Kennedy asks student lender cuts, scandal widens

WASHINGTON (Reuters) - The chairman of the U.S. Senate education committee introduced legislation on Tuesday to cut government subsidies to student loan companies, but the cuts were milder than some expected and lender stocks rose.

Massachusetts Democrat Edward Kennedy proposed a cut of 0.50 percentage point in the "special allowance payment" made to companies that handle federally guaranteed student loans.

That amount is in line with a cut already proposed by President George W. Bush, but smaller than a 0.55 percentage point cut called for in legislation passed last week by the House of Representatives education committee.

Kennedy wants to reduce to 97 percent from 98 percent the insurance paid by the government to lenders on defaulted loans. He also wants to kill a rule that designates some lenders as "exceptional performers" and makes them eligible for a 2 percentage point boost in their bad-loan insurance rate.

Bush has proposed cutting the insurance rate to 95 percent and the rate for exceptional performers to 97 percent.

The Kennedy bill would cut to 16 percent from 23 percent the fees that may be kept by student loan guaranty agencies on funds they collect from defaulted loans.

It also would raise to 1 percent from 0.5 percent a government origination fee charged to lenders on new loans.

The education committee is scheduled to take action on the legislation on Wednesday morning.

"The bill is more benign than earlier drafts ... This means the committee will overwhelmingly approve the subsidy cuts during tomorrow's vote," Stanford Group Co. student loan industry analyst Jaret Seiberg predicted in a report.

Kennedy's bill, if approved, would go next to the Senate floor for a vote. A House bill also faces a floor vote.

America's Student Loan Providers, a lender industry group, said Kennedy's bill "makes student loans uneconomical for most lenders. Lenders who remain in the program will be forced to reduce discounts on rates and fees and levels of service."

NEW CUOMO FINDINGS

As Congress worked toward overhauling the student loan industry, more revelations emerged in the scandal that has shaken the $85 billion business for months.

New York Attorney General Andrew Cuomo said his office has uncovered a large number of student lenders that punish borrowers with higher interest rates based on which colleges they attend, rather than on their ability to pay loans back.

Cuomo has led the charge in an investigation of kickback schemes and conflicts of industry in the business. He recently broadened his inquiry to take in underwriting criteria.

He said in a letter to lawmakers that industry practices may constitute discrimination under federal fair lending laws.

On Wall Street, the shares of student lenders closed up on the New York Stock Exchange. Nelnet Inc. (NNI.N) ended up 4.5 percent at $26.96; Sallie Mae SLM.N, up 1.1 percent at $57.72; Bank of America Corp. (BAC.N), up 1.3 percent at $50.55; JPMorgan Chase & Co. (JPM.N), up 0.8 percent at

$50.85.

In addition to subsidy cuts, Kennedy proposed measures targeting misconduct at the core of the student loan scandal.

Investigations are focused chiefly on payments and gifts to college officials by lenders in exchange for being placed on "preferred lender" lists shown to student borrowers.

Kennedy wants to force disclosure of any deals where a college steers students toward a lender that has given the college "a fee or other material benefit."

The Kennedy bill would also require disclosure of payments to college officials for service on lenders' advisory boards or in professional development programs.

It would raise the limit on federal Pell grants -- which do not have to be repaid by students -- to $5,400 per grant for 2008-2009 from $4,050, with further increases through 2012.