according to White House estimates.

Another $3.3 billion would be saved by reducing subsidies to student loan guaranty agencies and another $3.2 billion would be saved by eliminating the Federal Perkins Loan revolving funds entirely.

The bulk of those student loan savings under Bush’s plan would be used to gradually increase the Pell Grant maximum to $5,400. The bulk of that increase would not take effect until after Bush had left office in 2009.

Net of the spending increase, overall changes to student aid programs would save the government an estimated $2.9 billion over the next five years.

The proposal is substantially more ambitious than one being pursued in Congress, in which lawmakers also reduced lender guarantees, but cut the lender rate subsidy by just 10 basis points.

The proposal, approved 356 to 71 on Jan. 17 by the House of Representatives, would save the government $5.9 billion in lender subsidies and another $1.2 billion in guaranty agency subsidies.

The House bill would use the savings to offset the cost of cutting student loan interest rates to 3.4% from 6.8% over the next five years. Bush opposes that plan, arguing that “student debt loads have soared in recent years, and it is not clear that encouraging more loans is a wise course,” according to a statement released by his Office of Management and Budget.

The Senate is expected to consider a similar student loan interest rate cut, but the author there, Sen. Kennedy, would prefer to offset the cost of the rate cut by pushing students into direct student loan programs, in theory generating savings for the program by cutting out private lender middlemen.

By John Godfrey, Dow Jones Newswires

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