Student Loan Bonds May Be Eliminated By House Panel's Plan for College Aid

WASHINGTON - House Education Committee aides have unveiled a plan to revamp the way the federal government doles out financial aid to college students that municipal market participants say would virtually eliminate new issuances of tax-exempt student loan bonds.

The plan, which was widely expected, is included in a set of recommendations prepared by the staff of the panel's subcommittee on postsecondary education for panel members to consider when they begin drafting legislation next week to reauthorize the Higher Education Act of 1965.

The recommendations "represent a consensus among the Democrats" on the subcommittee on how to overhaul the education act, the panel's staff director, Thomas P. Wolanin, said during a briefing on Wednesday.

The plan for college aid would eliminate the existing student loan system by July 1, 1996. The federal government currently guarantees loans made to students 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. In 1990, 26 student loan bond issues totaling $1.08 billion were sold.

In place of the current system, the subcommittee staff is proposing that the federal government 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 program 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, all other eligible colleges would be in the program.

Mr. Wolanin said the direct-loan proposal was included in the education package for two reasons. For one, "frankly, nobody understands how the current program works, and there's a feeling it lacks credibility," he said.

The second reason is outside experts have estimated the change would lower the amount the federal government spends on education by about $1 billion per year. "We could save some money that we could better put to other uses," Mr. Wolanin said.

Congress is expected to complete the legislation reauthorizing the education act something next year. Whether the direct-loan plan will survive into the final bill is still unclear, education lobbyists say. That is because Senate education law-makers and the Bush administration appear to object to the direct-loan approach.

But in the House, at least, there are many lawmakers who favor the direct-loan idea, which should keep the plan alive at least until the House and Senate meet to work out their differences over the education bill next year, lobbyists said.

"I believe this needs to be taken, very seriously," one education lobbyist said. "Anybody who thinks it's going to go away because it's a bad idea - and it is a bad idea - are wrong," because "there is a lot of support for it" in Congress.

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