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Congress May Pass $10-Billion Loan Cut

By David D. Hsu
News editor

A $10 billion cut in student loans over the next seven years was passed in a package by the Senate Labor and Human Resources Committee.

The package includes a student loan tax that would cost universities 0.85 percent of the total student loan volume. In addition, the six-month grace period for repayment of loans would be eliminated, a cap of 20 percent would be placed on the Federal Direct Lending Program, and the interest rate on the Parent Loan for Undergraduate Students would increase from 3.1 to 4 percent. Also, the maximum interest rate would be raised from nine to 10 percent.

The bill would turn over $1.76 billion in taxpayer funds as collateral to agencies that offer student loans.

Voting was strictly along party lines. Eight of nine Republicans in the committee voted for the package, and all seven Democrats voted against it.

Cuts would hurt MIT and students

Under the student loan tax, universities would have to pay taxes on the amount of federal funds they receive.

"The tax on student loans is terrible public policy," said Director of Student Financial Aid Stanley G. Hudson. The tax "represents an annual cost to MITof about $200,000," he said.

The student loan tax also "provides a disincentive for schools to accept needy students," Hudson said.

The six-month grace period for loan repayment "was set up to allow students time to become employed before having to make the first payment," Hudson said. The elimination of the grace period "will put additional pressure on students to have work plans set up earlier."

The Federal Direct Lending Program enables colleges to receive funds directly from the U.S. Treasury, Hudson said. Capping the program "would mean relying on banks and guaranty agencies to approve and process their loans," increasing the chance of delays in receiving the money for loans.

The PLUS loan is currently competitive with other parent loans, but as the interest rate increases, parents will turn to other loan sources, Hudson said.

No matter what version of the package passes Congress and President Clinton, "It is clear that there is going to be less money in the loan programs, and that Direct Lending is at some risk," Hudson said.

The Department of Education estimates that elimination of the grace period could cost individual students anywhere from $700 to $2,500. The increased PLUS loan interest rates could cost up to $5,000 over four years per student. The student loan tax would cost universities $25 for every student every year.

To compensate for the losses, MITwould have to look for new sources of scholarship endowment, Hudson said. Right now, endowment for scholarships does not meet need, so unrestricted funds help subsidize aid programs. New loan options could include cooperating with other private universities.

"The Institute also is trying to reduce its overall administrative costs so that tuition increases can be moderated," Hudson said. MITwill continue to support need-blind admission.

Funds to go to loan agencies

The bill would also send $1.76 billion in taxpayer funds from federal ownership to guaranty agencies that offer student loans.

"Many of us feel that banks and guaranty agencies are recipients of corporate welfare that makes the loan programs more expensive to students," Hudson said.

Guaranty agencies "function as middlemen between the banks, who loan funds to students, and the federal government, which bears the risk on the loans," said Sen. Edward M. Kennedy (D-Mass.), the ranking minority member of the labor committee.

Over 30 years, $1.8 billion has been built up from insurance premiums paid by students, payments received for default claims, and investment earnings on reserves, Kennedy said.

Massachusetts has $33 million in reserves, according to Department of Education statistics.

"If this provision were enacted, the strong possibility exists that an agency could choose to use reserve funds for non-program purposes and be unable to pay lenders' claims," said Department of Education General Counsel Judith A. Wilson. Then, "the Department would have to use taxpayer funds to pay the lenders."

Senator Kennedy attacks cuts

Although the reserves existed to ensure that agencies could cover defaulted loans, "the bill turns over to the guaranty agencies no strings attached all but $40 million of taxpayer funds," Kennedy said.

"The bill is bitter news for students and their families, who will see their student loan costs rise by as much as $7,800 per family," Kennedy said. Over $7 billion of the cuts "fall on students and working families."

The cuts are part of an effort to balance the budget. More specifically, the reductions must meet the Snowe-Simon Amendment's stipulation to cut at least $4.4 billion over seven years.

Kennedy, along with the other Democratic members of the committee, have proposed an amendment which would reduce the cuts from $10 billion to the minimum $4.4 billion over seven years.