April 15 (Bloomberg) -- Senate Banking Committee Chairman Christopher Dodd backed a call by SLM Corp. for the U.S. Treasury to make more money available for student loans to avoid a looming crisis in U.S. higher education lending.

Dodd, a Connecticut Democrat, said today that he wants the Treasury Department's Federal Financing Bank to ``prime the pump of liquidity in order to help avert a funding crisis in the student loan market.''

John Remondi, chief financial officer of SLM, told Dodd's committee today that the U.S. is ``facing a scenario where demand for student loans will significantly outstrip supply.'' Action by the Federal Financing Bank would ``have the least disruptive, most immediate and beneficial impact,'' he said.

The Senate panel is considering the effect of the credit crunch on the student loan market. At least 50 lenders have ceased writing some form of student loans as the cost of raising money in the asset-backed market has skyrocketed. More than 6 million students used the guaranteed student loan program last year to help pay for their college educations.

Dodd said that ``the withdrawal of these lenders, the ongoing turmoil in U.S. credit markets and the illiquidity in the student loan market have fueled concerns that a potential student loan credit crunch may be looming.''

He said he is circulating a letter among his colleagues to encourage the Federal Financing Bank to act, he said.

Credit Markets

Democrats have introduced several proposals to help college students borrow money as credit markets tighten. Senator Edward Kennedy, a Massachusetts Democrat, proposed raising loan limits for students.

Representative George Miller, a California Democrat and chairman of the House Education and Labor Committee, would authorize the Education Department to buy loans from companies that need capital to lend more money to students and raise the amount that college students can borrow each year by $2,000.

The House of Representatives will debate Miller's measure this week, House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters today.

``We are putting this on the floor so we can give parents assurance that there will be loans available to them, and the credit crunch won't lock them out of the student loan market,'' Hoyer said.

Attend College

Dodd said it would be difficult for Congress to enact legislation in time to help students applying for loans to attend college in September.

``I don't see that happening,'' Dodd said.

Instead, Dodd called for federal actions that can be taken quickly and don't need congressional approval.

In addition to his letter to Treasury Secretary Henry Paulson, Dodd said he would write to Federal Reserve Chairman Ben S. Bernanke asking him to use ``all existing tools to avert a breakdown in the market for student loans.''

Dodd wants the Fed to allow debt that's backed by student loans to be used as collateral for Treasury securities under the Term Securities Lending Facility created in March to aid the financial markets.

Treasury spokeswoman Jennifer Zuccarelli didn't immediately respond to a request for a comment. Bernanke plans to respond to Dodd's letter after he receives it, Fed spokesman David Skidmore said.

Pressures from a global credit crunch have hurt student loan providers. Last month, Moody's Investors Service downgraded its rating for SLM, known as Sallie Mae, the largest U.S. education lender, citing a decline in federal subsidies for student loans and an aborted buyout of the company.

Last month, the Education Resources Institute Inc., a lender that says it is the largest nonprofit provider of student loans, filed for bankruptcy. CIT Group Inc. has said it will stop making new loans to U.S. students because lending costs have soared.

To contact the reporter on this story: Christopher Stern in Washington at Cstern3@bloomberg.net.

Last Updated: April 15, 2008 15:26 EDT