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Congress Mulls Telling Student Lenders It's All or Nothing for Stafford Loans

Thursday, June 19, 2008

In response to the news that several major student lenders have ceased offering Stafford Loans at many two-year and some four-year colleges, two Democratic senators have introduced legislation which would essentially make Stafford Loans an all-or-nothing deal.

Proposed Legislation Would Eliminate Discrimination Based on School for Stafford Loans

Recent changes in student loan legislation and the U.S. credit crunch have made the student loan business much less profitable for banks and driven many to scale back their operations or withdraw completely from the business. The proposed legislation by Senators Patty Murray (D-WA) and Chris Dodd (D-CT) would not allow student lenders participating in the FFELP program to discriminate based on the school a student attends, the length of the academic program, or the income level of the student. As Senator Murray put it in a statement, "Lenders offering loans backed by taxpayer dollars shouldn't be able to discriminate against certain schools or students."

How Will Student Lenders React

It's unclear what impact this legislation might have on the student loan market, if it were to pass. Stafford loans are subsidized by the federal government and are guaranteed against default for up to 95 percent of their value.

Several major lenders have already left the market completely including Bank of America and Student Loan Xpress. Would the requirement to lend to all eligible schools drive other student lenders out of the Stafford Loan business? Or could the legislation reverse the trend at many 2-year colleges where lender lists have been shrinking this year?

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