Early Skirmish Expected on Direct-Lending Plan

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Depending on who is talking, direct lending is a big money-saver for taxpayers or a potential bureaucratic nightmare.

Colleges participating in the year-old program--in which the federal government makes educational loans to students through their institutions--rave about its simplicity. And the Clinton Administration wants to expand the program rapidly, phasing out the traditional guaranteed-loan system, known as the Federal Family Education Loan Program, by 2000.

Officials claim this would save $12 billion by cutting out fees that would otherwise be paid to lenders who administer guaranteed loans.

But with millions of dollars in revenue at stake, the banking industry is fighting those plans, and their argument that direct lending could be a risky business has found some receptive ears. The new Republican chairmen of the House and Senate education committees have made slowing the expansion of direct lending one of their top priorities.

The program was created in a 1993 law. Just over 100 colleges, universities, and trade schools have been testing it this year.

Under current law, direct loans must account for 40 percent of new student-loan volume by next fall, when 1,400 more institutions are to come on board, and increase to at least 60 percent by the 1998-99 school year. But last month, key lawmakers introduced legislation that would cap participation at 40 percent of new-loan volume.

Rave Reviews

"We actually have less regulations to follow than we had in the old program," said Dan Davenport, the director of financial aid at the University of Idaho. "How many other federal programs have been introduced lately that make things easier, deregulate, and save money?"

So far, none of the schools that participated in the program's first year have dropped out. But a number of schools slated to join the program in the fall have changed their minds, at least partially due to uncertainty over the program's fate in the new G.O.P.-controlled Congress.

While Republicans do not unanimously oppose the program, they have questioned the Administration's savings claims. A study prepared by Rudolph G. Penner, a former director of the Congressional Budget Office, said that when the c.b.o. factored in the administrative costs of the program in 1993, the savings were reduced by more than 50 percent.

Furthermore, critics assert, lending money is not the hard part. Collecting loans when they come due is another story, they say, and only after the program has been in existence for a while will Congress will able to evaluate the Education Department's performance.

"Our members have been concerned about the enormous amount of additional debt that will be piled on the federal government's shoulders," said one Republican Congressional aide. "The last thing we want to do is go into hock tens of billions of dollars only to find the program doesn't work."

But Barmak Nassirian, the assistant director of governmental relations for the American Association of State Colleges and Universities, noted that the study was financed by the National Coalition for Student Loan Reform, an alliance of guarantee agencies, loan servers, and secondary markets, which stands to lose millions of dollars in federal subsidies if direct lending takes over.

'Corporate Welfare'?

Mr. Nassirian argued that pending legislation to cap direct-loan growth contains provisions that would unfairly stack the cards against the program by rewriting accounting rules.

For example, he said, it counts some one-time expenditures--such as setting up a loan-servicing system--up front, instead of spreading them out over the life of the program, as is done with all other federal loan programs.

"It's a profound irony that at the very same time the Congress is about to eliminate the in-school interest subsidy, which is an investment in students, they are willing to spend enormous amount of money to subsidize banks," Mr. Nassirian added. "If this isn't corporate welfare, I don't know what is."

Dan Cheever, the chairman of the Coalition for Student Loan Reform, contended that the change would only correct existing imbalances in favor of the direct-loan program. Moreover, he said, when the legislation was passed, there was no time for a thoughtful national debate about the feasibility of direct lending.

The argument itself may prove beneficial, said Terry W. Hartle, the vice president for government relations for the American Council on Education.

"There's now competition where there wasn't before," he said. "For a long time the student-loan industry was indifferent at best to the customer-service concerns that were so important to colleges and students."

Vol. 14, Issue 26, Pages 34-35

Published in Print: March 22, 1995, as Early Skirmish Expected on Direct-Lending Plan
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