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Lawmakers Back Off Direct Student-Loan Proposal

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WASHINGTON--In a major concession and a setback for one of President Clinton's priorities, House negotiators late last week backed off from their insistence that the federal government replace the current student-loan program with one in which the government makes loans directly to students via institutions.

Instead, under an agreement between House and Senate negotiators, the government will partially replace the current loan program, in which the government insures loans made by banks and backed by guarantors, by phasing in federal direct lending over five years.

At the same time, the government will insist on cost savings in the current program, such as reduced lender subsidies and lower guarantor fees.

The changes to the current program and the move toward direct lending are expected to save $4.3 billion over five years. But because the agreement was reached late in the week and cost estimates were still being prepared by the Congressional Budget Office, it remained unclear exactly how much money the phase-in would save and what kinds of changes would be needed in the current program to achieve the savings target.

The program savings are a small part of the five-year, $500 billion deficit-reduction bill that Congress is expected to take final action on this week.

High Stakes

With billions of dollars in private-sector profits and the success of a key Clinton Administration initiative at stake, representatives from both houses of Congress spent much of the latter part of last week exchanging proposals and counter-proposals to alter the loan program and achieve the savings written into the Congressional budget resolution.

The problem was that reconciliation measures approved by the House and Senate committees that have jurisdiction over student-loan programs represented such disparate views on how to change the system.

The House, in accordance with the Clinton Administration's wishes, called for saving the $4.3 billion by converting the Federal Family Education Loan Program to a direct-loan program over four years.

The Senate, however, called for no more than 50 percent of student loans be made directly by the fourth year, a study evaluating the new program, and several changes to reduce the profits of lenders, guarantors, and other private-sector participants in the current program.

Taking half a step toward full conversion of a direct-lending program was expected to save a little more than $2 billion, while such changes to the current program as reducing the insurance and origination fees students pay to initiate loans were expected to save about the same amount.

'A Leap of Faith'

The House was forced to back down in conference because it was running out of time to negotiate, said an aide to Rep. William D. Ford, D-Mich., the chairman of the House Education and Labor Committee.

Mr. Ford, the chief House negotiator, has been one of the strongest Congressional supporters of direct loans.

It was "just the reality of the timing,'' the aide said. "We had to get this done.''

Congress hopes to complete work on the deficit-reduction measure this week, so that the recess can begin on schedule Aug. 9.

But the aide said taking only a half step toward a full-blown direct loan program could hurt the current system by causing lenders and guarantors to withdraw.

"Since we had to compromise on something less [than we wanted] we turned to the Senate and said, 'Your destabilizing cuts are going to have to go through,''' the aide said. "We'll have to go on a leap of faith.''

Mr. Ford, he said, "made an agreement and he's standing by that agreement.''

Under the conference agreement, in the first year of operation, academic year 1994-95, 5 percent of all student loans would be made by the government. That amount would rise to 40 percent in the second year, 50 percent in the third and fourth years, and 60 percent in the fifth year.

Percentages for the first two years represent caps, while percentages in the next three years are minimums, allowing any higher-education institution that wishes to participate to do so.

In addition, the negotiators agreed to reduce the origination fees borrowers pay lenders and the insurance fees they pay guarantors, but the exact amounts were not available last week.

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