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Flagging interest

Nearly a quarter of the colleges and universities approved for third-year participation in the Department of Education's direct-lending program have declined to sign up.

Last May, the department approved 453 schools for the third year of the loan program, which began in July. But as of Oct. 1, only 354 institutions were on board.

Most, 284, are for-profit schools. Only 38 are four-year schools, while another 32 offer two-year study.

A spokeswoman for the department said some institutions have put off participation for another year. Others, she said, stepped back because of the political debate surrounding direct loans, in which the government makes loans directly to students via their colleges.

Since its inception, direct lending has been a controversial alternative to the traditional loan program. In traditional student-loan programs, the government subsidizes banks and private guarantors for providing college loans at low interest rates.

Direct-lending proponents say they have streamlined the program and made it easier by eliminating costly fees.

President Clinton, who cites the program on the campaign trail, maintains that he has improved the program, eliminated costly fees to borrowers, and allowed students to repay based upon their income.

"That means every young person in this program can afford to borrow the money to go to college," Mr. Clinton said in a speech last week.

In the face of the new competition, banks and other lenders have sought ways to make their loans more attractive. And direct-lending critics charge that the income-based repayment option could be harmful to students and taxpayers by stretching out the terms of the loans.

"If the borrower's loan payments are less than the interest that is accruing, the balance of payments still owed can mushroom, making them even harder to pay off," the chairman of the House Budget Committee, Rep. John R. Kasich, R-Ohio, said last week.

Under that option, the government erases the balance still left after 25 years.

--MARK PITSCHfederal@epe.org

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