Bernanke suggests student lender subsidies review

Federal Reserve Chairman Ben Bernanke speaks to a joint congressional hearing on the country's economic outlook on Capitol Hill in Washington, in this file image from April 2, 2008. (REUTERS/Jonathan Ernst/Files)

WASHINGTON (Reuters) - The chairman of the Federal Reserve has suggested that Congress revisit the issue of government subsidies to student loan providers, according to an April 25 letter made public on Thursday.

Fed Chairman Ben Bernanke, in a letter to Senate Banking Committee Chairman Christopher Dodd, said recent student loan market problems stem from many causes, including cuts made last year by Congress in lender subsidies.

"Congress may well wish to revisit the question" of whether setting hard subsidy levels for loan providers is the best approach, Bernanke said in the letter.

"You may decide that a more market-sensitive approach -- flexible enough to provide a wider spread during times of market stress and a narrower one during normal times -- could provide a more robust structure," he wrote.

Dodd had written to Bernanke asking the Fed to consider allowing primary dealers, which buy and sell government securities, to pledge student-loan-related-assets to obtain credit through the Fed's term securities lending facility.

Without answering Dodd directly, Bernanke said: "Student loan-related assets can already be pledged as collateral at the Federal Reserve's other three lending facilities."

He added: "We are always reviewing all our policy tools."

Major student loan providers such as SLM Corp <SLM.N> or Sallie Mae and others have been hit by fallout from the subprime mortgage crisis, which is restricting their ability to sell loans on the secondary market and raise capital to make new loans.

In addition, dozens of lenders dropped out of the federally guaranteed student loan program following the subsidy cuts, which reduced the profitability of making such loans.

"The Federal Reserve is working to promote the restoration of more-normal conditions across the broad landscape of financial markets," Bernanke said in the letter.

"How quickly that restoration can be accomplished is impossible to know, but as it occurs, lenders in the student loan market and in many other markets should see risk spreads decline from their currently elevated levels. That decline will help on one side of the profitability equation," he said.

(Reporting by Kevin Drawbaugh, editing by Gerald E. McCormick)