WASHINGTON -- The government has launched a program that will cut banks out of the student lending business, and at least one industry group is warning that the project faces major hurdles.

"We question the management resources at the Department of Education, we challenge the cost savings, and we know that most schools have the same questions about this major new experiment in eduction finance," said Joe Belew, president of the Consumer Bankers Association.

The program, begun last Friday, is set up as a large-scale test of direct government lending, though many bankers fear that, as a practical matter, the program will become permanent and take over the entire market.

Aiming for 60% of Loans

As structured by Congress, the program calls for the government to originate 60% of all student loans within five years. At that time, the program will be reevaluated.

Currently, student loans are made by banks and other private-sector lenders with guarantees from the government.

"We believe that time will show that the private sector can deliver loans with greater efficiency and service than can the federal government," Mr. Belew said.

He also said:

* While the Department of Education has assembled an "A team" to implement direct loans, it has been plagued for years by poor management and has no track record for implementing such a large-scale project.

* Estimates that the direct loan program will save $4 billion over five years have been challenged by independent accounting companies and the Congressional Research Service.

* There is no cost advantage to a student who uses a direct loan rather than a loan from a private lender.

* Schools have little or no experience as loan originators - a

role they are required to play in the new program - and will face new expenses as a result.

"We all want the best student loan program for students and taxpayers," Mr. Belew said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.