College Loan Fight Looms in Congress for Banks

Things are about to get ugly between Sallie Mae and the Democrat-led Senate over how students are to pay for college.

In hearings expected to start early next month, Sen. Edward Kennedy will seek support for legislation he introduced on Monday directly threatening Sallie Mae and big student lenders such as Citigroup, Wells Fargo, Wachovia, Bank of America, JPMorgan, and Nelnet.

And while Sallie Mae may sound like a buxom, unaware farm girl – the student loan giant is prepared to enter the ring with both gloves raised.

Kennedy wants to reward colleges for steering more students to direct government loans instead of the government-guaranteed loans that furnish handsome profits for Sallie Mae and the banks.  Kennedy argues that direct loans are cheaper.  The lending industry, unsurprisingly enough, disagrees with Kennedy’s math.

Reuters quotes Sallie Mae Chief Executive Tim Fitzpatrick:

"Unfortunately, Sen. Kennedy has attempted to smear the integrity of Sallie Mae, the student loan industry, and the financial aid professionals. I’m certainly personally disappointed in his baseless and insulting attacks.”

This isn’t the first time charges like Kennedy’s have been leveled at the student loan industry.  However, things this time around look like they might be favoring Kennedy’s point of view over Sallie Mae, et. al.  For one, Kennedy now chairs the Health, Education, Labor and Pensions Committee that oversees student loans.  For another, the House has already approved a bill to halve interest rates on many student loans to 3.4 percent over five years.

Another new development, as Reuters has pointed out, is a drop in the stock price of Sallie Mae, known formally as SLM Corp., in an otherwise bullish market. SLM shares closed on Thursday at $45.41 on the New York Stock Exchange, down from $55 a year ago.