Banks holding the ball for new interest rates

President Clinton's attempt to propel a proposal through Congress that will reduce student loan interest rates from 7.8 percent to 7 percent this July has been stonewalled by major banks.

The banks and the Department of Education have squared off over who should bear the cost of Clinton's financial break. Major lenders are threatening to back out of student loan programs altogether if interest rates drop to 7 percent.

"If banks do back out, there should be no fear on the students' part," said Jane Glickman, a public affairs specialist for the Department of Education. "The House and Senate proposal did include protecting savings for students."

But things behind the financial loan scenes would change.

"Basically, if the banks pulled out of this program, there would be no student loans as we know them today," said Donna Capanna, Saguaro Credit Union's vice president for loans.

The government would be forced to fund all student loans by hitting up taxpayers, Capanna said.

About one-third of UA students receive financial loans and graduate with an average $16,882 in debt, said Phyllis Bolt Bannister, UA director of student financial aid. Students who owe that amount at a 7.8 percent rate pay $7,484 in interest over a 10-year period. A 7 percent rate would cut that amount by about $845.

A Bank One Education and Finance Group spokesman warned that the student loan system would collapse if interest rates are cut.

"When it comes down to it, I think the banks hold most of the cards now," the spokesman said. "No one can tell the banks what to do with their money."

The Department of Education is daring banks not to lend at the lower rate.

"We don't really think lenders will abandon the program," Glickman said.

It remains unclear, however, what will pay for the interest rate cut - subsidies from taxpayers or the banks that offer the loans.

The House Education Workforce Committee reacted to Clinton's February proposal by agreeing to give $2.7 billion of taxpayers' money over five years to lenders to make up for the .8 percent interest rate reduction.

But the Department of Education came out against giving banks the extra taxpayer money, saying they will still profit from the reduced rate.

"It (the money paid to banks) would be better used to address critical higher-education needs than giving money to lenders," Glickman said.

The bottom line seems to be whether the banks will be able to make a profit at the reduced rate.

"We will probably lose money on each student loan if the rate is lowered to 7 percent," the Bank One spokesman said. "That's what the battle is over - the Department of Education is saying we can do it, but we're saying we can't."

The reduction will be "a good thing for students and the overall economy," Bolt Bannister said. About 12,500 UA students took out more than $93 million in student loans during the 1996-97 fiscal year, she said.

Bolt Bannister said the debt reduction will allow students to put money toward starting families, buying cars and financing homes.

Final word on the proposal should come through the Senate in the next few months.