Sen. Elizabeth Warren (D-Mass.) took Sallie Mae and the FederalHome Loan Banks to task Tuesday during a Senate Banking Committeehearing on private student loans over a FHLB line of credit that hasallegedly produced big profits for Sallie Mae.

Warren first broached the subject in an April 24 letter toFederal Housing Finance Agency Acting Director Edward DeMarco in which she questioned an $8.5billion line of credit from the FHLB of Des Moines, Iowa, to SallieMae.

According to its corporate filings, Sallie Mae initially paid0.23% on a credit line, but charges 25 to 40 times the interest forfixed rate, private student loans. Last year, Warren said in theletter, Sallie Mae reported approximately $2.5 billion in interestincome off its private student loan business.

“It is deeply worrisome that the Federal Home Loan Banks may beundermining their mission by extending billions of dollars in cheapcredit to private student lenders,” Warren said in the letter, andrepeated during the hearing.

Warren further asked DeMarco to provide more details about theSallie Mae credit line and lines of credit given to other lendersthat “are substantially engaged in offering private loans tostudents.”

David Jeffers, executive vice president of policy and publicaffairs for the Council of Federal Home Loan Banks, said when FHLBmembership was opened up to commercial banks and credit unions, thelegislation was very specific in stating that the banks wouldprovide members with funding to serve the needs of theircommunities, which includes housing but could also be used forother types of community development.

“Because the Federal Home Loan Banks are not a high-profilegroup of institutions, it's not unusual to make that mistake, basedon our name alone,” he said of Warren's comments about the FHLBmission.

Approximately 500 credit unions participate in Sallie Mae'sSmart Option Student Loan referral program.

The hearing featured regulators from the Consumer FinancialProtection Bureau, Office of the Comptroller of the Currency,Federal Reserve and FDIC.

In his opening statement, Banking Committee Chairman Tim Johnson(D-S.D.) said the private student loan market is worth $150billion, and private lenders allow many students to attend collegewho would not otherwise afford it and may sometimes offer betterterms than federal loans.

“However, nearly one million borrowers are in default on theirprivate student loans. And while federal loans offer flexiblerelief during periods of hardship, most private student lenders donot offer the same options for struggling graduates,” he said.

One issue raised during the hearing was the effect student loandebt has on other markets, such as the mortgage market. Sen. JeffMerkley (D-Ore.) called student debt a new debtor's prison becausecollege graduates are often unable to live independently because oftheir loan obligations.