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Big Savings From Loan Proposal

March 23, 2009

The Congressional Budget Office's analysis of the Obama administration's 2010 budget contained mostly distressing news for the White House, including the headline-dominating assessment that the plan would send the federal deficit sky high.

But buried within the budget office's review was one nugget sure to elate the Education Department and break the hearts of lobbyists for student loan companies: the determination that the administration's plan to eliminate the Family Federal Education Loan Program and originate all loans out of the government's Direct Loan Program would save the government $94 billion over 10 years, double the administration's own estimate.

"Under current law, the direct loan program is estimated to have a lower cost for each dollar loaned than does the guaranteed loan program. Thus, assuming that loan volume does not change, replacing the guaranteed loan program with additional direct loans would yield budgetary savings," the budget office wrote in its "Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook (see page 16). "CBO estimates that savings would total $94 billion over the 2010–2019 period."

That is about double what the White House estimated in the budget President Obama proposed last month, which projected using $24 billion saved over five years (and $47 billion over 10 years) by originating all federal student loans in direct lending and using the proceeds to turn Pell Grants into an entitlement that would grow each year with inflation.

Obama administration officials have argued that the eliminating the guaranteed loan program -- in which private sector and nonprofit lenders lend money to students via their colleges, with the loans guaranteed by the federal government -- would save significant federal funds, and that they could use the money to increase benefits for students.

Lenders and some policy analysts have doubted that the change could generate significant savings, given that the government has wrung tens of billions of dollars out of the loan programs since 2005 to increase spending on Pell Grants and other financial aid programs. And they have speculated that the Congressional Budget Office, which is generally viewed as independent and nonpartisan, might offer a less-generous assessment of the savings.

But instead, the CBO estimated the student loan plan to save significantly more money, to the satisfaction of Democratic lawmakers who support the president's plan.

“This estimate is stunning news for college students, their families, and taxpayers, especially given the economic and fiscal challenges we face," said Rep. George Miller, the California Democrat who heads the House Education and Labor Committee. "President Obama has laid out an innovative strategy for making our federal student loan programs more reliable and efficient, while giving us an opportunity to save taxpayers almost $100 billion. I look forward to working with [Education] Secretary [Arne] Duncan and President Obama toward our goal of making college more affordable by providing students with access to low-cost, stable federal college loans -- and at no cost to taxpayers.”

While the Congressional agency's assessment of the loan plan may hearten Democrats, the CBO analysis of the overall Obama 2010 budget plan, which it projects to increase the federal budget deficit far more than the administration's own analysis, could throw a kink into the president's plans to significantly expand spending on education and other domestic priorities. For instance, the CBO review projects that the president's plan to make Pell Grant spending mandatory rather than discretionary would "boost mandatory spending by $293 billion over the 2010–2019 period."

And the CBO analysis prompted many Republicans and moderate Democrats to say that the administration may have to rein in its plans for spending in 2010.

 

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