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CNN Live Saturday

Businesses Challenge Federal Direct Loans

Aired June 16, 2001 - 16:10   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DONNA KELLEY, CNN ANCHOR: A group of banks and private lenders are battling the U.S. Department of Education in court over a student loan program. They say that changes to the direct lending system give the government an unfair advantage and cut into their profits.

CNN's Brian Palmer has more on the story.

(BEGIN VIDEOTAPE)

BRIAN PALMER, CNN CORRESPONDENT (voice-over): The old student loan system was cumbersome, but familiar: Banks lent money to college- bound students, the government subsidized those loans. In 1993, President Clinton passed a law authorizing direct lending from the federal government to students, giving student's access to lower-cost loans and more time to pay them back.

DR. JOHN BRUGEL, DIRECTOR, FINANCIAL AID, RUTGERS UNIVERSITY: It's simplicity was that it was a student borrower with the institution as a broker between the student and the federal government. And once the student applied, the institution could grant the loan, put it in place, the student signs a promissory note and its a done deal.

DONNA KOZLOSKIE, STUDENT, RUTGERS UNIVERSITY: Yeah, it's definitely easy. I'm mean, there's so much other paperwork you have to deal with when you go to college. Everything has a paper and your Social Security number on it, and that's it.

PALMER: Colleges and universities across the country joined the program. By 1995, direct lending had gobbled up one-third of the federal student loan market. Private lenders scrambled to regain their market share by improving services and lowering fees to students, winning back some clients. In 1999, Education Secretary Dick Riley lowered direct lending fees further.

DALLAS MARTIN, NATIONAL ASSOCIATION OF STUDENT FINANCIAL AID ADMINISTRATORS: Otherwise students were actually ending up paying more money under the federal program, the direct loan program, than they were under the other.

PALMER: The student loan industry howled, claiming the move was illegal, and it sued. Sallie Mae, the largest provider of education funds in the U.S., is part of the suit. JANE MCCORMACK, EXECUTIVE VICE PRESIDENT, SALLIE MAE: Eleven of the most respected players in the education loan program have chosen to file a lawsuit against the federal government because we believe they are violating the Higher Education Act. We are principally interested because the government is not only a competitor but a regulator of ours, to make sure that regulation is fair across all segments of borrowers.

PALMER: Direct lending's supporters say students will pay more if the court finds in favor of lenders.

BRUGER: If the lawsuit fails, the direct lending program will continue on its path. If the lawsuit is successful, direct lending still exists and will still function, except our students will have to pay just a little bit more for their loan.

PALMER: It's now up to a U.S. district court to settle the matter.

Brian Palmer, CNN, New York.

(END VIDEOTAPE)

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