The U.S. Senate voted 79-12 on Friday to slash government subsidies to student loan firms and use the money saved to boost student aid by $20 billion and reduce the federal deficit.
The subsidy cuts were expected to hurt the profits of major lenders such as Sallie Mae, Citigroup Inc, Bank of America Corp. JPMorgan Chase & Co and many others, according to industry analysts on Wall Street.
The House was expected to vote on the legislation later Friday. If approved by both the House and Senate, it would then go to the White House, which has said President George W. Bush would sign it into law.
After months of scandals involving kickback schemes and conflicts of interest among lenders and college officials, the legislation was expected to shake up an $85 billion industry.
College costs have soared in recent years in the United States, forcing students to rely increasingly on loans, helping drive growth for banks and specialized student loan companies.
Massachusetts Democratic Sen. Edward Kennedy, a key backer of the bill, said it cuts the outrageous subsidies the government gives to lenders and gives the money to students.
The bill calls for a 0.55 percentage point cut in the special allowance payment subsidy to for-profit companies that make federally guaranteed student loans.
The bill also would cut interest rates on need-based loans in half, to 3.4 percent, over four years; raise the annual student Pell grant ceiling to $5,400 a year by 2012; and cap student loan repayments at 15 percent of monthly income.
The cost of college has tripled in the last 20 years. Yet family incomes are not keeping up ... This bill provides the help and assistance that millions of Americans need, said Kennedy, chairman of the Senate Education Committee.
One controversial measure in the bill is a test program that will require lenders to bid for the right to make federal PLUS loans to students' parents on a state-by-state basis.
The bill also would offer forgiveness of student loan debt after 10 years for borrowers who go into public service careers, such as being a teacher or police officer.
In addition, it would cut federal student loan default insurance to 95 percent in 2012, from the current 97 percent -- a change seen by analysts as potentially damaging to the student debt securitization market on Wall Street.
Lending industry advocates have criticized the legislation and said it unfairly punishes loan companies.
Some Republicans were critical of the way the student loans bill has been steered through Congress by the Democrats.
Wyoming Republican Sen. Mike Enzi said the bill was incomplete because it excluded some measures aimed at cracking down on the improper marketing practices behind the recent scandals and omitted a proposed revision of the long and confusing application form students must fill out to get financial aid.
The bill just passed is only a band-aid solution without the important bipartisan reforms left out for procedural reasons, said Enzi, top Republican on the education panel.
Kennedy said he was encouraged by the overwhelming vote for the bill and pledged to work on the other items.