Sept. 17 (Bloomberg) -- The U.S. House approved President Barack Obama’s plan to provide all new federal college loans directly and end guarantees and subsidies to lenders such as Sallie Mae.

The measure, included in legislation sponsored by Democratic Representative George Miller of California, passed today in a 253-171 vote. Lawmakers earlier rejected, 265-165, an alternative plan by House Republicans that would have let private lenders continue marketing the student loans.

“Today we made the single largest investment in making college more affordable in the history of our nation,” House Speaker Nancy Pelosi, a California Democrat, said in a conference call with reporters. Democratic Senator Tom Harkin of Iowa, who heads the Senate Health, Education Labor and Pensions Committee,said his panel will take up similar legislation soon.

The bill is intended to protect student loans from turmoil in financial markets and end federal payments that Obama says are wasteful. It would save the government $80 billion over 10 years, according to the Congressional Budget Office. Most of the savings would be directed into higher-education programs such as Pell Grants, which help low-income families afford college.

“This plan would end the billions upon billions of dollars in unwarranted subsidies that we hand out to banks and financial institutions,” Obama said before the vote, during a speech to students at the University of Maryland. “Instead, we’re going to use that money to guarantee access to low-cost loans, no matter what the economy looks like.”

‘Government Takeover’

Republicans said Obama’s plan would threaten as many as 35,000 industry jobs and eliminate consumer choice by forcing more than 4,500 schools to switch to direct lending.

“It is a rush to a government takeover” of the student- loan business, Representative John Kline of Minnesota, the top Republican on the House Education and Labor Committee, said before today’s vote.

Obama and Miller want to end the 43-year-old Federal Family Education Loan Program that subsidizes and guarantees loans made by private lenders. Starting in July 2010, all new federal loans would be provided through a separate program, created in 1993, that lets the Education Department lend directly to students.

Miller said the House-passed bill would prevent job losses because lenders would compete for loan-servicing tasks such as processing payments and collecting on defaults.

Service Contracts

“They’ve already started to bid on contracts,” Miller said in a Bloomberg Television interview after the vote.

SLM Corp., the company known as Sallie Mae, is the biggest U.S. provider of student loans, followed by Citigroup Inc.’s Student Loan Corp. and Nelnet Inc. Sallie Mae made $24.2 billion in student loans last year, 74 percent of them federally guaranteed.

“The Senate now has the opportunity to pass bipartisan legislation that produces historic savings without sacrificing choice and competition for students and thousands of valuable jobs across the country,” Martha Holler, a spokeswoman for Sallie Mae, said today in an e-mail.

While the shift to direct loans may lead some lenders to “get out of the business,” there will still be a “very clear role” for private lenders, Roberto Rodriguez, special assistant to the president for education policy, said today at a White House briefing.

“We already have a partnership with a number of these private lenders around servicing these loans and we expect that partnership will grow as the volume grows into the direct loan program,” Rodriguez said.

Lobbying Continues

House passage of Obama’s bill “is just one step in a lengthy legislative process” America’s Student Loan Providers, a Washington-based group whose 80 members include Sallie Mae, Student Loan Corp. and Nelnet, said after the vote.

“We continue to urge Congress to consider viable alternative reform proposals already on the table that would provide similar taxpayer savings, keep workers on the job with health benefits, maintain uninterrupted access to loans and preserve competition and choice in student loans,” the group said in an e-mailed statement.

Sallie Mae, based in Reston, Virginia, fell 25 cents, or 2.7 percent, to $8.99 at 4:01 p.m. in New York Stock Exchange composite trading. Lincoln, Nebraska-based Nelnet slid 43 cents, or 2.9 percent, to $14.26. Student Loan Corp. dropped $1.48, or 2.8 percent, to $51.07.

To contact the reporter on this story: Molly Peterson in Washington at mpeterson9@bloomberg.net.

Last Updated: September 17, 2009 17:28 EDT