Congress moves to calm student loan turmoil

New York University students cheer during the university's 175th graduation ceremonies in New York May 10, 2007.

WASHINGTON (Reuters) - The U.S. Congress moved closer on Thursday to putting a government safety net under the $85 billion student loan market as millions of young people make preparations to head to college in the autumn.

The House of Representatives overwhelmingly approved a bill to direct federal financial institutions, including the Treasury Department's Federal Financing Bank, to ensure enough money is available to provide student loans.

The student loan business is in disarray because of fallout from the subprime mortgage crisis, as well as deep cuts in federal subsidies paid to federally guaranteed student loan providers that were approved last year by Congress.

The House bill would also let the Education Department buy federal student loans from lenders unable to sell them on the largely paralyzed secondary market, and funnel loan capital to colleges through state guaranty agencies.

A bill similar to the House measure is pending in the Senate. The White House has voiced support for much of the legislation.

Underscoring the urgency, Bank of America Corp said on Thursday it would no longer offer private student loans in the coming academic year.

And the chief executive of Sallie Mae, the largest student lender, said the system was in for "something of a train wreck" by mid-2008 if the federal government did not move quickly with a stabilization plan.

Dozens of lenders have exited the federal loan program altogether since the cuts in subsidies, prompting some analysts to predict a shakeout of smaller competitors and growth for larger players.

LOANS CRUCIAL FOR COLLEGE

The American higher education system is the world's costliest. Most students, facing soaring costs for tuition, books and living expenses, get some financial aid. As grants and scholarships have dwindled, loans have become common.

Under the biggest loan program, students take out federally guaranteed loans from lenders such as Sallie Mae, Bank of America, JPMorgan Chase & Co and others.

Other ways to borrow money include private bank loans, which have no government involvement, and direct government loans from the Education Department through colleges.

"Today the House took an important step toward ensuring that, no matter what happens in our nation's financial markets, students will continue to have access to federal student loans," said California Democrat George Miller, chief sponsor of the House legislation.

Bank of America and Sallie Mae were among the major lenders detailing impacts on their student loan portfolios this week.

Sallie Mae CEO Albert Lord affirmed company profit expectations for 2008, news that one analyst said helped its shares close up 5.7 percent at $17.19 on the New York Stock Exchange.

But Lord also told a conference call with analysts that the credit crunch meant most of Sallie Mae's new student loans would lose money. Loan demand was running at $3 billion a month, while it has only been able to access funding of about $1 billion a month -- and at record-setting costs, he said.

Sallie Mae was working with Congress and the administration to make lending viable. "The effort has been very pleasantly bipartisan to this point," Lord said.

Sallie Mae posted a first-quarter net loss on Wednesday, although core earnings beat analysts' average forecast.

Bank of America, in a letter to colleges obtained by Reuters, said: "Bank of America is focusing our student lending strategy on the federal student loan program and discontinuing private loan products for the coming academic year ...

"Additionally, we're preparing for increased government loan volume for the 2008 peak student lending season."

In broadly flat trading Thursday on the New York Stock Exchange, Bank of America rose 1.3 percent to $37.47.

In a related matter, student loan services provider First Marblehead Corp said Bank of America terminated its agreements with the company involving private loans.

First Marblehead's shares closed down 16.8 percent Thursday to $3.37 on the NYSE.

KeyCorp said Thursday it boosted its loan loss provision to $187 million in the first quarter, up from $44 million in the year-ago period, due to housing market weakness and reclassification of $3.3 billion of student loans.

"The secondary markets for these loans have been adversely affected by market liquidity issues, prompting the company's decision to move them to a held-to-maturity classification," KeyCorp said. KeyCorp shares closed down 2 percent at $23.71 per share.

(Additional reporting by Jonathan Stempel in New York; Editing by Tim Dobbyn)