WASHINGTON - The Clinton administration and Senate Democrats have agreed to a compromise proposal for direct student lending by colleges that would allow the new program to be halted during the four-year phase-in period if it is found to be unworkable.
The compromise is a partial victory for proponents of tax-exempt student loan bonds, which would no longer be needed if direct lending were fully implemented. The plan originally proposed by President Clinton and approved by the House contained no provision for backing away from the direct lending program.
The Senate Labor and Human Resources Committee is scheduled to vote on the proposal today.
The compromise was pushed by Sen. Claiborne Pell, D-R.I., and several other members of the committee because they were concerned about moving too quickly to replace the Guaranteed Student Loan program without first testing the direct lending concept.
Under current law, the federal government guarantees commercial loans made to students by banks, which in turn sell the loans to state higher education authorities. The authorities often finance those purchases with tax-exempt bonds.
Clinton's proposal would eliminate that system in favor of one in which colleges make and service the loans. The loans would be underwritten by the federal government, and the program would be phased in over four years, beginning with the 1994-95 academic year.
The compromise Pell worked out with the White House on Tuesday night adds a provision to the plan setting up a bipartisan National Student Loan Reform Commission, which would study the progress of the phase-in and report to Congress by Jan. 1, 1997.
Committee chairman Edward Kennedy, D-Mass., who is a strong supporter of direct loans, said the addition should satisfy those who feel the program should be studied further.
If the commission finds direct lending does not work, "I think there certainly will be efforts made to reconsider the course we have embarked on," Kennedy said during a committee meeting called to discuss the compromise.
Also added to the plan is a provision that would slow the phase-in slightly. Under Clinton's original proposal, direct lending would represent 4% of total student loan volume in the first year, 25% in the second, 60% in the third, and 100% in the fourth.
Under the compromise, the percentages would change to 5% in the first year, 30% in the second, 40% in the third, and "a minimum" of 50% in the fourth. In describing the plan, Kennedy did not make clear when full implementation would take place.
Sen. Nancy L. Kassebaum, R- Kan., said the use of the term "minimum" disturbed her because that would leave open the opportunity to go up to 100% in the fourth year, before Congress would have a chance to fully evaluate the commission's report.
The committee has been considering Clinton's direct loan plan as a way of cutting the cost of the current student loan program. The panel is under a directive from the congressional budget committees to find at least $4.5 billion in savings among programs under its jurisdiction. Last month, the House Education and Labor Committee, under the same savings directive, approved Clinton's direct-loan program virtually intact.
Direct-loan proponents say the changeover would cut government costs for education, citing a General Accounting Office study released earlier this year estimating that direct loans would save the federal government $6 billion over five years.
But critics of the idea say the federal government would save far less, partly because it would be saddled with large administrative costs it does not have now.
The contention was bolstered this week by a letter sent to the Senate panel by the Congressional Budget Office. In that letter, CBO Director Robert Reischauer said the CBO had lowered its estimate of the amount the federal government would save under a direct loan system to $2.0 billion from $4.3 billion. The CBO cut its estimate because the agency factored in administrative costs for student loan defaults, even though those costs would not begin to be incurred before 1998.