Subsidy cuts eyed for college lenders

US Senator Edward Kennedy has proposed cutting subsidies to college loan providers by $18.3 billion and using the savings to increase aid for low-income students, in legislation similar to a measure approved by a House panel.

Kennedy, a Massachusetts Democrat, would reduce government payments including a subsidy that guarantees a certain rate of return to lenders such as Sallie Mae, Citigroup Inc., and Bank of America Corp., according to the legislation his office released yesterday. His Senate Health, Education, Labor, and Pensions Committee was scheduled to vote on the measure today.

The plan is the Senate counterpart to legislation a House panel backed last week that would raise grant funding and cut subsidies by $19 billion. Congress, led by a Democratic majority since January, has conducted hearings on the increasing cost of a college education and investigated ethics lapses and marketing practices in the $85 billion-a-year student loan industry.

Kennedy's proposal "will increase access to higher education and ensure our scarce federal dollars are going where they are most needed -- to students," his office said in a statement. The full Senate probably will vote on the plan before its August recess, spokeswoman Melissa Wagoner said.

Three congressional panels, including Kennedy's, and New York Attorney General Andrew Cuomo have investigated the loan industry and found that lenders had undisclosed arrangements to provide colleges or their staffs with payments, consulting fees, company shares, and other perks.

Cuomo and 31 other attorneys general yesterday sent a letter urging Congress to pass the student loan sunshine measure, legislation designed to make the lending system less susceptible to conflicts of interest. The House approved the legislation on May 9, and similar provisions are in a Senate measure also set to be discussed by Kennedy's committee today.

Cuomo also named three firms that are among loan providers that have engaged in a form of "redlining," basing rates on the college that applicants attend rather than their individual credit history.

Cuomo said in a letter to two members of Congress on Monday that the practice is analogous to past illegal practices by home mortgage lenders who extended loans based on racial criteria.

CIT Group Inc.'s Student Loan Xpress unit, Nelnet Inc., and NorthStar Education Finance Inc. are among "a significant number of lenders" who consider the college attended in evaluating applications, Cuomo said.

Amy Walz, a spokeswoman for NorthStar in St. Paul; Ben Kiser, a spokesman for Lincoln, Neb.-based Nelnet; and Curt Ritter, a spokesman for CIT, didn't immediately return calls to comment.