Report Says Direct Loans Would Not Save Money

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WASHINGTON--The federal government could make changes to the current student-loan program to reduce its costs and losses, thereby alleviating the need for a program in which the government would make loans directly to students, a report suggests.

The 27-page study by the Congressional Research Service, released to Congress last week, contends that "there are no real budget savings nor national income increases from conversion to direct lending.''

Converting the current federal system of loans for college students--under which the government backs loans made by banks and other lenders--to a direct program is a centerpiece of President Clinton's higher-education agenda.

The idea has also been gaining favor among lawmakers, who have cited other reports predicting substantial cost savings from a direct-loan system. A pilot direct-loan plan was authorized last year.

Last week, both critics and proponents of direct loans and other changes to the student-aid system used the C.R.S. report, "Federal Family Education Loans: Reduced Costs, Direct Lending, and National Income,'' to bolster their arguments.

Sen. Paul Simon, D-Ill., perhaps Congress's leading direct-loan advocate, noted in a statement that the report also cites the benefits of income-contingent loan repayment--another idea proposed by the President--and that it attests to the high profits of the student-loan industry.

"It confirms that the student-loan industry is taking excess profits while the government assumes virtually all of the risks,'' Mr. Simon said.

"The question is how to reduce the costs while expanding access to college,'' his statement continued. "Unfortunately, some of the C.R.S. suggestions would lead in the opposite direction by cutting costs in ways that limit access.''

Fritz Elmendorf, a spokesman for the Consumer Bankers Association, said that the report "is especially welcomed because it's an independent affirmation of our own arguments challenging direct loans.''

Questions Raised

The report raises the prospect of higher administrative costs in a direct-loan program; questions the ability of the government to be as able as the private sector to stimulate a competitive loan-servicing market; and asks if the government would have as much incentive as the private sector to minimize costs.

It suggests that the government could reduce costs in the current program by removing some students from it, by making institutions partly responsible for defaults, and by reducing lender subsidies that compensate for typically low interest rates.

The report also says that most calculations of savings from a conversion to a direct-loan program ignore credit risks and "give the appearance of being a transfer of lender profits to the public sector.''

The fiscal 1992 loan volume of $14.8 billion, the report notes, produced about $500 million in lender subsidies, which are typically eyed as prospective federal cost savings by proponents of direct loans.

Vol. 12, Issue 23, Page 26

Published in Print: March 3, 1993, as Report Says Direct Loans Would Not Save Money
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