Direct-Lending Fight Sparks War of Words, Battle of Numbers

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With congressional leaders eager to pare back the Clinton administration's direct-lending program for college students, defenders and opponents of the initiative are waging a battle of numbers.

The critics, mostly Republicans, claim that eliminating the program would save $1.5 billion over the next seven years, pointing to an analysis by the Congressional Budget Office.

But its defenders say direct lending could actually save more than $6 billion in fiscal 1996 through 2000, arguing that the CBO's analysis was based on biased "scorekeeping" rules.

Each side has accused the other of using the proverbial smoke and mirrors to obscure the real impact of their proposals. And the resulting volley of numbers has confused educators, students, and other observers.

"That's why people get frustrated with Washington," Robert H. Atwell, the president of the American Council on Education, an umbrella group representing higher education, said at a briefing for reporters.

At the center of the dispute are congressional rules governing the way the costs of government programs are tallied for budgetary purposes. This scorekeeping process determines whether budget bills meet deficit-reduction targets, and sometimes does not reflect what the government actually spends.

For example, the 1990 Credit Reform ACT decreed that most administrative costs were not "counted" as part of the cost of any government loan programs under those "scoring" rules--although the costs are part of federal spending.

Accounting Advantage

Both sides agree that the law inadvertently gave the direct-lending program--which was not enacted until 1993--an accounting advantage over the older guaranteed-loan program in terms of budgetary scorekeeping.

The reason is that federal "administrative" costs--the expense to the government of running the program--are higher under direct lending, since the program involves making loans directly to students. Meanwhile, some parallel guaranteed-loan costs were counted under budget rules, because the government pays lenders and guarantee agencies to administer many aspects of the program.

So congressional Republicans changed the rules. The fiscal 1996 budget resolution directed the CBO to count virtually all the costs of running the direct-lending program--including the projected yearly costs of default management as well as most current administrative costs--for budget purposes.

That allowed Republicans to claim that substantial savings could be gained by eliminating the program--and to count those savings toward deficit-reduction targets. (See Education Week, Aug. 2, 1995.)

Opponents of direct lending point to a statement in a letter from CBO Director June O'Neill that the new method "conformed the treatment of the administrative costs of direct student loans with that for guaranteed student loans."

But others say that is only partially true. "Administrative" costs for guaranteed lending that had previously been counted only for that program because similar functions are handled by the government under direct lending are now counted for both programs. However, because the rules change applied only to direct lending, some of the government's in-house administrative costs for that program are now counted, but in-house costs of guaranteed loans are still not counted.

Supporters Outraged

This has outraged supporters of direct lending, who charge that Republicans are using subterfuge to attack a program President Clinton favors--and preserve another loan program that is a source of considerable profit to the banking industry.

In a letter to Ms. O'Neill of the CBO, a bipartisan group of lawmakers called for an equal accounting of the true cost of each program. They said the Office of Management and Budget, a White House agency, had concluded that an equal accounting treatment "shows direct loans with a 20 percent cost advantage over guaranteed loans."

Some critics question not only the unequal treatment of the two programs' administrative costs, but also some of the particular costs the CBO counted.

Budget officials "basically threw in everything but the kitchen sink," said Barmak Nassirian, a policy analyst for the American Association of State Colleges and Universities, likening the new accounting method to buying a car and counting as part of the cost the gasoline, the clothes worn by the driver, and "the little tree you hang from the rear-view mirror."

But foes of direct lending are sticking to their position.

In a letter to Republican colleagues, Rep. Bill Goodling, R-Pa., the chairman of the House Economic and Educational Opportunities Committee, blasted Democrats for believing that "because of arcane budget-scoring provisions that were included in the Credit Reform Act, this program would somehow save taxpayers and students money."

If the inequity that existed under the old rules "wasn't smoke and mirrors two years ago, then why is including administrative costs suddenly smoke and mirrors?" said Joe Clayton, a spokesman for the Coalition for Student Loan Reform.

Mr. Clayton, whose organization represents state and private nonprofit guaranteed-loan providers, added that since congressional education panels must find $10 billion in savings, reducing funds for direct lending represents a way of achieving the mandated budget targets without directly harming students.

Besides attacking opponents' methods, direct-lending supporters argue that the program provides important competition with other loan programs.

"It would really be a major political mistake to eliminate this program at this point," said Tom Butts, the associate vice president for government relations at the University of Michigan.

Direct-lending supporters also point to the same letter from Ms. O'Neill cited by opponents,in which she states that the cost difference between the two government loan programs is "relatively modest," and could change dramatically with only small shifts in economic assumptions, such as fluctuations in interest rates.

Vol. 15, Issue 06

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