The Clinton administration is offering a scaled-down plan to reduce the interest rates charged for student loans in order to keep banks from abandoning the student-lending business.
A previously scheduled cut in interest rates for such loans would go into effect on July 1, and banks would make a lower return on those loans than they do now. But the drop under the administration proposal would be less than it would have been under changes required by a 1993 law intended to make college cheaper.Vice President Al Gore and Education Secretary Richard Riley on Wednesday announced the plan to keep a promise to students while assuring that the pool of willing lenders does not dry up.
They released a Treasury Department report showing that unless revised, the July changes would cause banks to quit providing the federally guaranteed loans.
"We will ensure that more students can afford to go to college and that lenders can afford to make the loans that will get them there," Gore said.
Treasury said that under the proposal made Wednesday, lenders would lose money the first two years but make enough over the next three years to average what it considers to be a reasonable rate of return over five years.
The government is expected to guarantee more than $24 billion worth of new loans this year to more than 5.5 million borrowers.
The interest rate on student loans now combines the rate on 91-day Treasury bills with a fixed markup, producing a current student-loan rate of 7.8 percent over five years.