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Orlo Austin, director of student aid at the University of Illinois at Champaign, remembers when each semesterbegan with the desperate query, "Is my check in yet from the bank?" That's no longer the case,he says, thanks to the Clinton administration's Direct Student Loan Program, which took effect last year at Illinois and 103 other institutions. The program allows students to receive loan checks directly from the federal government instead of dealingwith banks and college financial-aid offices.

Not surprisingly, the direct-loan program has the firm support of student groups and many university financial-aid officerssuch as Austin. But it also has critics, who see it as yet another example of bigger government. "It doesn't make senseto go to a full loan program [that is] going to take hundreds of employees and add billions to the deficit," saysRep. Bart Gordon, a Tennessee Democrat and sponsor of a bill that would freeze direct loans at 40 percent of the total federal loan program -- the figure slated for this coming academic year.Gordon and the bill's cosponsor, Republican William Goodling of Pennsylvania, want to test the new program before it moves (if it ever does) to 100 percent participation, which is slated to happen in the academic year 1997-98. Sen. Nancy Kassebaum,a Republican from Kansas, has sponsored similar legislation in the Senate.

Student loans are bigbusiness: In 1994, 6.7 million students borrowed billion from the government, up 2 percent from the previous year. Under the original legislation, known as the FederalFamily Education Loan Program, a network of 7,500 banks and secondary markets, banks that bid for and buy the loans from banks that originally grantedthem. These financial institutions have both the experience and resources to handle the task, says Susan Connor, vice president forpublic relations at the Indianapolisbased USA Funds, which services about one of every five student loans in the United States.

But the Clinton administration created the new program to address what it regards as two pressing problems: the high number of defaults on student loans -- totalling billion to date -- and the big profits garnered by banks and private companiessuch as the Student Loan Marketing Association, better known as Sallie Mae -- profits in large part underwrittenby the federal government, which has refunded 98 percent of all losses.

Under the Clinton program, students borrow directly from the federal government through their schools. (The Departmentof Education contracts with private firms to service the loans -- and to collect them when they comedue.) According to Deputy Assistant Secretary of Education Leo Kornfeld, the direct-loan program and elimination of the "middlemen" --banks and secondary markets -- will save the federal government nearly billion over a five-year period if put into effect by 1998.

The Clinton administration sweetened the potfor students, too, offering them various options to pay their loans: a pay-as-you-can plan based upon income andfamily size (with certain low-paying fields slated for special preference, such as public-school teaching and social work); an extended plan with fixed monthly paymentsover 12 to 30 years; a graduated plan in which payments start low andincrease; or the "standard plan" with fixed monthly payments for 10 years, as under the old system. Korn-feld maintains that the new program alsoallows students more flexibility borrowing money "Since they borrow onlywhat they need" -- not what they think they will need based on estimates --"they'll borrow less," he claims.

But critics argue that most of the claims put forth by the federal government in favor of direct loans don't hold up underexamination. Gordon notes that the Department of Education -- which will have to keep track of a large numberof loans for up to 30 years -- "doesn't have a good record at all when it comes to oversight."

Nor will middlemen disappear, according to the critics. "It isarduous work doing loans," says Connor. "They can't eliminate work that has to be done. There will bea new set of middlemen" -- hundreds of additional government bureaucrats.

Gordon notes that schools with high default records canenroll in the direct-loan program easily -- and have done so, even though they're ineligible for loans under the old program. "It's like givingthem a get-out-of-jail-free card," he says. Among schools with high default rates already receiving direct loans: the Las Vegas Gaming School, with a 47percent default rate in 1992; the California Nanny College, with a 45 percent default rate that year; and the Natural Motion Institute of Hair in NewJersey, with a 41 percent default rate.

Perhapsmost disturbing of all, an April report from the nonpartisan Congressional Research Service claims that "savings for one form of loan over another arepurely artifacts of budget scorekeeping." In addition, the report notes that administrative costs under direct loans likely would be higher than administrative costs under the old system. It recommends that defaults on loansbe handled by imposing penalties that are vigorously enforced on guaranty agencies.

Such findings discourage Gordon,who despite his criticisms believes that direct loans could "spur competition between the publicand private sectors." Under the challenge of the new loan program, for example, Sallie Mae, as well as several colleges anduniversities, have come up with their own ways of attracting loan-seekers that promise to give universities more autonomy over loans and prevent a government monopoly (see sidebar). Private-sectoradvocates such as USA Funds' Connor insist that the opponents of direct loans are not objecting to reform. "There is definitely room for improvement," she says. "Butwe don't want to throw out the baby with the bathwater." Admits Connor "Of course, we have a vested interest.... What [the government can't offer] is our training in the field. It'sour experience that we offer students."

Gordon hopes to review the program in two years when reauthorization of the Higher Education Act will be before Congress. By then, everyonewill have a more accurate understanding of its advantages -- or lack of them. What Gordon sees likely to emergein the next few years is a combination of direct student loans, if students want them, and the old system of banks and guaranty agencies, "with alion's share going to the private sector."

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The transition to direct loans has spurred reactions fromuniversities who want to develop their own programs free of a government monopoly and from private-sector groupssuch as Sallie Mae, which compete with the federal government for borrowers.

This spring, for example, the University of Maryland at College Park announced its withdrawal from a total commitment to thedirect-loan program. Students will have access to the direct-loan program on a limited basis, but will have other options, too,says William Leith, director of the university's financial-aid office. Maryland will work under the existing FederalFamily Education Loan Program and with Sallie Mae to offer students the advantages of direct lending without its setbacks: money posted electronically in studentaccounts, for example.

The University of Notre Dame has taken steps similar to Maryland's, offering students a preferred lender list with electronic links to the university. Maine EducationServices, or MES, offers Down East student loans at 1 percent less than the loans offeredby the federal government -- hoping to attract those who want to borrow through programs offeredby MES.

And revamping its own approach to student loans, Sallie Mae offers borrowers a 2 percent interest-rate reduction to borrowers who make 48 monthly payments on time -- a big incentive, especially for those who borrowed big.Payments done automatically from borrowers' bank accounts now receive special reductions.