Bankers’ Group Warns That Cuts in Federal Payments to Lenders Could Hurt Student Borrowers

Washington

A group of bankers warned lawmakers on Tuesday that a plan by Democrats to slash the interest rate on federal student loans could ultimately come back to harm student-loan borrowers.

Democratic leaders in the U.S. House of Representatives are planning to introduce legislation on Friday that would gradually reduce the student-loan interest rate, to 3.4 percent from 6.8 percent, over the next five years.

Rep. George Miller, the California Democrat who is chairman of the House education committee, has not yet revealed how the Democrats plan to pay for the proposal, which is expected to cost the government about $6-billion over that time period. But a memorandum prepared by Mr. Miller’s staff listing options that are under consideration became public on Tuesday, and loan-industry officials were not happy with what they saw.

According to the document, the Democrats may call on Congress to reduce the profit margin that the government guarantees lenders on federal student loans; impose new fees on banks that offer consolidation loans; and make loan providers assume a higher share of the risk that students might default on their loans.

In a written statement released on Tuesday night, the Consumer Bankers Association said that if Congress made those changes, “the ability of lenders to invest in technology, enhance customer service, and offer benefits to borrowers” would be put at risk.

The bankers’ group noted that Congress cut the payments lenders receive from the government to make student loans by $8-billion last year, as part of legislation that Republicans were pushing to reduce the federal budget deficit (The Chronicle, February 2, 2006).

“This program, which has been highly reliable and serves students attending 80 percent of all U.S. colleges and universities, cannot sustain annual deep budget cuts without the quality of services to borrowers being hurt,” the bankers’ group stated.

A spokesman for Mr. Miller said that the memo accurately reflected the options that the Democrats were considering but added that “nothing has been finalized yet.”

Background articles from The Chronicle:

• Democrats’ Plan to Slash the Interest Rate for Student Loans Draws Criticism From Unlikely Sources (1/5/2007)
• Democrats Focus on Student Aid, but Questions Remain About Details and Costs (11/17/2006)
• Democratic Leader Pledges an Agenda to Increase College Affordability if Her Party Retakes the House (10/6/2006)
• House Gives Final Passage to Legislation That Would Cut $12-Billion From Student-Loan Programs (2/2/2006)