Student loan auction proposal stirs opposition

on September 03 2007 11:27 AM

A proposal to test a radical change in the U.S. student loan industry by putting it on the auction block is set to pit Democratic lawmakers against the Bush administration and the banking industry.

As Congress returns this week from its summer recess and gets back to work cleaning up the troubled $85-billion business, one proposal would set up a test requiring lenders to bid competitively for the right to issue loans.

That would dramatically change the current system and some in the industry are attacking the proposal as unworkable.

The auction proposals ... create unacceptable levels of uncertainty for lenders and schools alike, said four industry lobbying groups, including the National Council of Higher Education Loan Programs, in a letter last month to lawmakers.

Another industry coalition said earlier in August that legislation would impose unworkable, untried auction systems on parent borrowers and schools.

Both the Senate and the House of Representatives have passed bills recommending auction pilot programs, as well as other reforms for an industry embarrassed this year by scandals involving kickback schemes and conflicts of interest.

Congressional negotiators are preparing to hammer out a final version of the bill to send to President George W. Bush.

A House bill passed on July 11 calls for a federal study of different auction options, a recommendation on the best option and then a real-world test of it.

A Senate bill passed just days later would mandate the prompt launching of a pilot program to auction off rights to issue federal PLUS loans to students' parents.

The White House said in July it was concerned that the Senate's auction proposal would reduce choices for students and parents and involve enormous implementation issues that threaten to disrupt services and limit loan availability.

The administration has threatened to veto the House bill, mainly because the White House wants more funding for student grants and less emphasis on lowering student-loan interest rates.

PLUS loans are available through the federally guaranteed student loan program that provides most U.S. students with loans to help meet the soaring cost of a college education.

Under the Senate bill, the U.S. Department of Education would run auctions for a portion of PLUS loans, holding one for each of the 50 states every two years. In each state, two winners would be picked as the lenders willing to do business at the lowest subsidy rate.

At present, lenders taking part in the 42-year-old federally guaranteed student loan program -- such as Sallie Mae, JPMorgan Chase & Co., Citigroup, Bank of America and others -- get government subsidies.

Subsidy levels are set every few years by Congress in a ritualized political fight that critics say hinges on guesswork and lobbying clout and largely ignores market forces.

Lenders should compete against each other to participate in the federal student loan program, said Sen. Edward Kennedy earlier this summer on the Senate bill.

The bill creates a pilot program in which an auction will be used to see what subsidies are truly necessary to keep loans available to students. The money we save through this pilot program will be sent back where it is needed most -- to increase financial aid for students, said Kennedy, a Massachusetts Democrat and Senate education panel chairman.

Education Secretary Margaret Spellings in an early August letter to House-Senate negotiators said: While the (Bush) administration supports taking advantage of market mechanisms, I strongly believe that we must proceed with great caution on entering the student loan auction arena.

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