As congressional conferees face the choice between the Senate and House versions of legislation creating a direct student loan program, the Consumer Bankers Association is supporting the Senate proposal.

The Senate bill caps the volume of direct government loans at 50% of the total, as opposed to the House's 100%.

We prefer the Senate version not only because we abhor having the government in the banking business, but because a significant number of lenders associated with our group have concluded that the Senate bill represents a viable -- albeit leaner -- future for the student loan program.

Some in Opposition

However, the Student Loan Marketing Association and some lenders oppose the Senate bill. [See Comment in the July 9 American Banker, page 5, by David V. Nosbisch, president of Durand (Ill.) State Bank.] Certainly, it includes some changes to the student loan program that are onerous to most lenders.

Some changes, however, are more onerous to some lenders than others. These include the lender-paid loan origination fee and a loan-transfer fee, which fall much heavier on those that make and sell loans into a secondary market rather than hold them to term.

The CBA agrees that some adjustment in these provisions is called for. But the reality is that this is a budget bill that will necessarily force some lenders and guarantee agencies out, of the student loan program. This is the outcome, despite warnings from CBA and others that the budget savings estimates are wildly unrealistic.

Opportunities Remain

CBA believes the extent of the disruption to lenders has been overstated. A number of financial institutions have concluded that some opportunities for medium-size and smaller lenders, including those who sell to a secondary market, will remain.

Secondary markets, especially the not-for-profit state markets utilizing tax-exempt funds, will alter loan purchase policies and adjust them to maintain opportunities for these lenders to participate in the program.

The CBA also hopes that the most detrimental provisions will be altered in the House-Senate conference. For example, the loan transfer fee should be struck from the legislation and replaced with a loan conversion fee that would affect all holders, regardless of business strategy..

It May Not Fly

Most important, lenders are confident that after two years, the Department of Education, Congress, and the public will revisit the issue of financing student loans and determine direct lending to be unworkable.

Faced with the possibility of tacitly endorsing a federalized student loan program or continuing the current private-sector-based program, CBA is endorsing the Senate legislation.

Opponents like Sallie Mae or smaller banks have an obligation to offer a workable alternative that meets the budget-savings requirements of the reconciliation bill.

Otherwise, they should support continuation of the current program on the principle that it is inappropriate for the government to make direct loans, and on the hope that at some point the program will be modified to permit participation by a broader array of financial institutions.

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