If the changes in health care legislation that were passed by the U.S. House of Representatives Sunday night become law, the S.C. Student Loan Corp. will be cut off from a lending stream that is expected to produce $700 million in federally backed loans this year.
Lenders had fought to a standstill legislation crafted to allow the federal government to make more loans directly to students and parents. But President Barack Obama and Democrats on Capitol Hill added the student loan legislation to changes in the health care bill, which was being moved through Congress by a process that allowed for passage with a majority vote in the 100-member Senate instead of the 60 votes needed to cut off endless debate.
Now, with the U.S. Senate poised to pass the health care changes and the student loan legislation in one package, the S.C. Student Loan Corp. and private lenders across the country are bracing for a gigantic hit in a prime area of their business.
"It's tremendous," Chuck Sanders, president of the S.C. Student Loan Corp., said of the potential impact of the student loan changes.
Sanders said the corporation's 200 employees, already down about 40 from a couple of years ago, will shrink further, though he said he did not know by how many.
"Obviously, we're going to have a lower staff," he said.
This year alone, the S.C. Student Loan Corp., a nonprofit organization that has been in operation since 1973, expects to make 111,000 federally backed loans to about 100,000 borrowers.
The $700 million in federally backed loans dwarfs the $70 million the corporation made in private student loans at its private lending peak a couple of years ago, Sanders said.
Federally backed student loans were a campaign issue during the presidential campaign in 2008, when Obama and other Democratic candidates argued that lenders were making millions off loans while taxpayers took all the risks.
If a borrower defaults on a federally backed student loan, the government pays the lender 95 percent of the outstanding balance, Sanders said.
Loans through the S.C. Student Loan Corp. have a fixed rate of 6.8 percent, but the amount of interest the corporation gets to keep is capped by law.
Right now, that cap is set at 1.75 percent, Sanders said.
The difference between what the corporation collects in interest and what it can keep is sent to the federal government.
Sanders said the S.C. Student Loan Corp. sent about $49 million to the federal government last year.
But Obama and other proponents of direct lending argue that taxpayers would save money if the federal government expanded its direct loan program.
Lenders, they argue, merely serve as well-compensated middlemen who take on almost no risk.
Cutting out nongovernment lenders would save taxpayers about $61 billion over 10 years, according to estimates from the Congressional Budget Office.
Some of that money would be used to expand the Pell Grant program.
U.S. Rep. Jim Clyburn, D-S.C., in a Tuesday conference call with South Carolina reporters, said the bill would be especially helpful to this state.
The bill increases the amount of aid poor students can tap and offers more support to schools that serve the disadvantaged. A big winner, Clyburn predicted, would be historically black colleges, which generally educate a larger share of poor students.
Clyburn said a much-needed school construction component is also included.
"This is a tremendous benefit to the people of South Carolina," he said.
Sanders, however, argues that savings estimates do not properly account for what he believes will be a higher default rate once the federal government takes over what was done by local institutions.
"You don't have that hands-on attention," Sanders said, noting that the S.C. Student Loan Corp.'s default rate was 2.7 percent, about 4 percentage points lower than the national average.
Lenders will continue to press their points while the legislation moves toward final approval, but Sanders said the deal is just about done.
"It appears they have the votes," he said. "We had hoped some sanity would kick in, but it hasn't."
S.C. STUDENT LOAN CORP.
About the corporation responsible for overseeing most of the state's student loans
Founded: 1973
Loan portfolio: $539 million
Loans outstanding: 163,000; 129,000 of those borrowers live in South Carolina.
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