Lawmaker asks Treasury for student loan help

By Kevin Drawbaugh and Lisa Lambert

WASHINGTON (Reuters) - The chairman of a congressional committee that oversees capital markets said on Thursday he has written a letter to Treasury Secretary Henry Paulson expressing concern about emerging problems in the student loan market.

Rep. Paul Kanjorski said, "My understanding is as soon as he receives my letter -- and we're having it hand-carried to Treasury this afternoon -- he's going to take action to ensure that marketplace."

The Pennsylvania Democrat made his remarks at a hearing focused on bond insurers hit by fallout from the subprime mortgage crisis, which is now widening well beyond its origins in the housing market.

Kanjorski, who chairs the House of Representatives capital markets subcommittee, said his letter to Paulson was requesting "support systems for the student loans."

Contacted after the hearing, a spokeswoman for the lawmaker declined to provide further details.

As a global credit crunch spreads to other sectors, concern is growing about the market for securitized student loan debt -- a mainstay of the complex U.S. student aid system.

The $85-billion student loan industry bundles student debts into securities sold on the secondary market in the same way that mortgages and auto loans are securitized.

At a time of tightening credit in many markets, the Michigan Higher Education Student Loan Authority said on Tuesday it was temporarily suspending one of its loan programs as there was insufficient capital to continue it.

The authority in a statement cited "the current and unprecedented capital markets disruption."

In addition, for possibly the first time, some non-bank student lenders experienced a failure in auction-rate securitizations.

"There was insufficient investor interest in their securitizations. So they were not fully subscribed to," said Mark Kantrowitz, a student financial aid researcher and publisher of the Web site FinAid.org.

Kantrowitz said a few weeks ago he floated a proposal to prop up the secondary student loan market that would involve the Treasury Department investing in loan securitization.

"Student loans in some ways are a special market in that there is a lot of public good that derives from it," he said.

As long ago as September, the market for student loan-backed securities was bracing for trouble. At that time, industry groups were saying several new student loan financings had been put on hold and that loan financing costs were up amid institutional investor skittishness.

Last fall these concerns centered on deep cuts being made in federal subsidies paid to student lenders in the federally guaranteed student loan market, such as Sallie Mae (SLM.N), Citigroup (C.N), JPMorgan Chase (JPM.N) and others. Those cuts were approved by Congress, reducing student lenders' profits.