Leaders of public colleges in California are seriously considering withdrawing from the federal government's direct-loan program in a deal that could protect them from further deep budget cuts as the state struggles to close a vast deficit.

Direct lending's supporters fear that if the Californians adopt the plan, which would affect 17 campuses in the state's two public university systems, it will hasten similar proposals in other states and put the program, already on shaky footing, in even greater jeopardy. New York and at least three other states are considering such proposals.

If the California plan is approved, other states are likely to follow suit, said Eileen K. O'Leary, chairwoman of the National Direct Student Loan Coalition, an advocacy group for direct lending.

"When that happens, so much volume will be lost from the direct-loan portfolio that it will be very questionable whether the Department of Education will continue to support the program," Ms. O'Leary said. "If all those states fall, I don't think direct lending will be around in five years."

Direct lending, which was created by Congress in 1993 and was championed by the Clinton administration, provides loans directly to students through their colleges, eliminating the role that banks and guarantee agencies play in the federal government's main student-loan program.

Although details of California's proposal are still being negotiated, financial-aid administrators at colleges that participate in direct lending fear that it is likely to become part of the higher education compact, an agreement between the governor's office and the state's public colleges that is renewed every few years. College officials say they are close to completing a deal with Gov. Arnold Schwarzenegger's office on the latest version of that pact.

"I am personally concerned that an agreement will soon be made and that the Berkeley campus will be forced to make a switch to the guaranteed-loan program without a public debate about the merits and pitfalls of such a change," said Cheryl H. Resh, director of financial aid at the University of California at Berkeley.

Officials at the state's colleges confirmed that the plan is on the table but declined to reveal any details.

"We're still talking through some of the issues," said Richard P. West, executive vice chancellor and chief financial officer of the California State University System. "It's worth doing some analysis of it."

The proposal would use surplus money in the state's guarantee agency, Edfund, to finance student-aid administration, allowing the cash-strapped state to cover the costs without dipping into taxpayer dollars.

If the 11 Cal State universities and six University of California institutions in direct lending leave the program and begin using Edfund's services, the agency's revenue would increase, prolonging the life of the surplus.

In its response to the governor's proposed budget, the California Student Aid Commission, which oversees Edfund, noted that Cal State and the University of California "largely participate in the federal direct-student-loan program and as a result do not contribute fully to Edfund's loan operating fund." The commission estimated that the amount of revenue "lost to direct lending" in California from 1997-98 to 2002-2003 totaled $150.9-million.

In New York, a surplus fund has financed student-aid administration for the past two years. This year, Gov. George E. Pataki, a Republican, included in his 2004-5 budget a proposal to require public colleges to reach a "memorandum of understanding" with the state's guarantee agency, the Higher Education Services Corporation (The Chronicle, April 23).

Financial-aid administrators at direct-lending institutions in the state view the proposal as a coercive measure that would force them to begin using the corporation's services.

They say Governor's Pataki's proposal could be a violation of the "illegal-inducement clause" of the Higher Education Act, which stipulates that lenders and guarantee agencies may not offer any incentives to gain federal loan applicants.

Some of direct lending's champions in Washington agree with that assessment.

"Students and taxpayers will end up paying more for guaranteed loans," said U.S. Sen. John Edwards, a North Carolina Democrat. "In fact, guaranteed loans cost taxpayers 10 times more than direct loans do. The big winner won't be California and New York students and taxpayers -- it'll be the big banks that earn excessive profits on student loans."

Mr. Edwards and Sen. Hillary Rodham Clinton, a New York Democrat, wrote a letter to Secretary of Education Roderick R. Paige last Friday, urging him to determine whether the state's plan would violate the law.

"Clearly the Department of Education's inaction is contributing to confusion over the law defining illegal inducements," the senators wrote. "Action is urgently needed, both to inform state legislatures and to address broader problems of this important, but poorly understood and enforced, law."

Jane Glickman, a spokeswoman for the department, said officials could not yet comment on the letter because the department had received it only this week.