The Clinton administration offered Wednesday to alter a planned interest rate formula that would cut lenders' returns on government-backed student loans.
"We have to solve this problem," said Vice President Al Gore, who introduced the administration's proposal at a White House press conference. "If we don't take action, some banks may pull out of the program."
Under the formula, due to take effect July 1, banks would have to peg interest rates on newly originated student loans to 10-year Treasury bonds instead of three-month notes, which are used today. Also, the maximum average estimated interest rate banks could charge would drop to 7%, from 7.8%.
The change is expected to increase banks' lending costs because it would prompt them to carry out expensive hedging strategies. Bankers say the formula will make guaranteed lending unprofitable. And lawmakers have been pressuring the administration to change the plan.
As a compromise, the administration has offered to keep three-month Treasury bills as the instrument for setting rates. However, banks would still be forced to cut their rates to 7%.
"President Clinton and I are deeply committed to ensuring this reduction," Vice President Gore said.
The comments were meant to assure lawmakers and the industry that the student lending dilemma is a top priority. Lawmakers, including Senate Budget Committee Chairman Pete Domenici, have warned that an exodus of lenders would wreak havoc on students' plans to enter college next fall.
Lawmakers were still reviewing the proposals Wednesday afternoon. However, Rep. Paul Kanjorski, R-Pa., opposed the administration's plan and introduced legislation that would keep the current 7.8% interest rate.
Banking groups reacted harshly to President Clinton's plan.
"It's absolutely unbelievable," said Joe Belew, president of the Consumer Bankers Association.
Mr. Belew said the interest rate limits included in the administration's compromise would still prevent banks from making an acceptable profit.
The vice president also unveiled a Treasury Department study showing that banks would be hurt if the July 1 formula takes effect. The study also included options to solve the problem.
One option, Treasury said, would be to let private lenders bid for the right to make guaranteed loans. Banks pledging to charge the lowest rates would win.
Some bankers have accused the administration of pushing the interest rate cut to boost the government's direct student lending program, a pet project that President Clinton launched in 1993. Though the administration had hoped that the direct lending program would eclipse those of banks, private lenders still supply 70% of the $34 billion in student loans.
But Gene Sperling, chairman of the National Economic Council, said there are no plans to force out private lenders.
"Our overall goal is to give students the lowest overall rate possible and still provide private lenders a acceptable rate of return," he said.