University officials said yesterday they are delighted about a new Bush Administration proposal to radically change the allotment of government-guaranteed student loans.

Under the new proposal, colleges and universities would receive money directly from the government, and then loan the money to students. Currently, most students--including Harvard undergraduates--must go to commercial banks for tuition loans, which are then guaranteed by both the state and the federal government.

"I think Harvard students would benefit substantially from [a program like] that," said John Shattuck, Harvard's vice president for government and community affairs. Shattuck said both students and the University would ultimately benefit because the proposal would "reduce all of the administrative complexity" of the current system.

The proposal has met with strong criticism from the banking industry, which depends on college loans not only for interest revenue but also for contact with potential customers. Joseph M. Cronin '56, president of the Massachusetts Higher Education Assistance Corp., warned that the plan would give the government more financial leverage over colleges and students.

"If a school doesn't establish itself as a drug-free zone; if every student isn't registered in the selective service, they don't get any money," Cronin said. "The government did this with good intentions...who knows what other controls will be imposed? It's not clear. There would certainly be more."

Cronin added that Harvard could stand to lose money under the new proposal.

Currently, Harvard is among the few schools with enough resources to make its own loans to graduate students, even though undergraduates must still go through commercial banks. Since the federal proposal mandates that universities charge lower interest rates than private institutions. would, Harvard would probably have to lower its lending rates for graduates by about 3 percent, Cronin said.

The graduate students might not notice, but according to Cronin, Harvard might lose up to $7000,000 annually.

Congress must approve the proposal as part of the President's new budget, which will be submitted early next month. Cronin and others say they hope Congress thinks twice about it, because the government could have trouble raising the money for the loans and then collecting it back from borrowers.

The Bush Administration claims the new proposal would save the federal government $1 billion, which it would have paid commercial banks to offer lower interest rates to students.

But Cronin said the government will be less effective at collecting its money. He said that existing default rates of 20 to 30 percent might jump to as high as 70 to 80 percent, which would be "damaging to the Republic."

In addition, Cronin said that the proposal might require even more bureacracy. Hesaid the government might have to hire 10,000 morecollectors for the system to work.

"Some people say if the system really isn'tbroke, why fix it?" Cronin said.

And if the government has to spend money tomake the plan work, it might have to raise interstrates for the loans, according to John E. Dean,counsel to the Consumer Banking Administration.

"What they don't tell you is that the studentfaces a sharp interest rate rise," Dean said.

Shattuck, however, said the interest rate forHarvard students will probably not change underthe new policy.

Dean said he was concerned about how theproposal would affect the banking industry.

"They've made a commitment to the program,"Dean said. "They're trying to contribute to thecommunity; they're looking for futurecustomers...there will be severe losses.