By now it's common knowledge in Washington that the proposal pending in Congress to move federal student loans to 100 percent direct lending generates savings by eliminating subsidies to private lenders under the alternative program, the Family Education Loan (FFEL) program. The student loan industry is now trying to draw attention away from those subsidies by arguing that it is actually student borrowers who will generate the savings when the government charges them interest on their direct loans. Take for example a comment that an ardent FFEL supporter posted on this blog last week.

First, under current law, the government will not pay lenders $87 billion [in subsidies] over the next ten years to make federal student loans -- in other words, that's not where the savings from eliminating FFELP comes from, and Second, the projected costs savings from eliminating FFELP represents profit, the margin, what's left over, whatever you want to call it, after the government lends money that costs it about 2 percent to families that would pay 5.6, 6.8 and 7.8 percent...

Thanks to Senator Judd Gregg (R-NH) and the Congressional Budget Office, however, we know that this argument is merely a distraction in the form of a half truth.  

The House of Representatives is expected to approve a bill today that would eliminate the Federal Family Education Loan (FFEL) program, expand the Direct Loan program, and put the resulting savings into student grant aid. But before a final vote is taken, the loan industry's champions in the House will make one last ditch effort to gut the student loan reform bill. They are offering an alternative proposal that would keep the FFEL program running on arbitrary subsidies easily manipulated by the student loan industry, and ironically, expand the role of the federal government in the FFEL program.

Reps. John Kline, the top Republican on the House Education and Labor Committee, and Brett Guthrie (R-KY) plan to offer a substitute amendment to the bill that would keep the FFEL program operating just as it is today, but extend to 2014 the Ensuring Continued Access to Student Loans Act (ECASLA) programs that Congress approved in 2008 to keep student loan providers afloat during the credit crunch. In the meantime, the amendment would create a commission, with heavy representation from the loan industry, to design and recommend to Congress a new "private sector model for [government-backed] student lending."

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.

For years, student loan-industry officials have complained about the way in which the government assesses the costs of the two competing federal student loan programs.

Federal budget analysts have consistently found that direct lending, in which the U.S.…

Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.

As the Federal Family Education Loan (FFEL) program has come under a torrent of criticism in recent months, loan industry officials have begun testing out a new line of attack in their long-running campaign to discredit the alternative Direct Loan program. The lenders claim and have convinced (hopefully temporarily)…Note: This post pre-dates Higher Ed Watch's shift to a new publishing system. For the complete original post, including any comments, please click here.