Congress wants to cut the middleman out of the student-loan business, but the idea is running up against opposition from the battered banking industry, loath to lose a profitable piece of government-guaranteed business.
In March, the House of Representatives approved a bill that would create a trial program for lending funds directly to college students. Rather than go to local banks for the money, students would go directly to their campus financial-aid offices, and the government would use its borrowing power to supply funds to schools.
Eliminating banks from the guaranteed-student-loan program would save taxpayers more than $1.1 billion of the program`s $2.7 billion annual cost, according to the General Accounting Office. A separate Congressional Budget Office analysis put the savings at slightly more than $900 million.
Bank lobbying groups, however, are determined to delete even the small pilot project from the student-loan bill when it goes to a conference committee to reconcile differences with Senate legislation. Bankers have commissioned their own study, which found that the administrative costs of direct government lending would run so high that taxpayers would lose money on a switch.
Direct lending appeals to a deficit-wary Capitol Hill because of its promise of a costless expansion in the Stafford student-loan program, a favorite with middle-class voters.
Many in Congress believe that banks aren`t really earning their money, because the federally guaranteed loans are a virtually risk-free source of business. The government picks up the tab when borrowers default.
Bankers argue that their fees pay for such services as processing applications and collecting payments. Because those services are part of banks` ordinary business, it`s likely they are more efficient than the government would be, bankers say.
”I`m for efficiency, customer service, collecting the money. To say the government is more expert at this than banks is just plain wrong,” said Stephen Schauwecker, vice president of First National Bank & Trust Co. of Carbondale, home of Southern Illinois University.
Schauwecker estimates that his bank would lose $250,000 per year in profits without the student loans.
On many campuses, however, direct lending is picking up support. The University of Illinois, the University of Michigan, Boston University and Harvard University are among the backers.
”We feel there is no prospect in the immediate future to increase appropriations to students, so we need to look at creative ways to increase funding for students,” said Elizabeth Hicks, financial-aid coordinator at Harvard.
Orlo Austin, financial-aid director of the U. of I., said direct lending could thin out a multilayered system that involves 10,000 commercial lenders, 45 state or non-profit ”guarantee agencies” and 35 secondary-market institutions. Universities would deal with just one agency, and students could apply for loans when they applied for financial aid.
”In the long run, it has the potential to save students money and make it a much more simple process,” Austin said. A quarter of U. of I.`s 36,000 students use federally guaranteed loans.
But not all colleges are eager to see direct lending. Small colleges, in particular, are reluctant to take on the administrative burden of processing loan applications. Some government-loan programs use the schools as lenders, but their size pales in comparison to the $10.3 billion lent under the Stafford program in the current academic year.
Strong lobbying by the powerful banking industry killed Senate attempts in create a direct-lending program.
The trial run, however, won approval in the House`s version of the Higher Education Act, which reauthorizes financial-aid programs. The bill would create a four-year demonstration program, beginning in 1994, at about 400 campuses across the country, with a combined loan volume of $500 million. The schools would be chosen by the Education Department.
If the program works well, direct lending presumably would spread to other campuses, and eventually banks would be bypassed.
More Top Picks Signs Of Afib In Women
The Bush administration has threatened to veto direct lending, but Education Secretary Lamar Alexander said last week that the administration may go along with a pilot plan. ”It`s hard to oppose a demonstration program,”
he said.
A House staff member said Republicans intend to press the conference committee for a smaller trial program, 100 schools at most. In addition, there is Republican support for an income-contingent repayment option that would adjust graduates` loan repayments as their incomes went up or down. Supporters of such a provision want to alleviate financial pressures on students who choose low-salaried careers such as teaching or social work.
Another way of reducing the cost of the Stafford program is to reduce the subsidy rate paid to banks, called the ”special allowance,” as an incentive to make student loans. A White House statement indicates that the administration doesn`t oppose lowering the banks` allowance rate ”if it is too high.” It didn`t elaborate on what it considered a fair level.
A separate GAO report in January said that banks` financial return on Stafford loans ”is high relative to comparable investments.” A moderate reduction in the allowance rate could generate substantial savings without jeopardizing the availability of loan capital.
The agency said a reduction in the rate from its current 3.25 percen, to 3 percent could save taxpayers $421 million between 1992 and 1996.
The House bill calls for lowering the special allowance to 2.85 percent while a student is in school and 3 percent thereafter.
The subsidy reduction could cause small-volume lenders to drop from the program and increase large commercial banks` share of the student-loan business, the GAO said.