President Clinton on Thursday threatened to veto legislation designed to keep private-sector lenders interested in the student loan market.
The administration has repeatedly contended that federal funds should not be used to partially compensate bankers for a reduction in interest rates students pay on government-guaranteed loans. That rate cut is scheduled to take effect July 1.
At a press conference Thursday, House Education Committee Chairman William F. Goodling said a veto would "cause a total meltdown of the student loan program."
The Pennsylvania Republican accused President Clinton of wanting to drive the private lenders out of the student loan market as a way to bolster the administration's direct lending program.
"The President is playing pure and simple politics with this issue," Rep. Goodling said. "This proposal gives the nation's college students the lowest interest rates in 17 years while ensuring banks can stay in the student loan program."
The legislation is necessary because a 1993 law would change the way rates on government-guaranteed loans are calculated. The new formula would cut rates by 80 basis points, a level lenders claim would make the loans unprofitable.
After months of negotiations, House Education forged a compromise that would implement the cut as scheduled but lenders would get a subsidy equal to 50 basis points. The administration objects to the subsidy, which it estimates would cost $2.7 billion over five years.
The plan is included in legislation for higher education spending that is expected to come to the House floor today. A Senate vote on that legislation is expected next week.