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Who’s Right on Student Loan Cost Estimate?

July 30, 2009 - 11:15am

Congressional Democrats missed a golden opportunity this week.

On Monday the Congressional Budget Office (CBO) published a letter to Senate Budget Committee ranking member Judd Gregg (R-NH) regarding the estimated savings of eliminating the Federal Family Education Loan (FFEL) program and making all loans through the Direct Loan program. The letter states that savings from shifting all  FFEL schools to direct lending -- the centerpiece of legislation adopted by the House Education and Labor Committee last week -- would be $47 billion over ten years when using market-based estimates, compared to $87 billion when using rules dictated by the Federal Credit Reform Act.

Republican lawmakers immediately went on the attack, accusing Democrats of misrepresenting the savings the legislation would produce. In separate press releases, Senator Gregg and Rep. Jon Kline, the senior Republican on the House Education and Labor Committee, trumpeted the new CBO estimate, saying it presented a more accurate picture of how much money would be saved if the legislation was enacted.

In other words, by embracing the CBO study, senior Republican lawmakers appear to have conceded that Direct Loans are much cheaper than FFEL loans, and that continuing the FFEL program, rather than transitioning to 100 percent direct lending, would cost taxpayers an extra $47 billion over ten years.

Unfortunately, instead of saluting the Republicans for their new understanding that FFEL is the more costly program, Rep. George Miller, the chairman of the House Education and Labor Committee, went on the counterattack -- accusing Republicans (and by default, CBO) of "trying to cook the books," in requesting the market-based cost estimate.

At Higher Ed Watch, we believe that this was entirely the wrong tack to take. As we've argued previously, market costs are superior to the current Credit Reform rules. Such estimates show the price private entities would charge taxpayers to offer the same benefits and services currently funded by the government. In the case of government-subsidized student loans, the market cost reflects the price private entities would charge taxpayers to fund low interest rates for borrowers, the gov­ernment's administrative costs, and the subsidies it pays to private lenders, among other things.

The method thus represents a fairer and more transparent estimate of the costs that the programs impose on taxpayers. Credit Reform rules, on the other hand, are not designed to reflect private market values for loans and have been shown to significantly understate the costs of both Direct Loans and FFEL. What is more, because the student loan reform bill sponsored by Representative Miller includes new spending that is greater than $47 billion over ten years, critics can accurately claim that the bill does not include any deficit reduction when using a market-cost estimate.

Unfortunately, we do not know many specifics about the CBO market cost estimate. The letter states that a market-based discount rate was used in the estimate, but the discount rate is only one important factor in a market cost estimate; cash flows for guaranteed loans must also be treated differently than they are under Credit Reform rules for a proper estimate. It is unclear from the letter if such adjustments were made.

In short, Republicans are right to back a market-based estimate of the savings achieved from eliminating the FFEL program. They must realize, however, that such estimates still show that 100 percent direct lending is the lower cost policy and should be adopted. This is the point that Miller and his Democratic colleagues should have made, instead of picking a fight over the merits of the CBO market-based estimate. This was a missed opportunity indeed.

Disclosure: The author is a former member of the Republican staff of the U.S. Senate Budget Committee. 

 

Comments

I triple-dog dare the

I triple-dog dare the scholars at the NAF to rationalize to the audience writ large the contradictions of our current President and Congress. Specifically, the talk of the town is the “public option” in health care. (Those of us familiar with the “public option” in the student-lending context know such “public options” are more akin to Trojan horses than to what one would normally associate with the Queen’s English definition of the word option—but I digress.) Yes NAF, our President and the less-eloquent, but-no-less-brilliant souls in Congress, wax poetic about the benefits of competition in health care. So poetic in fact, it leaves one with the impression that the competition generated by the “public option” in health care will lead to the cure for cancer! (An assertion I might add, that we educated NAF readers know is patently false—the elimination of private loans is the cure for cancer!) For instance, we hear how there are only two health-care providers (insurers) in certain states—and that’s bad! We hear how competition drives innovation, quality, and lower prices—these things are supposedly good for the consumer! (All true in fact!) So, in the finest tradition of the rigorous-Pythagorean-like logic so often displayed here at the NAF blogs, please explain how competition and its benefits are good for health care, but bad for student loans? We’re all ears NAF—do tell! I have a feeling this will be your greatest blog posting yet! Boldly go where no NAF blogger has gone before—reveal the truth NAF—I triple-dog dare you!

