Bankers are worried that President Clinton's proposed budget may become the catalyst for eliminating an interest rate subsidy enacted last year for student loans.
The budget leaves intact the industry's 50-basis-point subsidy, which was enacted last year after lenders threatened to quit the program because the government was forcing them to charge below-market rates on loans.
The President, however, proposed a slew of other student loan cuts, including a reduction in the subsidy given to nonprofit organizations that fund student loans.
Industry officials warned that lawmakers and the administration, once they reopen the Higher Education Amendments of 1998, may go after the industry's subsidy.
"Clearly the concern is that all of us are at risk," said Jon A. Veenis, president of Wells Fargo Education Financial Services. "Banks are always an easy target when it comes time to lobby for cuts in the program."
"Most people in the industry are suspicious of this administration simply because the track record has been one of aggressive warfare," said John E. Dean, special counsel to the Consumer Bankers Association.
Lenders said they could accept the proposed cuts, provided other parts of the student loan program are not changed. To save the government $132 million next year, one cut would reduce the subsidy from 50 basis points to 20 basis points for nonprofit organizations that fund student loans with tax-exempt bonds.
That could reduce the nonprofits' role, which could mean less competition.
Another budget proposal would hurt the secondary market. President Clinton wants to extend the period during which the government lets borrowers consolidate student loans by borrowing government money at below- market rates. Consolidation hurts investors because it removes loans from their portfolios. The period for federal consolidations expired Feb. 1, but the budget would extend it through Sept. 30, 2000. The plan would cost the government $91 million.
Another budget proposal would restrict the amount of interest banks may collect on delinquent loans. This is a relatively modest measure, expected to save the government $17 million.
The administration and student lenders have been feuding since 1993 when the government began making student loans directly. The President's goal was eventually to take over the entire market, though the government has never originated more than one-third of all student loans in any given year.