Your Mi$ery I$ Their Profit

Up to your ear$ in $tudent loan$? That'$ good new$ for the bond trader$

Even so, there is dissent among the Republican ranks. After all, Thomas Petri, a veteran GOP congressman from Wisconsin, is a lead supporter of the Direct Loan Reward Act.

And George W. Bush's budget office included this note in its last assessment of the loan programs: "Significantly lower Direct Loan subsidy rates call into question the cost effectiveness of the FFEL program structure, including the appropriate level of lender subsidies."

The lending lobby has tried to cover its tail with both parties. According to political contributions compiled by The Chronicle of Higher Education, sources affiliated with five big student lenders have given more than $400,000 to members of the House Committee on Education and the Workforce in the 18-month period ending in July 2004, with 75 percent going to Republicans.

illustration: Richard Borge

Since Republicans have a majority on the committee, their bill has taken center stage. Parts of it actually threaten to make repayment more difficult for graduates. For example, the College Access & Opportunity Act suggests that loan consolidations be made at variable rather than fixed rates. Critics of this measure say that it would force the average student with $17,000 in debt to pay $5,500 more in interest over the life of his loan.

Bankers argue that further cutting lender subsidies and perks could push more small players out of the market. Lots of lenders exited the business when the Clinton administration launched the direct-loan program in 1993. Bankers warn that lower subsidies and more support for the direct-loan program could push interest rates up for students.

"No bank in their right mind is going to lend money at this rate to students," said Matt Snowling, a stock analyst with Friedman, Billings, Ramsey who has covered Sallie Mae for six years.

Around 5 percent of students default on their school loans, compared with just over 1 percent of home owners who miss mortgage payments to the point of foreclosure. Students with little or no credit history are able to get large loans for school because of the guarantees and provisions in the Higher Education Act, which itself was a by-product of the civil rights movement. They're also entitled to flexible payment options, hardship deferments, and in some cases loan cancellations. The flip side is that it's virtually impossible to write off student debt through bankruptcy, the way you can other debt. Uncle Sam can collect until you're old and gray, seizing your tax refunds and attaching your wages without a court ruling. He can even go after your Social Security benefits.

With collecting muscle like that, the big lenders have stuck it out in the market even as their subsidies have been cut and their profit margins squeezed. Of course, if the government decides to overhaul the system, say by introducing auctions such as Kerry has proposed, then the middlemen will end up with little say in the matter. And perhaps students and taxpayers will get a bigger share of the profits. Otherwise, maybe we should all buy stock in Sallie Mae.

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