March 26, 2010 / 1:25 AM / 8 years ago

Congress approves Obama's overhaul of student loans

* Halts federal subsidies to private student lenders

* Billions of dollars in savings to go to needy students

* Measure tied to healthcare overhaul

By Thomas Ferraro

WASHINGTON, March 25 (Reuters) - An overhaul of the college student loan program, ending federal subsidies to private lenders, won final congressional approval on Thursday, giving President Barack Obama a second major legislative victory this week.

Coming in the wake of passage on Sunday of Obama’s landmark U.S. healthcare reform, the measure would end the 45-year-old Federal Family Education Loan Program, which has supported private student lending with federal subsidies.

The program will be replaced by an expansion of direct federal lending to students, eliminating well-paid middlemen -- bankers and other private lenders who have also been shielded by taxpayers from the risk of default.

The projected $61 billion in savings over 10 years would be used to provide federal grants to needy students and help fund other federal education programs, such as support for community colleges and historically black schools.

Obama’s fellow Democrats in the Senate and House of Representatives got the measure through Congress by tucking it into a package of changes to the healthcare overhaul.

Lawmakers in both chambers approved the package and sent it to Obama to sign into law.

A CNN/Opinion Research Corporation said this week that a telephone survey of 1,030 adult Americans found 64 percent of respondents approved it, while 34 percent opposed it.

“There is still a big partisan gap, 82 percent of Democrats support the change, compared to 52 percent of Republicans,” said CNN polling director Keating Holland. “Nonetheless, a majority of both parties have a positive view of the proposal. We haven’t seen that very often in recent polls.”

While student groups and Democratic lawmakers have backed the overhaul, student loan giant Sallie Mae SLM.N and other private lenders have staunchly opposed it.

Critics say the action will reduce students’ lending options and eliminate the jobs of thousands of private lenders, hurting efforts to remedy an ailing U.S. economy that has a 9.7 unemployment rate.

A number of lawmakers, most Republicans, also opposed the measure, saying it would end a successful program and amount to an unwarranted federal takeover of the student loan industry.

Private lenders would still have a role, albeit a greatly diminished one, in servicing loans, such as helping collect payments. Direct federal loans, unlike bank loans, must be serviced by U.S. workers.

“Congress voted to stop wasting billions of taxpayer dollars to subsidize big banks, and start investing that money directly in our students and families,” said House Education and Labor Committee Chairman George Miller.

“With this one move, we will help students pay for college, prepare them for our global economy, keep jobs in America and reduce the deficit,” Miller said.

The House of Representatives approved the measure last year, but it got stalled in the Senate in the face of a threatened Republican procedural roadblock that takes 60 votes in the 100-member chamber to clear.

Democrats avoided the roadblock by putting the student loan measure into the package of changes on the healthcare measure, which needed only a simple majority to pass.

“It’s a very bad idea,” Senate Republican leader Mitch McConnell said in denouncing the student loan overhaul.

“We now have the government running banks, insurance companies, car companies” and Democrats want the government to now “take over the student loan business,” McConnell said. (Additional reporting by Kevin Drawbaugh; Editing by David Alexander and Peter Cooney)

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