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

      FOR RELEASE                 Contact: Jane Glickman (202) 40l-1307       December 15, 1995                 Stephanie Babyak (202) 401-2311

Killing Direct Lending Would Hurt Students, Colleges

Jeannette Galanis, a senior at the University of Colorado, Boulder, faced a difficult dilemma upon graduation in the spring of 1994. She was offered the job of her dreams as president of the U.S. Student Association, a national non-profit association representing college students. But, as with many non-profit organizations, the pay was low -- and Jeannette faced a whopping $345 monthly student loan payment.

"I was in a tough predicament," Galanis said, "of either giving up a job I had prepared for and wanted for so long, or facing the very real possibility of defaulting on my student loans. Either way I would lose." Fortunately, Jeannette didn't have to choose between her dream job and her loan obligations. She was able to do both thanks to a new repayment option offered under the William D. Ford Federal Direct Loan Program, which bases monthly payments on borrowers' income and is adjusted annually as their income level changes.

Designed to give borrowers more control over their finances and career choices, income-contingent repayment plans can be especially helpful right after graduation when salaries tend to be lower.

This is just one benefit of President Clinton's direct lending initiative that would be lost to millions of students nationwide if Congress prevails in its attempt to cap direct loans at 10 percent of total student loan volume. Roughly 40 percent of American students now have this option, and millions more would be given the opportunity if colleges have the choice to participate.

If the Congressional majority succeeds, direct loans would be available only to those students who attend the 104 schools that have been in the program since 1994. Some 2.2 million college students attending more than 1,200 additional postsecondary schools currently participating in direct lending would be kicked out of the program within the year. And some 6,000 more schools -- including 450 already approved for next year -- would be denied the chance to choose direct lending.

Under direct lending, loans are issued from the federal government to students through their campus financial aid office, bypassing thousands of banks and dozens of guaranty agencies and secondary markets -- the special interests and middlemen -- that comprise the old guaranteed loan system.

In a letter last month to Secretary Riley, President Clinton wrote: "Those who propose to end Direct Lending are putting the interest of middlemen and special interests above the interests of students. The best solution to the current dispute is for us in Washington to give schools across the nation the freedom to choose the student lending program that works best for them. We should let the market work by letting the consumer decide."

The schools apparently agree. Last month, more than 400 college and university presidents and chancellors, representing schools that participate in both the direct and guaranteed loan programs, signed a letter to Senate Majority Leader Robert Dole to voice their support for current law -- which allows schools to choose which program works best for them -- and their opposition to any efforts to limit direct lending.

The letter said that "schools' ability to join either of the two programs has improved the student loan process for all students and schools, regardless of whether or not they participate in direct lending."

Those representing schools in direct lending cited several benefits for students, including:

"Simplicity of application, the speed of delivery of funds, the disappearance of lines of students waiting to endorse their checks at registration time, the precipitous drop in the number of emergency loans issued to students waiting to hear about their loans from banks and guarantors; students often borrow less under direct lending because they know they can adjust their loan amounts without repeating the entire application process; and the benefits of the income-contingent repayment option, which is only possible through direct lending."

The letter goes on to cite additional benefits for schools:

"Direct lending has eliminated redundant paperwork, reduced staff time allocated to dealing with thousands of lenders and dozens of guarantors and other intermediaries, and vastly improved our overall aid delivery processes because it seamlessly integrates with other federal aid programs."

Those representing institutions satisfied with the guaranteed student loan program also support the continued availability of direct loans:

"The competition created by the direct lending program has induced banks and guarantors to improve the efficiency of their delivery process, and has for the first time provided the student loan industry with market-based incentives to provide better service. The guaranteed student loan system has improved more since the phase-in of direct lending two years ago than it did over the more than two decades of its existence prior to 1993. Capping or otherwise limiting the direct loan program would undermine the market-based incentives that have so dramatically improved the guaranteed student loan system."

President Clinton is presently negotiating with Congress for a 7-year balanced budget plan that assures continued access to higher education through direct lending.