The Federal Loan Program on oxygen support

Herb London
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Posted: Mar 27, 2007 11:23 AM
The Federal Loan Program on oxygen support

It is axiomatic to contend that when Congress passes a law it is almost impossible to reverse it. The influence of the law may be malevolent, but its boosters will use a metaphorical bullhorn to drown out detractors.

This is the case with the Federal Direct Loan Program (FDLP) which has provided $150 billion in new and consolidated loans since 1994 for higher education students.

On its face, this seems quite desirable. After all, the federal government has been assisting students obtain a college education for more than 60 years, starting with the G.I. Bill after World War II.

At the time FDLP was initiated, it was argued that taxpayers would benefit because the “middle man,” banks and private lenders, would be taken out of the financial equation. The theory was predicated on the belief that government loans given directly to students would save money for the American taxpayers.

However, the theory has departed from the reality as recent evidence attests. In fact, FDLP has not provided savings and is paying out more in interest payments – calculated at about $16.5 billion – than it has received from borrowers since its inception a decade ago.

This is precisely what the Congress should consider when it meets to reauthorize the Higher Education Act (HEA) and the FDLP provisions therein.

Any dispassionate examination of the issue will suggest that a high student default rate as well as improper Department of Education payments and student loan forgiveness has made the FDLP a travesty for American taxpayers.

There is little doubt that there is bipartisan support for student financial aid, but the manner of that assistance should and could vary. Private lenders presently offer federally guaranteed loans to undergraduate and graduate students or their parents. They may be subsidized or unsubsidized loans, i.e. interest payments that are made by the government while the student is in college or loans whose interest is paid for by the student.

Many private banks and lenders originate, hold or consolidate college loans. Unlike FDLP, Federal Family Education Loan Program (FFELP) uses private sources such as banks and other lenders to provide federally guaranteed student loans. As one might guess, the private sources tend to be far more efficient in administering this program. As Lawrence Lindsey, President Bush’s erstwhile chief economic adviser, noted about FDLP, “Leave it to the government to lose money on a sure thing.”

Congressional concern about the FDLP inefficiency led to a General Accounting Office (GAO) investigation which noted that since FDLP borrowers were allowed to defer payment of their loans until out of school, a negative cash flow would result until more borrowers begin repayment. However, the GAO could not determine when or whether positive cash flow would occur.

Fifteen years after this study, FDLP is still losing money. It has actually paid more in interest to the Treasury than the amount of interest it has received from borrowers. By contrast, the opposite has occurred with FFELP where the rates of borrowers and payments to the lenders are connected by statute and market rates. There is little question where and under what circumstances the taxpayers’ investment is protected.

To state the obvious, when a private company makes a bad decision, those who suffer the consequences are members of the company and stockholders. When government makes a mistake, the taxpayers pay the price.

The FDLP, based on all reports, is not living up to expectations and it is costing the taxpayer billions. Simply put, there is an alternative in the private sector that is far more efficient than its government operated counterpart. It can provide the same loans and can do so without burdening the American taxpayer. Congress should take a long, hard look at the FDLP. If it can put aside its natural bias for a moment, it would realize America’s tax dollars are better spent elsewhere. Congress, are you listening?