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Tucson Weekly Loan Sharks

Private lenders fight cuts in student loan rates.

By Jennifer Shecter

MAY 4, 1998: 

"Dear Senator/Representative...Our lenders tell us they may not be able to continue to make loans unless the interest rate formula is revised. We believe them when they say they cannot possibly continue to allocate funds for [Federal Family Education Loan Program] loans unless they receive a reasonable return on their investment."

--Excerpt from "Suggested Text...Just in case you want help getting started!!," included in a Bank of America Communiqué sent to college financial aid offices last month.

AT ISSUE IS a July, 1, 1998, planned cut in the interest rate on guaranteed student loans that could save borrowers as much as $11 billion. This is good news for the growing number of students who have been borrowing large amounts of money to deal with rising college costs. The General Accounting Office reported last month that "the percentage of post-secondary students who had borrowed by the time they completed their programs increased from 41 percent in 1992-93 to 52 percent in 1995-96."

Student advocates are championing the interest rate cut. But the private lending industry--banks control about 70 percent of the $34 billion student loan market--is waging a battle against the change, claiming that it would reduce revenues and make it unprofitable for lenders to keep making student loans. The proposal would reduce the annual interest rate that student borrowers pay from an average of 7.8 percent to 7 percent.

Lenders have started mass mailing letters to college student financial aid offices around the country encouraging them to write to their lawmakers about the potential "crisis." Besides this so-called grassroots effort, the private lending industry is pushing Congress to stop the planned cut as part of legislation reauthorizing the Higher Education Act, which is set for debate this spring.

The industry suffered a setback last month when the Treasury Department reported that Congress could lower the interest rate and address lenders' concerns "at little or no net cost to students."

The Clinton administration has already issued an alternative proposal that student advocates claim would continue to make the student loan market attractive to private lenders.

One of the major opponents of the interest rate cut is the Student Loan Marketing Association, known as Sallie Mae, which buys and services student loans in the private lending market. Sallie Mae hired former Rep. Pat Williams (D-Montana), formerly chairman of the House Education Subcommittee, to lobby on this issue. Williams told the Center that the interest rate cut might force a lot of banks out of the student loan business with larger banks taking over the bulk of the lending. In this scenario, says Williams, banks will select the students least likely to default--leaving low-income students in the lurch.

The Student Loan Marketing Association spent $1.08 million during the first six months of 1997 paying the five lobbying firms it hired and its in-house lobbyists--up 12.5 percent from the same time last year. Sallie Mae has also given nearly $79,000 in soft money and individual campaign contributions so far in the 1997-98 election cycle, compared with $12,000 during the same period in 1995.

Also beefing up their political activities are banks that participate in the private lending program. The Citibank Student Loan Corp. recently hired its first lobbyist ever, Stephen Biklen, to fight the interest rate change.

This is not the first time the private lending industry has fought the Clinton administration. Lenders opposed the President's direct lending program established in 1993. The program allows students to receive federal loan money through their colleges without having to use banks.

The top 15 banks in the student loan market listed on the chart on this page contributed $1.8 million to federal candidates and parties so far in the 1997-98 election cycle, 67 percent to Republicans. All contributions are based on data downloaded from the Federal Election Commission on Feb. 1, 1998. The Office of Postsecondary Education at the U.S. Department of Education provided the list of top originators of FFELP loans.

This story originally appeared in Capital Eye, which is published bi-monthly by the Center for Responsive Politics. Visit the Center's website at http://www.crp.org for all kinds of juicy tidbits about money in politics.

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