WASHINGTON -- A proposal that could eliminate the need for tax-exempt student loan bonds has cleared a key hurdle by winning the endorsement of the House Education and Labor Committee.
The plan, which would end the system of federally guaranteed bank loans to students in favor of direct loans from the federal government, is part of a bill needed to reauthorize the Higher Education Act of 1965 that now goes to the full House.
Education lobbyists said they expect the proposal to receive House approval, though some held out hope that it could still be modified or eliminated from the overall bill.
The Senate, meanwhile, began drafting its own version of the reauthorization bill, which does not contain the direct-loan proposal. The Senate Labor and Human Resources Committee's subcommittee on education, arts, and humanities approved the bill on Thursday and turned back an attempt by Sen. Paul Simon, D.Ill., to add a direct-loan plan to the measure.
Lobbyists have said, however, that Sen. Simon and Sen. Dave Durenberger, R-Minn., would try to add the proposal again when the measure reaches the full Senate. The full committee is expected to approve th reauthorization bill next week.
Lobbyists are holding out hope that the House committee's direct-loan proposal could die, because during Wednesday's drafting session, House Education and Labor Committee Chairman William Ford, D.-Mich., said the House leadership has some concerns about his bill. He did not elaborate on what those concerns are.
He also said House Budget Committee Chairman Leon Panetta, D-Calif., had written to him expressing concern that the education bill and the direct-loan plan in particular could result in revenue losses for the federal government.
"Frankly, in a year when the deficit is nearing $360 billion . . . I believe it would be inappropriate to create a new entitlement program, especially without concurrent adoption of a long-term deficit reduction plan to offset the new spending and to guarantee continuing deficit reduction," Rep. Panetta said in his Oct. 22 letter to Rep. Ford. He said budgetary problems with the bill need to be worked out before the measure can come to a vote in the full House.
The federal government currently guarantees loans made to students by commercial banks, which in turn sell the loans to state higher education authorities. The authorities often finance those purchases with tax-exempt bonds, and some operate bond-financed loan programs of their own to supplement the federal system.
The program approved by the House committee Wednesday would require the federal government to give seed money to colleges to set up revolving loan funds for student aid. State education officials have said such a program would obviate the need for their student loan agencies, and in turn, for issuance of student loan bonds.
The system would be phased in over a two-year period beginning July 1, 1994, when 500 colleges would be selected from around the country to participate in the program. The following year another 1,000 colleges would begin participating, and on July 1, 1996, the program would be fully phased in.
Committee aides had said the overhaul was proposed for two reasons. One was that the current system was too complex and lacked credibility. The second was that estimates showed the federal government could save more than $1 billion a year if it switched toi a direct-loan approach.
State education officials have acknowledged that the current student loan program needs to be overhauled, because it is plagued with high default rates and other problems. But they have said they hoped the federal government would not make such a drastic change without careful review and testing of any new plan.