WASHINGTON - Republicans may end interest subsidies on student loans, the Consumer Bankers Association warned at a conference Monday.
John Dean, the trade group's special counsel, told bankers that the GOP's "Contract with America" includes the option of cutting in-school interest subsidies as a means of reducing the deficit.
"One of this Congress' first priorities is deficit reduction," Mr. Dean said. "They are going to take a very hard look at all entitlement programs, student loans included."
In-school interest subsidies allow the lender holding the student loan to bill the Education Department for interest at a rate equivalent to the rate for Treasury bills plus 3.1%.
Ending the subsidy is one of a list of options put forward by Republicans during this year's campaign as possible budget cuts, and has not yet become a specific legislative target, said Vic Klatt, education policy coordinator for the House Education and Labor Committee's Republicans.
"It is still too early to tell, but it is among the options," Mr. Klatt said. "I wouldn't rule it in, but I wouldn't rule it out."
Although he said that Republicans generally "see student loan issues the same way we do," Mr. Dean noted that cutting the subsidy could drive students away from private lenders and towards the Federal Direct Student Loan Program because of its extended repayment plan.
The federal direct loan program offers an "income-contingent repayment plan," which allows students to extend the repayment period to up to 30 years, and to tie the size of their monthly payments to the size of their income.
If the monthly payments are not sufficient to cover the accruing interest, the unpaid portion is annually added to the outstanding loan balance, and in turn subject to interest charges.
In the end, students end up paying more for what initially may appear to be an attractive repayment plan, Mr. Dean said.
The increase in students' loan repayment bills win be dramatic, according to Brett E. Lief, assistant vice president at the National Association of Independent Colleges and Universities.
"An undergraduate who borrows the maximum amount for four years will have his or her loan payments go up by 20% on repayment if the in-school interest subsidy is eliminated," said Mr. Lief. "For someone who goes for graduate or professional school study, those payments will go up by over $22,000, or 37.6%."
The Education Department is engaged in a five-year test run of a direct-lending program in an effort to discover whether a government program can cater to the needs of students more effectively.
