Obama backs placing student loans under government

WASHINGTON (Reuters) - Sen. Barack Obama, a U.S. presidential candidate, said on Tuesday he backs centralizing federal loans for college students under the government and ending federally guaranteed bank loans for them.

The bank loans program is a lucrative business for many financial institutions including Sallie Mae, or SLM Corp. as it is now known, Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp..

Obama, an Illinois Democrat, said a conflicts-of-interest scandal rocking the $85 billion U.S. student loan business underscores the need for such a major reform, which he endorsed originally in 2004.

“It is long past time to put an end to the rampant abuse by lenders of our student loan programs,” Obama said in a statement. He would eliminate the Federal Family Education Loan program that provides subsidies to banks and mandate that all federal student loans be provided through the direct loan program.

He said using direct loans to handle this year’s volume of federally guaranteed loans would have saved almost $6 billion.

Obama’s remarks came amid daily revelations of scandal in the student loan industry and maneuvering in Congress by Democrats trying to put reforms on a fast-track for approval.

Government investigators are accusing student lenders of giving colleges and financial aid officers kickbacks and bribes to curry favor and drum up business among student borrowers.

Bills have been introduced in the Senate and the House of Representatives that would reward universities for channeling more student borrowers into an existing program for direct government loans and away from guaranteed bank loans.

New York Sen. Hillary Rodham Clinton, another top Democratic presidential contender, supports the direct loan incentives proposal.

Lending institutions oppose the measure. They argue that the federally guaranteed loans they make are cost-efficient, promote competition in the industry and come with needed services for universities and the students who attend them.

Kevin Bruns, spokesman for America’s Student Loan Providers, a group representing the lenders, questioned Obama’s position and his cost-savings estimate.

“The amount of money he thinks they will save is really over-stated ... He’s misreading the voters,” Bruns said, citing a poll his group commissioned in mid-April.

It showed more than two-thirds of 800 voters surveyed preferred having a choice of private lenders who compete to offer student loans, while less than a quarter of respondents said they would prefer borrowing directly from the government.