U.S. House eyes extending student loan safety net

By Kevin Drawbaugh

WASHINGTON, Sept 15 (Reuters) - The U.S. House of Representatives was set to vote on Monday on a bipartisan measure to extend a program that pumps federal money into the sluggish secondary market for student loans.

Enacted in May amid worries about loan availability, the program is meant to ensure that students can get federally guaranteed loans so they can afford to go to school.

With financial markets even shakier today than they were four months ago, the House is considering allowing the Education Department to continue the program until July 1, 2010. It has been scheduled to expire on July 1, 2009.

"While no student or college has reported trouble accessing federal college loans since the law's enactment ... turbulent economic conditions are continuing," said a statement from the House education committee chaired by Rep. George Miller.

The California Democrat supports extending the program, as well as a related measure that allows the department to provide funds to state guaranty agencies for making loans to students and colleges in case they are unable to get loans elsewhere.

Major student loan providers affected by these laws include Sallie Mae (SLM.N) , JPMorgan Chase (JPM.N), Bank of America Corp (BAC.N), Citigroup Inc (C.N) and many others.

"It is critical that we extend the authority of the secretary to purchase student loans," said Texas Democratic Rep. Ruben Hinojosa on the floor of the House.

If approved, the extension measure would have to go next to the Senate for further review.

Many student lenders get money for making new loans by selling off old loans to investors in a process known as debt securitization. But the subprime mortgage crisis has chased many investors out of the market for securitized debt.

At the same time, some lenders have recently pulled back from the student loan business, where profits have thinned due to federal subsidy cuts and credit market dislocations.

Sallie Mae and other lenders in the $85-billion student loan industry in April and May warned that the credit crunch could jeopardize loan availability for students. Congress stepped in quickly with the stabilization program.

After it was approved, the Bush administration in late May rolled out details that called for a two-pronged approach.

To soak up unsecuritized debt, the Education Department said it would buy 2008-2009 academic-year loans, and buy into temporary trusts to be capitalized with federally guaranteed loans.

To date, $3.4 billion has been distributed under the trusts part of the program, while no student loans have yet been purchased outright, said a department official. (Reporting by Kevin Drawbaugh; Editing by Bernard Orr)