Federal Guaranteed Student Loans Cheaper For Taxpayers, New White Paper Says

Washington, D.C. (PRWEB) May 11, 2006

Federal guaranteed student loans have cost taxpayers less than loans made directly by the U.S. government, according to a white paper issued today by America’s Student Loan Providers (ASLP). Based on new government cost data, loans made by the private sector-based Federal Family Education Loan (FFEL) Program from 1994 to 2002 have cost $7.00 for every $100 in loans, as compared to $9.16 for direct loans.

The FFEL program’s cost advantage rose from last year, when an ASLP white paper found guaranteed loans slightly cheaper than direct loans.

Kevin Bruns, ASLP Executive Director, stated, “After correcting for just a few of the problems in current budget rules, this white paper finds that guaranteed loans have cost taxpayers at least $2.16 less per $100 lent than direct loans. That translates into a $4 billion taxpayer savings generated by FFEL program loans from 1994 to 2002.

“The FFEL program is the nation’s oldest and most successful student loan program, with 6,000 participating schools and tens of millions of borrowers,” Bruns said. “Sadly, it has become a partisan punching bag, almost entirely because of the erroneous impression left by government cost estimates. The truth is that guaranteed student loans are a better deal for taxpayers.”

“Guaranteed Student Loans Cost Taxpayers Less” white paper describes flaws in the current budget rules, which have been identified by the U.S. Government Accountability Office (GAO), Congressional Budget Office (CBO), Department of Education (ED) Office of the Inspector General (IG), PricewaterhouseCoopers (PWC) and others, and quantifies their impact on student loan program cost estimates. An excerpt follows:

“ASLP has long argued that OMB’s cost estimates are flawed, not only because they are based on overly optimistic interest rate projections far into the future, but also because they omit key program costs (e.g., administrative costs) and credits (e.g., tax revenues generated by both programs). This analysis shows that if the cost estimates better reflected the risks associated with actual program performance and omitted costs and credits were counted, OMB (and CBO) would draw a far different conclusion.

“Drawing on official government data found in the President’s FY 2007 budget proposal, as well as reports by GAO, CBO, ED Office of the IG, and PWC, among others, the ASLP analysis demonstrates that the FFEL program costs taxpayers less to operate than the Direct Loan program. ASLP came to this conclusion by taking the following steps:

•     Confining Cost Comparison To Relevant Time Frame. This was accomplished by comparing program costs for only the years in which loans (a) were made in both the FFEL and Direct Loan programs and (b) are mature enough to have actual performance histories [This eliminates 80 percent of the purported cost advantage of direct loans, according to re-estimated numbers in the FY ‘07 budget];
•     Adding In Missing Costs And Credits. The analysis added in the administrative costs of the Direct Loan program and the taxes paid by loan providers and servicers in both student loan programs; and
•     Adding a Risk Premium To the Direct Loan Program. Even though the costs of the Direct Loan program are highly dependent on future interest and principal payments by borrowers, OMB scoring methodologies do not fully account for the risks of lending money over time, namely, the uncertainty of future cash flows resulting from deviations in projected defaults, consolidations or interest rates. These risks were accounted for by assigning a minimal risk premium of 0.25 percent, or 25 basis points.

“After correcting for these factors, this analysis found that the average lifetime subsidy rate for the FFEL program is 7.00 percent, not 11.01 percent, as stated in the President’s FY 2007 budget. More important, the Direct Loan program’s subsidy rate is 9.16 percent, not the 3.65 percent found in the budget. In other words, after making these reasonable corrections, the purported cost advantage of the Direct Loan program is more than eliminated.

“This paper reaches this conclusion, it should be pointed out, without correcting for all of the biases found in the government’s scorekeeping rules. Nor does it even begin to place a value on the millions of dollars private and nonprofit loan providers spend each year on college awareness, debt management, anti-default and scholarship programs, not to mention investments in service enhancements, quality improvements and new technologies.”

A copy of the white paper is posted on ASLP’s web site: http://www.aslp.us

America’s Student Loan Providers represents education and financial firms and organizations that provide federally guaranteed student loans through the Federal Family Education Loan Program (FFELP), a public-private partnership of schools, students, loan providers, loan guarantors, and the federal government. By leveraging private financial markets and competing for the right to lend to students, the FFELP brings value to students, schools, and taxpayers. Students benefit through lower interest rates, and simplified loan application and approval processes. More information is available at http://www.aslp.us.

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