Student Loan Bill Passes in House

Lawmakers Step in as Banks Pull Out

The House, trying to avert a looming shortage in available student loans, approved a measure allowing the Department of Education to buy federally guaranteed loans that lenders are unable to sell to private investors.

The action is intended to address a crisis in the market that has forced Reston-based Sallie Mae, Citigroup's Student Loan subsidiary and about 50 other lenders to stop writing some forms of student loans. Bank of America joined them yesterday, saying it will no longer make private student loans. Companies cite increased borrowing costs, cuts in government subsidies for education loans and a lack of investor interest in securities backed by loans.

Without government action, demand for federally backed student loans would outstrip supply, industry officials said. About 7 million borrowers will need more than $68 billion in federal loans this academic year, according to Education Department estimates.

The measure would "ensure America's families can continue to access the federal college loans they are eligible for regardless of what is happening in the credit markets," said Rep. George Miller (D-Calif.), the chairman of the House education panel. The legislation approved yesterday would also increase the amount students could borrow.

Congress is considering other measures, and lawmakers have urged the Treasury Department and the Federal Reserve to take action to provide liquidity for federally backed loans.

The global credit crunch has raised student loan makers' financing costs, and they're unable to raise the rates they charge for federally guaranteed loans because the rates are locked in by the government.

Sallie Mae, formally known as SLM Corp., said yesterday that new student loans are being made only at a loss. Its shares gained 5.7 percent yesterday to close at $17.19.

The legislation passed by the House yesterday would let lenders sell their debt to the Department of Education at a premium. The move is designed to give investors more confidence in securities backed by the loans.

A similar bill has been introduced in the Senate. A Bush administration statement Wednesday backed most provisions of the House measure while recommending some changes to ensure that the secretary of education has "the necessary authority and flexibility needed to respond to the unfolding situation."