Securitizing student loan debt

By Kevin Drawbaugh

WASHINGTON, Aug 27 (Reuters) - The multi-billion-dollar market for securitized student loan debt, a financial mainstay supporting U.S. higher education, is facing new stresses as Congress moves to reshape the troubled student loan industry.

With concern over the subprime mortgage crisis roiling the credit markets, a group of financial industry groups said on Monday that several new student loan financings have been put on hold, while loan financing costs are up.

The industry groups pleaded for moderation as lawmakers begin talks, expected to start next week, on finalizing and sending a package of reforms to President George W. Bush that follows months of scandals involving kickback schemes and conflicts of interest among lenders and college officials.

Propelled forward by outrage over the scandals, the reforms' biggest impact is likely to come from proposed cuts in subsidies paid by the government to lenders of federally guaranteed student loans, such as Wall Street titans JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz), Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) and Citigroup (C.N: Quote, Profile, Research, Stock Buzz), as well as sector specialists like Sallie Mae (SLM.N: Quote, Profile, Research, Stock Buzz).

"The timing of the cuts contemplated could not possibly be worse in terms of program stability," the industry groups, including the Consumer Bankers Association, said in a letter addressed to Massachusetts Democratic Sen. Edward Kennedy and other key lawmakers involved in the upcoming discussions.

"We recommend that every possible consideration be given to reducing the cuts so as to ameliorate negative consequences," they said, stepping up a long-standing campaign to protect their businesses and profit margins from legislative threats.

In a rare case of agreement with the Democratic-controlled Congress, Bush favors cutting the subsidies, as well, with the talks ahead expected to focus on how deep to cut.