Ever since the Democrats took control of Congress last fall, investors have worried that the government might start trimming the largesse it gives educational lenders such as Sallie Mae. On Jan. 17, the House of Representatives passed legislation that would trim rates on need-based subsidized federal student loans by 50% over five years. The Senate has yet to move on the measure, but President Bush weighed in Feb. 5 with a proposed 2008 budget that aims to bolster grant funds, partly with a huge cut for federal loan subsidies. Stunned Wall Street players quickly unloaded shares of lenders such as Sallie Mae.
BusinessWeek suggests the cuts might be so deep that private lenders would stop issuing student loans altogether. An analyst at Morningstar says:
“We don’t believe the government would be doing taxpayers or students any favors by killing off the industry, so we expect that there will eventually be some compromise.” The cuts, if approved, would likely effect students who take out loans after July 1, 2007.—MEGHANN MARCO