A r c h i v e d  I n f o r m a t i o n

   FOR RELEASE              Contact: Stephanie Babyak (202) 401-2311    October 20, 1995                     Jane Glickman (202) 401-1307

Under this new student loan program, students bypass the maze of lenders and other middlemen that make up the old financial aid system and borrow directly from the federal government through their campus student aid office. With schools processing the loans, borrowing is streamlined with less bureaucratic red tape and students get their money within days, rather than weeks. The Direct Student Loan program also offers flexible repayment options, which give students more control over their finances, and increases their likelihood of not defaulting.

"We knew when President Clinton proposed this new loan option, it would be popular with students and with student aid administrators, and it is," Riley said. "It's simple, with less paperwork. It improves cash flow by offering quicker turn-around time for loan processing, and it improves services to students. In short, it makes sense."

A recent survey by the trade publication Education Daily found more than 90 percent of schools rated the new system as "excellent."

But the future of direct loans is uncertain. Congress is moving to eliminate or severely limit direct lending.

"Pure and simple, this is special-interest politics," Riley said. "With billions of dollars in middlemen's overhead costs at stake, the loan industry is asking Congress to reject common sense and the needs of students and their families."

The student loan industry is highly profitable, Riley said, noting that lenders receive 8.5 percent in interest, while the loan itself is guaranteed by the federal government. "No wonder they fear the competition of direct student loans that actually save taxpayer money," Riley said.

The Direct Student Loan program initially had bipartisan support and was hailed as a source of savings in the federal budget. However, Congress recently claimed that direct lending actually costs more -- a position flatly rejected by Lawrence Lindsey, a Bush appointee to the Federal Reserve Board. "As long as it is necessary to provide a profit to induce lenders to guarantee students loans," Lindsey has said, "direct lending will be cheaper."

"At a time when we should be looking for ways to make college more accessible, at lower cost," Riley said, "we find Congress moving in the opposite direction. It's clearly a partisan attempt to undermine one of President Clinton's significant accomplishments on behalf of middle-income families and students."

However, not everyone is going along. For example, Rep. Thomas Petri, a conservative Republican from Wisconsin, recently said, "If at the end of this whole process we do kill off direct lending, President Clinton and others will tell the American people that the Congress under Republican control shut down a conservative reform effort that was good for students and schools in order to keep the gravy flowing to powerful special interests. And that argument will resonate with the American people because it will be right."

"I call on every member of Congress," Riley said, "to reject special-interest politics, and do the right thing. This time, side with working parents and students, with ordinary Americans who pay taxes, and in return, expect government to be there when they need help."

More than 1,350 schools presently participate in the Direct Student Loan program, with some 500 slated to join next year. With more than 2 million borrowers, direct loans now account for about 40 percent of total student loan volume.