An old idea is about to resurface in Washington — potentially adding to the woes the student loan industry is facing in the Democratically controlled 110th Congress.

Sen. Edward M. Kennedy (D-Mass.) is poised to introduce legislation that would require banks and other lenders to compete for the right to make federally guaranteed student loans, with the goal of identifying those who could offer the loans at rates that would cost the government the least, and using the savings for other efforts to make college more affordable for students. A Kennedy spokeswoman said Thursday that “we hope to introduce a bill soon.... This is something Senator Kennedy has been watching closely.” Other details about the proposal, which was first reported Thursday by Bloomberg, were hard to come by...

More recently, a former Kennedy aide, Michael Dannenberg, who is now director of education policy at the New America Foundation, laid out the rationale for forcing banks to compete for the right to make government-guaranteed loans in an op-ed in The Washington Post. The essay, co-written with Philip Longman, a fellow at the foundation, noted that the government already auctions off Treasury debt and other assets, and estimated that abandoning the system by which the government sets a minimum subsidy it will pay lenders on the loans they offer to students could save the U.S. treasury $15 to $20 billion over five years, based on the 4 percent to 7 percent premium that officials in Missouri earned when the state loan agency there sold off a portion of its portfolio.

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