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Fuel for the Fire on Student Loans

March 3, 2005

The federal government significantly underestimates various costs of its Direct Student Loan Program in ways that make the program appear more cost-efficient than the competing guaranteed loan program, contends a report to be released today by PriceWaterhouseCoopers. The report, which was funded by three groups that have a major stake in the guaranteed loan program, is likely to pour gasoline on a more-than-decade-old battle that is heating up again.

President Clinton and Congress created the direct loan program in 1993 as an alternative to the Family Federal Education Loan Program, in which banks and other lenders provide loans to students and parents that are guaranteed by public or private agencies and reinsured by the U.S. government against default. Under the direct loan program, the government provides loans directly to students through their colleges or universities (not unimportantly, cutting lenders and guarantors out of the process). 

As the political winds have shifted in Washington in the intervening decade, the programs have taken turns seeming to be on the ascent. In recent years, advocates on the two sides have been in a relative truce, with both saying there's room in the student loan market for both programs. But skirmishing has intensified in the last few months as budget cutters in the Bush administration and Congress have increasingly discussed looking to the loan programs for savings -- in large part by cutting federal subsidies to lenders.

And legislation expected to be introduced soon in the House seeks to encourage colleges to switch to the direct lending program -- because the government currently determines it to be less expensive to taxpayers -- and to use the savings such a shift would generate to increase spending on Pell Grants for low-income students.

In the PriceWaterhouseCoopers report, the loan industry seeks to frame the issues to its advantage, with lawmakers and taxpayers in mind. The report was sponsored by the Consumer Bankers Association, which represents lenders; the Education Finance Council, an association of state student-loan secondary markets; and the National Council of Higher Education Loan Programs, whose members are primarily agencies that guarantee student loans.

The report, "The Limitations of Budget Score-keeping in Comparing the Federal Student Loan Programs," concludes that the federal government's assessments of the costs of the two programs are biased in favor of direct lending in three ways. 

First, it argues, the Congressional Budget Office and the Bush administration consistently underpredict the gap between short-term and long-term interest rates -- the "yield curve" -- in a way that reduces the estimated costs of the direct loan program.
The PriceWaterhouseCoopers report says that the government ends up consistently readjusting those costs, although it does not say how much a more accurate accounting would change the actual costs of the direct loan program.

Second, the report says that the government accounting of the relative costs of the two programs omits the federal tax revenues that private lenders and others pay to the treasury, which amounted to $651 million in the 2004 fiscal year. 

Lastly, the PriceWaterhouseCoopers report suggests that the budget scorers inappropriately exclude administrative costs for the direct lending program when they calculate the amount of the federal subsidies for the two programs. "This inconsistent treatment makes the FDLP program appear relatively less costly than it is," the report says. (Defenders of the direct lending program note that the president's budget plan for 2006 includes administrative costs for both programs.)

Because it had not yet been released, most student loan experts said Wednesday that they could not comment on details of the PriceWaterhouseCoopers report.

But lawmakers from both parties did not hold back. Rep. John A. Boehner (R-Ohio), who heads the House Education and the Workforce Committee, said: "Students, parents and taxpayers should be very concerned about the conclusions PWC reached in this study. There is growing evidence that asking American taxpayers to pay for an expansion of the Direct Loan program would be a serious mistake, and this study adds to that evidence significantly. Congress needs to consider this evidence before we ask American taxpayers to pay even more money to expand the Direct Loan program."

Rep. George Miller of California, the senior Democrat on the House paneland a sponsor of the pending legislation on direct lending, called the report "suspicious" because it was "paid for by three front groups for companies that could lose billions of dollars in excessive taxpayer-subsidized profits if our bill is enacted.The Congressional Budget Office and the president?s budget office agree that the government is wasting billions in taxpayer dollars on subsidies to lenders, when the money should be going to help students pay for college."

 

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