WASHINGTON -- Bank industry representatives are up in arms over a new twist to the Clinton administration's student lending program.
On Friday, the administration said borrowers could consolidate loans from private lenders into a new credit package -- the Individual Education Account -- that would be transferred to the federal government.
The American Bankers Association denounced the initiative as "a giant step backward," and warned that some $70 billion in student loans now held in the private sector could be shifted onto the books of the federal government.
Some lenders are viewing the new repayment plan as an opportunity for the government to take another bite out of their student loan portfolios, while others see it as a politically motivated move with unpredictable consequences.
"It's very unclear what this spells for banks," said John Dean, special counsel to the Consumer Bankers Association. "But it is clear that the motivation is primarily political. The administration desires a very public demonstration that they have done something positive, and this reaches out to a much larger population than just currently enrolled students."
Tthe federal government has provided guarantees to private sector institutions that make student loans. Last year, Congress approved a Clinton administration initiative that would give the government authority to lend directly.
The new initiative could give the government a chance to extend its market reach backward to include loans already made.
Under the plan announced Friday, it is solely up to the borrower to determine whether or not the repayment terms of the current loan servicer are satisfactory. If unsatisfied, the student can call a toll-free number and consolidate existing private sector loans into a Direct Consolidation Loan.
Diane Sedicum, chairwoman of the Education Department's Direct Loan Task Force, characterized the conflict between lenders and the federal government as a choice between profitability for private lenders or more advantageous repayment plans for students.
"Lenders have the option to offer students the same types of loan repayment benefits and the ability for students to alter a repayment plan," Ms. Sedicum said. "But they have been traditionally not wanting to do it because of the administrative costs."
The program could harm banks holding student loans if the federal government markets the repayment program aggressively, Mr. Dean said, but banks could respond by increasing the flexibility of their repayment plans.