New US Student Loan Plan Runs Into Scholastic Doubt

AT one minute after midnight, July 1, 1994, Lisa Cork - a graduate student at West Virginia University - was the first student in the nation to receive a direct student loan from the United States Department of Education (DOE). Since then, 104 colleges and universities have begun receiving student loans directly from the federal government instead of through the complicated network of private banks distributing federally-guaranteed loans.

One difference for students is the option to pay their loans at rates based on their income. Those who work at low-income jobs can repay their loans over a period as long as 25 years. If a former student doesn't pay back her or his entire debt at the end of 25 years, the government will forgive the loan and cover the debt. Students can also get their loan money within three days of signing a single promissory note, says Elizabeth Hicks, coordinator of financial aid at Harvard University. Under the old system they filled out many forms and waited several months to receive their loan money.

Congress and President Bill Clinton approved the direct student loan program in an attempt to cut fraud and default rates that have weakened the system.

In 1993, students defaulted on $2 billion of $24 billion outstanding in student loans, says Leo Kornfeld, DOE's deputy assistant secretary for student financial assistance programs. The Congressional Budget Office found that, besides cutting fraud, a direct-lending program would save taxpayers $4.3 billion over the next five years.

But Rudy Penner, former director of the Congressional Budget Office (CBO), says the savings look good on paper but may not result in savings. ``I don't think there is any cost savings in moving from guaranteed student loans to direct student loans,'' Mr. Penner says. ``It further begs the question of how well the government can administer the direct lending program.''

Even strong proponents of direct lending, like Sens. Dave Durenberger (R) of Minnesota, Sen. Paul Simon (D) of Illinois, and Rep. Tom Petri (R) of Wisconsin, oppose income-contingent repayment as set out by the administration. ``There is a concern that this will become a whole new middle-class entitlement that will increase the deficit,'' says Jon Schroeder, Minnesota aide for Mr. Durenberger.

Critics also are concerned that those who pay back loans slowly could pay triple the amount of the original loans. Others are not worried. ``The Scandinavian countries do it,'' Ms. Hicks says.

Hicks says income-contingent repayment is important because people need flexibility if they work at low-paying, public-sector jobs.

Some say DOE is dismantling the old system without being sure of the new program's effectiveness.

Other schools have not been so quick to jump in. ``There is a program in place and it works,'' says Jim Belvin, director of financial aid at Duke University.

But even among those who have not yet chosen to participate, most do welcome its arrival. ``The competition with direct loans that the private sector will have to endure is going to make the private sector better.... It's going to be good for all of us,'' Mr. Belvin says.