WASHINGTON - In a victory for lenders, the budget agreement reached by House and Senate GOP leaders last week could undermine administration plans to take over the student loan market.
Details of the deal, which was struck late Thursday, were still sketchy Friday. However, industry sources familiar with the budget talks said the package requires that administrative expenses be included when calculating the cost of the administration's direct loan program.
That requirement would have the effect of making the direct loan program look more expensive when compared with the private-sector program that the government subsidizes - giving bankers ammunition in their fight with the administration.
"This would be great defense for private student lenders, because this reflection of true cost would make the direct loan program far less attractive," said John Dean, special counsel to the Consumer Bankers Association.
"Had this change been in effect in 1993, direct government student loans would not have been enacted, because ignoring administrative costs created a severe understatement of the true cost of direct loans," Mr. Dean added.
In a 1994 law, Congress directed the Department of Education to conduct a five-year test to determine if the government could manage the student loan program more cheaply than the private sector.
Though President Clinton has pushed to expand the direct loan program to serve 100% of the market, the law currently states that the government-run program can take over only 60% of the market by 1998.
Mr. Dean said that if the proposal ends up in the final conference- report language, which is expected to be released early this week, it would add steam to GOP legislative efforts to cap the direct loan program at 40% of the market.
The Republican agreement, which seeks to balance the federal budget by the year 2002, also aims to expand individual retirement accounts.
While legislative sources said that congressional tax committees will have to hammer out exactly what sort of IRA expansion will be included in the budget, lawmakers are expected to include a tax- free account for nonworking spouses.
Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America, said that enhancing the tax deductibility of IRA contributions would be a boon for banks.
"Any expansion in IRAs is very good news for bankers," Mr. Guenther said. "IRAs represent long-term deposits, and there is no more valuable deposit to a banker than a long-term deposit."
He added that member institutions have been having trouble attracting money, and IRAs are one more avenue available for building core deposits.
However, there was one possible dark cloud for banks looming in the budget agreement.
The accord calls for an $11 billion reduction in education funding, and some fear that may spell the end for in-school interest subsidies.
While the cut would affect both private and federal student loans, Mr. Dean said that Sen. Jim Jeffords has expressed interest in replacing a cut in the subsidies with an increase in direct federal student loans. The Vermont Republican chairs the Senate Labor and Human Resources subcommittee on education.
"You get large savings from cutting the interest subsidy as well as increasing direct loans, so they are somewhat interchangeable," Mr. Dean said.
In-school interest subsidies allow lenders holding student loans to bill the Education Department for interest at a rate equivalent to that of Treasury bills plus 3.1%.
However, a House Budget Committee aide said that exactly which aspects of education funding will be cut is still uncertain.
"We just have a number - $11 billion. It could come from the student loan program, it might come from the schools themselves, or it may come from the subsidies," she said.
