Bush Treasury Secretary Identifies Student Loan Inefficiency

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Bush Treasury Secretary Identifies Student Loan Inefficiency

2006 Deficit Could Have Been $3 Billion Less

October 19, 2006

"If we went under current law to the direct student loan program, we'd save money basically because we subsidize those loans less heavily."

-Douglas Holtz-Eakin
Former Director
Congressional Budget Office
January 2005

Related Programs:
Higher Ed Watch, Student Loans

Bush Treasury Secretary Henry Paulson has good news. The federal budget deficit for Fiscal Year 2006 was $48 billion less than the Department of Treasury previously predicted. The bad news is that's no thanks to federal student loan spending, which was higher than initial projections because of increased use of the Federal Family Education Loan program as opposed to the more cost effective Direct Loan alternative.

It's ideologically inconvenient for some that a government program consistently is found to be cheaper than the taxpayer-subsidized, private alternative. But facts (see page 18 of GAO's report) are facts (see page 1 of CBO's report). And now there are more facts buried in the latest Treasury Department report.

According to the Bush Administration's Department of Treasury, government spending on federal student aid programs was $6 billion higher in Fiscal Year 2006 than Treasury's most recent estimates, primarily because of a substantially higher number of consolidated student loans.

Here are the important lines from Treasury's report.

"Consolidation loan volume increased by $36 billion in the Federal Family Education Loan Program over MSR (Mid-Session Review) estimates. . .The subsidy cost for this increased loan volume was $5.6 billion."

"In the William D. Ford Federal Direct Loan Program, consolidation loan volume was . . . $7 billion over the MSR (Mid-Session Review). The volume increase in the Direct Loan program led to increased outlays of $0.5 billion."

Given that FFEL consolidation volume grew more than Direct Loan consolidation volume, one would expect taxpayer subsidy costs to grow more in the FFEL program than the Direct Loan alternative. But it should be proportionate. It's not.

According to this latest report by the Bush Administration's Department of Treasury and the figures quoted above, for every extra $100 borrowed in FFEL consolidation loans in Fiscal Year 2006, taxpayers had to pay $15.55 in subsidy payments to lenders.

And again according to the Bush Treasury Department, for every extra $100 borrowed in DL consolidation loans in Fiscal Year 2006, taxpayers had to pay an additional $7.14 in subsidy payments.

If just the unexpected increase in Fiscal Year 2006 consolidation loans were provided through only the DL program instead of mainly through the Sallie Mae-dominated FFEL alternative, taxpayers would have saved $3 billion in Fiscal Year 2006.

And yet the government doesn't encourage folks to use the Direct Loan program. Eventually, fiscal hawks are going to realize that just doesn't make sense and act accordingly. Taxpayers and students await.

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Comments

Student Loan Inefficiencies

Submitted by Anonymous (not verified) on October 18, 2006 - 4:24pm.

Wow--So if the $36 billion increase over earlier estimates had been in the direct loan program rather than the FFEL program, the federal government would have SAVED $3 BILLION just on that increment, and in a single fiscal year. It would be great to know how much the government could save--and redirect toward helping more people get education and training--if all student loans (not just the increase above earlier estimates) were made through the direct loan program.

Direct Loans

Submitted by Anonymous (not verified) on November 21, 2006 - 8:30am.

It's useful to consider two additional observations that have been quietly pushed under the rug here before passing final judgement. First, the federal government does not compute the costs of administering the Direct Loan Program (DLP) in its cost estimates (in fact it is explicitly prohibited from doing so) but lenders do factor such costs into their loan portfolios. As such the DLP costs more than is reported but nobody knows by how much. Second, when the federal government subsidizes loan defaults it only pays 95 cents on the dollar; the remainder is risk divided between lenders and guaranty agencies. If one uses a modest $320-billion estimate for all outstanding loans (though I believe it's currently close to $390b) and we assume every loan were to default, then under DLP the federal government eats the entire $320-billion. Under the private loan scheme (FFELP) the federal government's cost is only 95% of that amount, approximately $304-billion or roughly $16-BILLION less. There are more points worth mentioning in the cost benefit analysis between DLP and FFELP but I think the point's been made. Let's try to keep the analysis a bit more balanced in the future folks, ok?

The federal budget deficit

Submitted by Ken (not verified) on May 1, 2007 - 5:00am.

The federal budget deficit is still to big.