Copyright© 2007 by School Services of California, Inc.

                                      Volume 20                   For Publication Date: July 20, 2007             No. 16

The Debate Over Cutting Student Loan Lender Subsidies 

Democrats in the United States Senate are divided over how much to reduce federal subsidies to student loan lenders. Last month, the Senate Education Committee passed a budget trailer bill, sponsored by Senator Edward M. Kennedy (D-Massachusetts), that includes language to reduce current government subsidies for for-profit lenders by .50% and for nonprofit lenders by .35%.  

There is conflicting information coming out of the studies completed on the effect of these cuts on lenders. One study, released by the Congressional Research Service, found that after making the proposed subsidy cuts, Sallie Mae would still be able to make a profit. Another study, which also took into account other provisions of the bill that would significantly increase lender origination fees and decrease government reimbursements for loan defaults, found that altogether these changes could cause an 81% to 89% decrease in Sallie Mae’s profits. This latter study was released by Mark Kantrowitz—Director of Advanced Projects for FastWeb and Publisher of FinAid, which are free websites for researching financial aid and scholarship opportunities—who suggested that the subsidy cuts be phased in over time in order to avoid devastating effects on the lenders and the student loan program.  

Lenders have expressed concerns that the proposed subsidy cuts could drive smaller companies out of the student loan program and would cause other lenders to reduce incentives that provide savings to borrowers. And the Administration says that it cannot support the bill due to concerns about several provisions, but that it supports reducing federal subsidies to lenders—in a fair manner and in a way to “… avoid unintended consequences that may lessen savings.”  

Meanwhile, an amendment to the bill has been proposed by Senator E. Benjamin Nelson (D-Nebraska) and Senator Richard Burr (R-North Carolina) that would reduce the subsidy cut for for-profit lenders from .50% to .35%, the same as for nonprofit lenders. Concerns have been expressed by student groups, which state that aid to students would be reduced if the amendment is enacted. Supporters disagree. The vote on the amendment is expected to be very close as there may be enough Democrat votes to approve it.  

Meanwhile, the debate continues this week. 

—Sheila G. Vickers

(Source: Chronicle of Higher Education)