Bott, you're right AND wrong

At first I thought this was a different arena with different animals, but it actually is the same. In the student loan arena, we are taking back a failing program from bankers who came between the borrower-taxpayers' money and the borrower-taxpayers. The bankers have proven themselves to be ruthless and dangerous to the student loan borrowers. In the healthcare arena, it's a matter of life or death where insurance companies are being ruthless and dangerous towards the patients by denying coverage of preexisting conditions, etc. But the insurance companies have a huge number of doctors who prevent them from getting anywhere close to bankers' behavior.

However, the complexity of a national health care system is way out of your league and inappropriate to discuss in the context of student loans.

Just take one single aspect when comparing both programs, for example:

The Private Student Loan Option, as we've experienced it:

With the private student loan option, bankers exchange loans over and over again with companies all around the world, until no one, including the borrower, knows who owns the promissory note. Yet the borrower is required to pay ONLY the lender who owns the note currently, at the place and in the amount of the lenders' choosing. So, the lenders delegate payment arrangements to the guarantor, which blurs their relationship and responsibilities counter to the purpose of the Higher Education Act. Even the Department of Education can't keep up with their exchanges and delegation of responsibilities. Borrowers can't even find out who their new lender is without a court order (and sometimes even with a court order). But, with the public student loan option, the Direct Loan, borrowers can check a database from the mall or the public library and find out what the current status of their loan is and know they must pay the U.S. Treasury always. If they can't do this now, there is no reason they won't be able to do it in the future.

Even healthcare insurance companies refuse to go anywhere near bankers' level of greed and treachery. If healthcare insurance companies ran the healthcare program like bankers have run the student loan program then:

With the private healthcare option, doctors would exchange patients over and over again, until no one knows who your doctor is. Yet, the patient would be required to keep up with his own records. It would take a court order to find out who your doctor is. But with the public healthcare plan, you would go to the one doctor of your choice. If you visit any other doctors, they would be required to forward your records to your primary care physician.

You can't compare these programs even superficially because we don't have student loan program models that have worked over the long run. We do have health care program models that do work because doctors aren't like bankers.

As Shakespeare said, "Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry." Remember that husbandry is defined as "the act or practice of cultivating crops and breeding and raising livestock; agriculture." The student loan program is ruining our economy because it has dulled the edge of job creation and we're finally feeling the rough edge of high unemployment.

STUDENT LOAN SAVINGS--WHY NOT LOOK A LITTLE CLOSER?

This blogger writes frequently about budget estimates relating to student loans but misses the key point about the Obama/Miller plan: In all probability there are no savings at all.

As Deputy Undersecretary Bob Shireman has said, "FFEL is Dead." If FFEL is dead or dying, why should CBO or OMB award "budget savings" for killing it?

Those familiar with the recent history of student loans know that a series of reckless budget cuts to the FFEL program rendered lender return so low that more than a hundred lenders quit making loans (including U.S. Bank just a couple of weeks ago). These same people know that but for the enactment of the Ensuring Continued Access to Student Loans Act (ECASLA), very, very few lenders would be making loans today.

So why should CBO attempt to compare the cost of Direct Loan program with an FFEL program that most likely would go out of existence in the near future even if the "Student Aid and Fiscal Responsibility Act" disappeared? The answer is that only by legislatively killing FFEL can "savings" be recognized that can be spent elsewhere.

As correctly pointed out by the author, when new spending is justified on the basis of estimated savings that do not occur, deficit spending occurs. This is the case with Chairman Miller's bill.

Let's take a closer look at why assuming a "healthy" FFEL program in estimating "savings" from ending the program is wrong. First, the Department and others say that without the liquidity provided to lenders under the ECASLA legislation, lenders would not make loans. This means that when ECASLA expires next year, most, if not all, FFEL lenders will quit the business. Evidence of the accuracy of this assessment may be found in the incredibly fast Sallie Mae endorsement of using federal capital to make student loans. Sallie Mae knew that it could not finance loans economically without ECASLA and that the loans themselves were very unattractive assets due to the budget cutting of 2005 and 2006.

Stated most simply, it is not accurate to assume that 70 percent of all loans would continue to be made under FFEL in the absence of a bill to terminate the program. If schools are going to quit FFEL anyway (due to the unavailablity of lenders), should budget "savings" be awarded for eliminating FFEL? I don't think so.

