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.
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.
"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%.
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.
