Fed Chairman Says Subsidy Cuts Contributed to Lender Exodus

Washington — Ben S. Bernanke, chairman of the Federal Reserve Board, is asking Congress to consider new ways of setting subsidy rates on federally guaranteed student loans. In a letter sent last week to the chairman of the Senate Banking Committee, Sen. Christopher J. Dodd, Democrat of Connecticut, Mr. Bernanke wrote that the subsidy cuts enacted by Congress last year are partly to blame for the exodus of commercial lenders from the guaranteed-student-loan program. More than 50 lenders have left the program in recent months, amid a credit crunch that has made it harder for lenders to obtain financing for the loans they make. “Congress may well wish to revisit the question of whether setting a fixed spread over the commercial-paper rate is the best approach,” Mr. Bernanke wrote, referring to the way the government sets subsidy rates now. “You may decide that a more market-sensitive approach — flexible enough to provide a wider spread during times of market stress and a narrower one during normal times — could provide a more robust structure.” Congress and the Bush administration have taken steps in recent days to ensure the availability of loans for students going to college in the fall, but lenders so far have had little luck in persuading Congress to undo the subsidy cuts. Lenders’ advocates welcomed the Fed chairman’s letter. “Mr. Bernanke clearly recognizes the value of having a strong, stable private-sector-based federal-student-loan program to meeting the borrowing needs of millions of families and expanding access to college,” said Kevin Bruns, executive director of America’s Student Loan Providers, a lobbying group. The importance of the Fed chairman’s letter, he added, “cannot be overstated.” —Kelly Field