("US News: Bill Upends System For College Loans", published at 10:29 p.m. EDT Thursday, misstated that Fitch Ratings downgraded SLM Corp. to BBB+, the company was downgraded to BBB-. A corrected version is below.)

 
   By Corey Boles and Robert Tomsho

WASHINGTON--House approval of an education-financing bill Thursday marks a first step toward sweeping changes in U.S. higher education that would cut out private lenders and leave the government as sole provider of student loans under federal programs.

The bill, which passed on a largely party-line 253-171 vote, would save taxpayers $87 billion over the next decade by ending fees paid by the government to private lenders, according to the nonpartisan Congressional Budget Office. Among other things, the House bill would use the anticipated savings to increase grants for low-income students and boost funding for minority students.

The cost of student loans wouldn't change as a result of the overhaul, according to the Obama administration. The only difference would be the source of the loans -- the government as opposed to private lenders.

While the measure would eliminate private lenders from originating government-backed loans, banks and other lenders would be allowed to bid for a limited number of contracts to service government-made loans.

Richard Hunt, president of the Consumer Bankers Association, said Congress and the Obama administration should "consider alternative approaches that maintain choice for students and protect local jobs" at banks. Ending private lenders' ability to originate government-backed loans "is a step in the wrong direction and at the wrong time," he said.

The House vote follows two years of turmoil in the student-loan industry. In 2007, Congress reduced government payments to lenders making federally guaranteed student loans by more than $20 billion -- just as credit markets started 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. Since the fall of 2007, more than 180 lenders have exited from all or part of the federal student-loan program.

This week, Fitch Ratings downgraded student-loan company SLM Corp., better known as Sallie Mae, to BBB-minus, and called its outlook negative.

For the school year that ended in the spring, companies lent students at 4,465 schools a total of $74 billion, up 13% from $65.3 billion the prior year.