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Student loan bankers on edge

Soon to be out of the GOP's `trusted hands,' nervous financiers reach out to Democrats.

November 27, 2006|Janet Hook | Times Staff Writer

WASHINGTON — The college student loan industry has been so well-connected in the Republican-controlled Congress that a powerful committee chairman once assured its bankers and other financiers that their interests were in "two trusted hands."

Now that Democrats are about to take control of Congress, those bankers will have to contend with a lawmaker who has compared them to the usurers Jesus drove from the temple of Jerusalem.

"It's time to throw the money-changers out of the temple of higher education," thundered Sen. Edward M. Kennedy (D-Mass.), who is in line to become chairman of the Senate committee that oversees education programs.

Within the student loan industry, the impending transfer of party control is producing anxiety -- in part because Democrats have promised that one of their first acts will be to cut interest rates on federally backed student loans from 6.8% to 3.4%.

For The Record
Los Angeles Times Tuesday November 28, 2006 Home Edition Main News Part A Page 2 National Desk 1 inches; 64 words Type of Material: Correction
Student loans: An article on the college student loan industry in Monday's Section A said that legislation proposed by Sen. Edward M. Kennedy (D-Mass.) would give students new incentives to borrow directly from the government. In fact, the incentives would go not to the students but to colleges, which decide whether their students can borrow directly from the government rather than through private lenders.

Having worked hard over the last decade to make Republican friends in high places, nervous bankers are now moving quickly to open wider avenues of communication with ascendant Democrats, such as Rep. George Miller (D-Martinez), incoming chairman of the House Education and Workforce Committee, who got a last-minute postelection invitation to address a student-loan trade meeting this week.

'Comeuppance is at hand'

Cutting student loan interest rates was part of a six-item agenda that Democrats ran on in the midterm election. The cost to the Treasury would be an estimated $18 billion or more over five years.

The rate cut could be made without touching the subsidies that the government pays to companies for lending money to college students. But some Democratic lawmakers see the subsidies as excessive and may move to slash them.

"Lenders are obviously concerned, because when you say something is going to cost $18 billion, the next question is, 'How are you going to pay for it?' " said John Dean, a lawyer for the Consumer Bankers Assn.

Most borrowers pay 6.8% interest on student loans originated on or after July 1, 2006, but the subsidies usually provide banks a higher return. Lenders are paid allowances equal to the rate of commercial paper -- an index set quarterly to estimate banks' cost of borrowing money -- plus about 2.3% of the student loan.

The federal government also guarantees student loans against default, meaning the banks take little risk.

Miller spokesman Thomas Kiley said, "We plan to examine lenders' profitability to determine whether there are excessive profits that should be put to better use helping students and parents pay for college."

About 8.5 million college students and parents took out $67 billion last school year in direct federal loans and federally backed private loans. That borrowing was the largest source of federal financial aid for college.

The new pressure on the student loan industry is just one example of how the 2006 election produced winners and losers not just among politicians but among congressional lobbyists.

Most at risk in the transition are industries that have given heavily to and benefited mightily from Republican control of Congress, among them energy interests and pharmaceutical companies, as well as the companies that make student loans.

"Comeuppance is at hand," said Barmak Nassirian, an official of the American Assn. of Collegiate Registrars and Admissions Officers. "They are in the line of fire, and they are going to take a bullet here."

A senior House Democratic leadership aide said the interest rate cut would probably be authorized for just a year, whittling its cost to $2.6 billion.

Whatever the cost, the rate bill will be an early test of another Democratic campaign promise: to reinstitute budget rules requiring new spending to be offset by cuts in programs or by revenue increases. Democratic aides say it is not yet clear how the cost of the rate cut would be offset.

Republicans argue that cutting interest rates would not address a more fundamental problem: the rising cost of college.

"The interest rates shouldn't be the major issue here. Rather, the principal -- the amount of money students are forced to borrow because of skyrocketing costs -- should be," said Steve Forde, a spokesman for Republicans on the House education committee. "Unfortunately, House Democrats don't see it that way and are taking a Band-Aid approach."

Democrats promoted two other education ideas during the campaign -- bigger tax breaks for tuition payments and larger direct grants for poor students -- but neither directly addresses the rising cost of higher education.

GOP connections

Lenders are facing new political exposure because for years they have invested much more heavily in building relationships with Republicans than they did with Democrats:

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