Act may privatize loan rates

A congressional act scheduled to be voted on this week may change the way interest rates of student loans are administered.

The debate regarding whether student loan interest rates should be determined by the federal government or the private student loan sector heated up after a student loan provision was added to the unrelated Work Incentives Act.

The act, which deals with the funding of health care incentives for working individuals, contains a provision that would change the method of determining the interest rate index. Instead of deciphering the index from treasury bills, government-backed interest rates, the index would be based on commercial paper, corporate-backed interest rates.

The bill passed the U.S. House of Representatives and Senate last month and is in conference committee. President Clinton has come out against the change to commercial paper. Among the issues being negotiated in the committee is the student loan pro

JESSICA JOHNSON/Daily LSA senior Amanda Schmiege talks with financial aid advisor Esther Warner yesterday about financial aid for Schmiege's plans to study abroad in London.

vision.

"It doesn't affect the students at all" said David Foy, press secretary for U.S. Rep. Howard McKeon (R-Ca.), who is chair of the House Subcommittee on Post-secondary Education, Training and Life-Long Learning.

The bill cuts costs for the lending community, but will not create a windfall for the private loan industry or increase costs for the government, Foy added.

Molly Sullivan, spokesperson for Sallie Mae, one of the largest student loan agencies in the country, explained that according to the Congressional Budget Office, the switch to commercial paper would save the government $20 million.

But student and education representatives disagree.

The proposed switch would up federal subsidies for lenders to the commercial rate, which is generally higher than the treasury bill interest rate, thus shifting much of the potential loss on student loans to the government, Ivan Frishberg, director of the Public Interest Research Group Higher Education Associate.

The provision is designed to make lending more attractive by raising the amount of guaranteed government aid to lenders, thereby shrinking the disparity between the amount lenders pay for getting the money and the interest rates they are allowed to charge on loans.

As of Friday, the proposal would mean a gain to lenders of .41 percent.

The student loan provision has the potential of driving up the costs for the federal government and costing tax payers more, which can result in a cut in student loans in the long run, Frishberg said.

But supporters of the provision claim that they "don't anticipate that this will have any impact on students or tax payers," said the committee's Director of Communications Becky Campoverde.

Further objection to the provision is the projected $1.75 billion profit in five years that the student loan industries will gain without any benefits to the students, Frishberg said.

The provision "potentially takes money away that could otherwise be available to students," said Margaret Rodriguez, associate director of Financial Aid at the University.

Officials at Sallie Mae are lobbying for the transfer to commercial paper which will "increase the efficiency and stability of the" Federal Family Education Loan Program, Sullivan said.

The government is using the budget surplus to reduce the national debt, effecting the supply of treasury bills to which the student loan industry's income stream is tied, Sullivan said, adding that the capital market must be tapped to raise the $25 billion needed annually to support student loans.

Opponents to the provision said that the competition created by the shift to commercial paper will harm students.

Small lending agencies will not benefit from the provision which would allow the larger companies to decrease competition, said Jamie Pueschel, legislative director of the U.S. Students Association. Less competition is harmful to the students, she added.

Much of the controversy surrounding the use of commercial paper began with the 1998 Higher Education Act when the proposal was first introduced and then rejected, Pueschel said. She added that the student loan industry then attempted to attach the provision to the Labor Health and Human Services appropriations bill and when that was rejected, they attached the provision into an unrelated bill.

The bill was not passed through the Education and Workforce Committee, Rep. Dale Kildee (D-Flint) said. The provision was "done outside the committee of jurisdiction," he said and as a result, hearings were not held on behalf of the students, Kildee said.

But although the provision was not passed through the Education and Workforce Committee, members have expressed support for passage of such a provision. There is bi-partisan support by the full committee and subcommittee, Campoverde said.

Under the act, a study group was formed in which Frishberg and others considered the use of commercial paper, he said, and determined that the student loan calculations in the proposed provision was inaccurate due to unrealistic projections.

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