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.