Congress moves to calm student loan turmoil

By Kevin Drawbaugh

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.