U.S. halts student loan refinancing.

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Author: Greene, Robert

WASHINGTON -- A massive backlog in processing paperwork has caused the U.S. Department of Education to quit accepting applications to refinance student loans.

Department officials confirmed that they had indeed taken such action late last month -- but only after Republicans in the House of Representatives, critical of the move, publicized it.

"The department' s action leaves tens of thousands of students and recent college graduates, many of whom are just beginning their careers, unable to consolidate their student loans," said Rep. William Goodling, RPa., chairman of the House Education and Workforce Committee.

Refinancing enables borrowers to roll all their previous loans into one, simplifying personal finances and giving more flexibility in repaying the loans. Mortgage lenders commonly demand such refinancing.

The problem is in the direct lending program, under which the department hands out the money. Under the older guaranteed program, still in existence, the government subsidizes private loans.

The Clinton administration supports putting more money in the direct program on grounds the government can run student aid more efficiently, while congressional Republicans support the guaranteed program that uses private lenders.

Education Department officials acknowledged in July that the agency' s new contractor, Electronic Data Systems in suburban Dallas, was so overwhelmed that applications for consolidation were being delayed for months.

Department records indicated that it has taken, on average, more than five months to handle loan consolidations since EDS took over the contract in September 1996.

EDS, has two five-year federal contracts worth $540 million.

This month, in an internal memorandum made public, Education Department officials said that they had suspended applications for the time being. The memo did not indicate a restart date.

"We will not accept new applications until we are able to process them in a reasonable amount of time," said Elizabeth M. Hicks, deputy assistant secretary for student financial assistance programs.

Goodling says the backlog amounts to 134,000 applications.

Hicks says in the memorandum that former students with guaranteed loans still could refinance them, then seek to refinance them later under the more favorable terms of the direct program once the backlog clears.

Direct loans, however, cannot be consolidated into guaranteed loans.

The suspension is more likely to affect recent graduates than current college students, analysts said.

The most popular time to consolidate loans is within six months of graduation, when students face their first major loan repayments.

Students generally seek a consolidation to merge several loans into a single repayment, said Larry Zaglaniczny, associate director of the National Association of Student Financial Aid Administrators in Washington, D.C.

Consolidating through a direct loan has some advantages compared to consolidation through bank-generated loans. Students with direct loans can set payments in line with their post-graduate incomes.

Critics of direct loans seized on the suspension as evidence of the program's failings.

"The department's failure to operate an efficient direct lending program is irresponsible," Goodling said.

"The program was touted as 'one-stop shopping' by Secretary Riley four years ago," Goodling said. "Now, for some students, the program has become 'no-stop' shopping."

Staff writer Charles Dervarics contributed to this report.

PHOTO (BLACK & WHITE): Rep. William Goodling, R-Pa.

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BY ROBERT GREENE