WASHINGTON - Trying to derail the administration's plan to squeeze out private lenders, Rep. Bart Gordon is warning that the government will lose big bucks on the student loan business.
The Tennessee Democrat is touting a new government report that shows the direct loan program to be a refuge for schools with high default rates.
"This information confirms my worst fears about direct lending," Rep. Gordon said in an interview last week.
If the government takes over the student lending market, it will incur much greater costs than administration officials have admitted, he charged.
The report was issued by the Advisory Committee on Student Financial Assistance, which Congress set up to advise it. The committee found that 272 of the more than 1,400 schools scheduled to join the direct loan program had default rates of 25% or more in at least one of the three most recent years for which data were available.
Under the direct loan program, a school with a default rate greater than 25% in both of the most recent fiscal years is ineligible to participate. But the advisory committee report showed that 59 schools approved for the direct loan program had default rates exceeding 25% in 1992 and 1991.
Rep. Gordon has cosponsored legislation to freeze the share of student aid provided through direct loans at 40%. Traditional government guaranteed loans funded by private lenders would retain the remaining 60%.
Rep. Gordon's bill puts him at odds with the Clinton administration, which is pushing legislation that would give the government 100% of the market.
Education Department officials were quick to respond to Rep. Gordon's charges. An agency statement said schools participating in the direct loan program must meet the same criteria applicable to the guaranteed loan program. The statement blasted criticism of direct lending as "attempts to muddy the waters with misinformation . . . by those who stand to profit from the old system."
Leo Kornfeld, a senior adviser at the department, said that strict collection measures planned for the direct loan program will bring down defaults. Despite industry skepticism, he stood by the administration's position that eliminating third-party lenders will reduce administrative costs.
"We are going to demonstrate to the country that the default rate will go down with direct loans," Mr. Kornfeld said.
Rep. Gordon said his proposal to freeze the market shares of the direct and guaranteed programs will allow a cost comparison of each over a period of years. He acknowledged that the bill faces an almost certain presidential veto if passed, but said he is rallying Democratic support in the hopes of garnering the two-thirds vote needed to override a veto.
In the past week, five more of Rep. Gordon's compatriots backed the bill, bringing the total number of Democratic co-sponsors to 16. The bill has a total of 47 co-sponsors, including William Goodling, R-Pa., chairman of the House Economic and Educational Opportunities Committee, which must approve the legislation before it can come to House vote.
Hearings on the bill are expected in May, Rep. Gordon said.
"It's hard to override a president, but I think we have a good issue, and I think we have a shot at doing it," he said.
Mr. Cahill writes for the Medill News Service.