Congress is considering a plan that would require banks and other lenders to compete for the right to make federally guaranteed student loans.

The proposal, which has bipartisan support, would set up government-run "auctions" in which lenders would bid on loans based on the size of the government subsidy they would be willing to accept. Those lenders that agreed to the lowest subsidy rate would "win," earning the right to lend to students in a particular state, region, or subset of institutions for a set number of years.

If enacted, the plan would radically change the way the government sets student-loan subsidies. Subsidies are now set by Congress. Under the auction plan, the marketplace would dictate lenders' profit margins. Supporters say that shift could save the U.S. Treasury billions of dollars, freeing up much-needed money for student aid...

But critics say auctions would allow larger lenders, like Sallie Mae, to increase their dominance of the student-loan market. They argue that larger companies, with their economies of scale, could easily underbid smaller lenders and state-based nonprofit groups, and force them out of business...

Proponents acknowledge that there will most likely be some consolidation in the industry. But they point out that the industry is already highly concentrated, with 1 percent of lenders controlling more than 90 percent of the market.

"The small lenders don't originate a lot of volume, and when they do, they often sell it to the big guys pretty quickly," said Michael Dannenberg, director of education policy for the New American Foundation, a public-policy group that has endorsed the auction idea.

For the complete article, please visit The Chronicle of Higher Education website.