WASHINGTON - Taking aim at a key bank lending product, President Clinton's 1996 budget calls for the government to take over the entire student loan program by 1997.
"I'm very surprised that they would commit themselves to 100%," said Joe Belew, president of the Consumer Bankers Association. "Everything is moving towards privatization, not 'governmentization.'
"It makes for a good applause line in speeches, but there are increasing doubts about the direct lending program in the industry, in the universities, and more particularly on Capitol Hill," Mr. Belew added.
However, the administration argued that expanding the federal direct loan program to serve the whole market would save $12 billion from 1995- 2000.
"When you are looking at different ways to cut the budget, this is an option," said Leo Kornfeld, senior adviser to Secretary of Education Richard W. Riley. "And the $12 billion in savings are so overwhelming that it makes this option a very reasonable one."
Instead of the current 7,000 lenders, 41 guarantee agencies, and over 50 secondary markets currently involved in the private student lending market, the direct loan program would be run by six to 10 government contractors, Mr. Kornfeld said.
"We're just moving this away from the financial industry to the computer service data bureau industry," Mr. Kornfeld said.
In 1993, Congress enacted the Student Loan Reform Act, which directed the Department of Education to run a five-year test to determine if the government could manage the student loan program more cheaply than the private sector.
However, the law also allows the Department of Education to take over up to 60% of the market by 1998.
In an effort to slow down the test program, Rep. William F. Goodling, chairman of the House Economic and Educational Opportunities Committee, introduced a bill last month that would limit the federal government's share of the market to 40%.
As expected, the administration's budget plan also proposes charging state-chartered banks and bank holding companies for examinations by the Federal Deposit Insurance Corp. and the Federal Reserve.
"This proposal would level the playing field among the banking regulators and eliminate an unwarranted subsidy to state banks," the budget report said. State banks with assets of less than $100 million would be exempted from the proposal.
The banking industry has come out in unison against the proposal, which the administration estimates would raise $1 billion by the year 2000.
"Even though there is the $100 million exemption, we think this sets a very bad precedent," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America. "It's essentially putting a new tax on banks."
The budget also proposed providing $2 billion to capitalize new state infrastructure banks. This would allow jurisdictions to "more easily leverage public and private resources" for financing infrastructure and the national transportation system.