WASHINGTON - The Department of Education's decision to pay Electronic Data Systems Corp. $150 million to service the government's student loans is prompting complaints from bankers.
Taxpayer dollars are being spent to put private-sector student lenders out of business, said Clark McGhee, vice president in charge of student lending at Crestar Bank, Richmond, Va.
On July 13, the Education Department signed a $150 million deal with EDS, Herndon, Va. EDS joins Computer Data System Inc., Rockville, Md., which also will perform loan origination and servicing duties for the department under a $92 million contract won in 1993.
Education Secretary Richard W. Riley said the bidding process used to award the contracts will "provide students and taxpayers the best value possible in terms of price and performance."
The Education Department refused to release the competing bids or to disclose whether any banks tried to get the work.
Bankers have been fighting the government's efforts to lend directly to students because they fear 7,000 private lenders will be put out of business.
The industry got some good news last week, when House Economic and Educational Opportunities Committee Chairman William F. Goodling proposed eliminating the government's direct-lending program.
Mr. McGhee said private-sector lending could be improved without creating a taxpayer-financed system.
"Do you completely scrap an existing program, at great expense, when we are willing to reengineer it?" Mr. McGhee asked, adding that the current Federal Family Education loan program is overregulated and could be improved with some cooperation from the government.
The Education Department is aiming to take over 40% of the student loan business in 1996 and all of it by 2000. To originate and service all student loans, the department plans to hire four more companies.
Mr. McGhee said the government's program is likely to push smaller loan servicing companies out of the business, creating less competition and higher prices.
"All the other places that do loan servicing will go out of business," he said. "Servicing costs will probably go up for banks like ours."
The government's direct loan program, a Clinton administration initiative approved by Congress in 1993, allows students to receive loans directly from the federal government instead of from private lenders. It is intended to save the government $12 billion over the next 10 years.
But industry observers say the hefty contracts are likely to deplete the government's intended savings.
Kawika Daguio, a lobbyist for the American Bankers Association, points to the government's experience with defense industry contractors to show that costs can quickly skyrocket.
"Much of the savings they intended to find with this program will quickly evaporate with these contracts," Mr. Daguio said. "They originally said they'd be able to save money by getting rid of the middlemen. ... Now the government realizes it cannot do it by itself."
Mr. Lumetta writes for Medill News Service.