Washington -- The U.S. Department of Education has warned New York State officials that their plan to entice the state's public colleges out of the federal direct-loan program could violate a provision in the Higher Education Act that bars lenders and guarantee agencies from using payoffs to win business from colleges.

In his 2004-5 budget plan, Gov. George E. Pataki, a Republican, included a proposal that would require public colleges to agree to work with the state's student-loan guarantee agency, the New York State Higher Education Services Corporation, in order to continue receiving money they depend on to cover the administrative costs of financial aid (The Chronicle, April 23).

Currently, the entire City University of New York System and eight campuses of the State University of New York System participate in the direct-loan program. Direct lending, which was created by Congress in 1993 and 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.

Financial-aid administrators at the CUNY and SUNY campuses that are in direct lending view the governor's proposal as a coercive measure that would force them to begin using the guarantee agency's services. They have charged that the proposal would violate the "illegal-inducement clause" of the Higher Education Act. That clause prohibits officials in the student-loan industry from "offering directly, or indirectly, points, premiums, payments, or other inducements, to any educational institution or individual to secure applicants" for federal loans.

Last month, two U.S. senators -- Hillary Rodham Clinton of New York and John Edwards of North Carolina, both Democrats -- sent a letter to Education Secretary Roderick R. Paige urging him to determine whether the state's plan would violate the law.

In his response, which the department released late Wednesday afternoon, Mr. Paige wrote that he shared the senators' concerns. He said that Sally L. Stroup, the assistant secretary for postsecondary education, had contacted officials at the state guarantee agency, which has been pushing the proposal, "to remind" them that it is illegal to "offer funds to an institution in order to secure applicants for loans."

He wrote, however, that the department "will not make any official decision with respect to this matter unless and until we receive detailed information on the proposed legislation from the State of New York."

He concluded the letter by saying that the department would "continue to monitor the situation in order to ensure compliance with the Higher Education Act."

In an interview, Ms. Stroup said that she was "concerned enough to be proactive" and "bring the department's concerns" to the attention of state officials.

Ronald S. Kermani, a spokesman for the state guarantee agency, said that it would cooperate with the department and provide "whatever information is requested." He said that the agency was working closely with the state's public colleges and the Legislature to develop a budget plan that would be "in the best interests of both the students and families of New York."

Ms. Stroup said that she had expressed similar concerns to officials of the guarantee agency in California.

Officials in the University of California and California State University Systems are considering withdrawing their institutions from direct lending as part of a deal with Gov. Arnold Schwarzenegger, a Republican, that would protect the campuses from further deep budget cuts. As part of that agreement, the colleges would be required to work with the state guarantor, the California Student Aid Commission (The Chronicle, April 29).

Ms. Stroup said the department had even less information about what was going on in California than in New York. "We don't know enough details to speak about it at all," she said.