WASHINGTON -- State agencies that sell student loan bonds are trying to figure out how they will survive in the brave new world of direct lending recently created by Congress.

The agencies exist to support the old system, known as the Guaranteed Student Loan program, by buying federally insured loans from commercial banks. The purchases, often made with tax exempt bond proceeds, free up funds for banks to make more loans.

But that system is probably going the way of the dinosaur. Congress passed legislation in August that creates a direct lending program, to be phased in over five years, under which colleges will make and service student loans. The Department of Education will give seed money to the colleges to set up revolving loan funds, and it will administer the program.

Many, if not most, of the agencies and the lobbyists they hired fought direct lending, arguing that a big new federal program was not the way to solve the old system's problems of large costs and high default rates. Some studies even show that a direct-loan program would be costlier than the current system.

But the direct lending proposal, offered by the Clinton Administration at the beginning of the year, became a political juggernaut. As the measure moved through Congress, even its staunchest opponents conceded that the best they could do would be to slow its implementation.

Opponents actually got a little better than they expected. The original proposal would have mandated that, after the five-year phase-in period, direct loans would be fully implemented and the old system would automatically die. But the final version passed by Congress limits the volume of direct loans at the end of five years to 60% of all student loans, and directs Congress to decide then which system to keep.

That gives the state agencies some hope, right? Lawmakers could scrap direct lending in 1998 if it doesn't work out, couldn't they?

Theoretically, yes, but realistically, no. Congress has convinced itself that direct lending will work, and the small measure of comfort the final bill gives to proponents of the old system is only postponing the inevitable.

State agencies "know it's going to take a major foul-up by the Department of Education" during the phase-in period "to get Congress to reverse its action," said one education lobbyist.

So the smart agencies aren't waiting for the axe to fall. They're already trying to figure out their future, which is not an easy proposition. The law defines the agencies as Qualified Scholarship Funding Corporations. As such, their only mission is to create a secondary market for student loans -- a market that, in theory at least, won't be needed once direct lending is fully implemented.

Once the direct loan program is fully implemented, the agencies will have two choices. They can try to transform themselves into something other than the scholarship funding corporations, and diversify their activities. But they could also keep their identity and prepare to pick up the slack they believe will be left by direct lending.

There does appear to be some hope that the latter could happen. Presumably the federal government will try to keep the size and cost of the new program from burgeoning out of control. That probably will mean strict income requirements, as well as caps on the amount that students can borrow under the program.

The restrictions would leave a gaping hole into which state agencies could jump with supplemental student loan programs. Some states already have supplemental programs, under which banks make loans that are state-guaranteed. Federal law allows the agencies to issue tax-exempt bonds to purchase the loans.

The second avenue would be for a state agency to transform itself into something else. For example, the New England Loan Marketing Corp. wants to shed its status as a scholarship funding corporation and become a 501(c)(3) organization with the ability to perform broader activities in the education area. The proposal includes the creation of a taxable subsidiary that would hold outstanding student loan bonds. The proposal would require approval by Congress.

Whatever path a state agency chooses, the next five years of transition are sure to be rough. But the agencies believe they have to accept the fact that direct lending is here to stay. If they act like ostriches now, they will end up as dinosaurs later.

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