Congress panel backs bill on student loan upheaval

WASHINGTON (Reuters) - The $85 billion student loan business is in turmoil and with millions of U.S. students locking in funding for the coming school year, Congress is scrambling to make sure enough money is available.

In another case of fallout from the mortgage crisis, some student lenders are having trouble bundling and selling off their loans due to a general paralysis in securitized debt markets, prompting lawmakers to take action.

A congressional committee on Wednesday approved a bill to let the Department of Education buy federally guaranteed student loans from lenders unable to sell the loans.

The bipartisan bill backed by the House of Representatives education committee in a voice vote would also let the Education Department funnel capital to state guaranty agencies that could then provide the loan money to colleges in need.

Other provisions in the legislation would try to get more federal loan money to students and ease some payment terms. The bill will head next to the House floor for a vote.

The House bill "will guarantee that students and parents are able to continue to access the federal loans they need to pay for college," said California Democratic Rep. George Miller, committee chairman.

A similar bill, which would also boost student grants, has been introduced by Massachusetts Democratic Sen. Edward Kennedy, chairman of the Senate education committee.

"The turmoil in the credit markets has become a crisis for some lenders. The question for Congress is how to prevent it from becoming a crisis for students," Kennedy told Reuters, adding he hoped for swift Senate action.

The House bill would additionally call on federal financial institutions, including the Federal Financing Bank (FFB), to pump liquidity into the student loan market.

The FFB, set up in 1973 under the Treasury Department, can buy any obligation issued, sold or guaranteed by a federal agency. Some in the student loan industry are also urging the Federal Reserve to get involved in ensuring loan supply.

POLITICAL IMPACT WEIGHED

Policy analysts and industry lobbyists were sorting through the political ramifications of a government rescue of the nation's largest, most controversial student loan program -- the Federal Family Education Loan Program (FFELP).

Major lenders involved in FFELP include industry leader Sallie Mae, Citigroup, Bank of America Corp, JPMorgan Chase and many others.

Jaret Seiberg, financial services policy analyst at the investment advisory firm of Stanford Group Co, said letting the Education Department buy FFELP loans "could lead to the end of FFELP. It shows that private capital is not up to the task of providing FFELP loans."

Dozens of lenders have recently withdrawn from FFELP because they could no longer sell loans onto the secondary market, reflecting a new wariness among pension funds and other institutional investors about buying asset-backed securities.

The profitability of the FFELP business also fell recently when Congress slashed government subsidies to FFELP lenders.

Seiberg said FFELP loans bought by the Education Department would be transferred permanently into the agency's Direct Loan program. Kennedy and some other Democrats have long hoped to boost the Direct Loan program and marginalize or end FFELP.

FFELP's critics argue that direct loans, which go straight to students through schools, without bank involvement, are cheaper and more efficient. Banks argue that FFELP loans are just as efficient and bring added services to students.

"We continue to believe Miller and ... Kennedy in 2009 will contend that the need for a government rescue this year shows that the FFELP industry is not reliable," Seiberg said.

(Editing by Maureen Bavdek, Phil Berlowitz)