The Battle Over Student Loans

GEORGIA FORTENBERRY, the financial aid director of Bethany College in Scotts Valley, Calif., is ready to head for Washington as soon as she gets the call.

Ms. Fortenberry believes the Clinton administration's plan to institute direct government financing of student loans - thereby eliminating the bankers' middleman role - is a bad idea, and she wants to say so to her representatives in Congress. The call she's waiting for is from the California Higher Education Loan Association, a secondary loan market, which, along with other banking groups, offered last week to finance a trip here.

"I am not colored by who's paying," Fortenberry says. The point, she says, is that their interests converge, and her small college can't afford to send her to Washington on its own.

The financial institutions currently profiting from student loans hope to send many like Georgia Fortenberry to Capitol Hill as part of an intense lobbying effort against direct government lending to students.

Banks, guarantee agencies, and secondary markets, which make hundreds of millions of dollars under the current setup, have much to lose if President Clinton's proposal goes through.

Under the current guaranteed loan system, the government pays banks a fee to make low-interest loans to students, pays the interest on the loans while the students are in school, then pays for defaults. The cost to the federal government annually is $5 billion.

Mr. Clinton wants the government to lend money directly, which it may be able to do more cheaply than profitmaking institutions. Colleges would originate loans themselves, or if they were unwilling or unable to, the government would hire a contractor to handle that role. Loans would be serviced by a small number of contractors monitored by the Education Department.

To Bethany College's Fortenberry, there's nothing to be gained by changing a system she says already works well for her. And the notion of having to deal directly with the Department of Education puts an edge in her voice. "They rarely if ever return my phone calls as it is," she says. Savings may result

Proponents of the plan cite the projected savings in eliminating the middle layer of bankers - savings that would translate into lower loan rates for students. In the first four years of the program, during which it would be phased in, the Education Department projects savings of $4.3 billion. After that, savings are projected at $2 billion a year. But the nonpartisan Congressional Research Service says the change would end up costing the taxpayers money because of increased administrative costs.

Congressional aides who back the legislation say support is solid in the House of Representatives and mixed in the Senate, but that Clinton faces a tough battle.

"He's going to have to fight very hard," says Rep. Robert Andrews (D) of New Jersey. The House Education and Labor Committee, of which he is a member, is scheduled to go over the legislation May 12.

A number of universities and student organizations are lobbying in favor of the legislation. But Tom Butts, a lobbyist for the University of Michigan and supporter of the plan, expresses concern that his side is outgunned by opponents.

"The only strength we've ever had on this issue is a good idea, for students, schools, and taxpayers," he says. "We don't begin to have the resources of our opponents."

The banking interests are approaching their task from all angles. In March, more than 100 bankers fanned out across Capitol Hill to lobby members. At the grass roots, opponents of the plan are holding seminars for college officials and sending letters warning of possible consequences.

One letter from Roy Nicholson, chairman of the financial services company USA Group, warns colleges to "consider the potential fallout of direct lending...."

"Will the money be there?" he asks, a common refrain among bankers that has frightened some financial aid administrators into worrying that budget-cutting by Congress could limit aid availability. The Education Department insists that college financial aid will remain an entitlement.

"Can the federal government run the program?" Mr. Nicholson continues. The Education Department acknowledges problems in its past performance, but maintains that the new system, with many fewer participants, will be easier to monitor than the old.

Nicholson also asks whether colleges can "handle the burden and risk of direct lending." Some colleges are concerned they will have to raise tuitions to handle the new program. The Education Department has promised to make the four-year transition as easy and cheap as possible.

Lawrence Hough, president and chief executive of Sallie Mae, the large secondary student loan market, also has been a prolific letter-writer. He and others representing the banking interests are urging college administrators to support legislation that was passed last year to institute a pilot program testing out direct government lending. Some financial aid administrators were insulted by a Sallie Mae letter that implied they weren't up to the task of installing a new program. Sallie Mae hires lobbyists

One aim of these letters is to get college officials to phone or write their congressmen. But Sallie Mae and the other financial interests are also relying on some of Washington's top lobbyists to take the message straight to Capitol Hill.

That prompted Sen. Paul Simon (D) of Illinois, lead sponsor of the student-loan legislation, to propose an amendment last week to a bill on lobbying that would require more public disclosure of Sallie Mae's lobbying activities.

Sallie Mae and other student-loan banking interests have devised other ways to gain favor with the financial-aid community. Last month, at the board of directors meeting of the National Association of Student Financial Aid Administrators (NASFAA), the opening dinner was sponsored by Sallie Mae and the Texas Guaranteed Student Loan Corporation. The closing reception was sponsored by USA Group.

NASFAA President Dallas Martin says, "I can understand people saying there's an appearance of conflict." But he argues that accepting sponsorship does not affect his group's independence.

In addition, however, many bankers serve on the boards of directors of colleges and universities, a comfortable relationship that may make it awkward for some university administrators to support a change in the system.