Lobbyists who represent Sallie Mae, Nelnet, and the rest of the student loan industry are anxiously awaiting the arrival of President Bush's Fiscal Year 2009 Budget on Monday morning. Last year, Congress cut taxpayer subsidies to banks that make government-guaranteed student loans and put those savings into lower-cost loans and bigger Pell Grants for students. Industry lobbyists will pore over the budget the moment it comes out Monday to find numbers that make their case that it is now cheaper to subsidize their retail loans rather than continue the wholesale approach known as direct lending.
[slideshow] The difficulty for the media and Members of Congress is that industry representatives will decide which budget numbers to use and how to portray those numbers in assessing the relative costs of the two programs. Unfortunately, their paychecks require them to reach a pro-industry conclusion no matter what story the numbers actually tell.
We at Higher Ed Watch and Ed Money Watch want federal student loans delivered as efficiently as possible. In the past, we have favored direct lending and auctions for government-guaranteed loans (FFEL loans) because both designs save taxpayer dollars relative to the traditional system and those savings can be plowed into financial aid for needy students. Now, we don't know what the new numbers from President Bush's Office of Management and Budget (OMB) will show about the post-reform cost of Direct Loans versus government-guaranteed loans. If they show that the cost differential has disappeared, we will say so, and the industry lobbyists of course won't disagree with our conclusion.
But here's the rub. If the numbers indicate that Direct Loans are still cheaper, then industry lobbyists will say we're just biased, dyed-in-the-wool "Direct Loan advocates" who can't be trusted to be objective.
To prevent the industry from accusing us of choosing and spinning the numbers after we see them, we are telling you - before the Bush budget is released -- where to look to get the answer yourself. We can do this because, unlike the industry lobbyists and front groups, we don't have financial ties that anchor us to any particular conclusion.
When the budget comes out on Monday, go to the OMB FY 2009 budget documents. Assuming the information is structured the same way as last year, from the Appendix, download the Department of Education portion. In the "Office of Federal Student Aid," look for the section that probably begins in a similar way as it did last year:
The following chart compares total FFEL and Direct Loan costs on a subsidy rate basis: program costs calculated under the Federal Credit Reform Act of 1990 and comparably projected estimates of Federal administrative costs, including expenses related to FFEL program oversight and servicing the Direct Loan portfolio.
In the chart, look at the bottom-line "total" for each program for 2009 (the right-hand column). If the Direct Loan number is bigger, then the student loan industry has reason to crow, because it would represent a major shift from past years.
But whichever direction those numbers point, a caveat is important to keep in mind: eliminating what appears based on that chart to be the lower-cost program will not necessarily save taxpayers money. That's because each program currently serves different sets of schools and different sets of borrowers, and this affects each program's costs. For example, defaulted borrowers are disproportionately placed into the Direct Loan program, adding costs especially to consolidation loans in that program. If Direct Loans were eliminated, those default costs would remain in FFEL. In addition, a new Public Service Loan Forgiveness benefit is only available in direct lending. If Congress decided to eliminate direct lending, presumably the new forgiveness benefit would be preserved, shifting those costs to the FFEL program.
It will be especially interesting to see if OMB puts forth a comparison of the relative Direct Loan versus FFEL costs for like student borrowers at like schools and otherwise in like circumstances. A bigger Direct Loan relative cost there should give the banks reason to seek a Congressional Budget Office (CBO) estimate of the savings that could be achieved by eliminating the Direct Loan program. The opposite, however, should encourage Congress to consider further action to cut excess FFEL lender subsidies more and shift the savings to further increased student financial aid.
In fact, regardless, a Member of Congress should request CBO to estimate the costs or savings associated with a 100 percent FFEL system and the costs or savings associated with a 100 percent Direct Loan system. If policymakers want to continue to have two student loan delivery systems, and there are reasons to, then so be it. But let a neutral arbiter in the form of CBO identify just what the taxpayer cost of that choice is. We shouldn't have to rely on Sallie Mae's interpretation of the numbers.