House Panel May Overhaul Aid Program For Colleges

WASHINGTON - A House panel next week is expected to consider overhauling the federal financial aid program for college students in a way that could end or drastically reduce issuance of tax-exempt student loan bonds, education lobbyists and state officials said yesterday.

A proposal for revamping the college aid system is expected to be made on Oct. 1, when the House Education and Labor Committee's Subcommittee on Postsecondary Education begins drafting legislation to reathorize the Higher Education Act of 1965, those sources said.

The subcommittee has not said what kind of an overhaul it plans to endorse. But lobbyists and state officials said they are concerned the a program under which the federal government would give seed money directly to colleges to set up revolving funds to make loans to students.

Under the current system, the federal government guarantees loans made to students by commercial banks, which in turn sell the loans to state higher education authorities. The authorities often finance those purchases with tax-exempt bonds. Some states also issue bonds to finance their own direct-loan programs to supplement the federal program.

If that system were replaced with a direct-loan approach, the effect "would be to eliminate state agencies and private nonprofits like ourselves who provide funding for the loan programs, and to eliminate the guarantee structure," said Larry O'Toole, president of the New England Education Loan Marketing Corp. "It's correct to say there would be no need for student loan bonds."

Congress is expected to complete work on legislation reauthorizing the higher education act sometime next year. The statute, which contains a host of federal education programs, is set to expire next month. But current law contains a provision automatically extending the act one more year if lawmakers have not reauthorized it by the current expiration date.

Education lobbyists said the prospects for passage of a direct-loan plan are uncertain, because lawmakers seem to be divided over the concept. House legislators are interested in a direct-loan approach, but the Senate is not, they said.

The chairman of the House Education and Labor Committee, Rep. William D. Ford, D-Mich., has not publicly taken a position on the issue, an aide to the congressman said. But in February The Washington Post quoted Rep. Ford as saying a system of direct loans "might not be a bad idea, especially if it would pick up a billion dollars a year to buy more education."

At least one member of the education panel has gone on record supporting the direct-loan concept. Rep. Robert E. Andrews, D-N.J., introduced legislation in August that would direct the Education Department to disburse loan funds to colleges, which would carry the burden for approving and servicing the loans. State officials and lobbyist said they did not know whether the committee would consider Rep. Andrews' proposal or draft some other kind of direct-loan plan.

Rep. Andrews and other proponents of the direct-loan concept say it would streamline the process for making student loans, lower default rates, and eliminate costly middlemen, like banks. In the process, the federal government would save "billions of dollars," Rep. Andrews said in a statement when he introduced the bill, which carries an effective date of July 1, 1994.

But Jean Frohlicher, executive director of the National Council of Higher Education Loan Programs Inc., said she did not believe a direct-loan program would be less expensive. In creating such a program, "what you're doing is handling over essentially a blank check for an entitlement program," she said.

Ms. Frohlicher said her membership - which includes Mr. O'Toole's agency and other loan authorities - strongly opposes the direct-loan approach and is "extremely concerned about the Department of Education's ability to administer" such a program.

The Bush administration's position on the direct-loan concept appears to have changed over the last few months. In January, the White House was reported to favor the idea, but the President did not include a plan for direct loans in his legislative proposal for reauthorizing the education act.

More recently, Education Secretary Lamar Alexander told Congress his department has several concerns about a direct-loan program. Among other things, such a program would increase the federal debt and would increase the government's risk exposure in the area of student loans, Mr. Alexander said in a June 28 letter to Rep. Ford.

Though a direct-loan program would probably wipe out all issuance of student loan bonds, it is still possible the bonds would be needed, though on a much smaller scale, said John Dean, a partner in the firm of Clohan, Adams & Dean, and counsel to the Consumer Bankers Association.

In adopting a direct-loan program, Congress could impose stringent conditions. For example, it could sharply limit loan size or the types of students who would be eligible for the loans. If that were to happen, state agencies could step in and fill any gap left by the federal program, by setting up their own guarantee programs and financing them with tax-exempt bonds, Mr. Dean said.

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.