A consumer group, in a report released Thursday, charged that banks would profit enormously from a Republican plan to kill direct student lending.
Citizen Action said the legislation, which Republican presidential nominee Bob Dole has endorsed, would require taxpayers to provide $2.1 billion in interest rate subsidies to banks during the next four years.
The group urged lawmakers to permit the Education Department to continue financing about half of all student loans directly. The government could use the savings gained by cutting banks out of the process to finance 2.5 million additional loans, the group said in its report, Big Money on Campus.
"When my banker friends come up here they complain about welfare for poor people," Sen. Paul Simon said at a news conference announcing the report. "They are less critical about welfare for bankers, and that is what this is all about."
The Illinois Democrat said he doesn't expect Congress to kill direct student lending this session, but he predicted Republicans would try again next year to abolish the program.
Republican activists and banking industry officials disputed the report's conclusions.
"I was amazed when it saw this propaganda piece," said Kawika Daguio, federal representative at the American Bankers Association. "It is not a study. Its methodology is even more flawed than its conclusions, if that is possible."
He said the government subsidizes students, not banks. For example, he said, the government pays interest on loans for borrowers that are still in school. Also, it provides funds that allow banks to offer below-market rates, he said.
Direct lending only appears cheaper because Citizen Action incorrectly assumes that the government will not incur any costs in administering the program, he said.
In releases distributed at the news conference, Republicans claimed direct lending would increase government costs by $1.5 billion and would require the Education Department to hire 600 new employees.
Joe Cali, chairman of the College Republican National Committee, said direct lending would transform the Education Department into the country's third-largest lender.
"This department has no expertise in banking or other financial services, business, loan collections, or any other skills needed to manage a multibillion-dollar financial program," he said.