Budget Cuts Student Loan Subsidies For Lenders

By Justin Gardner | Related entries in Money

And it looks like the move by new Education Secretary Arne Duncan could cripple an entire industry in one fell swoop.

From Wash Post:

The Obama administration has proposed a sweeping change in the $85 billion-a-year student loan industry, one that could fundamentally alter the business of lenders such as Sallie Mae.

The proposal, included in yesterday’s budget outline, would end a program that pays government subsidies to private student loan companies. The administration said the shift, which would mean that all federal loans would come directly through the government, would save $4 billion annually and $47.5 billion over the next decade.

The changes could be a blow to companies such as Sallie Mae of Reston that receive subsidies to originate federally backed student loans. Shares of Sallie Mae, formally known as SLM Corp., plunged 31 percent yesterday on the news.

So will it kill private lending for students? Perhaps. After all, if private industry is accustomed to having public money subsidize it, then there’s a good chance that investment in companies like Sallie Mae will dwindle down to nothing.

Still, Duncan explains why the move was made…

“Rather than continuing to subsidize banks, we want to help dramatically more students get more access to more aid,” Duncan said in a conference call with reporters. “Big picture . . . We’re going to save about $24 billion dollars over the next five years, and we want to actively invest that money in our students.”

But it looks like Sallie Mae is giving up just yet…

Under the administration’s proposal, the private sector wouldn’t be completely cut out of the equation. The Education Department would contract with companies to service loans and collect payments.

Officials yesterday said they expected some companies that now participate in the loan program to take part in a competitive process to service the loans.

Sallie Mae made clear yesterday that it intended to bid for such contracts.

“We also note that the budget proposal looks to obtain ‘high-quality services for students by using competitive, private providers to service loans,’ ” the company said in a statement. “Sallie Mae is the largest and lowest-cost provider of student loan services, and we deliver the highest quality for students, schools and families.”

In the end, if this means more students have access to higher education then I’m all for it, regardless of the fate of companies like Sallie Mae.

More as it develops…


This entry was posted on Saturday, February 28th, 2009 and is filed under Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “Budget Cuts Student Loan Subsidies For Lenders”

  1. Upton Says:

    Thank you for posting this, I’m not sure I would have found the WaPo story otherwise. Like you, I really wonder what this will mean “in the end.”

    You can check my blog to see my first reactions.

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