Almost two years after the city abandoned its multimillion-dollar, low-interest student loan program because of defaults in excess of $4 million, Washington banks are once again granting student loans.
Since the program resumed on June 1, more than 1,000 loan applications have been received, said Gail McCarthy of the D.C. Federal Student Loan Consortium Program. She said the first $25,000 in loans will be awarded next week.
"From the initial reaction, I'd guess students are pretty pleased that the program is back in operation," McCarthy said. "But we still get people calling us on a daily basis trying to find out if they really can get loans again."
Officials at the D.C. Bankers Association said $5 million in new loans will be available for city residents attending colleges and vocational schools this fall. The loans will be completely guaranteed by the federal government.
Since the program started here in 1967, nine D.C. banks made about $14.2 million in low-interest student loans that were guaranteed by the city government. Some 7,800 Washington residents received that money.
But in June 1976 the banks stopped making new loans when the default rate topped 33 percent - about triple the national average for student borrowers - and the city government failed to honor its guarantee agreement even though it was eligible for an 80 percent federal reimbursement.
The District of Columbia became the only place in the country where low-cost student loans were suspended.
City officials said they did not have enough money to start making repayments, and last July the banks sued to get it.An agreement was reached in February whereby the banks said they would resume the loan program if the city and federal governments promptly paid off the $4 million in defaulted loans.
The city and federal governments have kept their part of the bargain. In the last four months, they have repayed all but $300,000 of the defaulted loans, reported Eldridge Kendrick of the D.C. Bankers Association. He said the remaining amount should be repaid within the next two months.
"The banks are just happy to get their money back after such a long wait," Kendrick said. "And it's also good to the new program is working out so nicely."
Under the program, undergraduate students are eligible to borrow as much as $2,500 a year up to a maximum of $7,500. Graduate students can borrow as much as $2,500 a year up to a maximum of $15,000.
McCarthy said $1 million has been set aside for first-time borrowers and $4 million for renewal borrowers (those wishing to acquire more loans). She said the banks would "definitely loan the full amount to new borrowers."
She added that precautions have been taken to insure that fewer loans are defaulted. The federal government has taken over the program from the District and will now guarantee all loans. In addition, a student loan agency, Wachovia Services, has been contracted to conduct regular computer check-ups on payments and default problems. McCarthy said such a service will help "weed out" defaulters as soon as payments are missed.
Leo Kornfeld, deputy U.S. education commissioner for student financial assistance, said the revived student loan program with direct federal guarantees will be broader than the program that had city government backing.
The old program was restricted to students attending accredited two-year and four-year colleges and post-graduate programs such as law and medicine.The new program will include students with high school diplomas who enroll in vocational and technical schools or who attend proprietary schools.
Since student loan programs started in 1965, some $11.1 billion in loans have been made to 6 million students throughout the nation, said Kornfeld. About 40 percent of the money has been loaned through the program of full federal guarantees, which is now operating in Washington, and the other 60 percent has been loaned through state guarantee agencies that now operate in 28 states.
Kornfeld said the average default rate is 12.5 percent in the direct federal program and 9 percent in the state-operated programs. The District's 33 percent default rate of two years ago was the higher in the country. Kornfeld said no state ever had a default rate of more than 13 percent.
Earlier this year, the U.S. Office of Education released a report showing that the federal government has paid off more than $318 million in defaulted loans.