Department Study Finds Savings In Direct Loans

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The federal government actually earns money by providing college loans directly to students rather paying out funds to subsidize loans by banks and other private lenders, according to a Department of Education study released last week.

The U.S. Treasury earns $4 from the William D. Ford Direct Student Loan Program on every $100 borrowed over the life of the loan, while it spends $14 on subsidies from banks and other private lenders for the same amount, the report says.

For More Information

"Incorporating Federal Administrative Costs Into [Federal Family Education Loan] and Direct Lending Programs" is free from the Education Department by calling (202) 401-1576. Read a summary of the report from the Department of Education; or download the entire report (requires Adobe's Acrobat Reader).

Moreover, administering the direct-loan program instead of dealing with other funders has saved the government $4 billion since the program's inception in 1994, the study conducted by the department's budget service office concludes.

During the 2000 fiscal year, the direct-loan program will grant more than $15 billion in loans to 2 million borrowers.

The program "is much less expensive for taxpayers because it does not require federal subsidies for lenders," acting Deputy Secretary of Education Marshall S. Smith said in a statement released with the report Nov. 30. "In addition, interest earned on direct loans accrues to the U.S. Treasury, not to private lenders."

Critics' Concerns

But critics of the direct- loan program—one of the major education initiatives of President Clinton's first term—suspect the report was designed to boost the credibility of a program they see as floundering.

Fritz Elmendorf, a spokesman for the Consumer Bankers Association, an Arlington, Va.- based membership organization that works with a majority of student- loan lenders, called the report "contrived."

"Direct student loans have stagnated to one-third [of the market]," Mr. Elmendorf said.

The study looked at all costs involved in administering student loans over the past 50 years. Currently, about one-third of all the federally-backed loans issued to college students are part of the direct-loan program; the remainder of such loans are granted by other lenders. Some 1,200 colleges and universities participate in the direct-lending program.

Vol. 19, Issue 15, Page 19

Published in Print: December 8, 1999, as Department Study Finds Savings In Direct Loans
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