US House Passes Sweeping Student Loan Market Overhaul

The U.S. House of Representatives Thursday easily passed legislation which would effectively end private lender involvement in the student loan market, establishing the federal government as the sole provider of college loans.

The bill introduces sweeping changes to the U.S. higher education system, and serves as the third central plank of President Barack Obama's domestic agenda.

Similar to the continuing efforts at overhauling health care, the changes to the federal government's higher education policies would have a serious impact on the bottom line for private sector players currently serving the marketplace.

The House vote was 253-171, largely along party lines.

All for-profit lenders, who currently account for 80% of the government-backed loans made each year, would be cut out of the market for originating loans. There would still be a role for private banks and lenders to bid for a limited number of contracts to service the loans after they are made by the government.

For companies like SLM Corp. (SLM), better known as Sallie Mae, the proposed legislation is already having an impact. This week, Fitch Ratings downgraded Sallie Mae to BBB+ status, and called its outlook negative.

The Obama administration would use anticipated savings from the measure to increase grants for low-income students, boost funding for minority student groups, provide money for school construction with a small portion left over to pay down the deficit.

The non-partisan Congressional Budget Office said that ending fees paid to private lenders would save the taxpayer $87 billion over the next decade.

An alternative proposal floated by a group of lenders including Sallie Mae would realize the same level of savings, the CBO said.

In the Senate, staff on the Health Education Labor and Pensions Committee are drafting legislation which is similar to the House version, according to a Senate democratic aide.

The Senate bill would also end private lender origination of loans, the aide said, leaving the federal government as the sole provider of college loans.

The House attached a measure to the student loan bill ending all federal government funding of the community organizing group Acorn - the Association of Community Organizations for Reform Now. The group has long been in the cross hairs of Republicans, but more recently has been accused of widespread fraud and other illegal activities.

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