Readers that have followed this very sorry debate on "loan reform" closely will recall several key players talking about the "once in a lifetime opportunity" to secure large savings by reforming student loans. Why once-in-a-lifetime? The answer is that by next year FFEL volume may be only 10 or 20 percent of the total. The lower the presumed FFEL loan volume, the lower the "savings" possible by forcing schools to use Direct rather than FFEL loans.

A second reason is that in a year the rapidly growing federal debt may result in much higher federal borrowing costs that CBO and OMB would have to reflect in their budget estimates. That means that the profits the government makes on each Direct Loan will be smaller, or, if things really got out of control, non-existent.

All of the above supports why we say that the Student Aid and Fiscal Responsibility Act is misnamed. Guess which two words of the title we would delete?

Rather than engage in dangerous and arguably dishonest budget policy, Congress should be working on stabilizing student aid by fixing the FFEL program, making college affordable by working with schools to restrain tuition increases, and better targeting all forms of existing aid.

I would encourage NAF to start writing about at least the last two of these topics if it really is trying to contribute to higher education policy.

Restrain Prices?!?

Good God man, are you suggesting that Congress should help set prices for a college education?

I thought that every Tom, Dick and Harry who opened up a college of Andorran folklore had a God given right to charge 100k for that degree.

What is this mechanism for restraining college tuition increases that you speak of? Wait, I have an idea--how about we return some sembalance of consumer protections to student loans through bankruptcy reform.

Let students pay back back a reasonable portion of their income through bankruptcy plans drawn up by the courts, and higher education and the student loan industry will reform itself before you know it.

Does anyone know any specifics?

I commend Jason for taking the high road and suggesting that Chairman Miller should have done the same.

But the problem is Direct Loan advocates really can't.

If CBO whacked $33 billion, or 38%, off its estimate, how much would OMB using a risk-adjusted discount rate (otherwise known as "Budgeting Meets the Real World" methodology) knock off of its $41 billion cost savings estimate?

More important, the extreme variability in cost estimates demonstrates that Congress should not base closing one program over the other on cost estimates.

Finally, Jason says that "we do not know many specifics about the CBO market cost estimate."

Well, does anyone know the specifics of the original estimate?

And of course CBO used a risk-adjusted rate to score FFELP's costs. It would have been an apples to oranges comparison if it hadn't. Give them more credit than that.

Response to Alex's last point

 Regarding the last sentence of your comment, Alex, you seem to misunderstand the point about the risk-adjusted discount rate. Yes, CBO did use a risk-adjusted discount rate in its estimate for both FFEL and Direct Loans and it states this in its letter. The key question, which I put forth in this post, is whether or not CBO adjusted the cash flow treatment of FFEL loans. Without a change in the Credit Reform cash flow for FFEL loans, risk-adjusted discount rates must actually be LOWER than a risk-free rate for FFEL and HIGHER for Direct Loans. Otherwise, the estimate produces incorrect results. This concept is detailed in this policy paper.

So, the question remains about the CBO estimate: What risk-adjusted discount rate did CBO use and how did it treat the risky cash flow for FFEL program loans?

Spare us the "intellectual"

Spare us the "intellectual" flatulence on discount rates Jason.  Put your money where the collective NAF mouth is.  How can our President and the illustrious members of our Congress wrap themselves in the flag of competition for health care, but not do the same for student lending?  This is the fundamental point of the whole debate concerning the future of student lending.  The scholars at the NAF have been called out.  It's time to find out if the Emperor has any clothes.     

You're barking up the wrong tree

This is becoming something of a broken record, but Jason you're all alone in your belief that federal budget policy should treat a loan guarantee as a cash disbursement.

Loan guarantee creates a contingent liability in the same way that a promise to pay life insurance to a federal employee's heirs is a contingent liability. A life insurance policy is a guarantee of sorts, but it would be absurd for the Office of Personnel Management to assume that that every federal employee who could die (everyone one of them) will die in a given year. A certain percentage die; and many leave federal employment meaning the liability is extinguished.

I'll put my money with how Peter Orszag and Doug Elmendorf treats loan guarantees.

FFELP could be considered the 'public option' in this case

What if a "Senator Pro-DL" (none apparently exists) asked CBO to perform a similar stress tolerance analysis for FFELP? Then the savings for switching to 100% DL could be $200 billion. The "market risks" in FFELP are more significant than in DL, and, propped up by the 2008 "bail-out," Ecasla, FFELP still represents the majority of new loans to students and parents.

