Is it the end the line for the $92 billion student loan industry?
A bill passed yesterday by the U.S. House of Representatives would effectively end the decades-long practice of the federal government subsidizing banks and other private companies such as Sallie Mae (SLM Corp. (SLM) to act as middlemen for student loans. Democrats estimate that the House bill would save about $80 billion over 10 years.
If the bill becomes law, the money saved will be used to bolster the Pell Grant program by increasing the amount of money students could borrow. The maximum award for Pell grants, the main source of student funding for or low- and moderate-income students, would rise from $5,350 per student to $5,550 next year to $6,900 in 2019, according to The Washington Post. In addition, money will be sent to other programs, including early-childhood education
Sallie Mae and other lenders including Citigroup Inc. (C) argue that a private system is more efficient than a public one. Sallie Mae is backing its own plan, which would save $13 billion less than Obama's. And Sallie Mae continues to press its case for a bipartisan approach, which for now stands little chance of happening.
The government subsidies are a sweet deal for the lenders. As Time magazine notes, the government reimburses lenders up to 97 percent of the loans made under the Federal Family Education Loan program that are not paid back.
The House bill is the latest setback for student loan providers. Last year, SLM announced layoffs following an aborted bid to take the Reston, Virginia-based company private. More jobs will be in jeopardy if the Student Aid and Fiscal Responsibility Act of 2009 is passed. Media reports indicate that the company's 700 jobs in Florida along with others in Delaware are among the ones that are at risk.
"[I]f the bill is passed as is, Sallie Mae will be forced to undergo a massive business restructuring, re-evaluate our geographic footprint and reduce our workforce by 30 percent," the company said in a statement to DailyFinance. "For point of reference, we employ 8,500 nationally."
Lenders may find a friendlier audience in the Senate than the House, which approved the bill by 253 to 171. As The Washington Post points out, "senators sympathetic to the lending industry wield significant influence." Sen. Tom Harkin, chairman of the Senate Health, Education, Labor and Pensions Committee, however, issued a statement praising the bill, calling it "vital legislation to strengthen our educational system and increase the promise of an affordable college education for all students."
Because of the potential change to its business model, Sallie Mae's debt was downgraded by Fitch Ratings. Shares of the Virginia-based company fell in trading Friday, down two percent.
Introduction to Value Investing
Are you the next Warren Buffett?View Course »