Bills Are Bad News for Lenders, Good News for Students

The bill for scandals that have rocked the student loan industry is about to come due.

Lawmakers in both houses of Congress have approved bills slashing the subsidies and other perks lenders get for providing low-cost, federally guaranteed student loans. And the lenders' pain will be borrowers' gain, as much of the savings will be diverted into grants and other types of financial aid that students won't have to pay back.

A reconciled version of the bill should reach the White House by the end of the summer, where it is expected to get the president's approval.

Conflicts of interest in the student loan industry have made it an easy target for budget cuts. Over the past several months, an investigation by New York State Attorney General Andrew Cuomo uncovered evidence that these companies showered employees at major colleges and universities with expensive gifts in exchange for sweetheart deals and preferential treatment.

As a result of Cuomo's findings, several schools including New York University, Syracuse University and the University of Pennsylvania have reimbursed students hundreds of thousands of dollars, while companies such as Citigroup(C) are donating millions to financial aid education efforts. Many lenders and the schools they work with are also voluntarily adopting codes of conduct drawn up by the attorney general.

A report released by Sen. Ted Kennedy (D., Mass.), chairman of the Senate committee that oversees education, cites documents that paint a picture of an industry rife with unethical behavior, where college employees who were supposed to be looking out for students were cozying up to loan companies for their own financial gain. A Bank of America(BAC) email lists the lavish demands of one financial aid officer, who expected lenders to pay for birthday parties, sporting events, wine and tequila (the bank did not provide any sports tickets, though it did buy him alcohol on one occasion).