The Bush administration is considering a proposal for simplifying student loan programs under which the federal government would replace private banks as the source of more than $12 billion lent to almost 5 million college students each year.
The White House is reviewing the proposal for possible inclusion in President Bush's 1992 budget request and his legislation on reauthorizing higher education programs, administration officials said. The idea surfaced with an Education Department task force that focused on changes the administration would seek in the Higher Education Act of 1965, which Congress is scheduled to reauthorize this session.
Under the change being contemplated, the government would borrow as much as $12 billion -- amid action to reduce the budget deficit -- and use the money to create revolving loan funds at colleges and perhaps proprietary trade schools as well. Students would apply for loans at colleges, instead of at private lending institutions, eliminating one of as many as six entities that can be involved in a single
The major shift in lending responsibility would save the government about $1 billion in fees now paid to private lenders, but offsetting that saving would be the cost of private contracts for collecting from students. The Student Loan Marketing Association, a government-sponsored enterprise known as Sallie Mae, is being mentioned
as one of the contractors that could service loans under such a system.
The Education Department oversees one small program, called Perkins loans, that is campus-based and operates roughly as the new system would, except that colleges do the collecting themselves. The Perkins program has been gradually scaled back, and the largest source of
federal student aid remains gov- ernment-guaranteed loans borrowed from banks and other private lenders, which last year totaled $12.4 billion for 4.8 million students.
The system being proposed was criticized by the Consumer Bankers Association, which said it would not necessarily be simpler or reduce federal costs. A less negative but tentative reaction came from college and student groups, which said they had not seen the proposal but suspected it would simplify matters for students.
The Consumer Bankers Association, which represents 700 banks and other private lenders, called the plan "naive and misleading" as well as "unsound." President Joe Belew said "it will actually increase the complexity of the student loan program" because bank loans would be outstanding for as long as a decade while the new system was also in place. He predicted the government would have to impose higher interest rates to pay for loan-servicing and other costs.
A spokesman for the American Council on Education, which represents 1,600 colleges, called it "an intriguing idea" but wondered whether the student loans would remain an entitlement and whether for-profit trade schools, where
loan defaults have been concentrated, would be eligible to participate.
Dallas Martin, executive director of the National Association of Student Financial Aid Administrators, said the new system envisioned seemed simpler and more efficient, particularly for low-income students. United States Student Association lobbyist Selena Dong said, "We, of course, support any attempt to simplify the system."
News of the proposal was not welcomed at Sallie Mae, which would lose its role as a secondary market for private loans. Yesterday its stock fell $2.375 to $45.75 a share in an adverse market reaction to a New York Times story about the proposal.
"We believe that private capital is the best way to go, and it will continue to be that way," said Gisela Vallandigham, a Sallie Mae spokesman. "We don't want to launch into a long discussion about something we don't think is going to become reality."