In Focus: U. S. Giving Itself Unfair Advantages, Student Lenders Say

The Department of Education has student lenders caught between a rock and a hard place.

At least that's what a number of industry representatives said during a student lending conference sponsored last week by the Consumer Bankers Association.

How, they asked, can an agency that competes with us through the direct loan program also expect to regulate us fairly?

"I believe that the Department of Education has good intentions, but no one can successfully be a regulator and a competitor," said Peter Mino, senior vice president of operations for the New England Education Loan Marketing Corp., or Nellie Mae, an originator and secondary market for student loans.

Mr. Mino said student lenders are in the same boat as banks competing with their regulator, the Federal Reserve, in payment services.

"There's clearly an uneven playing field, and the inequities are unbelievable," he said.

The government's conflict of interest becomes apparent in forms required for loan applications, lenders said.

Students applying for a direct loan from the government fill out one simple computerized application. Those who apply to banks fill out as many as three forms - and all are much more complicated, they charged.

While the industry has been working to introduce an electronic loan application system, the current regulatory scheme simply doesn't allow them to use forms as simple as those available for the government program.

"We can only utilize technology and marketplace efficiencies to the extent that the regulations allow us to," said W. Clark McGhee, vice president of Crestar Bank's student lending department.

Student lenders said they would even be willing to take on more risk in the federally guaranteed program, in exchange for a little more equity with Uncle Sam.

Under budget legislation pending before Congress, financial institutions would share 5% of defaulted loans. Currently, the government guarantees 98 cents of every dollar of a loan. The legislation would drop that figure to 95 cents.

Kathy Cannon, vice president of Bank of America's National Student Loan Center, said that a recent CBA poll of student lenders found that most wouldn't mind taking on as much as 10% of the risk, if they could handle loan collection as they see fit.

"Most banks would willingly take on more risk," Ms. Cannon said. "But right now, the way we collect loans is based on Education's regulations."

The department requires lenders to send delinquent borrowers a complicated series of letters over specific intervals, Ms. Cannon said.

"If we had the freedom to do it our way, it simply wouldn't be as risky, so we would feel much more comfortable taking on the risk ourselves," she added.

An administration official said he doubted that lenders truly wanted to compete with the direct loan program.

"They only want a playing field that tilts in their direction," said Leo Kornfeld, senior adviser to Education Secretary Richard W. Riley.

Mr. Kornfeld pointed to the direct loan repayment plan, which makes the amount of time graduates have to pay back a loan contingent on their income.

"Instead of agreeing to stick to the same repayment plan as we are, (private lenders) would only go so far as to say, maybe we'll do this," Mr. Kornfeld said. Lender complaints of unfair competition "are just a smoke screen," he said.

Lenders could successfully compete with the federal program if it were maintained at a demonstration level as originally intended, said Crestar's Mr. McGhee.

However, while the budget bill caps the direct loan program at 10% of the student loan market, President Clinton, as expected, vetoed the measure last Wednesday.

A compromise is expected eventually, and numerous industry representatives at the CBA conference estimated that the cap on the government's share of the market could be set as high as 40%.

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