A compromise on student loan rates, adopted by the House of Representatives this week, could become even less palatable to bank lenders as it moves through the Senate.
Lenders grudgingly accepted the compromise that the House passed 414-to- 4 Wednesday. It would partially compensate lenders for an 80-basis-point cut in rates scheduled to take effect July 1.
Arguing that the deal will cost the government $220 million a year, Senate Budget Committee Chairman Pete Domenici is demanding major changes.
When the higher education spending bill reaches the Senate floor, possibly late next week, Sen. Domenici, R-N.M., may try to force lenders to fully absorb a smaller cut in rates-possibly 30 basis points. That rate would be in effect until 2000, giving policymakers time to develop a market-based pricing system.
"Unless a fairy godmother finds the money to pay for the House plan, I don't see how it could move through the Senate," said one congressional source.
The Clinton administration opposes plans to compensate lenders for the interest rate cut and has vowed to veto the House version.
"We still have serious concerns about the interest rate subsidy for banks," a Department of Education spokeswoman said Thursday.
Lenders and the Clinton administration both say they favor a market- based approach to setting rates, but can't agree on how to accomplish that.
Lenders said they should be able to charge any rates they want, and competition would keep them affordable. But the banks presumably would be able to earn sufficient profits to invest in technology and improve customer service. They oppose an administration proposal that would require them to bid for the right to participate in the guaranteed student lending program.
"In an auction, lenders would be chosen solely on price. We think quality should be a factor too," said J. Paul Carey, executive vice president at Sallie Mae Inc. "If lenders could set rates themselves, schools and students could choose whoever they want."
Under an auction proposal drafted by the administration and Sen. Ted Kennedy, D-Mass., most banks would absorb a 60-basis-point cut in rates, which would be in effect through 2001. Banks making less than $1 million annually in student loans would receive a 20-basis-point subsidy.
The Treasury Department would begin pilot auction programs in 1999 and implement one of them nationally in 2002.
Though rates initially would be higher under Sen. Kennedy's plan than under the House measure, he has argued that in future years auctions would lead to lower rates.
Banking industry officials complain that auctions would give the Treasury too much power. "This is an incredible request for carte blanche authority," said John E. Dean, special counsel to the Consumer Bankers Association.
Sen. Domenici has not ruled out the auction idea but is unlikely to let the Treasury impose one without congressional approval, sources said.
The interest rate fix is necessary because a 1993 law would change the way rates on government-guaranteed loans are calculated. Bankers warn that the loans will become unprofitable and they will flee the program if the rate cut goes into effect.
After months of negotiations, the House Education Committee forged a compromise that would implement the cut as scheduled on July 1, but would give lenders a subsidy equal to 50 basis points.
"Our bipartisan interest rate proposal will ensure that loans remain available for all and that students receive the lowest interest rates in 17 years," said Rep. Howard P. McKeon, chairman of the House Education subcommittee on post-secondary education.