The head of a private Pennsylvania college urged schools Tuesday to drop federally guaranteed loan programs in favor of independent lending deals with banks.

John H. Moore, president of Grove City College, said in a speech to the Cato Institute here that colleges and universities can "escape the clutches" of federal regulation by relying solely on private-sector loan programs.

Grove City, a Christian college 60 miles north of Pittsburgh, has a long history of rejecting federal funding, and it decided last fall to bar incoming students from participating in federal loan programs.

Instead, its students borrow unguaranteed funds from PNC Bank. The arrangement lets students borrow on identical terms as offered under federally sponsored programs.

The low default rate of Grove City students-roughly 3.5%-enables the new program's fees and interest rates to compete with those on federal loans, Mr. Moore said. If the default rate rose, however, PNC would increase its 4% origination fee.

Nationally, the student-loan default rate averages 11%, but that includes trade and vocational schools, which traditionally generate more bad loans.

To keep students' costs low, Grove City is trying to recruit other lenders. "We've talked with several banks over the last year," Mr. Moore said. "We need the competition."

Currently 800 of the school's 2,200 students rely on federally guaranteed loans; they will be able to continue their financing arrangements.

Tuition, room, and board at Grove City will cost $10,760 for the 1997-98 school year, Mr. Moore said.

He said he has found one drawback to dropping government loan programs: Students using veterans benefits can only take out federally guaranteed loans.

Nevertheless, he said, the school is not bound by the more than 7,000 regulations contained in the Higher Education Act, saving Grove City compliance costs and preserving its academic independence.

The school has never accepted federal research funds and since 1988 has not allowed students to participate in the government's Pell grant program.

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