Banks Could Lose Student Loan Business

Banks may be in danger of losing their pivotal role in the student loan business--with a push from Congress.

With the Higher Education Act of 1965 up for renewal next year, bankers are focusing somewhat nervously on a bill that would replace the current guaranteed lending program with direct government loans.

The bill cleared a House committee this year and is expected to be reintroduced in the next session of Congress. But it may face a stiff fight. The White House opposes the measure, and a Senate committee passed a proposal that keeps banks in the business.

The House provision, however, has a General Accounting Office report arguing in its favor. The congressional auditing agency estimated that a direct loan program would save the government $620 million to $1.47 billion by eliminating interest subsidies that are now paid to banks.

Consumer Bankers Assn. President Joe Belew calls the direct loan proposal “one of the worst ideas in decades” and argues that the program will not cut costs.

“It will cost money,” he charged. “It will drive banks out of the student loan business. It will cost the university communities and the Department of Education. It fails on all points.”

For bankers who gathered here last week for the Consumer Bankers Assn. student loan and finance conference, few issues are more central to their business.

Even without the threat, “banks are taking a very hard look at staying in the business,” Belew said, because of the high administrative costs and low profits associated with student loans.

He said student loans are “still very important to banks, although profit margins have gotten very skinny.”

Citibank, one of the largest student lenders with about $2 billion in education loans, may lobby against the direct loan proposal, a spokesman said. “It’s a profitable business for us, but it’s not the most profitable part of our business.”

Belew said that because student loans are less profitable than other products, bankers have to make resource-allocation judgments.

Many banks continue to make student loans in hopes of building new customer relationships, which means more business for banks as graduates come back for car loans and mortgages.

In June, Belew told the House Education and Labor subcommittee on post-secondary education that a direct loan program would require the federal government to assume responsibility for all default costs, which are now shared with lenders and loan guarantors.

Last year, student loan defaults cost the government $2.4 billion, and the Department of Education predicts an increase to $3.6 billion in 1991.

The American Bankers Assn. also told the subcommittee that it opposes eliminating the current guaranteed loan program, which helps banks fulfill the requirements of the Community Reinvestment Act.

Under the House bill, banks and agencies would be out of the picture, and the government would distribute loans directly to the schools, which would in turn administer them.

A Senate proposal calls for keeping the current system of doling out student loans through banks and guarantee agencies.

Both bills cleared their respective committees before Congress adjourned and are expected to come up for floor votes in February, said Susan Hattan, Republican staff director for the Senate Labor Committee’s education subcommittee.

Hattan is confident that the Senate bill, which keeps banks in the lending process, will pass.

“We were not persuaded that direct lending would be beneficial,” she said. “Obviously there is some interest in direct lending, but there’s no majority support at this point.”

The Bush Administration also backs a plan to keep banks involved in the process and in October threatened to veto legislation that would remove them.