NEW STUDENT LOAN PROGRAM DRAWS DOUBTS

Federal legislation that would establish a new direct loan program for college students is meeting with skepticism from some of those who deal with the existing guaranteed student loan program in Missouri.

Financial-aid officials at Southeast Missouri State University, a Cape Girardeau bank and at the state level question if the pilot program, approved by Congress as part of the reauthorization of the Higher Education Act, will work.

"There definitely is some concern about it," said Barbara Ulrich, student loan officer at Capital Bank of Cape Girardeau County.

Ulrich said Capital Bank makes loans to about 4,000 to 5,000 students a year.

The average, annual loan during the first and second years of school is about $2,600, under the existing program. Students can obtain loans of up to $4,000 in their third, fourth or fifth years of school. Graduate students can obtain a loan of up to $7,500 for one year of schooling, she said.

Nationally, in federal fiscal year 1991, lenders provided more than $12 billion in student loans.

Ulrich questioned the need to change the existing program. "This program has helped thousands and thousands of students through school and it has been a good program.

"There is a lot of concern from the schools that I have talked to that do not want to go with the direct loan program. They do not have the staff to handle it," she said.

"A lot of people do not feel the pilot program is going to work," added Ulrich.

The bill involves much more than just the direct loan program. It extends the life of federal higher education programs and authorizes spending of $115 billion over five years.

To make subsidized loans available to more students from middle-income families, the bill would drop equity in home or farm and college savings accounts from the calculation of assets now used to determine student aid eligibility.

Income ceilings would also be raised for students seeking Pell grants. Students from families of four with an annual income of up to $42,000 a year could now qualify for the grants.

Among other changes, the bill establishes a new unsubsidized loan program for students and families who now don't qualify because their incomes are too high.

The U.S. House on Wednesday approved the measure by a vote of 419-7. The Senate had approved the compromise legislation last week. The measure now goes to President Bush, who is expected to sign it.

The legislation calls for establishment of a direct loan program at 200 to 250 schools, eliminating banks and loan guarantee agencies from the process. The pilot program was scaled back from 500 colleges and trade schools after the Bush administration objected to the size of such a program, arguing that it could add billions of dollars to the national debt.

Congressional auditors, however, have estimated the government could save nearly $1 billion a year by going to direct student loans.

Under the pilot program, the government would lend the money directly to students through the financial aid offices at colleges and trade schools rather than pay subsidies to banks and state and private guarantee agencies to make the loans.

The pilot program would run from July 1, 1994, to June 30, 1998.

Ken Dobbins, vice president for finance and administration at Southeast, said the institution won't be volunteering for the pilot program.

There are about 2,500 students at Southeast with a total of $5.5 million in Stafford (guaranteed student) loans.

But he expressed concern that if the direct loan program eventually replaces the current student loan system, it could mean higher personnel and administrative costs for schools as they cope with the increased duties involved in handling the loans.

"What's being done at all the different banks in Southeast Missouri, we would have to be doing," said Dobbins. "There are a lot of unknowns right now in the program."

Proponents argue that such a system would streamline the process and save the government money. But Dobbins said, "Hopefully, it won't be at our expense."

Ulrich noted that colleges and universities are already under budgetary constraints, which would make it difficult to absorb increased administrative costs.

"There are also other liabilities out there that banks and lending institutions are absorbing, guarantee agents are absorbing.

"Even though the loans are guaranteed by the federal government, there are a lot of regulations applied to these loans," she said. The guarantee of repayment is lost if those regulations are not followed.

"There are a lot of hidden costs, a lot of hidden things that are not coming out in the initial talk of the direct loan program," said Ulrich.

She questioned if the direct loan program would actually save the government money.

"There is a misconception out there that banks are getting rich off student loans and that is totally false," she said. "The majority of institutions do loans as a customer service."

Under the current program, a student fills out an application form at a college financial aid office. If the student meets the financial-need requirements, then a loan for college fees and expenses is made by a participating bank.

A guarantee agency, such as the Missouri Student Loan Program operated through the Missouri Coordinating Board for Higher Education, promises to pay off the loan in the event that the student defaults.

Students pay a fee, and the federal government also provides funding for the operation of the guarantee agency based on the overall default rate on loans handled by the agency.

"If a student defaults on a loan, dies, declares bankruptcy or becomes permanently disabled, we will buy the loan from the lender," said Julie Meyer of the Missouri Student Loan Program.

In the 1991 federal fiscal year, the Missouri Student Loan Program paid out $31.9 million to lending institutions for 14,000 defaulted loans. But Meyer said that's a relatively small amount out of a more than $1 billion outstanding loan balance.

After buying the loan, the guarantee agency tries to collect on the loan, including taking tax refunds from delinquent students, Meyer said.

If the agency can't collect, the federal government ends up buying the loan, with the money going to the guarantee agency.

The federal government pays the bank the interest on the loan while the student is in school.

Students have up to 25 years after they get out of school to repay the loans. "Most loans are probably paid out within eight years, but they can take up to 25," said Meyer.

Under the current system, the banks lend the money. But under the direct loan system, the money would be federal dollars, not private money.

"In a time when they are looking at trying to balance the federal budget, I think the worst thing they could do is add more debt," said Ulrich.

Meyer said the government tried a direct student loan program before. "In the early '70s, there was a federal student loan insured program. It was basically a direct loan program, but it was not effective."

Meyer said the direct loan program couldn't handle the large volume of loans being processed and default rates were higher than they are under the current program.

In 1978, the government switched to the current student loan program.

Meyer said that even under a direct loan program, the government would probably contract with private agencies to manage it.