September 6, 2007 / 6:53 PM / 12 years ago

Bush to sign bill cutting student lender subsidy

WASHINGTON (Reuters) - President George W. Bush will sign legislation that would slash federal subsidies to student loan firms, cut into their profits, and boost student aid by $20 billion, the White House said on Thursday.

Coming after months of scandals involving kickback schemes and conflicts of interest among lenders and college officials, the legislation was expected to shake up the $85-billion student loan industry, with some turmoil already evident.

Lending group Nelnet Inc. said on Thursday it will cut 400 jobs, or 12 percent of its work force, ahead of the expected profit-pinching legislative changes.

In addition, the changes could cloud the outlook for a proposed $25-billion buyout of Sallie Mae, the nation’s largest student lender, by a group of private equity firms and banks, said Jaret Seiberg, an analyst at Stanford Group Co.

Unveiled by a House-Senate conference on Wednesday, the legislation still faces floor votes in both chambers, which are expected soon, before it goes to Bush.

“The president does intend to sign it,” White House spokeswoman Emily Lawrimore said.

College costs have soared in recent years in America, forcing students to rely increasingly on loans and creating a sensitive political issue among voters.

“I am delighted that the president will join us in helping make this historic bill a reality for millions of students and their families,” said California Rep. George Miller, a key backer of the bill and the Democratic chairman of the House education committee.

The bill calls for a 0.55 percentage point cut in the “special allowance payment” subsidy to for-profit companies that make federally guaranteed student loans, such as Sallie Mae, Citigroup, JPMorgan Chase and others.

The subsidy reduction is deeper than a cut backed earlier by Bush who had once threatened to veto a House-passed bill.

Seiberg said the White House likely feared that a veto of the final bill, although closely similar to the original House version, could have meant political damage for Republicans going into the 2008 presidential and congressional elections.

The bill also would cut interest rates on need-based loans in half to 3.4 percent over four years; raise the annual student Pell grant ceiling to $5,400 a year by 2012; and cap student loan repayments at 15 percent of monthly income.

The White House’s Lawrimore said the Bush administration was pleased that the final bill increased funding for Pell grants over levels put forward in the earlier House bill, but wished it had devoted more funding to needy students.

One controversial measure in the bill is a test program that will require lenders to bid for the right to make federal PLUS loans to students’ parents on a state-by-state basis.

A lobbying group for lenders criticized the legislation and said it punishes the industry. “The cuts and nationwide auction are going to punish lenders right out of the program,” said Kevin Bruns, spokesman for America’s Student Loan Providers.

The bill would offer forgiveness of student loan debt after 10 years for borrowers who go into public service careers, such as being a teacher or police officer. In addition, it would cut federal student loan default insurance to 95 percent in 2012, from the current 97 percent — a change seen by analysts as hurting the student debt securitization market on Wall Street.

“Our legislation ... takes the fat from the banks and lenders and gives it back to students,” said Massachusetts Democratic Sen. Edward Kennedy, Senate education committee chairman, at a Democratic rally supporting the measure.

Congress was expected to move soon on additional legislation more specifically targeting questionable student loan marketing practices targeted in the recent scandals.

Senate Majority Leader Harry Reid, a Nevada Democrat, at a press conference on Thursday listed student loan legislation as a high priority for passage in the next few weeks.

Additional reporting by Richard Cowan and Tabassum Zakaria in Washington

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