As a community banker, I am proud of the role that my bank plays in our town's economic well-being. Part of our job, as I see it, is helping maintain that economic health and growth for future generations.

That's one of the reasons why my bank -- and thousands of other community banks throughout the country -- make loans to students under the 20-year-old, public-private partnership of the Federal Family Education Loan Program.

But, as a banker, I am also deeply concerned about the economics of making loans to students. Recent proposals by the Senate may change the economics of this privately funded program substantially -- with the unintended (I assume) consequence of curtailing students' access to loans in the future.

Diminished Role

The Senate has approved a bill that would significantly decrease the role of the private sector in making student loans by providing for a direct federal loan program.

The bill says that 50% of all loans for higher education would be government funded by 1997. A similar bill passed by the House would make 100% of all loans federally funded by 1997.

Of even greater immediate concern to me is that the Senate proposal, through the imposition of a number of fees and other yield reductions -- particularly on smaller lenders and their principal source of liquidity, Sallie Mae -- would make many such lenders' participation in the program uneconomic enough to drive them out of the business altogether.

Crucial Liquidity

As a result, access to credit for tomorrow's students could be limited. Here's why.

Like most small lenders in the student loan business, my bank makes the initial loan and services it while the borrower is in school, before payments are due. When the loans come due, we sell them into the secondary market.

Institutions like Sallie Mae, state secondary agencies, and other banks buy these loans and collect on them. By selling the loans, my bank obtains funds to make more loans. Without this liquidity, it would be difficult to continue to make student loans.

As it now stands, the Senate bill would make lending a lot harder. It would impose a loan origination fee on lenders, transfer fees on secondary markets for loans they purchase, and a unique user fee on Sallie Mae.

It would reduce the up-front yield (the return the bank receives while the student is still in school and repayment has not yet begun) on these loans. For the big banks that can afford to hold loans through repayment, this is a good deal. Yet these institutions are constantly reevaluating their participation in the program, based on a variety of internal and external factors.

Incentives Dry Up

For small banks like mine, which rely on Sallie Mae or other secondary markets -- and which typically have a long-term commitment to education lending -- the bill would devastate the economics of the business.

As Senate and House conferees meet to resolve the differences, I hope they think long and hard about the impact of what they are doing on all of the participants in the program -- and, ultimately, the beneficiaries of the program: students.

From a public policy perspective, we can all agree that making more funds available to more students is a desirable goal. Achieving that goal by making it more difficult for small lenders to stay in the business is counterproductive.

Make Bill More Equitable

Community bankers believe it is in the public's best interest to keep the private-sector-based program viable. The House-Senate conferees should consider ways to make the current bill more equitable.

Substituting a life-of-the-loan reduction in yield for the up-front reduction, eliminating loan origination fees and secondary market transfer fees, and deleting from the legislation user fees on Sallie Mae would make for a more equitable program.

Smaller lenders need to know that participating in the student loan program can be economically viable, and we encourage Congress to take that into consideration as it makes a final decision on the student loan program.

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