White House Renews Push to Cut the ‘Middleman’ Out of Student Loans : Budget: The plan for direct financing from the government has already met compromises in Congress. But the banking industry is not giving in.

The Clinton Administration, resisting efforts by Republicans and others to maintain a profitable role for private banks in the government’s student loan program, is launching a new offensive to win approval for direct government financing of all such aid by 1997.

The Administration says its plan would save billions of dollars by reducing the fees and interest that students now pay for government-guaranteed loans from private lenders and cutting out middlemen who have been reaping “excess profits,” according to President Clinton, at the expense of ordinary citizens.

The House approved legislation similar to the Administration’s plan, but the Senate Labor and Human Resources Committee approved a bill Thursday that stopped short of the Administration’s goal of a full transition to direct funding within five years. To win bipartisan support, Sen. Edward M. Kennedy (D-Mass.) engineered a compromise that would limit direct government lending to half of total student-loan volume, with the remainder to be administered by private institutions.

Education Secretary Richard W. Riley praised the move as a “great step in the right direction” but said the Administration will court influential senators and representatives to try to persuade them to remove the 50% cap.

Senate advocates of direct lending said they were optimistic about the Administration’s chances.

But the industry that has profited from the government guaranteed loan program has spent huge amounts of money to persuade Congress not to adopt the President’s plan and is not giving in. It is regrouping and planning new lobbying strategies.

“The senators have shown the proper caution that should be taken in moving into the uncharted waters of direct lending,” said Daniel S. Cheever, chairman of the Coalition for Student Loan Reform, which has lobbied against direct lending. “Ever-decreasing estimates of savings from direct lending and the Department of Education’s poor administrative track record make shifting to full-blown direct lending without an adequate test an extremely risky proposition.”

The Student Loan Marketing Assn., known as Sallie Mae, a private corporation the government set up two decades ago, is by far the largest intermediary between students and the government. It plans to continue working with Congress in hope of maintaining a substantial role for itself, according to Gisela Vallandigham, a spokeswoman for the organization.

After the full Senate votes, the legislation will go to a House-Senate conference committee to work out differences between the two versions. It appears probable that a bill will be passed that will dramatically change the way the government funds student loans.

“These are the most significant changes in federal higher education policy in three decades, and the President has achieved that in four short months,” said Bob Shireman, education adviser for Sen. Paul Simon (D-Ill.), an advocate of direct lending.

Shireman said the committee could have passed a bill that looked more like the President’s, but it would not have had the bipartisan support many believe is required if it is to withstand lobbying pressures from the loan industry.

By switching to direct lending, the government would significantly reduce student loan origination fees. Former students would be able to pay back loans as a percentage of their income rather than by fixed payments over a 10-year period, which the law now requires, thus helping students who want to work in low-paying public service jobs.

It also would eliminate the middlemen and reduce their subsidies, saving the federal government an estimated $4.3 billion over the next five years.

The Clinton Administration has stressed that the new system would not shift costs to colleges and universities. Schools would be permitted to choose whether to originate loans. The government would contract with private firms to service loans and act as originators when the schools choose not to do so.

The new system also potentially allows for the use of the Internal Revenue Service to collect delinquent loans.