Behind the Student-Loan Deal

Financial-service companies mounted a ferocious lobbying campaign to scuttle direct-loan plan, and Senate conferees struck last-minute compromise

THE broad outline of the budget that emerged this week from a House-Senate conference committee bears a striking resemblance to the plan unveiled by President Clinton in February. But under intense pressure from lobbyists and constituents, lawmakers altered many of the specifics of the president's budget - sometimes a little, often a lot.

Consider the fate of student loans. Mr. Clinton proposed entirely phasing out the $15 billion system of government-guaranteed student loans. Under the current setup, the government pays the interest on loans while students are in college and pays if they default, but the money is handled by quasi-private companies.

Direct-lending by the government, the president argued, could save $1 billion annually by squeezing out the middlemen's profits. Although the House of Representatives approved Clinton's plan, the House-Senate conference committee this week passed a proposal that would have the government making only 60 percent of loans by 1998.

What happened to change the plan between the time the president proposed it and today, when the House is set to approve the modified version as part of the overall budget? For one thing, financial-service companies mounted a ferocious lobbying campaign to preserve the current system.

Leading the charge was the Student Loan Marketing Corporation, or Sallie Mae, the largest "secondary market" for student loans. Set up in 1972 as a government-sponsored enterprise, Sallie Mae buys student loans from commercial banks, thereby freeing up their capital to make more loans. It has $47 billion in assets, and raked in $394 million in profits last year. Although it is a publicly traded company, Sallie Mae's business is insured by the federal government.

Sallie Mae joined forces with other financial middlemen to hire some of Washington's best-connected Democratic lobbyists. (See box.) While the lobbyists buttonholed congressmen in the Capitol, Sallie Mae ran anti-direct-lending advertisements in the Wall Street Journal and other publications. Lobbyists urge derailing plan

The lobbyists also organized a wave of letters and personal visits from college financial-aid administrators who raised questions about the viability of direct-lending. Typical was the letter from Joyce Hall, the director of financial aid at Purdue University in West Lafayette, Ind., who wrote to her senator: "There are serious reservations that the Department of Education can manage a full-blown direct-loan program without adequate pilot-testing."

On the other side of the issue, student groups, some major university presidents, the White House, and key congressmen, such as Sen. Paul Simon (D) of Illinois, pushed for direct-lending. But their efforts never matched the other side. "We didn't have the money they had," says Tom Butts, a lobbyist for the University of Michigan at Ann Arbor.

"The lobbying by the financial industry had a large impact," says Bob Shireman, a staff member of the Senate Labor and Human Resources Committee and a supporter of direct-lending. "It doesn't take much to raise concerns on a complex issue like this. All you need to do is create confusion and uncertainty, and the status quo wins out."

Opponents of direct-lending won a major victory in the Senate, where the bill was watered down to allow half of all loans to stay in the hands of quasi-private companies. But House negotiators, led by Rep. William Ford (D) of Michigan, went into conference committee determined to push for a complete direct-loan scheme.

The House position was undercut in the middle of negotiations by the release of a letter opposed to direct-lending that was signed by 282 representatives. The letter was organized by Rep. Bart Gordon (D) of Tennessee, a longtime opponent of direct-lending, and some signatures for the petition were gathered by lobbyists working for financial institutions. "The letter was unprecedented," Representative Gordon asserts. "It demonstrated that the position of the House was not for direct-lending." Key GOP switch

While the petition may have weakened the hand of direct-lending advocates, insiders say the critical factor in conference was the Senate negotiators' position. Two moderate GOP conferees - Sens. Nancy Landon Kassebaum of Kansas and James Jeffords of Vermont - refused to back the House proposal.

Normally, the views of Republicans might not count for much in a Democratic-dominated Congress, but this time the GOP members had some special leverage: Democrats needed their votes to break the GOP filibuster on the president's National Service bill.

Sen. Edward Kennedy, the Massachusetts Democrat who chairs the Labor and Human Resources Committee, "didn't want to alienate Jeffords and Kassebaum," says Omer Waddles, a House aide who participated in negotiations.

So Senator Kennedy forced his House colleagues to agree to a compromise that would have only 60 percent of loans made directly by the government. As soon as that solution was reached on the night of July 30, Kennedy had the votes he needed to pass the National Service plan.

But phasing in 60 percent direct-lending would not achieve the committee's goal of $4.3 billion in savings over five years. Tough compromise

To reach that magic figure, the conference committee was forced to reduce the fees the government pays to financial institutions that continue to handle student loans.

Both sides can live with the result, although neither is very happy. "We're very excited they made the decision not to implement 100 percent direct-lending," says Roy Nicholson, chairman of the USA Group, an Indianapolis-based loan guarantor. "But the cost-saving provisions may drive us out of the program."