The student loan industry is about to go up against its own customers.

Lenders and student advocacy groups are preparing to fight each other on Capitol Hill over how much the government subsidizes school loans.

Student loan subsidies were designed originally to encourage lenders and guarantors to participate in the program. Student groups...want to see the subsidies reduced, arguing that those federal dollars would be better spent on increasing Pell Grants to $5,100 from $4,050...

Reducing subsidies could drive some lenders out of the business entirely, industry members contend. And fewer lenders means fewer options for loan-shopping students...

If recent history is an indicator, the lenders are facing an uphill fight. At the close of the 109th Congress, federal subsidies for loans were cut $20 billion as part of the Deficit Reduction Act...

They are also grappling with fallout from scandal. One firm, Nelnet, is being scrutinized for some $278 million in subsidies that an audit claimed improper. And Sallie Mae raised eyebrows recently when Chairman Albert Lord sold more than $18 million in stock three days before Bush proposed the subsidy cut, causing the company's stock to drop 9 percent.

"The banks have been triangulated by the president," said Michael Dannenberg, director of education policy at the New America Foundation. "He has made common cause with congressional Democrats..."

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