The University Record, October 2, 1995

Direct lending takes direct hit in House, Senate committee actions

As expected, direct lending suffered two setbacks last week as a Senate committee voted to cap the number of participants in direct lending, and a House of Representatives budget committee voted to eliminate the program altogether. The stated reason for the cuts was special changes in accounting contained in the budget resolution. These changes, which have been questioned in a number of quarters, create the appearance that direct lending is more expensive than guaranteed loans, says Thomas A. Butts, associate vice president for government relations.

On Tuesday, the Senate Labor and Human Resources Committee passed a proposal that would cap direct lending at 20 percent of total loan volume, impose a .85 percent fee on universities for the total volume of their student loans, eliminate the six-month interest-free grace period following graduation and increase the interest rate on parent loans.

Currently, nearly 40 percent of student loans are administered through schools participating in the direct lending program, including the $85 million U-M students are expected to borrow this year. So far this year $7.2 billion in direct loans have been originated to 1.8 million students attending about 1,300 institutions.

“Some members still think this is a program that only involves 104 institutions and 5 percent of the loan volume,” says Butts. “They still don’t get it that direct lending is a major success.”

The .85 percent fee would cost the U-M $723,000 per year. The chair of the committee, Sen. Nancy Kassebaum, R-Kansas, indicated that the restriction that institutions could not raise fees to cover the cost had been dropped from the proposal, and that the fee would likely be passed to students by institutions.

Butts stated that the fee is nothing more than another cut in the availability of student aid, as well as a scary precedent.

On Thursday, the House Economic and Educational Opportunities Committee, led by Rep. William Goodling, R-Pennsylvania, went one step further than the Senate and voted to eliminate the direct lending program. It also eliminated the six-month interest-free grace period, capped the maximum parent loan (PLUS loan) at $15,000 and increased the interest rate for that program. The House proposal does not contain the fee for financial aid.

The House and Senate plans will now be incorporated into their respective reconciliation bills along with Medicare and tax proposals. Butts says that amendments from the floor are likely in the Senate but not in the House. Following a conference in November and final passage by Congress, the reconciliation bill will be sent to the President where a veto is possible if significant changes are not made.