Many wary of plan to bypass S.C. company

The 36-year-old S.C. Student Loan Corp. would be stripped of its main function - and possibly half of its employees - if legislation passed by the U.S. House of Representatives becomes law, its president and chief executive officer says.

The legislation, approved earlier this month on a largely party line vote in the House, would allow students and families to borrow money directly from the federal government, cutting out banks and nonprofit lenders, including the S.C. Student Loan Corp.

The impact of such legislation on the Student Loan Corp. "would be dramatic," said Chuck Sanders, its president and chief executive officer.

Supporters of the change, mostly Democrats, argue the banks and nonprofit lenders are unneeded middle men who cost taxpayers because the federal government pays the lenders money over and above the interest they make on loans, which are almost fully guaranteed by the government.

Opponents, mostly Republicans, say the change would insert the inefficient federal government into an industry that has long served borrowers well.

For the Student Loan Corp., those arguments come with financial life-and-death consequences.

"Our only reason to be in existence is to make student loans," Sanders said.

The S.C. Student Loan Corp. has $3.9 billion in outstanding loans, Sanders said, including $675 million in loans made during the 2008-09 academic year.

There is a chance, if the legislation becomes law, the corporation would be among those used by the federal government to service student loans.

But with the corporation's core function - making student loans - threatened, it has begun to pare back its work force.

Sanders said the corporation had about 240 employees before Congress seriously began considering changes to the loan program.

As those proposed changes began to seem more likely, Sanders said the corporation has pared its staff down to 205.

The holiday season could be a tough one for employees if the legislation becomes law, Sanders said. "We'll have to start laying off staff right around Christmastime."

Ultimately, he said, only about half of those now employed by the corporation would be needed if the legislation becomes law.

College officials are wary of the changes, which, under the current legislation, would take effect as soon as July 1, 2010.

If that start date holds, students looking to attend college next fall will be applying to the federal government for loans if they or their parents don't get private loans.

"It can work, but our overriding concern is the monopoly this would create and the customer care students might receive (from the federal government)," said Keith Reeves, associate director of student financial aid at Clemson University.

As a candidate for president, Barack Obama backed the idea of having the federal government end student loan subsidies and guarantees.

He praised the House for passing the bill, which needs U.S. Senate approval and his signature to become law.

"This bill will end the billions upon billions of dollars in unwarranted subsidies that we hand out to banks and financial institutions, and will use that money to guarantee access to low-cost loans and strengthen Pell Grants and Perkins loans that make college more affordable," Obama said.

The Congressional Budget Office has estimated ending the current loan program would save $87 billion over 10 years.

Lenders dispute that figure.

U.S. Rep. Jim Clyburn, the Columbia Democrat who is House majority whip, praised the bill, saying it will "help more students graduate with less debt" because savings from the loan program will be used to expand the amount of money available through grants, which students do not have to repay.

Clyburn and his Democratic colleague from South Carolina, U.S. Rep. John Spratt of York, both voted for the legislation.

Three of the state's four Republican congressmen opposed the legislation. U.S. Rep. Gresham Barrett, R-Westminster, did not cast a vote.

Ed Miller, director of student financial aid and scholarships at the University of South Carolina, said an expansion of the Pell Grant program - which provides grants for higher education that do not have to be repaid - would be greatly welcomed.

But greatly expanding direct lending by the federal government brings other challenges, Miller and Reeves said.

With private student loans difficult to get, many students who have loans from the S.C. Student Loan Corp. would look to borrow from the federal government to continue their education. When they graduate, they will have two lenders to repay - to the Loan Corp. and the federal government - unless they can consolidate their debt.

"It will be a mess for students currently enrolled," Reeves said.

Reeves said he is particularly concerned about what the lack of competition for student loans will mean for borrowers.

Direct government loans were created, in part, to spur lenders to provide more competitive rates and better consumer care.

Now, Reeves said, the federal government wants a near monopoly on that lending.

"I'm concerned about the Department of Education's ability to deal with this much volume this quickly," Reeves said. "They'll become almost like a mini-IRS. There's no incentive to apply new technology. You could see how this could become stale."

Miller said whatever the federal government decides to do on student lending, he hopes it is done quickly with clarity.

"Going to something that's cut and dried is going to be beneficial," he said. "We want what's best for our students."