Too early to grade Clinton's student-loan reform plan

Orlo Austin, director of student aid at the University of Illinois at Champaign, remembers when each semester began with the desperate query, "Is my check in yet from the bank?" That's no longer the case, he says, thanks to the Clinton administration's Direct Student Loan Program, which took effect last year at Illinois and 103 other institutions. The program allows students to receive loan checks directly from the federal government instead of dealing with banks and college financial-aid offices.

Not surprisingly, the direct-loan program has the firm support of student groups and many university financial-aid officers such as Austin. But it also has critics, who see it as yet another example of bigger government. "It doesn't make sense to go to a full loan program [that is] going to take hundreds of employees and add billions to the deficit," says Rep. Bart Gordon, a Tennessee Democrat and sponsor of a bill that would freeze direct loans at 40 percent of the total federal loan program -- the figure slated for this coming academic year. Gordon and the bill's cosponsor, Republican William Goodling of Pennsylvania, want to test the new program before it moves (if it ever does) to 100 percent participation, which is slated to happen in the academic year 1997-98. Sen. Nancy Kassebaum, a Republican from Kansas, has sponsored similar legislation in the Senate.

Student loans are big business: In 1994, 6.7 million students borrowed $23 billion from the government, up 2 percent from the previous year. Under the original legislation, known as the Federal Family Education Loan Program, a network of 7,500 banks and secondary markets, banks that bid for and buy the loans from banks that originally granted them. These financial institutions have both the experience and resources to handle the task, says Susan Connor, vice president for public relations at the Indianapolisbased USA Funds, which services about one of every five student loans in the United States.

But the Clinton administration created the new program to address what it regards as two pressing problems: the high number of defaults on student loans -- totalling $26 billion to date -- and the big profits garnered by banks and private companies such as the Student Loan Marketing Association, better known as Sallie Mae -- profits in large part underwritten by the federal government, which has refunded 98 percent of all losses.

Under the Clinton program, students borrow directly from the federal government through their schools. (The Department of Education contracts with private firms to service the loans -- and to collect them when they come due.) According to Deputy Assistant Secretary of Education Leo Kornfeld, the direct-loan program and elimination of the "middlemen" -- banks and secondary markets -- will save the federal government nearly $12 billion over a five-year period if put into effect by 1998.

The Clinton administration sweetened the pot for students, too, offering them various options to pay their loans: a pay-as-you-can plan based upon income and family size (with certain low-paying fields slated for special preference, such as public-school teaching and social work); an extended plan with fixed monthly payments over 12 to 30 years; a graduated plan in which payments start low and increase; or the "standard plan" with fixed monthly payments for 10 years, as under the old system. Korn-feld maintains that the new program also allows students more flexibility borrowing money "Since they borrow onlywhat they need" -- not what they think they will need based on estimates -- "they'll borrow less," he claims.

But critics argue that most of the claims put forth by the federal government in favor of direct loans don't hold up under examination. Gordon notes that the Department of Education -- which will have to keep track of a large number of loans for up to 30 years -- "doesn't have a good record at all when it comes to oversight."

Nor will middlemen disappear, according to the critics. "It is arduous work doing loans," says Connor. "They can't eliminate work that has to be done. There will be a new set of middlemen" -- hundreds of additional government bureaucrats.

Gordon notes that schools with high default records can enroll in the direct-loan program easily -- and have done so, even though they're ineligible for loans under the old program. "It's like giving them a get-out-of-jail-free card," he says. Among schools with high default rates already receiving direct loans: the Las Vegas Gaming School, with a 47 percent default rate in 1992; the California Nanny College, with a 45 percent default rate that year; and the Natural Motion Institute of Hair in New Jersey, with a 41 percent default rate.

Perhaps most disturbing of all, an April report from the nonpartisan Congressional Research Service claims that "savings for one form of loan over another are purely artifacts of budget scorekeeping." In addition, the report notes that administrative costs under direct loans likely would be higher than administrative costs under the old system. It recommends that defaults on loans be handled by imposing penalties that are vigorously enforced on guaranty agencies.