"The announcement of the intervention is welcome news to anybody concerned about not having students' education plans for the current academic year disrupted," said John Dean, special counsel to the Consumer Bankers Assn., which represents many large student loan companies.
Democratic leaders on the congressional education committees, who have investigated abuses by the private student loan industry, said they were alarmed that bailout money could be funneled toward these companies. The lawmakers were not informed about the plan and were unclear how it would be implemented.
"I'm very skeptical," said Rep. George Miller (D-Martinez), chairman of the House Education and Labor Committee. "My concern here is that what Paulson may be doing is borrowing the good name of student loans to bail out some very bad actors."
Education Department officials praised the plan for helping to create new private and federal loans. "The department fully supports the program," said spokeswoman Samara Yudof.
The government's new program is meant to help the consumer-lending industry by lending as much as $200 billion to investors who hold securities backed by student loans or other forms of consumer credit. Federal officials hope that lending will jump-start the credit markets and encourage companies to offer loans for cars, credit cards and college.
The $17-billion-a-year private student loan industry has been hit particularly hard by the financial meltdown, according to industry groups and analysts. Thirty-seven firms have stopped issuing private student loans, and investors have been reluctant to put money toward them, according to FinAid.org, a website that tracks the industry.
The government's plan will primarily benefit large lenders, which are more likely to have sufficient capital, said Mark Kantrowitz, FinAid's publisher. Smaller lenders, which often offer lower rates, will be largely shut out, he said, making it unlikely that the plan will lead to significantly lower rates.
Sallie Mae, the nation's largest lending company, has offered private loans with an average interest rate of 11% to 13%, nearly twice as much as federal loans, according to Student Lending Analytics, a California-based firm that advises financial aid offices. It said Sallie Mae, which controlled 42.5% of the private student loan market last year, had offered some private loan variable rates that are more than 17%.
