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Lenders face school-loan cuts

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Tess Vigeland: The student loan industry’s generating a lot of “F’s” for itself lately. Attorneys general and Congress are investigating quid pro quo deals between lenders and college financial aid officers.

Today, the Senate Education Committee voted to reauthorize the Higher Education Act. And as part of that legislation, the government would cut billions of dollars in government subsidies to lenders. Senators want to use the savings to boost funding for Pell Grants. Guess who’s not happy with that idea?

Jeremy Hobson has a report card for what the proposed changes would mean for student lenders large and small.

Jeremy Hobson: Senators think they can save $18 billion over five years by cutting lender subsidies. Their bill would reduce lender profits on new federal loans by just a half a percent. It would also cut the amount the government reimburses lenders on defaulted loans by about a percent.

Doesn’t seem like a lot, but it is, says Barmak Nassirian of the American Association of Collegiate Registrars and Admissions Officers.

Barmak Nassirian: When such meager cuts generate that kind of savings, you kind of begin to wrap your head around the obscene profitability of the loan business.

These savings would boost the money available for Pell Grants. Students currently get a maximum of about $4,000 a year. That would rise to $5,100 next year under the Senate plan.

But for the companies that offer federally-backed student loans, the changes would be a nightmare.

Kevin Bruns: This is raiding a financial aid program that’s very successful. It’s helped 50 million Americans.

Kevin Bruns is executive director of the lenders’ group America’s Student Loan Providers.

Bruns: The fact is if you cut lender payments by 0.5, the hit will be passed on to the ultimate consumer, which is the students and the parents.

Today’s Senate legislation is similar to a bill passed in a House committee last week and to a proposal submitted by President Bush earlier this year. With that kind of support, changes to the current loan system seem likely, whether lenders like it or not.

I’m Jeremy Hobson for Marketplace.

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