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Audit Praises Clinton Administration’s New Student Loan Program

March 28, 1995

WASHINGTON (AP) _ Seizing on the results of a favorable audit, the Education Department is trying to persuade Congress to continue to support a new type of student loan praised by many universities but panned by Republicans.

``Government can indeed work better and cost less,″ the department’s top financial officer, Don Wurtz, said after releasing the report done for the agency’s inspector general.

But Republicans said they weren’t convinced. They plan a hearing Thursday on concerns that the new direct student loan program, a Clinton administration initiative that Congress approved in 1993, when Democrats were in control, lacks good financial safeguards.

The argument over direct lending is just part of an expected fight this year over student aid. College tuition is continuing to go up, and more students are taking on more debt. And pressure to cut back federal spending is intense.

President Clinton promotes direct lending as a way to save money, by eliminating government subsidies to the banks and private agencies that run the old guaranteed student-loan program. Education Secretary Richard Riley last summer estimated the potential savings of the program at $4.3 billion over five years.

But Republican critics complain direct lending will create a big new federal bureaucracy. They believe Clinton has failed to estimate the government’s costs of collecting _ or writing off _ future delinquent student loans.

Under the old loan program, a private bank makes a loan to a student and a private guaranty agency backs it, with ultimate backup from the government.

Under direct lending, the government gives money directly to the students through their schools’ financial aid offices. Students also have a much more flexible payback schedule.

The audit, by Urbach Kahn and Werlin, a Washington public accounting firm, found the Education Department had few cash-handling or computer problems during the current 1994-95 school year _ the program’s first year _ when 104 colleges and trade schools participated.

In the coming school year, the program is scheduled to jump to about 1,500 schools, and Clinton wants to add even more schools the third year.

But Republicans want to cap direct lending at 40 percent of all student loans, thus allowing the old and new programs to run simultaneously as a test. The original plan was for 5 percent of student loans to be direct from the government in the first year and at least 60 percent by the 1998-99 school year.

The Republicans cite a recent study done by a congressional advisory committee, which warned that the Education Department has no good way to track possible problem schools.

Under the old loan program, the Education Department kicks out schools with student default rates of 25 percent over three years. Some lawmakers, worried about trade-school scams, view that as the best way to ensure that student aid money is well-spent.

But the Education Department insists it will continue to use defaults to track problem schools under direct lending. And it says closer contact with schools also will improve accountability.

``When you have on-line, real-time information, you’re able to manage the program much more effectively,″ Wurtz said.

However, the audit done for the inspector general also hinted at possible concerns with tracking problem schools.

It said the Education Department needs to start performing ``risk-based reviews″ to identify problems, such as whether a school is asking for too much loan money at one time.

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