The Congressional Budget Office (CBO) released student loan estimates this week showing that the federal government spends significantly more to administer the Federal Family Education Loan (FFEL) program than it does to run the U.S. Department of Education's Direct Loan program, thanks to student loan guaranty agencies.

This finding blows a hole in a key argument that the student loan industry and its supporters have long relied on to cast doubt on government estimates showing that FFEL loans cost more than those made through direct lending. Lenders have argued that the government's administrative costs are substantially higher in the Direct Loan Program than in FFEL. Industry officials have been able to make this claim because in the past, federal budget officials have left out from their estimates a very big piece of FFEL administrative costs: guaranty agency fees. But not anymore.

This year, for the first time, CBO included federal payments to guaranty agencies in FFEL program administrative costs. As shown in the table below, administrative costs in 2009 are expected to be $1.3 billion for FFEL and $700 million for direct loans.

To be fair, these estimates don't show the average administrative cost per-loan in each program (the most appropriate way to compare programs), but they do shed light on the massive administrative costs associated with the FFEL program and its guaranty agencies.

What Do Loan Administrative Costs Mean?

When budget agencies such as CBO and the White House Office of Management and Budget (OMB) estimate federal student loan program costs, they typically treat administrative costs differently than other loan program costs. Administrative costs generally include U.S. Department of Education personnel salary and informa­tion technology expenses associated with both student loan programs, as well as payments made to private contractors, like those that service the Direct Loan program. Expenses not classified as administrative include subsidy payments to private lenders and any subsidy conferred to student borrowers. These costs are captured in the loan subsidy estimates reported by the budget agencies.

For the past few years, OMB has included present value, per-loan administrative cost estimates in the President's budget request, but has not included guaranty agency payments in these figures (OMB classifies the costs as lender subsidies). CBO takes a different approach. The budget office simply lists the annual appropriation for student loan administration on a cash basis, not as a present-value subsidy, and doesn't break out how much goes to each loan program. (For further explanation of the differences between cash and present value budgeting, click here) With the release of the 2009 estimates, CBO has added guaranty agency payments to this cost reporting method.

This change is long overdue. Any accurate report of administrative costs under FFEL should include payments to guaranty agencies. These agencies are middlemen within the FFEL program and are paid by the Department of Education to carry out administrative functions. For example, they administer the federal guarantee on all FFEL loans, which entails disbursing federal funds to lenders when borrowers fail to repay their loans. The agencies also monitor student borrower enrollment status, assist borrowers who have problems repaying loans, and perform collection services on defaulted loans. Nearly all of these activities are performed by the Department of Education in the Direct Loan program and are classified as administrative activities in that program's budget estimates. 

Ask About Guaranty Agency Fees

As the debate over the future of the FFEL program heats up, the student loan industry and its supporters are dusting off their tried-but-not-necessarily-true talking points. If they bring up differences in administrative costs between the two programs, be sure to ask if they have included guaranty agency fees in their calculations. Our guess is that they have not.