Banks and other private student loan providers are gearing up for battles on several fronts, including a fight against a possible congressional overhaul of a major loan program that would force companies to compete for business, and likely shrink their profit margins.

Already reeling from the Bush administration's FY08 budget proposal last month, which cuts lender subsidies by $11.2 billion to pay for a Pell Grant increase, private companies are also facing a threat from Senate Health, Education, Labor and Pensions Chairman Kennedy, who might offer legislation to require them to compete in a bidding process for $47 billion in Federal Family Education Loans they offer each year.

By forcing companies to bid to provide the 13.6 million FFEL loans, the government would no longer have to entice lenders by offering subsidies, which totaled $17 billion last year, proponents of this system say.

Instead, lenders would try to propose the most attractive financial package to the government by offering lower interest rates and smaller fees, in the hopes of being awarded student loan contracts.

"Right now, student loan subsidy rates are determined by congressional fiat," said Michael Dannenberg, director of education policy at the New American Foundation. "The problem with that is no one knows what the right subsidy is to bring in private lenders..."

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