Archive for Tuesday, January 8, 1991


January 8, 1991


Revamping the student loan system to limit the role of commercial banks and bolster direct lending by the federal government would be a smart or stupid move depending on the vantage point.

This reform idea, reported in Monday's New York Times to be under consideration for President Bush's fiscal 1992 budget, is supported by higher education officials and opposed by the banking industry.

However, the Wall Street Journal today reported White House officials said Monday that the president's next budget probably won't include sweeping changes to the federal student loan system.

"I don't think you have a story, if you read the Journal," said Gisela Vallandigham, a Washington, D.C., spokeswoman for Student Loan Marketing Assn. or Sallie Mae, which has an office in Lawrence.

If Congress eliminated banks from the system, it could eventually put Sallie Mae out of business. Sallie Mae is the largest investor in guaranteed loans and helps lenders and investors buy and sell student loans.

ACCORDING TO the Times, reforms would require that students deal exclusively with their universities. The government would bypass banks by giving money to schools to create a fund from which they would lend to students.

The change would save $1 billion a year because the government no longer would pay the "special allowance" banks get as an inducement to offer student borrowers low-interest loans, the Times said.

The Guaranteed Student Loan Program is the largest source of federal aid to U.S. college students. Commercial banks now lend more than $12 billion a year to college students through the program.

The current system relies on banks to make the loans, non-profit state agencies to guarantee the loans and the federal government to compensate the non-profit agencies for their losses.

"I hadn't heard anything about the proposal, but it does sound practical," said Stanley Koplik, executive director of the Kansas Board of Regents, which has jurisdiction over Kansas University.

KOPLIK ALSO serves on the 11-member Advisory Committee on Student Financial Assistance, which was created by Congress to offer advice on ways to improve federal programs.

"We're not partial to banks," he said. "We are partial to getting money into students' hands. I'm sure it will generate a great deal of discussion" at this month's meeting of the committee.

Jerry Rogers, director of the KU financial aid office, likes the proposal because it might cut the GSL default rate. Each year, KU issues between $15 million and $16 million in GSLs.

"It's my experience that people will feel more like paying back the loan," he said. "The idea of paying the school gives them a different feeling than if they had to send payments" elsewhere.

Rogers said KU already handles distribution and collection for the federal Perkins loan program, which provides $1.9 million a year to KU students. The default rate on Perkins loans is 2.7 percent at KU, he said.

IF THE GSL program were placed under the university's control, he said, KU would need more employees in its accounting and business offices. The financial aid office wouldn't necessarily need more staff.

Student loan defaults cost the federal government $2 billion last year. While the proposal won't eliminate defaults, federal officials say it could produce savings by eliminating a "cottage industry" of middlemen.

As incentive for banks to make low-interest loans, the government pays a special allowance so the banks' annual rate of return is 3.25 percentage points above the interest rate for Treasury bills.

Banks have been deeply involved in the student loan program for 25 years. The banking industry opposes this modification of the loan system because it would lose a line of business.

"Being a lender, I don't think it's a good idea. Some institutions would lose a large source of income," said Carol Wirthman, who coordinates student loans for First National Bank of Lawrence.

VALLANDIGHAM of Sallie Mae said the administration's proposal won't be implemented because "the program using private capital is working." Sallie Mae has a record of success over the last 17 years, she said.

John Dean, counsel to the Consumer Bankers Assn., which represents more than 700 banks and other financial institutions, said the proposal would make the program more complex.

"Loans will still have to be serviced," Dean said. "Somebody will have to make aggressive collection efforts against delinquent borrowers. If the banks don't do it, who will?"

Commenting has been disabled for this item.