WASHINGTON - The Education Department is so consumed with building the government's direct student loan program that it is ignoring the need to reform the old system, according to an independent study released last week.

The report, by a committee appointed by Congress and the Education Department, seems to lend support to bankers' contention that the department cannot regulate student lenders while competing with them for market share.

"The department is primarily focusing its resources on the implementation of the direct lending, thus ignoring the necessary reform" of the private lending program, wrote the bipartisan committee of education and financial aid experts.

Banks make government-guaranteed loans to students under the Federal Family Education Loan program.

The Education Department plays a key role by tracking which students have defaulted on their loans. But the report concluded that the department is falling down on the job.

The report also said the department's director of the financial aid programs, Leo Kornfeld, had failed to correct problems with the guaranteed loan program. Mr. Kornfeld has stated publicly that reforming it "is not a priority," the report said.

The Clinton administration would like the government to make all student loans by 1998, knocking 7,000 private bank lenders out of the business. The Education Department is planning a nationwide advertising campaign for this fall to interest colleges and universities in the direct loan program.

The report supports banking industry claims that the department's regulations favor its own program at the expense of banks.

Kawika Daguio, lobbyist at the American Bankers Association, said the report makes clear that the department cannot regulate private lenders while pushing its own system.

"I think its fair to say that the department is doing everything it could in its power to eliminate" the Federal Family Education Loan program "and to drive private lenders out of the business," Mr. Daguio said. Mr. Lumetta writes for Medill News Service.

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.