WASHINGTON - President Clinton has proposed three breaks for students who borrow directly from the government.

One industry observer described the move as a defense against heavy private-sector competition.

The initiatives - which the President unveiled Thursday in a speech at DePaul University in Chicago and were detailed in a proposal published Thursday in the Federal Register - would provide students or parents who use the federal direct loan program with an interest rebate equal to 1.5% of their loan.

Over a standard 10-year loan, the rebate would amount to an interest rate reduction of 24 basis points, according to the White House.

The proposed changes also would provide students who consolidate their loans under the federal program an interest rate 80 basis points lower than what they currently pay, which would save a student with a $10,000 loan roughly $500.

Students or parents would be required to make payments on time during the first year of the loan to keep the benefits.

The changes also would implement a teacher loan forgiveness program for direct loans and federally backed student loans made by banks. It would excuse as much as $5,000 of debt for teachers who work in needy schools for at least five consecutive years.

John Dean, a partner in the Washington law firm of Dean Blakey & Moskowitz and special counsel to the Consumer Bankers Association, said the proposed changes are "an attempt by the government to breathe new life into a troubled program, and I fully expect that [private] lenders will respond by redoubling efforts on customer service and benefits to the extent of their ability."

Comments are due to the Education Department by Sept. 25.

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