Here’s Where They Call In Their Chits

Eeee-yew, gross! Watch 5 million students get backhanded so bank profits can rise from excessive to obscene. Watch Congress sell out both the students and the nation, which needs all the educated citizens it can produce, in exchange for campaign contributions. What a country. What a mess.

This month, a House subcommittee takes up the matter of interest rates on student loans, which are set by Congress. The rates are scheduled to drop on July 1 from 8.25 percent to about 7.1 percent.

But the big banks are crying poorhouse and claiming they’ll get out of the student lending business altogether if this shocking decrease in their sacred profits is allowed to go through. Of course, these are the same banks that manage to make mortgage loans for 6.75 percent without going broke. And student loans are no risk for the banks, being co-signed by Uncle Sam.

The 1993 budget act requires that banks lend to students at the 91-day Treasury bill interest rate plus 3.1 percent, which comes to the 8.25 percent they currently charge. But after July 1, the formula changes to the interest rate on 10-year T bills plus 1 percent, or about 7.1 percent interest on student loans.

According to a spokesman for the American Association of State Schools and Universities, the estimated difference between the current formula and the new formula comes to $11 billion during the next five years - $11 billion that either stays in the frayed jeans pockets of students or goes to the banks.

No wonder the banks have lined up a full lobby press on the issue, even sending form letters to student loan offices so they can pressure Congress.

Bank of America and Northwest Corp. are threatening to stop all student lending if they don’t get their way - this, despite a Treasury Department study issued in February showing that the banks have been earning a return of about 1.65 percent on student loans, which government officials say is about twice what it should be.

Knight Ridder’s Business News reports: “This isn’t the first time lenders have held students hostage to their demands. In recent years, as the government reduced interest subsidies or capped rates, lenders routinely complained about losing money and vowed to leave the business. Though some smaller banks have dropped out, the major lenders have stayed put. In fact, even as they griped about how marginally profitable student loans are, lenders have fought vigorously to hang onto the business, opposing government’s attempts to compete with direct-loan programs.”

According to a 1991 government study, bank profits from student loans are second only to credit cards. U.S. commercial banks earned a record $59 billion last year - 12.6 percent more than the previous record, $52.4 billion in 1996, according to a report by S&L Securities. It was the sixth consecutive record year for the banking industry.

According to the Center for Responsive Politics, banks and lending institutions contributed a total of $14.2 million during the 1996 election cycle, 31 percent of it to Democrats and 69 percent to Republicans.

In 1994, the government began making direct loans to students and now covers about 35 percent of the market. But because the government program is new and has had some start-up problems, it can’t possibly absorb the entire field.

In the past, Republicans have traditionally sided with the bankers and Democrats with the students. But there’s so much lobby money out on this case that one source said even longtime friends of students open their mouths and put forth words he knows are straight from the bankers’ propaganda on the issue.

Veep Al Gore came up with a compromise proposal to keep the three-month T bill index but lower the margin to 2.3 percent. However, the lobby clout on the issue is massive, and that may be just a starting point in concessions to the banks.

“We are very concerned, very alarmed” by the Gore proposal, said Joe Belew, president of the Consumer Bankers Association. “I don’t think there’ll be anybody left in the program,” he told The Washington Post.

This is a variation on the old manufacturers’ blackmail: Give us what we want or we’ll pull up stakes and move our factories to Mexico.

The bankers have numbers proving they can barely limp along under the current formula. But Citicorp has broken with the rest of the herd and actually lowered its student rate to 8 percent already. A Citicorp spokesman said it’s a chance to build market share and win loyalty from students in hopes they will turn to Citicorp for their other banking needs. “We view the students as a strategic asset,” said the spokesman, according to Business News. No flies on Citicorp.

So here you have a classic case of the effects of campaign financing - it’s the people against the money. Anyone want to bet on the outcome?

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