WASHINGTON -- Congress is expected to give final approval this week on legislation that would allow schools to test a new college financial aid system that could eventually end the need for tax-exempt student loan bonds.

House and Senate conferences agreed last week to the proposal, which would allow a selected number of colleges to make and service their own student loans for four years beginning in 1994. Later in the week, the Senate passed the plan, as part of a larger package needed to reauthorize the Higher Education Act of 1965.

The House is scheduled to vote on the package tomorrow, and President Bush is expected to sign it, education lobbyists said.

Under present law, the federal government guarantees loans made to students by commercial banks, which in turn sell the loans to state higher education authorities. Those authorities often finance their purchases with tax-exempt bonds, and some operate bond-financed loan guarantee programs of their own to supplement the federal system.

The legislation would create a four-year demonstration program, with the federal government providing seed money to colleges to set up revolving loan funds for student aid. Banking and education lobbyists have said, however, that a permanent direct-loan program would eliminate the need for the state education authorities and, in turn, for issuance of tax-exempt student loan bonds.

The bill places no limit on the number of schools that could participate or on the amount of loans they could make. But it contains an implicit cap, by directing the U.S. secretary of education to select schools that represent $500 million in loans under the current system for the 1992-1993 school year. That would translate into less than 300 schools, lobbyists said.

Lobbyists are still concerned that without an explicit cap on the amount of loans, volume could still surge under the pilot. They are concerned that if volume gets too high under the pilot, many banks could decide to get out of the student loan business. A dearth of bank lending, they fear, would increase the role of state higher education authorities and, in turn, student loan bonds.

The plan's provision for choosing schools based on past loan volume is not an effective limit on lending, because the reauthorization bill makes changes in loan qualification standards that will allow schools to make more and bigger loans than they have in the past, said Marilyn McAdams, president of the McAdams Group, a consulting firm that works primarily on education issues.

"Even though you're looking at $500 million in current programs, that's going to translate into at least $750 million under the [pilot] program," Ms. McAdams said.

The Consumer Bankers Association has estimated first-year loan volume under the pilot at about $732 million.

Although associates representing banks and education authorities have opposed the proposal, they acknowledge it is not as onerous as earlier proposals.

Late last year, the House Education and Labor Committee approved a proposal to scrap the current system completely in favor of a permanent direct-loan program. But opposition from the House leadership forced committee members to scale back the plan to a pilot program limiting the number of loans to $500 million, which passed the House in March. The Senate's version of the education bill did not contain a direct-loan proposal.

In mid-June, House and Senate conferees reached an agreement on direct loans that would have limited the number of schools participating to 500, but placed no dollar limit on the amount of loans originated. At the time, lobbyists said that version could cause the amount of loans to balloon to $1.2 billion, and the Bush administration threatened a veto. That caused the conferees to revert back to a plan similar to the House proposal.

The final version of the bill "is a lot better than where we were last fall," said Laurie Quarles, the deputy director of the National Council of Higher Education Loan Programs Inc. "Over all, we're pleased they ultimately ratcheted down the size of the pilot."

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