this week by limiting the government's piece of the student loan market to 10%. Republican leaders settled on the 10% cap late last week, directing negotiators from each chamber to include it in broader budget legislation being hammered out this week. The budget bill also levies new charges on banks that lend to students, but GOP officials last week backed off plans to increase those fees even further. "This is very positive for the student loan industry," said John E. Dean, special counsel to the Consumer Bankers Association. "Because of the fees, the legislation will produce a much leaner guaranteed loan program." If Congress holds the government to 10% of the market, Mr. Dean said, banks will recoup the new fees by making more loans. The House had considered ending the government's direct lending program, while the Senate was willing to give Uncle Sam up to 20% of the market. But when it came time to reconcile differences, House lawmakers refused to go any higher than 10%, congressional sources said. Moderate Republican senators had threatened to vote against the budget bill if the direct loan program's market share was restricted further, said an aide to Senate Labor and Human Resources Committee Chairwoman Nancy Kassebaum, R-Kan. The final budget bill measure is expected to force financial institutions to absorb 5% of the loss on unpaid loans - banks' losses are now capped at 2%. The bill also is expected to contain a provision that would double, to 100 basis points, origination fees lenders must pay. The Clinton administration criticized the 10% cap Monday, arguing that it would cut 1.5 million students out of the direct loan program. The government now controls about 25% of the $28 billion student loan market. "This would add a logistical nightmare, as well as a cost to students and schools," said Leo Kornfeld, senior advisor to Education secretary Richard W. Riley. "Why is Congress doing this? Right now we are sitting at $7 billion in loans and 2 million students that are happy as a lark." However, William L. Banks, vice president of Chemical Bank, New York, said 10% is an appropriate level. Direct lending was established in 1993 by Congress to test whether the government could do a better job than the private sector in providing student loans. "This keeps the program in line with its original intent, which was for it to be a pilot program - 10% is enough to gather data," said Mr. Banks.

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.