Feb. 15 (Bloomberg) -- Banks that provide college loans with U.S. subsidies would have to compete for the payments, possibly saving the federal government as much as $7 billion a year, under legislation being drafted by Senator Edward Kennedy.

Kennedy, a Massachusetts Democrat and chairman of the Senate Education Committee, plans to file the measure this week, spokeswoman Melissa Wagoner said. One "rough" estimate projects savings of $4 billion to $7 billion a year over the current system, in which Congress sets the reimbursement for handling the loans, Wagoner said.

The legislation is the latest proposal to cut the profits that lenders such as SLM Corp., known as Sallie Mae, reap from government-subsidized student loans. Banks make about $18 billion by helping the government supply about $90 billion a year in tuition financing, federal education officials have said...

The idea didn't have enough political support previously, in part because the government was running budget surpluses, said Michael Dannenberg, a former Kennedy aide who is now director of education policy at the New America Foundation, a nonpartisan public policy group based in Washington.

That's changed because of "a confluence of circumstances," including the growth of federal budget deficits, the Democratic takeover of Congress and Bush's own willingness to challenge lender subsidies, Dannenberg said.

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