U.S. asks banks to take a cut in student loan interest rates Industry says move would drive many banks out of college market

March 12, 1998|By David Folkenflik | David Folkenflik,SUN NATIONAL STAFF

WASHINGTON -- As part of a passel of election-year programs intended to allay fears about the cost of college, the Clinton administration has proposed that banks accept slightly lower interest rates on student loans.

Though the figures involved are relatively small -- a graduate paying off a $10,000 loan over 10 years would save $499 -- lenders are fiercely resisting the move. The industry contends that many banks would stop making college loans if Congress adopted the proposals.

"The administration's proposal would continue to drive lenders out of the student loan business," said Barbara Chiapella, a spokeswoman for the American Bankers Association. "For a lot of smaller banks, it hasn't remained a profitable business."

The proposal is a modest element in the White House's higher education agenda for President Clinton's second term. Priorities include an increase in grants, which do not have to be repaid, and tuition tax credits. But the clash over interest rates has tied up the five-year higher-education bill that determines federal sponsorship of enterprises such as student loans.

"This isn't big money, but it's an ugly fight and it's a political fight," said Ellen Frishberg, director of financial aid at the Johns Hopkins University.

While saying banks should continue to make "a reasonably handsome profit," Assistant Education Secretary David Loganecker argued that they are making too much money off student loans. "We need to do everything possible to reduce the cost for students," he said.

Rep. Howard P. "Buck" McKeon, a California Republican who heads the House subcommittee that oversees the measure, echoed industry concern. "It basically would drive all the banks out of the program," McKeon said. "That would be a catastrophe."

Yet Republicans are concerned about being painted as allies of banks and as adversaries of students. Congressional staff members say McKeon is likely next week to offer students the savings promised by the White House, but to blunt the pain to bankers by giving them more than $1 billion in federal money to make up nearly half the difference.

Current law requires a shift in the formula that determines student-loan interest rates in a way that cuts payments to banks.

But that law was written by Democrats on the assumption that the government, and not banks, would by now be offering most student loans, under a 1993 Clinton initiative called "direct lending." Federal college aid has heavily tilted toward loans and away from grants in recent years, even as annual college costs have soared to $30,000 at the most elite campuses, and above $10,000 at many public schools.

A series of foul-ups in the direct lending system and the ascent to majority of unsympathetic Republicans prevented the program from reaching full strength. The direct lending program now handles only one-third of the $40 billion lent to students each year.

After an outcry from bankers' advocates as the deadline approached, and a failed effort to reach a compromise with campus officials seeking lower payments from students, the administration proposed a compromise.

On Feb. 25, Vice President Al Gore suggested that banks accept a less-severe reduction in interest-rates, to 7 percent from nearly 7.8 percent, on five-year loans. Education officials projected the savings to students of $11 billion.

That's still too steep, say lenders, who are keenly awaiting the details of McKeon's bill.

For critics in financial aid circles, however, banks have lost some credibility because they have objected to every cut in repayments as imperiling their financial health. Student loans are ultimately guaranteed by the government, which means that banks are repaid all but a small slice of loans on which students default.

"People are making a ton of money off this program," said Art Hauptman, a higher education analyst based in Arlington, Va. "The banks are saying, 'This is really a marginal program for us' -- which is a crock."

Pub Date: 3/12/98

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