Direct lending priority of administration


Students from colleges in the Mid-Atlantic area gathered on the lawn of the United States Capitol recently to voice a simple plea to members of Congress: "Students, Not Banks!" The Congressional leadership, however, has sided with special interests and their lobbyists on a crucial issue for middle-class students and their families: student loans.

Helping students manage their educational debts is a big reason why the Clinton Administration supported the creation of a new student loan programs know as direct lending. direct lending makes it easier for families to pay for college by allowing graduates to pay back their student loans as a percentage of their income. In addition, direct lending is simple: College student aid offices issue federal loan funds directly to students, offering one-stop shopping that means no more trips to the bank or long lines to turn in loan papers. Students can choose the repayment plan that best fits their financial status. Now in its second year of operation, direct lending is being hailed as a hit by more than 1,350 participating colleges and almost two million student borrowers.

Who supports direct lending? Bush Administration officials first proposed it. The Clinton Administration and a bipartisan majority in Congress made it a reality in 1993. The colleges that enrolled in the program report that it is working well, as evidenced by the fact that none of them has asked to get out. The roster of direct lending schools includes many of the nation's most prominent universities, such as Ohio State University, MIT, Rice University, the University of Colorado, Harvard University and the University of Florida.

More importantly, students who use it love it, too. One student told Rolling Stone that direct lending is "the best thing since microwaveable brownies." Students say they like having a choice among several repayment options, rather than having a bank set the size of their payment. Borrowers can choose to make smaller payments in their first years out of school, when they are likely to earn less. Or, borrowers can choose to set their monthly payment as a percentage of their income - a big help for graduates who are just beginning their careers, starting families or entering low-paying public service employment.

So, who opposes direct lending? The financial middlemen who benefit from the old loan program, earning billions of dollars each year while assuming virtually no financial risk. That's because the guaranteed loan system gives them a federal guarantee to replace their money if a borrower defaults, as well as hefty federal subsidies for participating in the guaranteed loan program. The bottom line is that the special interests' profits are threatened, and their lobbyists have made clear to Congress that they expect to be protected. They do not want competition from a new system that works better.

The leaders of the majority in Congress say that they are prepared to shrink direct lending or kill it outright, thereby forcing almost two million student borrowers back into the old system. And when there is no competition, the incentive to improve the system for the student and families that use it will disappear. The President's veto blocked the first legislative attack on direct lending, but the special interests and their Congressional allies continue to oppose this improvement in student loans.

Direct lending is a Clinton Administration priority because it makes it easier for families and students to pay for college and for students to further their education. Direct lending embodies everything that the American people expect today from their government: less cost to taxpayers, less red tape, better customer service. This is a case of special interests vs. students and colleges. We side with the students and colleges, so that college officials can choose between the two programs to decide which one works best for their students and their institution.

Richard W. Riley
U.S. Education Secretary