The banking industry appears to be headed for a showdown with the Clinton administration over the interest rate lenders will be allowed to charge for student loans.
Neither side was willing to budge in testimony Thursday before a House Education subcommittee.
Jon A. Veenis, president of Norwest Corp.'s student lending unit, blasted a plan unveiled Feb. 25 by Vice President Al Gore that would cut the rate to 7%, from 7.8%, on July 1.
If Congress approves the plan, most private lenders will not be able to earn adequate returns and will abandon the government's guaranteed-loan program, Mr. Veenis said. "The Gore proposal doesn't work," he said. "A train wreck will occur if this is enacted."
If banks pull out, students planning to enter college next fall would have trouble finding financing. Private lenders provide 70% of the $40 billion in guaranteed student loans. The rest is supplied by the government's direct lending program, which bankers say cannot handle a crush of additional loan applications.
But at the hearing, an administration official argued that enough private lenders would continue making the loans.
"We have been asked whether our interest rate proposals will encourage banks to leave the program en masse," said David A. Longanecker, assistant secretary for postsecondary education. "The answer is 'no.'"
Even if many banks flee the program, he said, the void would be filled by Sallie Mae Inc., the largest securitizer of student loans and a provider of direct loans.
"If called upon by the secretary of education, Sallie Mae is required by law to act as a lender of last resort," Mr. Longanecker said.
But Sallie Mae lobbyist J. Paul Carey said the burden should not be dumped on his company. "That is no way to ensure the health of this vital program," he testified.
The Clinton administration's plan is an attempt to settle industry complaints about a new interest rate formula adopted by Congress in 1993 and scheduled to take effect July 1. Under the formula, banks would have to peg interest rates on newly originated student loans to 10-year Treasury bonds instead of three-month notes, as they do now. Also, the maximum average interest rate banks could charge would drop to 7%.
Besides cutting their margins, banks argue, the change would force them to adopt expensive hedging strategies.
As a compromise, the administration offered to continue pegging rates to three-month Treasury bills but refused to increase the 7% cap.
Education Committee leaders said it is too early to predict how the dispute will be resolved.
"I don't believe any of us know what the rate should be," said Rep. Dale Kildee, D-Mich., the postsecondary education subcommittee's ranking Democrat.
But Rep. Paul Kanjorski, D-Pa., who has introduced legislation that would preserve the 7.8% interest rate, said the program should remain as it is today while Congress looks for ways to cut fees and other administrative costs.