Clinton, Congress Clash on Student Loan Issue

WASHINGTON — For millions of young Americans, the ability to go to college next year and beyond could hinge on a push-it-to-the-brink struggle between President Clinton and a bipartisan coalition in Congress over the future of federally backed student loans.

At issue is not only the interest rate students will pay but whether money will be freely available to all borrowers. The administration says banks are profiting excessively from the program, while the congressional coalition contends banks will begin to shy away from making loans if their rate of return is cut too much.

The dispute took a major turn Wednesday night as the House approved the congressional coalition’s formula, 414 to 4, with overwhelming bipartisan support. But the administration insists it contains too much money for the banks, especially the bill’s $1 billion to $2.7 billion in taxpayer subsidies for lenders. The bill now goes to the Senate, but faces a possible presidential veto if Clinton’s concerns are not resolved.

Because of a quirk in the existing loan law, one of those it-seemed-like-a-good-idea-at-the-time decisions Washington sometimes makes, Congress and the White House are under pressure to resolve the conflict by July 1--only nanoseconds from now on the tortoise-paced legislative clock.

Indispensable Element

What makes this arcane dispute important to so many people are the host of economic and other trends which have interacted over the last two decades to make student loans the indispensable element in paying for higher education. As many as 8 million new borrowers are expected to shoulder $35 billion in new loans in the coming year.

The debate centers on the interest rate formulas for all new, federally guaranteed student loans. Such loans carry variable rates pegged to Treasury bonds, with one rate for students still in school and a higher rate for the period--often 10 years or more--after they begin repaying the loans. Both sides have agreed student borrowers should pay a current-market rate of 6.83% while in school and 7.43% when they go into repayment.

The sticking point is that Republicans, supported by many Democrats on the Hill, want banks to receive a higher rate during the repayment phase, 7.93% in today’s T-bill market, as an incentive to keep the banks making loans. The difference between what former students pay and what banks get would be made up by the government.

Without the subsidy, supporters warn, bank profits will fall so low that money will begin to dry up for students. Lenders note that even with the subsidy, the congressional proposal calls for a significant interest rate cuts below current levels.

Loan Rates Could Plummet

If Congress does nothing, loan rates will fall dramatically on July 1--from a current high of 8.23% to below 7%--as a result of a formula enacted in 1993 that was one of the proudest accomplishments of Clinton’s first year in the White House, redeeming a 1992 campaign pledge to cut student borrowing costs and make college more affordable.

As things have turned out, however, the July 1 rates will be so low that banks have already threatened to bolt.

Almost everyone, including the administration, thinks something must be done. The disagreement comes on what is a fair and equitable rate.

“We don’t have any crystal ball” about what the perfect interest rate would be, says Rep. William F. Goodling (R-Pa.), chairman of the House Education and Labor Force Committee where the congressional compromise was developed. “But with July 1 just around the corner, I don’t want to take a chance. . . . If we don’t fix it by July 1, we’re looking at the worst disaster you’d ever want to see.”

“We all have our fingers and toes crossed that Congress will act by July 1, but it’s anybody’s guess whether they will get the job done,” says David Mohning, director of financial aid at Vanderbilt University.

Bank profits on student loans have long been a sore point with Clinton.

The administration charges that lenders have reaped earnings as high as 20% to 30% on equity under the present system.

Striking a populist note, Education Secretary Richard W. Riley declared: “We strongly object to taxpayers subsidizing record bank profits.”

Banks contend the administration analysis of their profits is faulty and say Clinton’s proposed cuts are so extreme that lenders would begin pulling out of the student loan business.

“There may be some level of profitability that could be trimmed without driving lenders out, but it’s nowhere near as big a trim as the administration wants,” says Fritz Elmendorf of the Consumer Bankers Assn., noting that the congressional compromise represents the largest drop ever in a series of rate cutbacks over the years.

The importance of the student loan program has grown as college costs have soared.

Tuition and fees doubled between 1976 and 1994; they continue to grow faster than inflation in the economy as a whole, as well as outpacing the growth of family income.

