Consensus Sought on Plans To Revamp Student Loans

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WASHINGTON--As the Clinton Administration readied its direct-loan and national-service legislation last week, guarantors, bankers, and secondary market officials began pitching alternative proposals to reform--not scrap--the current student-loan system.

Those groups hope to convince higher-education officials, members of Congress, and possibly the Administration that modifications in the current system can achieve the $4.2 billion in savings the Administration estimates would occur under a direct-loan system. Congress included those savings in its fiscal 1994 budget resolution, and lawmakers are thus required to make changes in the program sufficient to achieve them.

However, some observers say even achieving consensus on reforms within the loan community may prove difficult.

"We continue to work to try to find some common ground. But it's going to be difficult, if not impossible, to get everyone to agree on one proposal,'' said Fritz Elmendorf, a spokesman for the Consumer Bankers' Association. "The easy things are not adding up to $4 billion.''

Under separate proposals released by the Student Loan Marketing Association--the nation's largest holder of student loans, commonly known as Sallie Mae--and the Coalition for Student Loan Reform, a collection of guarantors and secondary markets, the government would move forward with a pilot direct-loan program that was authorized last year in the Higher Education Act.

Both plans also endorse Mr. Clinton's proposals for income-contingent loan repayment and a payment option involving national service.

But instead of a full-fledged direct-loan program, they suggest changes in the current system--including some that would affect their profits and risk--in an attempt to save it.

Sallie Mae, for example, has proposed to reduce federal subsidies to guarantors and lenders by adopting market-based reforms. Under the plan, loan originators would pay a "rights'' fee, set in an auction similar to current Treasury auctions and based on loan volume.

The proposal also calls for the Secretary of Education to entertain bids for loan-default collections rather than pay guarantors 30 percent of what they collect from defaulters.

Both Sallie Mae and the coalition also suggest that lenders and guarantors assume more risk for defaults, and receive a smaller percentage of payments from the government for overhead expenses.

Meanwhile, the coalition also proposes to reduce the in-school subsidy to lenders, calls on Sallie Mae to make a special payment to the government based on its outstanding loans, and proposes that other non-profit secondary markets do without a guaranteed rate of return.

Vol. 12, Issue 32

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