Direct Loans Turn Harvard Into Bank

Starting next fall, Harvard students will have an easier time paying off government loans, thanks to a new Clinton Administration program designed to streamline the financial aid process.

The new direct lending program will debut at select schools nationwide in July. College students receiving government aid will be able to borrow money directly through their own schools.

Direct lending has been touted as a revolution in the field of education loans.The program eliminated the costly intermediary role now played by banks and loan guaranteeing agencies.

Under the new plan, aid recipients will have to complete less paperwork as the entire loan will be handled through college financial aid offices. Students will also be able to borrow at lower interest rates than before.

"For those in my field this is as big as health care reform," said Elizabeth M. Hicks, assistant dean of admissions and financial aid for federal and special programs.

Harvard and Radcliffe were chosen out of a pool of 1,100 appicants to be two of the 105 schools in the initial program. Hicks said the University was chosen because of its strong record for administering student loans and its commitment to the program from its beginning.

Under the old system, Harvard acted as a lender for some of its students But the process also included outside lenders such as banks and loan guaranteeing agencies.

"Major savings will occur because the process will be streamlined and the middle man will be eliminated," Hicks said. "We were probably the only lender in the nation in favor of the reform.

Recognizing that direct lending would cause them to lose profits, the banks and loan guaranteeing agencies fought the change. But the plan passed over their objections.

Student Loan Reform Act

The streamlined loan system is part of the Student Loan Reform Act passed last August, which also allows students to receive lower interest rates and increases payment options available to them.

Next year, the maximum interest rate on government loans to students will drop from eight to four percent.

In addition, four payment options will be available to students under the new system as part of an attempt at increased flexibility on the part of the government.

Under the current basic payment plan, a loan is repaid over 10 years at a fixed rate. Now students will have the option to extend the payment time under either a fixed or variable rate.

Another option offered will be a graduated payment schedule with loan debts growing larger the longer a student is out of school.

A fourth option available under the act--termed an "innovative plan" by Hicks--will fix the amount a student needs to pay on the basis of how much money the student earns later in life.

In what amounts to somewhat of a gamble students will be able to have their payment rate be contingent upon their incomes, with the more financially successful paying higher rates. Similar programs have been tried in Canada, Australia and some Scandinavian countries.

The new plan is supposed to save money for the government as well as for students. The Congressional Budget Office has estimated that the direct lending program will save about $4.5 billion over three years.

Some critics have disputed this figure, citing the costs of hiring new employees and developing the software.

But officials at both the General Accounting Office and the Office of Management and Budget have agreed that direct lending will save the government money.