Democrats Shake Student-Loan Market
One of the first promises the newly triumphant House Democrats issued after their election victory was to slash interest rates on educational loans–a move that heartened students and parents but frightened those who invest in lenders' stocks.
Sallie Mae, the nation's largest lender, had been trading between $49 and $50 in the days running up to the election. Then, on Wednesday, on double its usual trading volume, Sallie fell $2 a share. By this morning, it was trading below $47. Nelnet, another large lender, has lost more than $1 a share in unusually heavy trading and was changing hands below $27 this morning.
But Wall Street analysts and even Democratic strategists say that fears for the lenders' profitability may be overblown. True, the lenders had made many large and visible donations to Republicans. Through 2004, for example, Sallie Mae was the single biggest contributor to Rep. John Boehner, the Ohio Republican who currently serves as House majority leader.
But the initial Democratic plans won't necessarily hurt the lenders' business. Companies that make Stafford and PLUS educational loans are guaranteed a market rate of return by the government. So any reduction in the interest rate charged to students will simply mean taxpayers will make up a bigger difference in profit payments to the lenders.
A bigger threat to the lenders is the Democrats' plan to increase grants, which could reduce the demand for loans. Also, the lenders are fighting a Democratic plan to encourage students to borrow directly from the federal government, instead of going through middlemen like Sallie Mae. Federal studies have shown that such direct loans would save taxpayers $9 for every $100 loaned. The lenders dispute those savings numbers and say schools and students benefit by the competition among lenders to provide better service.
The higher grants, however, might be difficult to enact since the Democrats will most likely be hard-pressed to find ways to finance them, notes Harrison Wadsworth, a spokesman for the Consumer Bankers Association.
And Democratic staffers say that the proposal to encourage schools and students to channel educational loans directly to the federal government was not on the initial list of goals drafted by Rep. Nancy Pelosi, the California Democrat who is expected to become speaker of the House, which could mean it won't get the full support of the Democratic leadership.
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