Thus an apples-to-apples Gregg request would have included a far-end FFELP market risk comparison while noting that legislative changes over the past decade-plus have quietly shifted large parts of the market risk from lenders to taxpayers, none of which the CBO has ever agreed to estimate. Index risk is only one example.

FFELP is actually very similar to the health care solution proposed by HillaryCare back in 1993: The State Alliances of HillaryCare are similar to the state-agency/"not-for-profit" guaranty agencies, secondary markets and state lenders of FFELP, which were propped up by CCRAA and will apparently receive a set-aside (in multiple ways) within the so-called "100% DL" plan currently working its way through the Congress.

If anyone in FFELP ever wanted to begin to introduce market forces into the FFEL program, then they had over a decade to aggressively get on the bandwagon for introducing a market mechanism (whether auctions or some other type of bidding process) to determine lender subsidies. When compared to legislator/lobbyist determined subsidies, DL is the only other option. Continuing with 1986 FFELP is not an option and never was. At least the market forces in DL (inter-agency borrowing interest rate and discount rate) are not subject to program-specific lobbying. (Someone could certainly suggest that the rates that federal agencies pay Treasury are too high overall, but this would not be student-loan-specific.)

Legislators from states with state lenders have been quite open over the years in their actual dislike for the competitive private contracting used for direct loan -- a private sector innovation that does not guarantee a contract in each and every one of their states. Well, it appears they have taken care of that concern. Having cake and eating too is alive and well.

The $7 billion incremental admin cost (over 10 years) is not a financing cost, and it only takes accounting 101 to understand why. Would a bank include its office rent in the same part of its budget as the net positive cash flow of the loan it just originated yesterday? Of course not. Yet you are expecting federal credit programs to do so. The purpose of federal credit program accounting is to make the federal credit programs budget themselves the same as how a neighborhood bank would budget.

If you prefer FFELP, then choose FFELP, but don't do so just because DL's administrative costs are relatively transparent while FFELP's administrative costs are buried in a variety of opaque ways (until recently a dedicated $50m annual admin line-item complemented the guarantors' account maintenance fee -- nearly $1b annual -- and numerous misc fees and programs that supplement what lenders pay out of gross yield -- some of which has long been provided in special allowance from taxpayers -- to cover the overall administrative costs of the FFEL program. Not to mention the federal share of FAFSA administration, institutional oversight, student loan database, Education Dept staff and contractors, etc., that align to FFEL program functions, nearly $1b annual).

This doesn't even get to the irrelevance of focusing on $720 million per year in what is projected as a multi-trillion-dollar program. Even if what are now seemingly agreed-upon-to-be fairly-competent FFELP servicers somehow morph into the most over-priced servicers in existence once they become DL servicers next year, it doesn't begin to chip into DL's huge advantage over FFELP on the financing side. Even in the best of times, no lender has as low a cost of funds as the U.S. Treasury. Just as importantly, repayment of principal and interest on DLs goes to the Treasury rather than to a FFELP lender. This is the difference, not how much the servicers spend on pencils.

An interesting typo

I note in this issue of "Higher Ed Watch" this sentence:

"We believe that this was the wrong tact to take."

While "tack" is the correct word, there is an irony in describing political attacks with the word "tact," isn't there? Was the author being double-dip ironic himself? One wonders, but assumes it was simply a misuse of one word for another, which is all to common these days.

[Omit old-fart rambling rant about the state of education these days, particularly with regard to usage and grammar.]

I note that the connection between the CBO and Republicans is an issue with importance these days, and even note that the
head of the CBO was involved in giving the same "kiss of death" to the Clinton health plan, back in the 90s. No wonder the Democrats see possible collusion, or at least partisan leanings in the actions of the CBO.

As the authors point out, either way you calculate costs, direct loans are cheaper (and, even if they don't make this point, less liable to create corruption than if you have, for instance, the banks paying off college aid administrators). But you do have to wonder if the CBO's biases are not "showing" in this case and in the case of health care revamping plans.

Ed

Whoops

Thanks for pointing that out. It has been changed. "Tack" was indeed the word intended. There was no intention of irony.

Priceless Scoring

Craigie for Congress! The Hill could use a clear-headed thinker. By the time the student loan bills are considered in September, however, I'll bet a lot of people are going to realize, as he suggests, that $87 billion in savings could actually be an underestimate when making real market risk assumptions.

