WASHINGTON--House and Senate conferees have approved an education bill containing a direct-loan program so large that it could disrupt the present college financial aid system, lobbyists say.
Currently, banks lend money to students and sell the loans to state higher education authorities, which often finance their purchases using tax-exempt student loan bonds. This week, however, the conferees adopted a bigger program than originally proposed to test the idea of having colleges make and service their own student loans.
"We're very disturbed about the outcome on direct loans," said Joe Belew, the president of the Consumer Bankers Association. "This would destabilize the [present] program."
The direct-loan proposal is part of a package needed to reauthorize the Higher Education Act of 1965, which expires on Sept. 30. Legislation passed by the House in March would have created a four-year demmonstration program with the federal government providing seed money to colleges to set up revolving loan funds for student aid.
The House provision contained no limit on the number of schools that could participate, but placed a $500 million cap on the total amount of loans. The Senate bill did not include a direct-loan provision.
House and Senate negotiators working this week to craft a final bill agreed to a proposal by Rep. Robert E. Andrews, D-N.J., to enlarge the House direct-loan provision. Under Rep. Anderws's plan, the number of schools would be capped at 500, but there would be no dollar limit on the amount of loans originated. The program would run for five years, from 1993 to 1998.
John Dean, a lawyer representing the consumer bankers group, estimated that amounts originated could reach $1.2 billion without a cap on loans, more than twice the amount permitted under the House bill.
Banking and education lobbyists said they are concerned that many banks could decide to get out of the student loan business if the proposal is enacted. A dearth of bank lending would decrease the role of state higher education authorities and obviate the need for tax-exempt student loan bonds, state education officials have said.
"If it's a large demonstration, the question is what incentive will there be for lenders to stay in the program," said Marilyn McAdams, president of the McAdams Group, a consulting firm that works primarily on education issues.
"If the really large schools go over [to the direct-loan program] then it does not become feasible for a bank to stay in [the current system], making loans to nothing but junior colleges," Ms. McAdams said.
Mr. Dean said banks "are very fearful that the schools selected will [be the best] under the existing program." Removing those schools from the current system would "undermine lender support for the program," added Mr. Dean, a partner in the law firm of Clohan & Dean.
The direct-loan proposal agreed on by the conferees has apparently put the entire education bill in jeopardy. Republican lawmakers have stated they expect President Bush to veto the measure, and Education Secretary Lamar Alexander sharply critized it in a statement this week.
"It's a shame" that conferees enlarged the direct-loan proposal, which will "create billions of dollars of new unlimited government debt," Mr. Alexander said. "President Bush should veto this legilation."
Mr. Below said he hopes it will be possible for the conferees to reopen the bill and scale back the direct-loan program to avoid a veto. But Ms. McAdams said that may not be necessary, given the fact that both houses approved their versions of the education bill by margins wide enough to override a veto.
As troublesome as the current proposal is, lobbyists acknowledged it is still less onerous than one originally envisioned last year by House Education and Labor Committee Chairman William D. Ford, D-Mich.
His plan would have completely eliminated the current system and replaced it with a direct loan program by 1996. Although his committee approved the plan, congressional leaders objected, and he scaled it back to the pilot program that the House passed.