Oct. 26, 2005

Finally, a Report on Loan Costs

Several times during the past year, Republican leaders in Congress — many of whom oppose the federal government’s direct student loan program — have expressed hope that a Government Accountability Office report they had requested would endorse their deeply held view that the program costs the federal government more than its supporters say it does and, crucially, more than the competing guaranteed loan program.

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“Until we get that GAO report, we just don’t know the costs,” Rep. Tom Davis (R-Va.), chairman of the House Government Reform Committee, said at a hearing on the two programs in May.

When word began circulating two weeks ago that the GAO had delivered the report to the leaders of the House Education and the Workforce Committee, but the panel’s leaders had not released it to the public, speculation mounted among supporters of direct lending that the report had not produced quite the result that its Republican requesters had hoped.

Sure enough, when the committee finally released the report Tuesday evening, the study suggested that while direct lending appears to cost the government more than previously thought, it still costs nearly five times less per loan than the guaranteed program. The Republican sponsors of the report expressed disappointment at its results, saying the GAO had failed to quantify the factors that make it difficult to compare the two programs or to offer recommendations on how to better assess those costs.

“More than a year ago, we asked the GAO to help explain why federal budget scorekeeping rules are unable to provide a clear picture of what the student loan programs really cost American taxpayers. The GAO told us what we already knew; federal budget rules make it virtually impossible to accurately assess the cost of the student loan programs,” said Rep. John A. Boehner (R-Ohio), chairman of the education panel. “While the report does identify many of the same factors that previous analyses have found to bias scorekeeping in favor of Direct Lending, it stops short of quantifying these variables, leaving unanswered questions about the extent to which cost estimates are skewed.”

The government established the direct lending 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 (cutting lenders and guarantors out of the process).

The two programs have been more or less locked in battle ever since, with Republicans repeatedly trying to kill the program throughout the 1990s. In recent years, there has been much talk of the value of having two competing, vital programs in improving the performance of both programs and the services they deliver to students. But the battle heated up this year as Democrats introduced legislation that would provide federal incentives to institutions that switch from the guaranteed loan program to direct lending, which several previous federal reports have shown costs the government less per student to manage.

Republicans, though, have criticized the methodology used by those reports, and looked to the GAO, Congress’s investigative arm, for ammunition that direct lending is more expensive than it appears.

But the report released Tuesday is far from conclusive, in that direction or any other. It found that the estimates of the cost of subsidies for both loan programs vary significantly over time, “reflecting the challenges inherent in estimating the costs of loans made under each of the federal student loan programs.” While reestimates of the direct loan program’s costs in most years from 1994 to 2004 were higher than estimates done at the time, and while those reestimates show that direct lending may actually cost the government money rather than produce a surplus, direct lending costs “have generally remained lower than those of” the guaranteed program.

One table in the report shows the subsidy cost for the direct loan program at $1.70 per $100 of loans disbursed, compared to a cost of $9.20 per $100 of loans disbursed through the guaranteed program.

The report also finds that estimates of the costs of both programs omit some key factors, rendering the estimates incomplete. Critics of direct lending have argued that cost estimates of that program are significantly understated because of the omission of some key costs.

The lawmakers who requested the GAO report said the lack of clear conclusions left them persuaded that the government should continue to operate both programs. “Given the uncertainty identified by the GAO, it’s no surprise the report doesn’t include any specific recommendations,” Davis, of the Government Reform Committee, said in a news release Tuesday. “Until we get answers, it would be irresponsible for policymakers to promote one program over the other when so many schools have continued to identify competition as the key benefit that comes from maintaining two loan programs.”

Robert Shireman, founder and executive director of the Institute for College Access and Success, a nonprofit group, said late Tuesday that the report"confirms what the other budget agencies have been telling Congress for years: We could reduce taxpayer costs and provide more aid and better benefits for students by ending unnecessary subsidies to lenders.”

— Doug Lederman

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