Groups Hope To Keep Private Lenders' Role In Student Loan Market

A group of firms led by SLM Corp. (SLM), and a subsidiary of Citigroup Inc. (C) released a plan Tuesday that seeks to retain a significant role for private lenders in the student loan marketplace.

The backers of the plan hope to convince lawmakers to take up their proposal rather than a plan put forward by the Obama administration that would end all private origination of student loans and use only a small panel of financial firms to service all student loans in the future.

Administration officials have argued the Obama proposal would provide certainty that funding will be available to students, and save nearly $90 billion over the next decade by ending unnecessary public subsidies paid to banks.

Critics have questioned the amount of savings it would generate, and said it would needlessly end an income stream for banks at a time when they are suffering through a severe economic downturn.

The alternative plan released Tuesday is supported by student lending giants SLM Corp., better known as Sallie Mae, Citigroup subsidiary Student Loan Corp., PNC Financial Corp. (PNC) and SunTrust Banks Inc. (STI). It also has the support of a large group of not-for-profit lenders, regional banks and guaranty agencies.

The groups hope to be able to convince House Education Committee Chairman George Miller, D-Calif., of the merits of their alternative. Miller, who is seen as being the point man on any reforms of the student lending market, has held hearings on the issue, but has yet to introduce any legislation outlining reforms.

There has been speculation he may do so in the coming weeks.

The coalition of lenders, servicers and guaranty agencies sent a letter Tuesday to all 535 members of Congress outlining their plan.

It would continue Treasury funding of all student loans as envisaged by the Obama proposal.

The crucial difference would be that it would allow individual colleges to maintain panels of private sector and not-for-profit lenders that would originate and service loans.

Firms would be paid an annual subsidy by the Treasury for servicing the loans. The public funds to pay the subsidy would be considered discretionary federal spending meaning Congress would have to set its level each year.

An existing default fee of 3% that servicing firms must pay to the federal government in the event of a student defaulting on a loan would continue, which the backers of the alternative plan said would both raise revenue for the Treasury and lead to lower default rates by students.

Lenders active in student lending say they don't make significant earnings off the loans themselves, but they present the opportunity to strike up relationships with students to whom they can then cross-sell other financial products.

They have aggressively argued against the Obama plan as it would end their role in loan origination.

-By Corey Boles, Dow Jones Newswires; 202-862-6601; [e-mail]