By Kevin Drawbaugh
WASHINGTON (Reuters) - President George W. Bush signed student loan legislation on Thursday that slashes federal subsidies to lenders such as Sallie Mae , Citigroup , Bank of America and many others.
Bush originally called for smaller subsidy cuts, but ultimately backed tougher legislation agreed by the Democrat-controlled Congress that will also direct $11.4 billion in savings to federal grants for college students.
"Today is a reaffirmation of our commitment, our determination to help more Americans realize dreams by getting a good education," Bush said before signing the bill.
Congress passed its overhaul of the troubled student loan industry's subsidy structure on September 7, after months of lobbying by critics of the business, backed by Democrats, and the powerful lender community, tied closely to Republicans.
In the end, the $85-billion industry suffered a setback that industry analysts expect will pinch large lenders' profits and chase some smaller lenders out of the business.
Democratic California Rep. George Miller, a key backer, said, "This bill will help ensure that no qualified student is prevented from going to college because of the cost."
College costs have soared in recent years in the United States, forcing students to rely increasingly on loans and driving growth for banks and specialized student lender firms such as Nelnet Inc and First Marblehead Corp .
"We are making student loans work for students -- not the banks," said Senate Majority Leader Harry Reid, a Democrat from Nevada.
But Kevin Bruns, spokesman for America's Student Loan Providers, an industry group, said the new law will limit consumer choices. "Choice of lenders has saved millions of families billions of dollars -- this 80 percent cut in federal support for the program puts that choice at risk," he said.
The subsidy cuts have raised doubts about the proposed sale of industry leader Sallie Mae to a group of private equity funds and banks. Sallie's share price was recovering in midday trading on Thursday on news of a possible deal renegotiation.
The new law specifically cuts the "special allowance payment" subsidy to for-profit companies that make federally guaranteed student loans by 0.55 of a percentage point. Bush had proposed a 0.50 percentage point cut in his budget.
It cuts interest rates on need-based loans in half, to 3.4 percent, over four years; caps student loan repayments at 15 percent of monthly income; and raises the annual student Pell grant ceiling to $5,400 a year by 2012 from $4,310.
The law sets up a controversial test program that will require lenders to bid for the right to make federal loans to students' parents on a state-by-state basis.
It also offers forgiveness of student loan debt after 10 years for some borrowers who go into public service careers, such as being a teacher or police officer.
In addition, it reduces federal student loan default insurance to 95 percent in 2012, from the current 97 percent -- a change seen by analysts as potentially damaging to the student loan debt securitization market on Wall Street.
The law also raises a loan origination fee paid by lenders to the government, to 1.0 percent from 0.5 percent.
But the law does little to crack down on the kickback schemes and conflicts of interest at the center of a scandal this year that embarrassed lenders and college officials.
After investigations by New York Attorney General Andrew Cuomo and congressional committees, the scandal put the lending industry on the defensive and gave Democrats an opening to push through the subsidy cuts, lobbyists said.
But separate legislation to bar the questionable practices and make other changes -- such as shortening the 10-page federal college application form -- is not yet finalized.
(Reporting by Kevin Drawbaugh, editing by Tim Dobbyn)