White House Budget Plan May Drop Crucial Subsidy For Banks' Student

President Clinton's fiscal year 2000 budget may propose killing a key federal subsidy for banks that make student loans, according to congressional sources.

Estimated to be worth $800 million to $900 million over five years, the subsidy was part of a compromise reached last fall between banks and the White House after more than a year of negotiations.

The government's commitment was part of the Higher Education Amendments of 1998, which reduced the interest rate that students pay by 80 basis points.

Though the White House wanted the rate reduction to help students, banks said the cut would drive them out of the business.

The industry persuaded the government to fund 50 basis points of the reduction, leaving banks with a 30-basis-point hit.

Now President Clinton is considering leaving out funding for the 50- basis-point subsidy from his budget.

"We understand they're going to try to ... get rid of the whole subsidy," said Joe Belew, president of the Consumers Bankers Association.

Wayne Upshaw, chief of the education branch of the Office of Management and Budget, refused to discuss the budget, which will not be made public until Feb. 1.

However, details began leaking out this week, prompting Rep. Bart Gordon, D-Tenn., to write to the White House on Wednesday in an effort to head off the move.

"I am very concerned about recent reports that indicate you may ... destroy the compromise reached last year," Rep. Gordon wrote.

"Destroying this compromise would send a bad message to Congress at a time when partisan tensions are running high.

"This proposal could reignite a heated debate over the future of our student loan programs," he wrote.

Rep. Howard "Buck" McKeon, R-Calif., chairman of a key House Education subcommittee and principal author of last year's law, said he is planning to send a similar letter.

In an interview Thursday, Rep. McKeon said that cutting the subsidy through the budget process would be an unusual step, particularly in light of all the factions that finally united behind the compromise.

"I thought we had tremendous support on the bill and throughout the industry," he said.

"I guess we're going to be fighting this for as long as he's President."

If the President proposes cutting the entire subsidy, the government's savings would be roughly $200 million in 2000.