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STUDENT LOAN PROPOSALS NOT A RISK TO BONDHOLDERS, FITCH SAYS -- FITCH FINANCIAL WIRE --

 NEW YORK, May 20 /PRNewswire/ -- State and local debt issuance to purchase student loans in the secondary market should continue unabated this year, especially if banks begin to liquidate student loan portfolios in reaction to proposals to revamp the federal student loan program, Fitch says. Although the future of the Federal Family Education Loan Program (FFELP) is unclear, approximately $2 billion in Fitch-rated student loan bonds and notes should not suffer cash flow losses due to conversion to a direct lending program.
 Passage of such legislation will not signal the death of student loan securitization. The predominant state and local secondary markets, as well as Student Loan Marketing Association and Student Loan Corp., could still purchase loans, providing liquidity to schools and enabling continued lending to students.
 "Back To School With Student Loans," a Fitch Research report being published next week, outlines Fitch's criteria for rating student loan securitizations. The report also focuses on state and local debt issuance to finance FFELP loans and offers insight into the history of the student loan market.
 Recently introduced bills in the U.S. Senate -- The Student Loan Reform Act of 1993 and National Service Trust Fund Act of 1993 -- carry President Clinton's proposals for direct lending by schools, similar to the pilot program authorized by Congress in 1992. The bills seek to replace the FFELP with direct loans by 1997, offer students educational awards in return for community service, and provide a variety of repayment plans based on income.
 If the bills pass, direct lending would be phased-in gradually until the 1997-1998 academic year, when all loans would be made under the Federal Direct Student Loan Program (FDSLP). Since loans would be made directly by schools and the federal government, the private capital provided by banks as loan originators would be replaced, resulting in large initial outlays until loan repayments begin to fund future lending. Guaranty agencies would require federal or state support without the income from loan originations and federal allowances. School lenders would look to the FFELP servicers for help with collections and managing program requirements.
 The cost savings of a direct lending program over FFELP are questionable. Also, the General Accounting Office notes that the Department of Education (ED) must improve its gatekeeping of federal aid (i.e. taxpayer moneys) for such a program to succeed.
 In its December 1992 report on guaranteed student loans the GAO stated, "...the inventory of known problems in the ED's administration of guaranteed student loans raises questions about its ability to adequately manage a direct lending program."
 Further questions remain, including: the federal government's ability to guarantee work to those who choose community service over loan repayment; the effectiveness of providing labor versus direct funding to communities; the means by which community services would handle numerous inexperienced workers; and whether the government would, in effect, be subsidizing education and employment in nonlucrative careers by adjusting repayments to income.
 Ironically, Clinton's proposal is similar to the direct lending program that failed in the early 1970s because of poor loan servicing by schools and extremely high default rates. This unsuccessful program was replaced by the FFELP, which improved loan collections and has survived for a generation.
 -0- 5/20/93
 /CONTACT: Betsy Hill of Fitch, 212-908-0612/


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TM -- NY109 -- 0953 05/20/93 16:52 EDT
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Date:May 20, 1993
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