Direct Student Loans’ Popularity Lags

WASHINGTON — When it introduced a fundamentally new way for the nation’s college students to get tuition loans a few years ago, the Education Department made a few bold predictions. The program, called direct lending, would dazzle universities so much that most would no doubt change their financial aid systems--and dump private lenders--in a flash.

It hasn’t quite worked out that way.

Direct lending, which allows college students to draw loans straight from the federal treasury through their campus aid office, without ever using banks, is now well into its third year. It has attracted more than 1,200 colleges and universities, but the program has not yet reached the grand goals that the Education Department once set for it.

President Clinton has long touted direct lending as one of his most important education initiatives, created to streamline the loan process for students and save the federal government millions of dollars in subsidies that it gives banks each year to support low-interest, low-risk college loans. Clinton also has refused to budge every time that Republican lawmakers have tried to limit or curtail the program.

The fate of direct lending is among the most serious issues in higher education because college students have never been more dependent on loans to pay for tuition than they are now. A record number of students--more than 7 million--are borrowing a record amount of money because tuition increases on many campuses are continuing to exceed inflation and other forms of financial aid are not keeping pace with college costs.

Republican attacks against direct lending are subsiding, but now the administration is facing a tough new question about the program: Why isn’t it more popular?

Higher education officials, and leaders at the Education Department, suggest several reasons. Republican attempts in Congress to kill the program over the last two years, they say, have made some campuses wary of taking the arduous step of revamping their financial aid offices for a new system that seemed to be on thin ice politically. Other colleges apparently are not thrilled with how the department is running the program.

But perhaps the most significant reason, officials say, is that the private lending market, which for decades was the only option that millions of college students had for tuition loans, is being forced to clean up its act to compete better with the federal government’s new program.

“Four years ago on many campuses, there was widespread discomfort with how the private lending system worked. But without a doubt, they are doing a much better job,” said David Longanecker, assistant secretary for post-secondary education.

The Education Department insists, however, that direct lending is still much more efficient for colleges and students. The universities that are participating in it generally have given it high marks in evaluations conducted by independent research groups.

To date, direct lending has secured slightly more than one-third of the nation’s burgeoning student loan market, which exceeds $32 billion.

That’s not bad for only three years of work, department officials say. But it is still less than the 50% of the market the Clinton administration had expected direct lending to seize by this time.

Three times as many schools still rely on the private lending system.

Lawmakers opposed to direct lending often accuse the Education Department of being too inept to run it. Last year, that case was strengthened when 900,000 student aid applications being handled by department contractors were delayed by management problems. But there have not been any more troubles of that magnitude since then.

Department officials say one reason the political clamor about direct lending has diminished in Congress is because more universities that use it are telling lawmakers from their states that the program is working.

“There have been some start-up problems, but overall I think the process has been going smoothly for universities,” Longanecker said. “We are gradually increasing our market share, people in it are enthusiastic, and it’s very obvious now to Congress and to colleges that the president is going to support this, that it’s not going away.”