Congress’ attack on direct lending leaves millions in cold

Congress’ attack on direct lending leaves millions in cold

By Richard W. Riley

Students from colleges in the Mid-Atlantic area gathered on the
lawn of the U.S. 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 program known 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 hailed as
a hit by more than 1,350 participating colleges and almost 2
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 have asked to get out.

More importantly, students who use it also love it. One student
told Rolling Stone that direct lending is "the best thing since
microwaveable brownies." Students say they like 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, in addition to 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 it 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 2 million student borrowers back into the old
system. And when there is no competition, the incentive to improve
the system for the students 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
governments: 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.

Riley is the U.S. Department of Education secretary.Comments to
[email protected]