The Cheaper Student Loan Program?

The debate over the relative costs of the federal government's two competing student loan programs has simmered or raged, depending on the moment, ever since the Direct Loan Program was created 15 years ago. Supporters of the direct loan program have long asserted -- and various government reports have agreed -- that the government-run program costs less per loan than the Family Federal Education Loan Program, due mostly to the large subsidies that the government has paid to participating banks and guarantee agencies.

Although lender groups have long complained that the figures misrepresent the picture by leaving out some key administrative and other costs of the direct loan program -- and have generated competing studies to make their case -- many observers have accepted the premise that the guaranteed loan program is more expensive for the government to operate.

Many college officials and student aid experts have long since tired of the argument, but the question has been far from academic. It has driven federal policy making, including legislation in two of the last three years that designed to wring tens of billions of dollars in profit out of the lender-based loan program. And it is even creeping into the 2008 presidential campaign, with several Democratic candidates have suggested that they would seek to kill or limit the "more expensive" guaranteed loan program to try to squeeze out further profits that they can re-direct toward other financial aid purposes.

While most independent analyses have shown that competition between the two student loan programs has helped taxpayers and borrowers and should be sustained, lenders perhaps rightly fear that their program could be at risk if Democrats controlled the White House as well as Congress.

So it is perhaps not surprising that student loan providers are finding a measure of satisfaction in Education Department numbers that they say show that even using the formula favored by direct loan advocates, the guaranteed loan program will, going forward, cost the government less per loan to operate than direct lending does.

The data, which were drawn from budget numbers and other reports issued recently by the department and circulated by supporters of the guaranteed loan program, suggest that in the wake of the College Cost Reduction and Access Act -- which cut subsidies for lenders by more than $20 billion and added several benefits for borrowers in the direct loan program -- the federal subsidy (the net budgetary costs measured as a percentage of the amount lent) for loans in direct lending will be 4.26 percent, compared to 1.72 percent for the guaranteed loan program. In other words, the direct lending program would now be about two and half times more costly to operate than its alternative is.

In many ways, such a result is hardly surprising, given the large cuts that imposed by the 2005 and 2007 budget reconciliation measures, said Kevin Bruns, executive director of America's Student Loan Providers, which represents dozens of lenders. President Bush's 2008 budget proposal, which proposed a $16 billion cut in subsidies to lenders, projected that the subsidy rates would be very close if the president's proposal were carried out, Bruns noted. So after Congress sliced as much as $6 billion more out of subsidies for the guaranteed loan program, and enacted benefits such as an income-based repayment option that could add to the costs of a direct loan, "no one should be surprised that the tables have turned," said Bruns.
For Bruns and other supporters of the lender-based student loan program, the new budget numbers mean that presidential candidates like Hillary Clinton, John Edwards and Barack Obama should stop promising to kill off the guaranteed loan program to save money. "Let’s get real -- no one’s going to save money doing that, and it might even cost money," Bruns said.

More broadly, he said, supporters of the direct loan program have consistently used the presumption that the guaranteed loan program is costlier as a primary argument in favor of direct lending. If it turns out that there is no cost advantage to direct lending, as these numbers suggest, Bruns said, "what it should mean is that cost really should no longer be a factor in criticizing the FFEL program, and it ought to become a debate about the comparative quality of the two programs and the best way to deliver loans to students. It should be about customoer service, and innovation and reliability. We invite that."

As one might expect, given the years of contention over the question of the two programs' costs, supporters of direct lending aren't quite ready to concede the ground that Bruns suggests -- at least based on unofficial calculations that, while based on Education Department documents, have been put together by backers of the guaranteed program.

"Anybody can pick out whatever numbers they want and make whatever case they want," said Thomas Butts, a former University of Michigan lobbyist and one-time deputy assistant U.S. education secretary who works closely with the National Direct Student Loan Coalition. "We'll see the president's 2009 budget in another couple of months, and if they show a change in numbers, that's all well and good. But I don't think it'd be much of a service to get out there at this point, prematurely, with numbers that may not mean anything. I'm not going to take anybody’s numbers other than [the White House Office of Management and Budget] and [the Congressional Budget Office].

Butts raised several questions about the numbers making the rounds this week, such as what assumptions they make about how many borrowers may be drawn into the direct loan program by income-based repayment and other new borrower benefits, and how they treat guaranteed loans that are consolidated into the direct loan program, among other things.

He also challenged Bruns's assertion that the budget numbers -- even if they were to show that direct lending now costs more to subsidize than the guaranteed loan program -- would necessarily mean that savings couldn't still be derived from cutting back the guaranteed loan program. "Once you dig into this further, and look at all the fraud and abuse stuff that keeps rolling out from different audits, there may be some other policy reasons to think about simplifying [the student loan] system," Butts said, referring to Education Department findings that some lenders have pocketed tens or even hundreds of millions of dollars by exploiting loopholes in federal laws and rules.

Bottom line, even if and when indisputable new numbers come out: The argument is unlikely to end anytime soon. Think Hatfields and McCoys.