WASHINGTON - Bankers plan to outlag the federal government in the student loan market and at the same time seek new legislation to curb the government's expanding role.

Delegates attending the Consumer Bankers Association's Student Lending Conference here last week said competition between the banks and the Department of Education will be fierce over the next five years.

Congress will decide at the end of that period whether the government should have a broader role in a market that was once served almost exclusively by banks and the Student Loan Marketing Association.

William L. Banks, chairman of the CBA Education Funding Committee and vice president of Chemical Bank in Jericho, N.Y., said it is important that banks now prove to Congress that the private sector has much to offer.

A law passed by Congress in August requires the federal government to set up loan funds for colleges that eventually could reach up to 60% of all students loans. Supporters of the bill believe the government and students can save millions without banks acting as middlemen.

Trial Lending Program

Last month, the U.S. Dept. of Education selected 105 schools to participate in the first year of the Federal Direct Student Loan Program. The program will represent $1 billion, or 5%, of new student loan volume for the 1994-95 school year.

After the five years are up, many expect Congress to allow only direct lending for student loans, squeezing banks out of the industry.

"There is a great sense of anticipation," said John Dean, a partner at the Washington law firm Clohan & Dean. He said that when President Clinton signed the August bill into law, the program as it is now came to an end in the minds of many in the financial industry.

Strong Criticism

Rep. Bart Gordon, D-Tenn., has been a critic of direct lending in the House and supported an amendment that will prevent schools from involuntary participation in the direct loan program.

He said at the conference that student lending is corrupt and the administration's interest in the issue is largely symbolic. He said direct lending is simply a monument that the administration wants to leave behind as a sign of success.

"There is a real revolving door in the Department of Education," he said. Rep. Gordon said the department is failing in oversight of the lending. He said officials just shove money out the front door and then forget it.

Rep. Gordon's frustration with the student loan process led him to an undercover stint as a student at a truct driving school three years ago. "They told me I could see the world using government money," he said. Rep. Gordon said that corruption in student lending is still prevalent

Recently, he said, he visited a Memphis health-care school with 3,500 students and $5 million in defaulted lonas. Rep. Gordon said this disparity showed him that the school was not so much interested in qualified students as it was tuition.

Promises Seen as Excessive

Mr. Banks, the Chemical exective, criticized the administration for having a "smooth marketing package" for direct lending. He said officials are promising more than they should. But he also said he thinks the Department of Education will eventually work in partnership with the financial industry.

Sally Stroup, a staff member of the House Committee on Education and Labor, voiced another question for the future of the system: "What agency will oversee the direct lending?"

Mr. Dean, of Clohan & Dean, stressed that bankers should get involved in this issue. "We have a choice as an industry to either help shape the future or to stand by."

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