U.S. Cites Declining Default Rate In Defending Direct Student Loans

Secretary of Education Richard W. Riley defended the government's student loan program this week, saying competition with bank lending will drive down default rates.

The national average default rate dropped to 11.6% in 1993, the most current data available, barely more than half the 1990 rate of 22.4%. The rate is the lowest since the government began tracking student loan default rates in 1988.

While President Clinton's direct-loan program - which allows students to borrow federal money directly from the government, rather than through a bank - did not begin until 1993, Mr. Riley touted the program as a way to reduce the default rate even further.

The department is "convinced that the array of repayment options and minimal red tape in direct lending will make it easier for student borrowers to meet their obligations," Mr. Riley said.

Mr. Riley said competition between the direct lending program and the Guaranteed Student Loan program, which banks fund, makes both programs healthier by ensuring diligence and high operation standards.

"It's best for the country and for education if we had full competition" between the two lending programs, Mr. Riley said.

But John E. Dean, special counsel to the Consumer Bankers Association, said the drop in default rates had little to do with competition between lending programs.

"Lower default rates are a very good development, but that has more to do with ongoing initiatives that stretch back into the Reagan administration," Mr. Dean said. "This all started before Clinton was President."

Mr. Dean gave credit for the three-year decline in default rates to bank lenders themselves, and to increased federal diligence that has carried over from the Reagan and Bush administrations. Lenders weathered an explosion of student defaults in the 1980s, causing the government to retool the guaranteed student lending program.

"Bank lenders have been implementing better delinquency procedures and staying away from student loan defaults," Mr. Dean said. "Competition (with government lending) is a very minor or non-existent factor in dropping the default rate."

The Consumer Bankers Association and other banking lobby groups have frequently sparred with the Clinton administration over the future of student lending. The banking groups have the support of many Republican members of Congress, who have claimed government lending adds to the budget deficit and impedes private banks in the student loan market.

President Clinton originally wanted to entirely eliminate bank lending to students. His administration has insisted government lending is more efficient and a better deal for students who have trouble paying back their loans.

But with Congress trying to scrap the direct-lending program, the administration may be willing to bargain, Mr. Dean said.

"(Administration officials') backs are against the wall," Mr. Dean said. "So with a majority of Congress supporting the elimination of the direct lending program ... now (Mr. Riley) says they want competition" between student lending programs.

To trim the default rate, the Education Department dumped schools with too many deadbeat students. Mr. Riley said more than 600 institutions have been dropped from the federal student loan system since 1993 after the acceptable default rate for educational institutions was lowered.

"These numbers reflect real and substantial progress," Mr. Riley said. "They are the product of aggressive management decisions intended to get the default problem under control."

Mr. Duchemin writes for Medill News Service

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