August 20, 1995 in Nation/World

Republicans Give Boost To Bankers House Trying To Eliminate Student Loan Competition

Adam Clymer New York Times

After complaints from banks that have seen their share of student loans drop sharply, Republicans have changed the accounting rules to make it easier for Congress to kill off the banks’ competition - a federal program that makes direct loans from the Treasury.

The Republican-led House of Representatives has also voted to reduce the amount the Department of Education can spend supervising the system of federal guarantees for banks that make student loans - a program that has frequently had management problems. The Senate has yet to act on the House proposal.

Under current law, the direct-loan program is expected to provide $13.8 billion in student loans in the year beginning Oct. 1, while federally guaranteed bank loans will provide $15.3 billion. In 1993, the year before the direct program was created with strong support from President Clinton, bank loans made up all $19.2 billion in federal student loans.

The direct loans have proved popular with students because the money comes through faster, and with university administrators, who have found them to be simpler to administer. Banks, however, have long treasured the guaranteed loan program, which offers profits without much less risk than they have on other loans.

A big boost for the direct-loan program, enacted in the 1993 budget reconciliation bill, was an accounting rule that required the Congressional Budget Office and the Office of Management and Budget to exclude federal administrative expenses when calculating the effects of loan programs on the federal budget.

Both sides agree this gave direct loans an unfair advantage in any budget-making comparison, since the direct-loan program gets more federal money for administrative purposes.

Seizing on that, Republican foes of the direct-loan program put a very unusual directive into this year’s budget resolution. It ordered the Congressional Budget Office to include administrative expenses of the direct-loan program, which are estimated at $441 million for next year, in its budget calculations - but not the government’s outlays to administer the guaranteed loan program, which amount to about $270 million a year.

When the Budget Office followed orders last month, the Republicans hailed the figures as a reason for “scrapping the direct-lending program,” in the words of Rep. Howard P. McKeon, the California Republican who heads the subcommittee dealing with higher education.

But the Clinton administration, Senate Democrats and many supporters of direct loans cry foul.

Sen. Edward M. Kennedy, D-Mass., accused Republicans of “cooking the books.” Marshall Smith, under secretary of education, accused them of “a venal assault on student aid” and “putting bankers first.”

Kennedy and White House officials said if the administrative costs of both programs were counted, the direct loans in total would again prove to be cheaper for the government because incentives for the banks are not needed.

Even one supporter of the changes, John E. Dean, a consultant to the Consumer Bankers Association, agreed that $160 million in federal payments to assist the 40 agencies around the country that administer the guaranteed loan program meet their administrative costs should be included, although he argued that the other $110 million in supervisory costs should not be counted because much of it was unnecessary. These agencies have often been criticized in the past, and in 1990, one of the largest, the Higher Education Assistance Foundation, went broke while carrying $9 billion in loans.

And a conservative Republican economist now serving on the Federal Reserve Board has sought to halt the changes for the loan program. The Fed governor, Lawrence Lindsey, criticized the step as “making the change the industry proposes without looking at other changes.”

He also said the argument that school officials make about the direct system as simpler for them was “a compelling argument for the advantage of direct loans to the economy.”

In Seattle, for example, Eric Godfrey, assistant vice president of the University of Washington and director of financial aid, said the university was very pleased with the direct-loan program “We would characterize our first year in the program as being very close to an unqualified success,” he said.

The debate over the systems does not involve interest rates, which are set by the federal government for both programs.

But Godfrey said the direct-loan program was simple for students to understand and much easier for the university to deal with than the 700 banks and 40 or so state guarantee agencies it used to work with.

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