Lenders are fighting a Clinton administration proposal that would require them to bid for the right to make some government- guaranteed student loans.

The Clinton administration and Sen. Ted Kennedy, D-Mass., are urging Congress to establish a pilot program that would test whether rates could be set by an auction. The lowest bidders would be entitled to participate in the program.

Sen. Kennedy is pressing Senate leaders to include the auction plan in a higher-education spending bill that must be passed by Sept. 30. That bill also contains a bipartisan proposal that would make permanent a subsidy to partly compensate lenders for an 80-basis-point drop in rates charged to students.

Under Sen. Kennedy's plan, the Department of Education could hold an auction after the pilot was completed.

But lenders argued that doling out business to the lowest bidders would force the industry to cut back investment and lead to poor service. "We should be allowed to compete both on price and quality of service," said J. Paul Carey, executive vice president of Sallie Mae Inc.

The banking industry, which wants to set rates without any government restriction, is asking lawmakers only for a study on market-based approaches to setting student loan rates.

The Senate is expected to vote on a higher-education spending bill during the second week of June.

Under a temporary plan approved Friday by the Senate and the House, lenders would receive a 50-basis-point federal subsidy to help pay for a cut in rates that takes effect July 1. The measure would cover loans made until Oct. 1.

Banking trade groups praised the short-term fix, arguing that the rate cut would otherwise make loans unprofitable. "We welcome the three-month extension as a means of avoiding any possibility of disruption in the availability of loans to students returning to college this fall," said Joe Belew, president of the Consumer Bankers Association.

Despite his opposition to the subsidy, President Clinton is expected to approve the temporary fix. The measure was included in a $216 billion transportation spending bill.

Lawmakers must figure out how to pay for a permanent subsidy, estimated to cost $220 million a year.

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