UPDATE : GOP Proposal Would Limit Direct Student Loan Program

TIMES STAFF WRITER

Congressional Republicans, lobbied intensely by financial institutions, are trying to cancel a college loan program that has grown popular with students precisely because it bypasses middlemen to send money directly from the government to schools.

As the academic year begins, more than a third of the students who would have sought aid from private lenders through the Guaranteed Student Loan Program, the nation's largest college financial aid system, are instead borrowing directly from the government.

The basic feature of the Clinton Administration's new Federal Direct Loan Program is that it eliminates banks, guaranty agencies and secondary markets from the $25-billion annual student-loan industry.

Advocates say direct government lending saves taxpayers money and makes life easier for those involved because it requires less paperwork and offers students more flexibility in repayment than does GSL. Under GSL, financial institutions make loans from private funds and the government reimburses lenders in the event of default.

To date, more than 1,000 colleges are in the program. Plans call for closing out the GSL program while phasing the remainder of the nation's schools into direct lending over the next three years, if not sooner.

So far, the new program is drawing raves from those involved. Students got their money on time and college financial aid administrators received few complaints from parents or students.

"Direct lending is very, very efficient," said Sue O'Flaherty, the acting director of financial aid at the 25,000-student University of Colorado at Boulder. "So far, it's been a wonderful change for us."

Detractors argue that the program is an example of the government's taking on tasks best left to private industry. Republicans are pushing to get the government out of activities they believe the private sector can handle better.

For the last two years, Congress has been lobbied heavily by the banks and guaranty agencies, which are losing their lucrative GSL business as the direct-lending program kicks in.

Although its opponents concede that the Department of Education did a good job running the program last academic year, when it debuted with 105 colleges, they doubt the department's ability to handle the thousands of schools scheduled to join the program.

Republican lawmakers have introduced legislation to cap the program at 40% of total loan volume, or a little more than the current one-third level. The other 60% would remain with private lenders.

Those who oppose the new program say the middlemen--7,500 banks, 41 guaranty agencies and about 90 secondary markets--could offer the same benefits as the direct program if student-loan information were consolidated.

Larry O'Toole, chairman of the Coalition for Student Loan Reform, a group of guaranty agencies, gives credit to the direct-loan program for forcing private industry to pull together to come up with ways to simplify the GSL program. Susan Connor, vice president for public affairs for USA Group, the parent company of USA Funds, the nation's largest guaranty agency, says direct loans could turn into a bad deal for students and taxpayers, who are left holding the bag if a student defaults.

A matter of fierce dispute is the amount of savings to taxpayers the new program offers.

Supporters say it would save billions because it eliminates the subsidies the government pays middlemen. Those are in the form of $760 million a year to pay for administrative costs and varying amounts to compensate lenders for extending loans to students at reduced interest rates.

The Congressional Budget Office originally projected that the program would save $4.3 billion over five years when evaluated in 1993. But, at the insistence of Republicans, the CBO reopened the question and last month concluded the savings would amount to just $115 million over seven years. The number changed, CBO officials said, because the earlier estimates did not include the government's administrative costs.

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