Moving to keep banks in the government-guaranteed student lending program, Congress is pressuring the Clinton administration to change the way interest rates will soon be calculated.
Several House Banking Committee members are expected to kick off their campaign today by asking fellow lawmakers to alter a new interest rate formula that would cut student lenders' returns.
Set to take effect July 1, the new formula is expected to cost student lenders $260 million a year.
"The new index can result in a greater likelihood that the program will become unprofitable at certain points in the business cycle," Rep. Paul Kanjorski, D-Pa., warned in a letter to members of the House Education Committee, which is expected to take up the issue later this month. "The result could be a shutdown of the guarantee delivery system."
The bipartisan letter was signed by nine Banking Committee members including Reps. Bill McCollum, R-Fla., Richard Baker, R-La., John LaFalce, D-N.Y., and Bruce Vento, D-Minn.
Senate Budget Committee Chairman Pete Domenici weighed in last week, urging Treasury Secretary Robert E. Rubin to intervene. He said the new formula will cause student lenders to go out of business.
As of July 1, banks will have to peg interest rates on newly originated student loans to 10-year Treasury bonds instead of 3-month notes. In addition nearly eliminating the spread on student loans, the change is expected to increase the amount of interest rate risk lenders must bear and damage the market for student loan securities.
The new interest formula was passed in 1993 as part of the law that created the President's direct student lending program. The new scheme was intended to cut student borrowing costs.
Little attention was paid to the impact on private lenders because administration officials expected the direct lending program to dominate the market by the time the formula took affect.
But private lenders still supply 70% of the $34 billion in student loans. And a mass exodus by banks could wreak havoc on many students' plans to enter college this fall.
"There will be big problems if this isn't fixed," said Randy M. Behm, director of Key Education Resources, which manages Key Bank's student lending operation. "There are going to be lenders leaving the business."
Bill Hoefling, executive vice president at Chase Manhattan Bank, the largest private student loan provider, said the government could not takeover the entire student loan market.
Though the Clinton administration recognizes the problem, it has not suggested a solution. Mr. Rubin said last week that Treasury officials are studying the issue and will not have report for a "month or two."
The foot-dragging has exasperated lawmakers, who will take up reauthorization of higher education funding later this month. They do not want to be seen, particularly during an election year, as siding with lenders without administration support.
House Education Committee Chairman Bill Goodling complained that the Treasury Department is withholding a draft of its report on the interest rate dilemma. "Any information in the hands of the Treasury Department should not be withheld from the Congress for any reason," he wrote in a letter to Mr. Rubin last month.
But administration officials insist that they are still trying to work out a solution that will keep banks in the business and cut students' costs.
"We've been waiting for proposals from the industry, but they have not been forthcoming with suggestions that will secure a lower rate," said Robert Shireman, senior policy adviser at the National Economic Council.
But industry officials say a number of acceptable proposals have been made. The most prominent, being pushed by Sallie Mae, would price loans at 2.7% above the one-month commercial paper rate. "This would guarantee a profit for lenders and still reduce costs to students," said Paul Carey, Sallie Mae's executive vice president.