Bank of North Dakota makes about 70 percent of the student loans in its home state, but if the Obama Administration has its way, the $3.5 billion-asset bank would be out of the origination business by this time next year.

The bank is not going down without a fight, however. Bank of North Dakota, the only state-owned bank in the country, has been working closely with its congressional delegation to find a way to remain in a business it entered more than 40 years ago, when it made the first government-guaranteed loan in the country.

Specifically, it wants any legislation that reforms government-guaranteed student lending to include a provision that would allow select, smaller institutions to continue originating and/or servicing loans.

"To all of a sudden be uprooted and told, 'We can do this better than you,' — I don't believe that," says Bank of North Dakota president Eric Hardmeyer "I think there are opportunities… where we continue to make loans or we continue to at least service the loans. We're open to both of those opportunities."

Industry insiders, though, say small lenders are facing a losing battle, because the savings proposed under President Obama's plan to essentially cut private lenders out of the student lending market appear substantial. The plan would do away with the Federal Family Education Loan Program (FFELP), which subsidizes and guarantees loans — up to 97 percent — made by private lenders. The $85-billion-a-year industry would then be consolidated into the U.S. Department of Education. Large lenders would continue to service the loans.

The nonpartisan Congressional Budget Office estimates that Obama's budget proposal would save the government up to $94 billion over 10 years, which could then be directed by the government to the Pell Grant program, which helps low-income students afford college.

The private sector, though, argues that if the budget goes through as proposed, more than 30,000 jobs will be lost due to FFELP operations being forced to shutter. In addition, detractors say that the proposed savings are inflated because the predictions are based on a scenario that the recession will last longer than many analysts predict it will.

"No one seriously thinks it's going to save $94 billion and no one should be making a major change based on that number — but it's pretty seductive," says Kevin Bruns, executive director of America's Student Loan Providers, a Washington, D.C., trade group.

Lawmakers appear open to alternatives to Obama's plan. In the heart of a recession, no politician, especially those running for re-election next year, want to be responsible for letting jobs leave their districts. Also, Republicans may blanch at the prospect of giving the government a near-monopoly of the industry.

Still, alternative plans won't be considered unless they too can produce meaningful savings.

That is why Sallie Mae's counter-proposal appears to be gaining some traction. The company, known formally as SLM Corp., offered a proposal under which a private lender would originate the loan, immediately sell it to the government, but retain the servicing rights. Servicers would also share in the risk of loan default. Analysts say the proposal could achieve 80 to 90 percent of the savings that the Obama plan can.

Under Sallie's plan, like Obama's, most lenders would be forced out of the industry. The smaller institutions are asking the government to let select lenders originate, for example, $6 billion to $10 billion per year, as a group. In addition, they are asking the government to award small institutions up to 10 percent of the servicing volume. These provisions, they say, would help preserve jobs and would give students more choice.

Though debate on the legislation is ongoing, most insiders agree that banks' role going forward will primarily be servicing loans. And even if some sort of a carve-out model is adopted, most smaller lenders will be forced out of the business anyway.

One bank executive, who asked not to be named, said spreads are so thin on student loans that only high-volume lenders can make a profit. He expects there will only be "two or three players" left in the business.

"My guess is that you will see a sharp decrease in the number of smaller lenders participating in the program," adds John Dean, special counsel to the Consumer Bankers Association. "That's too bad if you believe in local customer service being better."

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