Any way you calculate it -- at 47, 80, 87 billion, or more -- it's a lot and worth doing. As Ed Drone points out, less corruption is also worth something, even if it isn't in the calculations. Integrity again in federal programs? Priceless.

Thanks to NAF for creating a space where all sides of legislative issues are discussed in the comments, often with impressive substance well beyond what one reads in the Chronicle, IHE, or other blog sites.

The Big Lie

The Direct Loan Program is a house of cards. Like everything else that comes out of Washington, it’s built upon lie, after lie, after lie. If the cost to the taxpayer were really the consideration, the Direct-Loan sycophants know full well it’s cheaper just to have Washington walk away entirely from student lending. Let the private sector handle it—no big deal. But, as we all know after being fed the constant demagoguery here and elsewhere, nothing good can ever possibly come from the private sector. (The private sector is really you and I, so let’s insert you and I in lieu of the private sector going forward shall we?) You and I are just too corrupt! Politicians are much more capable of "justly" allocating society’s limited resources via the political economy than you and I can through the private economy. (Pretend that no politicians just got arrested in New Jersey and that human history isn’t replete with corrupt governments run by corrupt politicians.) If you’re a well-organized constituency, thus in a position to curry favor from your incorruptible politician, you too can have your student loan forgiven! Make no mistake about it, liberal, conservative, whatever; absolute power corrupts absolutely in the political economy!

Another excellent byproduct of the political economy is that promises are made as though scarcity isn’t a consideration. Scarcity, you might not know about it since it isn’t in the NAF-blog vernacular. It’s the limited resource thing I mentioned earlier—24 hours in a day, money doesn’t grow on trees, doctors don’t grow on trees, we’re all dead in the long run, college educators don’t grow on trees, and so on. Personally, I hope I’m alive to see the day when all the promises Washington has been making come due. (Fortunately for me, that day is rapidly approaching!) Washington has this nasty habit of making promises as it swims in red ink as far as the eye can see! That’s why the refuge from reality here at the fantasy land known as the NAF blogs is so comforting to us all.  You can have your cake and eat it too! 

No, Patrick, as an actor in

No, Patrick, as an actor in a democracy, I am a part of the government, not the private sector. I help elect a government that when it administrators essential government services such as education, is responsive to me, is recallable, is subject to public pressure and voice. CEO's are not elected, are not recallable, don't have to listen to what I say or care about my very existence; they are a for-profit entity that doesn't care about doing anything but squeezing every last penny they can out of students. And it is a big deal for those of us who have been trapped by the predatory private sector into endless loans that lack any consumer protections and are set for default because the corporation makes more money that way. So no, thank you, we will remove the for-profit private crooks from the system, and put things right.

Private sector loans

Mr. Bott

Do you think the private sector should handle the entire student lending business, provided that students be afforded the same or similar bankruptcy protections afforded to mortgagors and credit card holders?

All I know for certain about this debate is that my direct loans are at 4.5% interest rate and the private sector loans are at 11.5% interest rate.

In the absence of bankruptcy protections, I'll take the direct loan program, thank you very much.

A federal student loan program without any govt involvement

Has been offered before. No takers thus far among the FFELP participants. In theory, as long as the interest deduction in the Internal Revenue Code is liberalized so that there are no limits on income, annual interest deducted, lifetime interest deducted, etc., then, from a fiscal standpoint, you don't need additional govt involvement in the federal student loan program. You would need, however, a Federal Trade Commission and Justice Dept that have been more active than during the past several decades. (The recently-proposed Financial Products Safety Commission would also fit the bill.) States and "nonprofits" would also have to agree to leave the student loan program. They add significant inefficiencies and cross-subsidies.

The fact that taking govt out of the student loan program didn't fly during the credit bubble (when anyone with a PO box and a telephone could set up a non-bank lending company) makes it unlikly to succeed in the current non-bubble environment.

The challenge is that there is simply not enough available credit to accommodate all the people in the USA who have been told they should pursue postsecondary education. This gap was first temporarily addressed with capital from Europe and Asia during the 1980s and 1990s. Then more complex financial maneuvers and derivatives were brought to bear. The only solutions are reducing the cost of postsecondary education or moving to a model where only the elite attend postsecondary institutions. Vocational education would be moved back to the purview of the Labor Dept. where it was before 1970.

Neither of these ideas are likely to be popular in America. You will hear cries about "access". What people are forgetting is that, even someone who writes a check for the full sticker price of a public college or university still does not come close to covering the actual costs of that education.