Bridging the Gap With Student Loans

At the same time, public funding for higher education stagnated or declined during the 1980s and 1990s.

The resulting gap between what schools charge and what students and their families can pay is increasingly filled by loans, almost all of them dependent on federal guarantees. Undergraduates commonly complete their bachelor’s degrees owing $10,000 to $20,000 in such loans. Graduate students, doctors, lawyers and other professionals usually end up owing much more.

Though most students pay little attention to the cost of their loans while in school, even seemingly small differences in interest rates turn into substantial amounts of money as young workers pay down their student debts for years after graduating.

Given the stakes, it’s not surprising that when Congress took up the problem earlier this year, it found itself caught between powerful interest groups.

On the one hand, the United States Student Assn. and others representing borrowers insisted the government keep its promise of lower rates. On the other hand, financial institutions and their lobbyists warned of dire consequences if their profits fell.

For its part, the Clinton administration tacitly agreed that the formula hailed as a triumph in 1993 had not withstood the test of time. But its proposed substitute would have provided banks and other lenders with lower profits than they insist they need if money is to remain available for all student borrowers.

The merits of the argument over whether the various proposed rates are too high or too low are difficult to determine.

Though the Treasury, the Congressional Budget Office and others have studied the question, conclusions depend on complex assumptions about the way lenders operate and what happens to the economy. Industry analysts warn that squeezing lenders’ earnings will reduce the availability of money, especially to the neediest borrowers.

This is so, lenders and some outside experts say, because banks generally make more money on loans to students attending traditional four-year colleges and to students in graduate and professional schools than they do on loans to those in two-year community colleges and vocational or technical schools.

Students in the first category tend to accumulate larger loans and the loans run longer; since bookkeeping and other costs are the same for large and long-term loans as they are for smaller, shorter loans, banks make more money on the former than on the latter.

And it is the needier students, those from working-class and minority families just getting a toehold on the upward-mobility ladder, who tend to fall into the second category. If bank profits are squeezed, lenders say, many will begin to avoid making loans to students in community colleges and non-degree-granting technical schools.

Defaults, which banks must spend money to try to collect even though the loans are guaranteed, are also more common among less-affluent students, making loans to them less financially desirable for banks.

Though default rates were a major problem for student loans in general only a few years ago, lenders and the Department of Education have made substantial improvements. The overall default rate, running previously over 20% on all loans, is now about 10%. Defaults on loans to students in so-called “proprietary” schools--privately owned vocational and technical schools--have been cut from about 40% to below 20% today.

It was to deal with all this that the House and Senate education committees hammered out the compromise that holds down student rates but sweetens the pot with a subsidy for banks to encourage lending.

That not only upsets Clinton, it puts Republicans in an awkward position for an election year.

A GOP House aide who has worked on rate reductions in the past concedes that the banks “often do cry wolf on student loan issues. They may be crying wolf this time.” But at some point, if rates keep being squeezed, “the wolf will really be there,” he says, and Congress should not gamble with such an important program.

Meanwhile, because primary election fights threaten some of the key players on the Hill, politics is straining once-bipartisan resolve. Call it primary politics meets student angst.

Goodling himself, for example, agreed to support an amendment by Rep. Frank Riggs (R-Windsor) adding California’s Proposition 209 ban on affirmative action to the $101-billion higher education bill that includes the student loan rates, even though passage could have shattered the coalition he had labored more than a year to build. But Goodling, a moderate former schoolteacher now in his 12th term in Congress, faces a brutal primary fight with a more conservative GOP challenger.

In the end, the Riggs amendment was defeated Wednesday night, 171 to 249, avoiding greater problems in finding a solution to the loan problem.

Amid all this maneuvering and concern, Rep. Howard P. “Buck” McKeon (R-Santa Clarita), chairman of the education subcommittee that built the bipartisan approach, suggests the issue is actually quite simple.

“If we are putting in too much money for the banks,” he says, they will just “make more money and pay more taxes.”

But then McKeon has no primary challenger to worry about. So far, he doesn’t even have a Democratic opponent for November.