April 17 (Bloomberg) -- The Department of Education could buy federally guaranteed student loans that lenders can't sell to investors under a measure the U.S. House of Representatives approved to help avert a shortage of funds to cover college costs.

The action is intended to address a crisis in the market that has forced Citigroup Inc.'s Student Loan Corp., SLM Corp. and about 50 other lenders to stop writing some forms of student loans. The companies cite increased borrowing costs, cuts in government subsidies for education loans and a lack of investor interest in securities backed by loans.

Without government action, demand for federally backed student loans would outstrip supply, industry officials said. About 7 million borrowers will need more than $68 billion in federal loans this academic year, according to Education Department estimates.

The legislation would ``ensure America's families can continue to access the federal college loans they are eligible for regardless of what is happening in the credit markets,'' said Democratic Representative George Miller of California, chairman of the House education panel. The legislation approved today also would increase the amount students could borrow.

The House approved the measure 383-27, and a similar bill has been introduced in the Senate. A Bush administration statement yesterday backed most provisions of the House measure while recommending some changes.

Other Measures

Congress is considering other measures, and Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, sent letters today to Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson urging them to take action to provide liquidity for federally backed loans.

``We must act quickly and aggressively in order to avert a crisis in the student loan market, so that students and their families have options to finance their education,'' Dodd wrote.

The global credit crunch has raised student-loan makers' financing costs, and they are unable to raise the rates they charge for federally guaranteed loans because they are locked in by the government.

Sallie Mae

SLM Corp., known as Sallie Mae, has stopped offering consolidation loans, which allow borrowers to combine several loans into a single one charging a lower rate. The company said today that new student loans are being made only at a loss.

Agencies in at least 10 states including Massachusetts, Michigan and Pennsylvania have announced plans to stop providing federally guaranteed student loans.

Turmoil in global credit markets and congressional action last year to reduce subsidies to lenders have combined to restrict lenders' access to capital.

Congress passed and President George W. Bush signed into law in September legislation that cut federal subsidies to student lenders by $20.9 billion over five years.

The threats to the college loan market are emerging as thousands of new college students across the U.S. are making their final decisions about which college they will attend and how they will pay for it.

This year, the demand for loans will likely outstrip supply, John Remondi, Sallie Mae's chief financial officer, said at a Senate hearing earlier this week.

The legislation passed by the House today would let lenders sell their debt to the Department of Education at a premium. The move is designed to give investors more confidence in securities backed by the loans.

``This is about making sure the lifeboats are going to float when they need them,'' Miller said after today's vote.

Private Lenders

Sallie Mae and other private lenders would prefer that the Treasury buy loans directly from lenders although they didn't oppose the bill that passed the House today.

``It does help from the standpoint that rather than making these loans at a loss they can sell them at cost plus a small premium,'' said Sameer Gokhale, a New York-based analyst with Keefe Bruyette & Woods Inc.

The legislation passed today would increase the amount that undergraduate students can borrow in their first year of college to $5,500. That figure goes up to $6,500 in the second year and $7,500 for the final two years, an increase of $2,000 each year from current levels.

The total amount of federal unsubsidized loans that students dependent on their parents could borrow would increase to $31,000 from $23,000. For independent students, the amount would increase from $46,000 to $57,500.

Parents who take out loans to pay for their children's education would be able to defer payments for up to six months under the new bill. Last year, more than 6 million students used the guaranteed loans to help pay for college.

The legislation is H.R. 5715.

To contact the reporter on this story: Christopher Stern in Washington at cstern3@bloomberg.net.

Last Updated: April 17, 2008 16:43 EDT