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Commentary: Student Loans Don't Need Clinton's Tinkering



Over the next few weeks, millions of high school seniors will find good news waiting in their mailboxes, as colleges begin sending out acceptance letters to next year's eager crop of freshmen. But if the Clinton Administration continues to play politics with the government's student loan program, some of those same students could be in for a rude shock when they arrive on campus next fall--and discover there's not enough financial aid to cover their tuition costs.

This unpleasant surprise could be the result of the Administration's hardball tactics with the 5,000 or so banks that make $25 billion in student loans each year at Uncle Sam's behest. At issue is a change, effective July 1, in the arcane formula that determines the interest rate banks can charge. The old formula guarantees the banks 3.1 percentage points above the recent average for 91-day Treasury bills. The new formula will pay banks one point over the rate for 10-year Treasuries.BIG DROP. But the unexpected drop in long-term rates has created a potentially major problem: Lenders complain that the plunge in what they earn--from well above 8%, now to 7% or less--could render much of their student lending marginally profitable. "They're expecting banks to make these loans at 40%-50% less than they can lend elsewhere," complains J. Paul Carey, executive vice-president for marketing at Student Loan Marketing Assn. "I don't think banks are going to put out $25 billion as a loss leader each year."

So far, White House officials are showing little sympathy to the banks' plight--preferring to play up the potential savings to students: Vice President Gore boasts that the new formula would save the average graduate with $12,000 in loans, roughly $650 over 10 years. If the Administration's lowball offer is simply a ploy to determine how much of a cut banks will accept, that's fine. But it's possible that, despite its claims to the contrary, the White House has an ulterior motive: To cut rates so low that many banks will simply exit student lending, leaving schools with no choice but to steer some students into the Education Dept.'s four-year-old direct-lending program--which they have been loath to do.

Despite the Administration's bold predictions that it would by now be making the bulk of all student loans, its share of all new loans is at 32%--a far cry from the 40% it briefly claimed two years ago. And those vaunted savings the Administration promised once the banks were cut out? Sure, accounting gimmickry makes direct lending look to be less expensive, "but when you include the administrative costs, the programs are comparable," notes an official at the Congressional Budget Office.

If its goal is to drive out the banks, the Administration should be careful what it wishes for. If too many banks flee the program this summer, thousands of would-be scholars could find themselves scrambling to secure a student loan this fall. That's because, as banks privately warn, they'll cherry-pick the most profitable loans--the $50,000 debts of graduates of Harvard University and other elite schools--while shunning unprofitable $5,000 loans, which largely go to students at trade schools and community colleges. Jerry Steele, executive vice-president of a California state-run student aid program, frets that banks will pull out of schools "that are higher risk because of their default rate or eliminate institutions with whom they do not have an ongoing relationship."HOLDING THE BAG? Over the long term, the government's sorry record of managing lending programs doesn't leave even Democratic lawmakers confident that the Education Dept. will be up to the task of collecting on the billions in direct loans when they come due. The Education Dept., indeed, will likely be stuck with the lowest quality loans. "The Federal Housing Administration, Veterans Administration--our experiences with large-scale government lending hasn't always been good," notes Representative Paul E. Kanjorski (D-Pa.). "Bankers are closer to the market and better able to prevent fraud and abuse from creeping into the system."

In promoting the direct-lending program, Clinton officials have repeatedly vilified bankers for reaping lush profits at the expense of student borrowers. But time has shown that the student loan program works pretty well just as it is. If bankers are enjoying windfall profits, it's largely due to efficiencies in marketing and collecting student loans. But it may be time for banks to share some of those savings with taxpayers--by accepting a quarter or half-point interest rate cut. And perhaps it's time for the inveterate tinkerers at the White House to resist the urge to fix something that isn't broken.By Dean Foust

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