The Senate is expected to pass legislation today aimed at keeping banks in the government's guaranteed student loan program.

The bill would create a permanent subsidy to partly compensate lenders for an 80-basis-point drop in the rate they may charge students that took effect July 1.

"This solution is by no means perfect, but it promises to preserve the stability of the program for the nearly four million students and their families who depend upon these loans each year," said Sen. Jim Jeffords, R- Vt., chairman of the Senate Labor and Human Resources Committee. Debate on the legislation began on the Senate floor Thursday.

The interest rate fix, contained in a spending bill for higher education programs, was made necessary because a 1993 law changed the way rates on government-guaranteed loans are calculated.

The House overwhelmingly passed a similar measure May 6, and the banking industry has grudgingly accepted it.

The Clinton administration, however, opposes any subsidy to banks. The Office of Management and Budget has estimated the bill's subsidy would cost $2.7 billion over five years. Because of the subsidy and objections to several other provisions in the spending bill, the administration in April threatened to veto the measure.

Under the legislation, bankers' subsidy would equal 50 basis points. A temporary subsidy approved by Congress expires Sept. 30.

Undaunted by President Clinton's veto threat, Senate Republicans are expected to defeat an administration compromise that would require the Treasury and Education departments to establish a pilot program to test whether rates could be set by auction.

Leading the fight on behalf of the administration is Sen. Ted Kennedy, D-Mass., who complained on the Senate floor Thursday that bank margins on student loans are too high.

"The bill offers a sweetheart deal to banks," he said. "This subsidy means that bank receipts will go down only slightly from the excessive receipts they now receive."

But bankers argue that an auction would force banks to curtail customer service in order to participate in the program.

Bankers oppose two other amendments, which are likely to be defeated.

One, offered by Sen. Tom Harkin, D-Iowa, would reduce the origination fees that students pay for government-backed loans. Bankers oppose the amendment because the lost revenue would be offset by forcing the state and regional guarantee agencies that insure student loans, to forward some premiums to the federal government.

The other amendment, offered by Sen. Kay Bailey Hutchison, R-Tex., would let some nonprofit organizations originate student loans. Bankers say this plan would create unregulated student loan banks.

Bankers this week also criticized an Education Department plan to cut by 80 basis points the rate charged when former students consolidate all their government-backed loans into one credit. Industry officials complained that the rate cut is meant to force private lenders out of the consolidation market.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.