H.R. 4872 includes a reconciliation provision to alter federal student loan programs by eliminating the Federal Family Education Loan program and shifting all student loans to a government-run and taxpayer financed system under the Direct Loan program. While this legislation has nothing to do with the government takeover of health care, the provision scores as reducing the deficit by $19.4 billion, which is used as an offset against the $1 trillion cost of the legislation. However, CBO has also noted that current budget scoring rules do not include the cost to the government stemming from the risk that the cash flows may be less than the amount projected (that is, that defaults could be higher than projected).
The federal government provides both subsidized and unsubsidized loans for higher education (both undergraduate and graduate) using two main programs-the Federal Family Education Loan (FFEL) program, and the Direct Loan (DL) program. The FFEL loan program offers subsidized loans to students from private lenders. The FFEL program makes it possible for borrowers to get student loans at low interest rates. In contrast, the DL program uses the federal government as the lender to provide capital for all loans (as well as interest on subsidized loans). Under the DL program, the Department of Education serves as the lender and funds come directly from the U.S. Treasury.
THE HIDDEN COST OF DIRECT LENDING AND MEMBER CONCERNS
When the DL program was created in 1993, proponents of the program believed that taxpayers would ultimately save money if the federal government served as the lender to students, rather than going through private lenders, who receive a subsidy to keep loan rates low for students. However, over the years this has not proven to be the case and the program has continuously lost money. Numerous independent studies have concluded that the DL program has not provided the promised savings and is actually paying out more in interest payments than it has taken in from borrowers.
According to a report released by PriceWaterhouseCoopers in 2005, the DL program is not more cost effective than the FFEL program. The report shows that current budget scoring methods do not consider important factors when comparing the costs of FFEL to DL. For instance, the report noted that budgetary predictions of the cost of DL as opposed to that of FFEL do not take into account the impact of interest rate variability and that DL costs are more sensitive to changes. In reality, the DL program continues to pay more out in interest than it receives and the cost to administer the program has increased almost by 600 percent.
CBO Director Douglas Elmendorf states that the "billions in savings" from converting FFEL to DL are deceptive. According to the CBO Director, current budget scoring rules do "not include the cost to the government stemming from the risk that the cash flows may be less than the amount projected" (that is, that defaults could be higher than projected). CBO found that after accounting for the cost of such risk ... the proposal to replace new guaranteed loans with direct loans would lead to estimated savings of about $47 billion over the 2010-2019 period-about $33 billion less than CBO's estimate under the standard credit reform treatment." (Costs to the government stemming from the risk that the cash flows may be less than the amount projected.)
Due to this market risk assessment, CBO reported that it will actually cost taxpayers billions more than Democrats have acknowledged. When CBO re-examined the cost of reforms to the Pell Grant program, they found an additional $11.4 billion in spending, costs that will be passed on to taxpayers resulting in further deficit spending. Their review predicted an additional $10.5 billion in direct spending over ten years, along with $900 million in additional discretionary spending.
Given the limitations of CBO's scoring rules, the fact that most of the proposal's "savings" are poured back into more entitlement spending, and the increased cost of the Pell Grant program, it is very likely that the proposal will increase federal spending by $32-39 billion over ten years.
While Democrats continue to use government takeovers as a panacea to all economic problems, converting all student loans to government subsidized loans is just another way that Democrats are killing jobs, increasing government intrusion, and eroding the rights of the consumer.
Effectively eradicating the private sector competition in the student loan industry and shifting all student loans to the DL program kills jobs and greatly expands the federal government's control of the educational loan market. By eliminating the FFEL program, Democrats will limit choices for parents and students seeking educational loans and decrease the quality of service historically provided by private lenders. In 2007-08, the FFEL program served more than 6.4 million students and parents at 5,000 postsecondary institutions, lending a total of $55.3 billion (or 78 percent of all new federal student loans).
For more information or questions, please contact Sarah Makin at 6-2302.
For more information on the FFEL and DL program, see these Conference documents.