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College aid reform could be costly for some Utah banks, credit unions

Published: Friday, Aug. 28 2015 9:23 p.m. MDT

SALT LAKE CITY — Utah's banks and credit unions are assessing the impact if and when historic sweeping changes to the current college student loan program take effect.

Reforms contained in separate legislation bundled with the House's health care bill that passed Sunday night would overhaul college aid for millions of students.

The House bill, which still must pass muster in the Senate later this week, eliminates private lenders from their role as middlemen in the process. Instead, student loans will be directly administered by the federal government.

Lenders currently supply low-interest loans to college students which in turn are guaranteed against default by Uncle Sam. The government also subsidizes private lenders whenever necessary to keep interest rates low.

"I think time will show it was the wrong move," said Howard Headlee, president of the Utah Bankers Association. "Either way, it's hard to understand what (this) has to do with health care. The only thing that's consistent is that we're pulling more activity out of the private sector and moving more activities to the public sector, and the associated risks. And that's what I don't think the government is good at."

Rob Brough, executive vice president of marketing and communications for Zions Bank, sees the impact on his bank — and the industry — as minimal, however.

"We actually got out of the direct student lending business about two years ago," Brough said, adding that many of Zions' larger regional competitors had already pulled out. "Most students were going through college financial aid office for loans rather than coming to the bank, and Congress has been pushing cutbacks that negatively impacted banks' ability to make money (on the loans)."

Scott Simpson, president of the Utah League of Credit Unions, said his membership shares a position with the banks on the matter. Although student loans aren't typically a major part of lending portfolios for most credit unions, Simpson says, several Utah institutions have picked up some of the student loan slack after the credit crunch caused banks to shy away.

"The impact remains to be seen," Simpson said. "It's the government taking away avenues for future earnings," thereby hampering the economic recovery.

Nationally, private lenders raised a ruckus, unsuccessfully lobbying to stop the legislation and pledged to carry the fight on to the Senate. They contend it puts private-sector jobs at risk in favor of broadening government involvement.

"The student-loan provisions buried in the health care legislation intentionally eliminate private-sector jobs at a time when our country can least afford to lose them," said Martha Holler, vice president for communications for Sallie Mae in Reston, Virginia.

Holler said Sallie Mae supports sensible student loan reforms. "We know it can be achieved without another big government takeover. ... We are profoundly disappointed that thousands of student loan originators will soon lose their jobs, although the Senate has the power to change this."

Holler said student-loan providers employ 35,000 in this country, including 8,600 who work for Sallie Mae. She estimates this legislation will force Sallie Mae to reduce its work force by 2,500.

Ironically, the bill's next stop will be in the Senate, where there's "never been a hearing, a bill introduced, a committee review or any vote until now — where it is jammed into a huge health care bill and still will not be discussed thoughtfully," Holler said.

The Congressional Budget Office is projecting that student loan reforms passed by the House would save more than $60 billion between 2010 and 2020. Much of this money would be used to expand Pell Grants for low- and moderate-income students. About $19 billion would be reserved for deficit reduction and to offset expenses accompanying the health care package.

"I think what's difficult to project is the credit losses that the government may incur. It may have been a fairly optimistic projection as to what this was going to yield," Headlee said.

e-mail: chuck@desnews.com, jarvik@desnews.com

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