FFELP participants have often said that they would not lend to "high risk" institutions without federal financial support. This has always been their "checkmate" move. It is most likely pure bluff, but gutless politicians won't take the chance. In reality, keeping the federal supports but moving towards introducing market forces would require paying lenders less to lend to USC than to a community college. The flat, nationwide subsidy is a relic of pre-computer days.

Preserving uniform terms, conditions and benefits from the student's viewpoint has always been the promise, but a truly transparent system would not only pay lenders different rates for different schools but would include a higher student interest rate at Bob's Beauty School than at USC. Only then could potential students have full information about their educational decisions. A potential student who sees an interest rate that is twice as high at one school than another would most likely ask "why?" Right now there is little to indicate these "facts of life" to potential students. Without any federal involvement in student lending, wouldn't this happen anyway? Hasn't it always been the case in private student lending?

Thus, the primary challenge to taking state and federal govt out of student lending is the lack of capital. If that were not an issue, then a fully-market based system would probably work, although there would be significant disruptions to the status quo. Schools and lenders would have to discard the red herring that they need "extra" funds to serve the "high risk" populations. They will see that there have been institutions serving "high risk" without extra subsidies for years.

Consumer Protections

From a borrower's standpoint, both programs look the same. Sallie Mae (or similar) will still be servicing the loans, providing the type of customer service that is becoming legendary. Sallie Mae (or similar) will still be collecting on defaulted loans, exploded with collection costs. The only difference is that in the Direct Program, the Fed takes the interest, and also the blood money from defaulted borrowers that previously the guarantors made their living from. I can see why the guarantors and the FFELP lenders are fighting. This is alot of free money going back to the Fed.

However the rancor and venom shouldn't distract us from the core problem that continues to go unaddressed, despite the noise:

Both programs are astonishingly absent of the basic, standard consumer protections, and this guarantees that the same horrible characteristics of the system , such as obscene inflation, increased lending, horrible oversite, and millions of citizens being preyed upon, their lives being trashed.

I see no reason to weigh in on this debate until standard consumer protections are returned. As usual, however, the powers that be would rather address their interests before the students...which of course means that the student's interests simply won't be addressed, despite the rhetoric. Prices will continue to go through the roof, and the default rate will remain astronomically high (at about 1 in 3 borrowers).

Repayment programs that do nothing for people who have already been completely trashed, financially, by this predatory system are insulting in that they are being used as a substitute for the standard consumer protections that should have never been taken away.

Canada has effective borrower advocates who quashed tricks played with the bankruptcy laws wrt student loans quite quickly. In one canadian province, they are even doing away with interest on student loans!

Why not here?

Default rates quite low

While certainly many defaults occur after two years in repayment, someone keeps simply cutting-and-pasting projections (not actual defaults) from the late 1990s here. Putting aside those guestimates, the actual defaults are surprisingly low. If you then remove the people who work to get their loans out of default, such as through rehabilitation, the default rates fall even further.

The reasons why default rates are quite low include the self-selected nature of those who choose to attend postsecondary education. While it is certainly not an elite, exclusive group, it is much more elite than, say, the universe of people who choose to get credit cards or take out car loans. The vast majority of borrowers do not attend the types of institutions that NAF and others tend to associate with high default rates, so it could be argued that the weight of the borrower pool is far more financially savvy than the average American, even by osmosis.

The wide variety of consumer protections which DO exist also reduce defaults; some cynics want to count borrowers who take advantage of these consumer benefits as "defaults" or "future defaults" but this is patently incorrect. It is possible that knowledge of the wide variety of powerful post-default tactics available to guaranty agencies and collection agencies is another factor incenting borrowers not to default. It is not clear, however, that borrowers are taking this factor into consideration in the mental calculus.

Canada tried a system where lenders received a bunch of cash for each new origination year. This was a way to encourage risk sharing and avoid the ongoing quarterly subsidization of loan holders which they saw in the American guaranteed student loan program. The idea was that lenders would invest the money for the day when the loans entered repayment and they needed to spend it on loan servicing, staff, phone calls, letters, default prevention, etc. Most specifically, the government "contribution" was to offset the lenders' losses on future defaults. Unfortunately the lenders did not manage the cash properly and/or the up-front cash significantly underestimated the defaults that began to occur. They quickly decided that direct lending was simpler. http://www.hrsdc.gc.ca/eng/learning/canada_student_loan/about/index.shtm...