The chairman of the U.S. Senate education committee on Tuesday introduced legislation to cut government subsidies to student loan companies, but the cuts were milder than some expected and lender stocks rose.
Massachusetts Democrat Edward Kennedy proposed a cut of 0.50 percentage point in the special allowance payment made to companies that handle federally guaranteed student loans.
That amount is in line with a cut already proposed by President George W. Bush, but smaller than a 0.55 percentage point cut called for in legislation passed last week by the House of Representatives education committee.
Kennedy wants to reduce to 97 percent from 98 percent the insurance paid by the government to lenders on defaulted loans. He also wants to kill a rule that designates some lenders as exceptional performers and makes them eligible for a 2-percentage-point boost in their bad-loan insurance rate.
Bush has proposed cutting the insurance rate to 95 percent and the rate for exceptional performers to 97 percent.
The Kennedy bill would cut to 16 percent from 23 percent the fees that may be kept by student loan guaranty agencies on funds they collect from defaulted loans.
It also would raise to 1 percent from 0.5 percent a government origination fee charged to lenders on new loans.
The education committee is scheduled to take action on the legislation on Wednesday morning.
The bill is more benign than earlier drafts ... This means the committee will overwhelmingly approve the subsidy cuts during tomorrow's vote, predicted Stanford Group Co. student loan industry analyst Jaret Seiberg in a report.
Kennedy's bill, if approved, would go next to the Senate floor for a vote. A House bill authored by California Democratic Rep. George Miller also faces a floor vote.
America's Student Loan Providers, a lender industry group, said Kennedy's bill makes student loans uneconomical for most lenders. Lenders who remain in the program will be forced to reduce discounts on rates and fees and levels of service.
In a broadly flat market, shares in student lenders rose in afternoon trading on the New York Stock Exchange. Nelnet Inc. was up 5 percent tot $27.08, Sallie Mae was up 1 percent to $57.68 and Bank of America was up 1.3 percent at $50.55.
In addition to the subsidy cuts, Kennedy proposed measures that would attack the kickback schemes and conflicts of interest that have been under investigation for months in a scandal shaking the $85-billion student loan business.
Investigations are focused chiefly on payments and gifts to college officials by lenders in exchange for being placed on preferred lender lists shown to student borrowers.
Kennedy wants to force disclosure of any deals where a college steers students toward a lender that has given the college a fee or other material benefit.
The Kennedy bill would also require disclosure of payments to college officials for service on lenders' advisory boards or in professional development programs.
It would raise the limit on federal Pell grants -- which do not have to be repaid by students -- to $5,400 per grant for 2008-09 from 4,050, with further increases through 2012.
It would also bar lenders and loan guarantors from offering inducements to college aid officials to drum up business.