The U.S. House of Representatives approved legislation Thursday which would effectively end private lender involvement in the student loan market, establishing the federal government as the sole provider of college loans.

The bill introduces sweeping changes to the U.S. higher education system, and serves as the third central plank of U.S. President Barack Obama's domestic agenda.

Similar to the continuing efforts at overhauling health care, the changes to the federal government's higher education policies would have a serious impact on the bottom line for private sector players currently serving the marketplace.

The House vote was 253-to-171, largely along party lines.

Under the legislation, all lenders would be cut out of the market for originating loans. There would still be a role for private banks and lenders to bid for a limited number of contracts to service the loans after they are made by the government.

The Federal Family Education Loan Program, wherein the government guarantees loans made by private lenders, remains the single largest source of college loans. Lenders made related loans for students at 4,465 schools for the 2008-09 academic years. Loan volume totalled $74 billion, up 13% from $65.3 billion a year earlier.

For companies like SLM Corp. (SLM), better known as Sallie Mae, the proposed changes are already having an impact. This week, Fitch Ratings downgraded Sallie Mae to BBB+ status, and called its outlook negative.

Sallie Mae's shares were recently trading down more than 2% at $9.

"Today the House made a clear choice to stop funneling vital taxpayer dollars through board rooms and start sending them directly to dorm rooms," Rep. George Miller, D-Calif., the chairman of the House Education and Labor Committee, said.

The Obama administration would use anticipated savings from the measure to increase grants for low-income students, boost funding for minority student groups, provide money for school construction with a small portion left over to pay down the deficit.

The non-partisan Congressional Budget Office said that ending fees paid to private lenders would save the taxpayer $87 billion over the next decade.

An alternative proposal floated by a group of lenders including Sallie Mae would realize the same level of savings, the CBO said.

In the Senate, staff on the Health Education Labor and Pensions Committee are drafting legislation which is similar to the House version, according to a Senate democratic aide.

The Senate bill would also end private lender origination of loans, the aide said, leaving the federal government as the sole provider of college loans.

The House vote comes after more than two years of turmoil for the student loan industry.

In 2007, Congress reduced government payments to lenders making federally-guaranteed student loans by more than $20 billion.

The resulting cut in profits came just as credit markets were beginning to seize up, eventually making it nearly impossible for lenders to package student loans into securities and sell them to investors, a key source of liquidity in the student loan market.

Complaining that the business is no longer profitable, more than 180 lenders have exited all or part of the federal student loan program since the fall of 2007.

Still, remaining lenders have fought against the changes, arguing that providing loans to students is among the best ways to establish a relationship with new clients that could lead to more lucrative business in the future.

Passage of the legislation would require the Department of Education to accommodate around 4,000 schools by next July 1. And those schools would have to have their processing systems prepared well before that since most financial aid packages are typically distributed in the spring.

Lending experts at some of the largest schools in the country such as Pennsylvania State University have argued they won't have sufficient time to make the transition to a government-run lending program.

Having lined up additional contractors to handle the anticipated increase in direct-loan volume, federal officials say they are prepared. Absent an unanticipated breakdown in the system, industry observers say borrowers are unlikely to notice the shift.

House lawmakers attached a measure to the student loan bill ending all federal government funding of the community organizing group Acorn - the Association of Community Organizations for Reform Now. The group has long been in the cross hairs of Republicans, but more recently has been accused of widespread fraud and other illegal activities.

-By Corey Boles, Dow Jones Newswires; 202-862-6601; corey.boles@dowjones.com