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Flexible Student-Loan Payment Options Unveiled

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Washington

Millions of Americans can consolidate existing student loans and adjust payments to meet their income under an initiative due to start next year, President Clinton and Education Department officials have announced.

The program was authorized by Congress last year, but the Administration highlighted it in White House press briefings Oct. 21--thereby garnering media coverage for one of the President's successes during the campaign season.

With some 20 million people repaying student loans, the consolidation policy represents the Administration's most aggressive step to expand the William D. Ford Federal Direct Loan Program, which was enacted as part of a 1993 budget bill. (See Education Week, Nov. 24, 1993.)

"As more and more middle-income Americans will discover, this is a very good deal, which is a very important part of America's long-term strategy for economic health," President Clinton told reporters.

Mr. Clinton said flexible payment options will allow more people to enter college or take low-paying public-service jobs.

The consolidation plan will allow borrowers with multiple loans to combine them under the new direct-loan program. It will also be open to borrowers whose loans are in default.

Still undecided, however, is whether borrowers with a single 10-year loan could switch to the new program to obtain lower interest rates. The current variable interest rate for student loans is 7.4 percent; federal law caps the rate at 8.25 percent.

Destabilization Feared

Skeptics say the new options will require more sophisticated decisions by borrowers and could increase their long-term costs by extending repayment.

Others continue to question whether the Education Department can handle a surge in direct-loan portfolios. Critics also suggest that an exodus to the new program could destabilize the private student-loan market subsidized by the older guaranteed-loan program, which the Administration hopes to eventually phase out.

"Direct lending makes borrowers completely reliant on a single lender and encourages them to extend their education debts through much of their adult lives," U.S.A. Group Inc., a nationwide student-loan guarantor and administrator, said in a statement.

The new program would require borrowers to first try to negotiate an "income sensitive" consolidation and payment plan with their current loan servicers. But if that failed, they could call a government phone bank for information on setting up an Individual Education Account and the various repayment plans offered.

Borrower options, which can be changed at any time, range from an income-contingent, or "pay as you can," option to extended repayment plans of up to 30 years.

Current and future college students would choose an option after they graduated.

"When you are earning less, and you want to take a job in teaching, for example, you can pay less," Deputy Secretary of Education Madeleine M. Kunin told reporters. "When you're earning more at a later stage of life, you pay more."

A Successful Reinvention?

"I think it's a worthwhile option for students, especially those with high debt," said Brett Lief, the assistant vice president of government relations at the National Association of Independent Colleges and Universities. "But I agree it's for responsible decisionmakers. The options must be laid out so people see the full impact."

Ms. Kunin said that financial-aid officers will be trained to explain the new program, while information will reach current borrowers in future billings.

She deflected concerns about the government's expanding lending role by pointing to the early success of direct federal loans, which let students bypass lenders and borrow through their schools.

While just 104 schools are participating in this academic year, 1,500 schools are expected to join in 1995-96. Since June, $1.2 billion has been loaned to more than 300,000 students.

While federal law limits direct lending to 5 percent of total loan volume in 1994-95, the cap climbs to 50 percent in 1996-97.

Ms. Kunin said taxpayers will save $4.3 billion in five years through lowered service charges and the elimination of traditional middlemen.

"This reform of the whole student-loan program has, in fact, proven to be a successful reinvention story," Ms. Kunin said.

But David R. Merkowitz, the public-affairs director for the American Council on Education, wondered how the Administration plans to handle an influx of consolidated loans.

"We totally understand in a political season why they want to press ahead. The feds have been doing a good job," Mr. Merkowitz said. "But this is a whole new thing."

Concern on Capitol Hill

The new developments are also being eyed with caution on Capitol Hill.

In Oct. 3 letter to Secretary of Education Richard W. Riley, Congressional education leaders cautioned the Education Department not to expand consolidation in a way that would "destabilize" the older loan program, and reminded department officials that the law allows current borrowers to switch to the new program only if they cannot negotiate new terms with their lenders.

The lawmakers also expressed concern that borrowers would sign up seeking a lower interest rate, but end up paying more over a longer period.

Leo Kornfeld, the senior adviser for direct lending to Secretary Riley, agreed that destabilization is an issue. For example, groups that buy loans in the secondary market would be less able to predict long-term paybacks on existing loans because of the consolidation option.

"But if we look at what's best for 20 million Americans, the federal government is obligated to make smaller payments available," Mr. Kornfeld said.

In coming months, federal officials will work to "make a lot of people more comfortable" about the plan, Mr. Kornfeld added, pledging that the expansion would be gradual and methodical.

Loan-industry officials, who almost certainly will lose some of their best "paper" if many buyers choose to consolidate, have a laundry list of concerns.

The U.S.A. Group, for example, cites a General Accounting Office report in challenging the Administration's savings estimates as too high and incomplete.

And a statement from the company's public-affairs office said that direct lending simply replaces one set of middlemen with a new set made up of "federal employees and government contractors."

Scott E. Miller, the government-relations director for the student-loan giant Sallie Mae, said that the private sector already offers many of the services touted by the Administration, such as electronic transfers and loan consolidation.

He noted that private student-loan servicers will have to match direct-loan interest rates and fees.

"We've been in this for 20 years, and student loans are difficult to administer," Mr. Miller said. "It would be a challenge for anyone in this field."

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