Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 2, 1995 TAG: 9510020090
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: JANE BRYANT QUINN WASHINGTON POST WRITERS GROUP
DATELINE: NEW YORK LENGTH: Medium
The new program hasn't changed the amount a student can borrow: A dependent student still gets up to $23,000 for his or her undergraduate career. What's new is the speedy, streamlined process. For eligible students, even last-minute applications could sail through in two or three days rather than two or three weeks, as often happened before.
President Clinton promoted the direct-lending program and now is struggling to save it. Its opponents want to kill it by turning it into a poster child for government excess.
But the schools that are using direct loans generally have been delighted with them.
Kay Jacks, director of financial aid at Colorado State University, says: ``I can hardly talk about eliminating the program without crying. Students are happy. Universities are happy. Why they want to cut it, I just don't get it.''
They want to cut it for two reasons. First, in this bloody political season, anything backed by the president - regardless of merit - is marked for death. Second, the old way of dispensing student loans paid guaranteed profits to banks and private loan-guaranty agencies; they're lobbying lavishly to get those profits back.
Under the traditional system, still in use at a majority of schools, students apply for their government-backed loans at a bank or other private lender.
A state or private ``guarantor'' affirms that a student is eligible for the loan. Both lender and guarantor receive comfortable fees from Uncle Sam.
The U.S. Education Department estimates those fees and subsidies at $20 billion over the next five years - ``and a lot of that's corporate welfare,'' sneers Rep. Tom Petri of Wisconsin, one of the few Republicans to support direct lending.
If you default, the taxpayers generally pick up 98 percent of the loss. So the private sector is earning its government-guaranteed profits at virtually no risk.
The new direct-loan program cuts out the middleman. You get your student loan directly from your school, which draws the money from a government-funded account. Your repayments go back to the U.S. Treasury. Private contractors administer the loans and handle collections.
The government expects to make money the same way the private lenders do: by borrowing at a low interest rate and lending to students at a higher one.
How much money, if any, direct lending saves the taxpayer is a hot political potato. Under current federal accounting rules, direct loans look cheaper - partly because some of their administrative costs aren't counted. The House of Representatives recently voted to fix that error, but the change wasn't made with an honest heart.
The House's proposed accounting system leaves out many of the costs associated with bank lending, which makes the traditional system look cheaper than it really is.
Even under the House's pro-bank accounting plan, there's not a great difference in both programs' projected costs, the Congressional Budget Office reports.
Lawrence Lindsey, a governor of the Federal Reserve Board, believes that lending through banks always will cost more, because of the need to ``provide a profit to induce lenders to guarantee student loans.''
The banks and guaranty agencies aim to kill not only direct lending but also the government's new loan consolidation program, which lets lower-income graduates repay their loans with reduced monthly payments. The president aims to keep loan consolidation and expand direct lending to all student loans by the 1997-98 school year.
The president's timetable, however, may put too much pressure on an untested administrative system. The most sensible solution: continue to run both programs side by side, for a real-life test of how they work and what they really cost.
Here are the advantages of hanging on to direct lending:
The schools find it faster, cheaper and easier.
The students' loans are all with the same lender, not scattered around. That greatly simplifies repayment.
The private lenders are offering better programs, which wouldn't have happened without competition from direct loans.
by CNB