Bankers Edgy over House Proposal To Cut Their Role in Student Loans

WASHINGTON -- Banks may be in danger of losing their pivotal role in the student loan business -- with a push from Congress.

With the Higher Education Act of 1965 up for renewal next year, bankers are focusing somewhat nervously on a bill that would replace the current guaranteed lending program with direct government loans.

The bill cleared a House committee this year and is expected to be reintroduced in the next session of Congress.

The provision has a General Accounting Office report arguing in its favor. The congressional auditing agency estimated that a direct loan program would save the government $620 million to $1.47 billion by eliminating interest subsidies are now paid to banks.

Trade Group Leader Blasts Plan

But Consumer Bankers Association president Joe Belew calls the direct loan proposal "one of the worst ideas in decades" and argues that the program will not cut costs.

"It will cost money," he charged. "It will drive banks out of the student loan business. It will cost the university communities and the Department of Education. It fails on all points."

For bankers who gathered here last week for the Consumer Bankers Association's student loan and finance conference, few issues are more central to their business.

Even without the threat, "banks are taking a very hard look at staying in the business," Mr. Belew said, because of the high administrative costs and low profits associated with student loans.

Slim Margins

He said student loans are "still very important to banks, although profit margins have gotten very skinny."

Citibank, one of the largest student lenders, with about $2 billion in education loans, may lobby against the direct loan proposal, a spokesman said. "It's a profitable business for us, but it's not the most profitable part of our business."

Mr. Belew said that because student loans are less profitable than other products, bankers have to make resource-allocation judgments.

Lining Up Customers

Many banks continue to make student loans in hopes of building new customer relationships, which means more business for banks as graduates come back for car loans and mortgages.

In June, Mr. Belew told the House Education and Labor subcommittee on postsecondary education that a direct loan program would require the federal government to assume responsibility for all default costs, which are now shared with lenders and loan guarantors.

Last year, student loan defaults cost the government $2.4 billion, and the Department of Education predicts an increase to $3.6 billion in 1991.

The American Bankers Association also told the subcommittee it opposes eliminating the current guaranteed loan program, which helps banks fulfill the requirements of the Community Reinvestment Act.

A Senate proposal calls for keeping the current system of doling out student loans through banks and guarantee agencies.

Under the House version, banks and agencies would be out of the picture, and the government would distribute loans directly to the schools, which would in turn administer them.

Both bills cleared their respective committees before Congress adjourned and are expected to come up for floor votes in February, said Susan Hattan, Republican staff director for the Senate Labor Committee's education subcommittee.

Ms. Hattan is confident that the Senate bill, which keeps banks in the lending process, will pass.

"We were not persuaded that direct lending would be beneficial," she said. "Obviously there is some interest in direct lending, but there's no majority support at this point."

The Bush administration also backs a plan to keep banks involved in the process and in October threatened to veto legislation that would remove them.

Among other concerns voiced at the student loan conference was the rising rate of defaults and a court decision that exposes banks to defaults on loans to students at low-quality schools.

In Tipton et al. v. Secretary of Education, a federal court ruled that lenders and holders of student loans are subject to claims by students who borrowed funds and refused to repay them on the ground that their school did not provide a quality education.

Saul Moskowitz, a lawyer who represented the Consumer Bankers Association and two guarantors in a similar case, said students will suffer if banks pull out of the lending process or become wary of lending to them because of the Tipton decision.

If banks are liable for financing students at institutions that do not meet quality requirements or are themselves on shaky financial ground, they need to be careful, he said.

"They should not make loans where the lender is not 100% certain of the school," he said.

Although banks are not responsible for school evaluation and accreditation, Mr. Moskowitz said, they must "deal with reality."

"The law is unclear. As long as that's the case, the lender has to assume that risk."

PHOTO : Joe Belew Says plan would not cut costs

Ms. Hockstader writes for the Medill News Service.

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