Magazine article American Banker

Senate's Proposal for Student Loan Cuts May Drive Away Lenders, Survey Finds

Magazine article American Banker

Senate's Proposal for Student Loan Cuts May Drive Away Lenders, Survey Finds

Article excerpt

Senate's Proposal for Student Loan Cuts May Drive Away Lenders, Survey Finds

WASHINGTON -- The Senate's proposal to cut the federal guaranteed student loan program could reduce by more than one-third the number of financial institutions taking part in the program, according to a Consumer Bankers Association survey.

The banking trade group released its survey just one week after the Senate passed a reauthorization measure that would cut the program and raise the costs to lenders providing guaranteed student loans. The House bill, passed last December, does not include substantial cuts. The differences between the two bills will be debated in a conference session that could come as early as June 23.

"As a result of these [Senate] changes, you're going to have a significant number of institutions, at the top management level, asking, 'should we continue?" said John E. Dean, counsel for the bankers group. "Many are going to reduce their participation or withdraw."

Currently, the federal government pays commercial lenders a special allowance of 3.5% above the 91-day Treasury bill rate for each guaranteed student loan they hold. Essentially an interest subsidy, this special allowance enables the lender to collect interest until the student is able to begin repaying the loan.

The trade group for the retail banking industry surveyed 103 of its member banks, savings and loans, and credit unions. Of those institutions, 38% said they would withdraw from the program if the special allowance was cut from 3. …

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