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Private Lenders Suffer A Blow

By CityTownInfo.com Staff
September 14, 2009

A recent cost analysis dealt a blow to the private lending industry late last week by indicating that legislation to end government loans through private lenders would ultimately save more money than a counterproposal backed by Sallie Mae.

The Chronicle of Higher Education reports that the analysis was released by the Congressional Budget Office just days before the U.S. House of Representatives is scheduled to vote on HR 3221--a Democratic bill that calls for all federal student loans to be directed through the U.S. Department of Education, rather than through private lenders such as Sallie Mae. The bill would effectively eliminate subsidies the government now pays these lenders, saving taxpayers billions of dollars annually.

The analysis found that both proposals would save taxpayers about $87 billion; however, the plan submitted by private lenders--which would allow lenders to originate and service loans--would cost the government an additional $13 billion in lender fees. Taking into account the costs of administering the loans, the Democratic bill would save about $80 billion while the industry plan would save about $67 billion.

The Budget Office's analysis determined that "the Obama administration's student-loan proposal is the superior plan for saving taxpayers dollars and providing the greatest benefits for our nation's students and families," wrote Rachel Racusen, a spokesperson for the House Education and Labor Committee, in an e-mail that was quoted by Bloomberg.com. The counterproposal backed by private lenders "sneakily short-changes students and taxpayers to line the pockets of banks," she said.

Martha Holler, a spokesperson for Sallie Mae, argued in an e-mail that the counterproposal "produces historic taxpayer savings, preserves choice and competition for students and school and protects valuable jobs relied on by thousands of families and communities across the country."

Lenders note that their proposal would save more than 35,000 industry jobs and allow uninterrupted access to financing by letting over 4,500 institutions continue using their existing loan programs rather than switching to the government plan.

The Wall Street Journal [from an article originally located at http://online.wsj.com/article/BT-CO-20090911-713134.html] notes that the legislation is almost certain to be approved when it is voted on this week; however, it remains to be seen how or when the Senate will act on the legislation.

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