The Student Loan Industry Pushes Back

By Amit R. Paley
Washington Post Staff Writer
Tuesday, April 14, 2009

With the Obama administration proposing to overhaul the programs a majority of American students use to finance their college education, the student loan industry is fighting back.

The administration is calling for sweeping changes to the decades-old approach of providing federal subsides to private loan companies, arguing that the revamp will save $94 billion that can be redirected to needy borrowers and help even more people go to college. But the industry and its congressional allies are countering that it would add billions to the national debt, put thousands of industry employees out of work and provide shoddy service for borrowers.

The result of the growing confrontation will determine the way students across the country pay for college and, potentially, the fate of dozens of student lending firms.

"The Obama plan would mean that many lenders would lose 100 percent of their business," said Mark Kantrowitz, an industry analyst and publisher of "It would be a dramatic shift for the way this industry works."

The administration's proposal would end the 16-year period in which two government programs have provided federal loans to students. One of the programs involves the Education Department making the loans directly to students, while the other involves private companies originating the loans with congressionally imposed subsidies.

President Obama's budget seeks to eliminate the subsidized program -- known as the Federal Family Education Loan program -- and proposes that all the loans come directly from the government. It would then redirect the enormous savings it forecasts to Pell grants for needy students.

Reston-based Sallie Mae, the nation's largest provider of student loans, recently launched a lobbying blitz on Capitol Hill and the White House, proposing a hybrid approach that combines aspects of both federal loan programs. It has hired two well-connected Democratic lobbyists: Tony Podesta, whose brother headed the Obama transition team, and Jamie S. Gorelick, a senior Justice Department official in the Clinton administration. The company has circulated draft legislation around Washington and pressed Democrats whose districts include Sallie Mae employees. The company recently announced the return of 2,000 jobs that had been sent overseas.

"We agree that it's time to remake the loan programs," said Martha Holler, a Sallie Mae spokeswoman. "We support the president, and we want to help him reach his objectives by proposing a constructive alternative that would pull the best of both programs."

The Salle Mae proposal would involve private loan companies originating the loans and then immediately turning them over to the Education Department for a fee. The federal government, which borrows money at a much lower rate than it charges students, would then still generate revenue, which it could channel to needy students.

Robert Shireman, a senior adviser to Education Secretary Arne Duncan, said the administration is open to hearing new ideas. But he added, "Our presumption at this point is the plan that we have laid out is the best plan, and that is what we are moving forward with."

Administration officials said that the Sallie Mae proposal was still not fully developed and did not make clear how the department would decide how much to charge lending companies.

Senior Democratic lawmakers said they were strongly in favor of the president's plan.

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