Lenders search for alternatives to loan proposal

As legislation that would dramatically remake the student loan industry speeds its way through Congress, private lenders are pushing alternatives to maintain a grip on some portion of the multibillion-dollar business.

President Barack Obama wants to overhaul the student loan industry by cutting out private lenders that offer subsidized loans while expanding the government’s role in lending directly to students. The changes could cut into profits at student loan giants Sallie Mae, Nelnet and others that have benefited from government backing in the $90 billion-plus market for student loans.

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The industry is in the middle of a major push, with some prominent Democratic lobbyists on its side, to stall momentum for the Obama plan. The House Education and Labor Committee passed the reform bill by a 30-17 vote, with two Republicans in favor. The bill likely will head to the full House soon after the August recess.

As industry stakes its strategy on cost and efficiency grounds, private firms and members of Congress are clashing over budget estimates for the administration’s proposed changes.

Industry groups latched onto an estimate from the nonpartisan Congressional Budget Office (CBO) requested by Sen. Judd Gregg (R-N.H.) that showed under high-risk scenarios the House bill would save $47 billion over 10 years.

That is far less than the $87 billion that would be saved under standard scoring according to the CBO estimates. Rep. George Miller (D-Calif.), chairman of the Education and Labor Committee, has pointed to that figure to sell the lending bill.

The administration and Democratic supporters want to use the savings to help pay for expanded Pell Grants to low-income students.

Sallie Mae is supporting an alternative that the company argues is more efficient than Obama’s plan. Representatives from Sallie Mae met with lawmakers on Monday to discuss the proposal. The plan has not yet been scored by the CBO or introduced as official legislation.

Martha Holler, vice president of corporate communications at Sallie Mae, said the plan would save as much as or more money than the House bill. A bipartisan group of senators and House members have submitted the alternative plan to the CBO, according to a source.

“We meet all the president’s objectives, achieve the same level of savings, and do so in a manner that preserves competition, innovation and low loan default rates,” said Conwey Casillas, managing director of public affairs at Sallie Mae.

The student loan community Proposal includes risk-sharing provisions requiring student loan servicers to pay 3 percent back to the federal government if a loan defaults. It also contains a consolidation and extended repayment plan to allow borrowers to have more options to manage debt incorporating consolidation as a term of servicing contract, as opposed to an origination fee.

The lender has spent $1.8 million on Washington lobbying in the first half of the year, while its employees and political action committee have contributed $6.3 million to federal lawmakers over the last decade. Sallie Mae is also relying on the Podesta Group, a major Democratic lobbying firm, and Jamie Gorelick, a former deputy attorney general in the Clinton administration, to make its case.

Kevin Bruns, executive director of America’s Student Loan Providers, said the CBO’s recent analysis of the administration’s proposal should give lawmakers pause.

“It raises more questions about the merits of moving forward with the bill because we still have many questions left about how much the plan would save,” Bruns said.

Several other groups have proposed alternative ideas, including the National Association of Student Financial Aid Administrators and the New Hampshire Higher Education Assistance Foundation, a state-based nonprofit group.

Another group composed of university financial aid administrators, known as the Friday the 13th Group, is pitching an alternative hybrid framework that would eliminate several state-funded aid programs, such as the Academic Competitiveness Grant, and redirect those funds towards the Pell Grant and federal work-study programs.

Switching to a direct lending program would be expensive and inefficient, the group contends. The administrators estimate it would take most academic institutions a minimum of eight months to one year to transition to the direct lending plan.

R. Dewey Knight, a financial aid director at the University of Mississippi, said that the group has been corresponding with several congressional offices about their concerns, including Sen. Lamar Alexander’s (R-Tenn.).

Rachel Racusen, communications director for the Education and Labor panel, said the House will consider the bill after the August recess.

The Senate could consider the bill after the August recess as part of the healthcare budget legislation, according to sources.

Democratic and Republican senators have raised questions about the Obama plan, including Sen. Ben Nelson (D) of Nebraska, which is where Nelnet is based.