Despite federal government efforts to get the money flowing again, low-cost student loans are still not available to Washington residents who attend college.
Last summer, the District became the first major city in the country without a student loan program when banks here stopped making the loans because defaults had topped $2 million and the city government had failed to honor its guaranty agreement to cover them.
Since January the U.S. Office of Education has been trying to get the banks to make new loans under a program of direct federal guarantees. The banks have been unwilling to do so until they are paid back all the money that is already owed to them.
Federal officials also have tried to get savings and loan associations and credit unions to make student loans. So far only nine small credit unions have agreed to make the loans to their own members.
"I'm kind of numb now," said John Ackley, chief of program operations for the federal office of guaranteed student loans. "We've been working on this thing for six months, and I've kind of run out of ideas at this point."
Last week, Ackley said, the federal government tried to break the logjam by offering the banks 50 per cent of what they are owed if the bankers agreed to resume the loan program. The bankers said no.
On Friday officials of nine banks met for an hour with Mayor Walter Washington, but the only action announced afterwards was that lawyers for the city and the bankers would meet again soon.
Joseph Riley, the president of National Savings & Trust Co., said the bankers have made no threats to sue the city for the money, but he said he told the mayor, "Until we get paid, there aren't going to be any more loans. I can guarantee you that."
The key intractable element in the problem is the very high default rate among D.C. students who have received the loans. Defaults here now are running about 33 per cent, Ackley said, by far the highest rate in the country and about triple the average for all student borrowers nationwide.
In fact, the defaults are continuing to pile up even though no new loans have been made in Washington for a year. Overall, Riley said, the city government now owes the banks about $3 million for the defaulted loans. However, the District government has only $700,000 in a reserve fund to take care of the defaults, and city officials have said repeatedly that they do not have any more money.
About 14,000 students have borrowed $14.2 million under the program since it started here in 1967. Last year about 1,500 students applied for loans, but no loans were made.
If the city does come up with the money it owes the banks, it is eligible to get 80 per cent of it back from the federal government. To qualify for the reimbursement funds it must show that its records are in order and that it has made serious efforts to collect from the defaulting students.
In January, the city asked the federal government to advance its 80 per cent reimbursement, but the federal student loan office rejected the proposal after a sample audit of loan records showed that only 17 per cent were in proper order.
"There had been very little collection effort by the city," Ackley said. "The situation was poor."
However, Ackley said, the city has made "encouraging progress" since April when it reorganized the student loan office and announced for the first time that it would sue the students who default.
Under the D.C. loan program, the money for the loans was put up by nine of the District's major banks through a pool arrangement. All dealings with student borrowers and colleges were handled by the D.C. department of Human Resources through its educational assistance office.
Wallace Gee, who was named head of the office in late April, said that in the past two months letters demanding repayment have been sent to about 1,200 students, and that 55 students have signed notes to repay their loans. However, the total amount promised in the notes is only $173,000, Gee said, and the total amount collected from defaulters since April has been only $5,583.
Gee said he has asked the D.C. corporation counsel's office to file criminal charges in two cases of suspected fraud. He said he is preparing other cases for civil suits.
So far, Gee said, no suits have been filed.
"I think we can enforce our loan agreements," Gee said, "but it's a long, slow process. In the past, many students may have had the idea that they would never have to pay this money back, but they should know that's not true now."
Nationwide about $11 billion has been made in student loans since 1965 in programs that either are run directly by the federal government or through state agencies, such as the one operated in the District.
Individual loans now can total up to $2,500 a year with a maximum for undergraduates of $7,500 and for graduate students of $10,000.
Students pay 7 per cent interest a year, but the banks also get a 1 1/4 per cent interest subsidy from the federal government. Even so, the banks make less than they do on normal consumer loans.
Borrowers do not have to start repaying the loans until nine months after they graduate or drop out of school. Repayment may take up to 10 years in monthly installments, but as soon as any payment is more than 120 days overdue, the loan is considered in default and payable in full.