Debate rages over method of loan interest calculation

Ingrid Skjong

University student Chris Mester is squeamish about repaying his student loans as his spring graduation rapidly approaches.
“Now it’s starting to get scarier,” said Mester, a senior American studies and French student. “At this point I don’t really even know who to pay.”
But the federal government could soon add a new wrinkle to the process Mester already finds confusing. And the changes have private lenders in an uproar and threatening to get out of the student loan business.
President Clinton, Congress and bankers are locked in an 11th-hour political fight over how loan interest will be calculated. It is just one detail in a much larger piece of legislation, the Higher Education Act, which affects several financial aid programs.
Legislation to reduce student loan interest rates, which was adopted in 1993, is slated to go into effect this summer. The measure would cut loan rates by tying them to 10-year treasury bonds, instead of using the more popular 3-month treasury bills that now set loan interest. The bonds serve as a base interest amount to which an additional percentage is added by banks.
The Clinton Administration is trying to soften the blow to private lenders by keeping loan rates affixed to the short-term treasury bonds. But Clinton’s plan would still lower the amount banks can tack onto the bond rates.
Clinton wants interest rates on loans to drop from 7.5 percent to 6.7 percent. This could yield students nationwide about $11 billion in savings over five years.
But banks contend even this reduction is too drastic. With private financial institutions kicking in 70 percent of the total $40 billion of guaranteed loans, the stakes are high.
“It has been described as a train wreck waiting to happen for private lenders,” said Dan Reyeltes, vice president of educational loans at Twin Cities Federal.
Bank loans aren’t the only loans that would be affected by changes. Direct loan programs offered through colleges could be burdened if banks pull back.
The University, along with several other Minnesota schools, offers some type of direct loans program. Such programs were initiated by the Clinton Administration in 1994.
But satisfaction with direct loans has faltered in the last year. A survey conducted by Marco International for the U.S. Education Department found that schools satisfied with direct loans fell to 64 percent in 1997 from 89 percent in 1994-95.
At the same time, guaranteed loan ratings increased to 82 percent from 62 percent three years before.
Only one-third of the country’s colleges and universities participate in direct loan programs, Reyeltes said. If private lenders were to abandon the student loan business, direct lending and state programs such as Minnesota’s Student Educational Loan Fund would be forced to pick up the slack.
“Any kind of action on federal loan programs has a potential effect on our program,” said Phil Lewenstein, director of communications and legislative services at the Minnesota Higher Education Services office.
While the phasing out of private lenders would not directly affect the University, it could have a detrimental impact on schools whose students rely on guaranteed loan programs, said Bob Kvavik, associate vice president in the office of the provost.
But indirectly, the sudden influx of students to direct loan programs would be significant, seriously compromising the level of service offered.
In the long run, a consensus that strikes a balance between benefitting students and appeasing lenders is crucial, said Lewenstein.

— Staff Reporter Brian Bakst contributed to this report.