A r c h i v e d I n f o r m a t i o n

   FOR IMMEDIATE RELEASE      Contact:  Jane Glickman (202) 401-1307    November 2, 1995                  Stephanie Babyak (202) 401-2311

Students, Schools to Be Dropped From Direct Lending Under Congressional Budget Plan

Congress is preparing to kick out thousands of college students and hundreds of schools from the new direct loan program. Approximately 2 million college students at more than 1,350 schools have direct loans.

Under direct lending, students bypass the maze of lenders and other middlemen that comprise the old guaranteed loan system and borrow directly from the federal government through their campus financial aid office. Eliminating these middlemen saves taxpayers billions of dollars. And students are given the option of paying back their loans as a percentage of their income, so that they can repay the loans more easily.

"Congress is pitting students against special interests," said U.S. Secretary of Education Richard W. Riley. "Partisan politics and special interests are winning out over common sense and the best interests of students, schools and taxpayers. Returning to the old loan program means wasted time and hassle for students when they take out their loans, but it also means preserving billions of dollars in profits for all the middlemen that make up the old system."

Recently, Congress changed the accounting rules to show that direct lending costs more. However, respected economists disagree. For example, Lawrence Lindsey, a Bush appointee to the Federal Reserve Board, said, "As long as it is necessary to provide a profit to induce lenders to guarantee student loans, direct lending will be cheaper."

Riley said students and parents like the program because it's faster and easier. They work directly with the school's student aid office instead of shopping around for a lender and waiting for the bank to process the paperwork and forward it to the school. As a result, loan money is available within days rather than weeks. And direct lending offers flexible repayment options, including one based on income, which gives borrowers greater control over their finances and career choices, and decreases the likelihood of defaulting.

Independent surveys of aid administrators have found that schools like direct lending's streamlined and simple processing system. It involves less paperwork, and less time and money tracking loans with lenders. Direct lending improves cash flow and allows schools to structure the loan program to fit their particular needs and capabilities. Most of all, it frees schools to offer better service to students.

Here's what schools have to say about direct lending:

"It is rare that the federal government creates a program that both saves money and improves service to its constituents. Direct lending is such a program," said Jerome Supple, president, Southwest Texas State University.
And Karen Fooks, financial aid director, University of Florida, said, "I don't even want to think about going back to the guaranteed-loan system. The whole idea of going back is a nightmare."

The House and Senate are expected to conference this week to hammer out the differences between their versions of the budget reconciliation bill. The House voted to kill direct lending altogether, which would force all schools and students now in the program to revert to the less efficient and more cumbersome bank- run loan program. The Senate imposed a 20 percent cap on direct lending, which means that about half the students with direct loans would have to return to the old system.

Direct loans currently account for nearly 40 percent of total student loan volume.