The federal government could save about one third by making student loans directly instead of guaranteeing them, according to the General Accounting Office.

Direct loans would cost the government $9.73 billion over five years, the GAO said, while guaranteeing the same loans could cost $14.55 billion.

Student loans now are issued by banks and insured by "guarantee agencies" backed by the federal government.

Interest Subsidies

The study said most of the 33% saving from direct lending would come from eliminating interest subsidies the government now pays to private lenders to keep student loans competitive with other types of credit.

And since the government subsidizes the interest payments of students who are still in school, the study noted, direct lending would reduce that cost - because the government's borrowing costs would be less than private lenders'.

Savings from direct lending would offset the costs of setting up the program, the GAO said.

But Fritz Elmendorf, a spokesman for the Consumer Bankers Association, a trade group, said the GAO study does not account for the costly phasing-out of the current program.

Rocky Transition Seen

The most dramatic effect, he said, "is the problem with the availability of loans during the interim period as banks try to protect themselves from the meltdown of the [guarantee] program."

Joseph J. Eglin Jr., a contributor to the GAO report, said the secondary market for student loans would take care of that. If banks aren't funding loans, the Student Loan Marketing Association will pick them up, he said. "Sallie Mae can originate loans."

Mr. Eglin agreed with Mr. Elmendorf's claim that dismantling the guarantee system could push some guarantee agencies into bankruptcy and that the federal government would be required by law to bail them out.

But Mr. Eglin said the bailout would not cost "anywhere near" the "hundreds of millions of dollars" estimated by the CBA. "There will be costs, but they will be over the long term, as loans wind down."

And he predicted some agencies would find other businesses. "Some could wind up servicing loans for the government."

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