[Congressional Record Volume 141, Number 70 (Monday, May 1, 1995)]
[Senate]
[Page S5918]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                         CUT CORPORATE WELFARE

 Mr. SIMON. Mr. President, there has been a great deal of 
praise to various people for direct lending, including some to Paul 
Simon.
  But the person who really pioneered direct lending for the student 
loan program and was convinced of its usefulness before I was, is 
Congressman Tom Petri, a Republican Member from Wisconsin.
  Recently, he sent a ``Dear Colleague'' letter on direct lending 
because it is now threatened by people who profit from the present 
system.
  His ``Dear Colleague'' is titled ``Cut Corporate Welfare,'' and I ask 
that it be printed in the Record.
  The letter follows:

                         Cut Corporate Welfare

       Dear Colleague: Those of us who call ourselves fiscal 
     conservatives won't have one shred of credibility as budget 
     cutters if we are unwilling to go after corporate welfare 
     with the same zeal we apply to other types of waste. And in 
     this kind of effort, liberals should be willing to join us. 
     Please consider the following case carefully.
       Suppose you were a banker and you were able to make loans 
     that: were fully guaranteed by the federal government (i.e. 
     as safe as t-bills); paid you interest directly from the 
     federal government for a period of years at 2.5% more than 
     the interest on t-bills; were fully as liquid as t-bills (or 
     even more so) because you could sell them at any time at face 
     value or even a slight premium in a large secondary market 
     with plenty of eager buyers; require no credit-worthiness 
     analysis up front; and required no collection effort for a 
     period of years (you do nothing but sit back and collect your 
     interest), after which you could still sell them or start 
     collecting on them and receiving an extra .6% interest?
       Wouldn't that be a great deal? Wouldn't you fight like Hell 
     to keep it? You bet. And the deal exists--it's the guaranteed 
     student loan program. But it's a lousy deal for the 
     taxpayers. They'd be much better off selling t-bills 
     themselves to finance the loans (rather than renting banks' 
     capital at 2.5% more than the t-bill rate) and then 
     contracting for loan servicing with the current private 
     servicers on a competitive bid basis. And guess what? That's 
     what direct lending is. It's still a public/private 
     partnership, but the one useful function the private sector 
     performs--loan servicing--is priced in a market process 
     rather than a political negotiation over interest rate 
     premiums.
       Think about it another way: what useful function are the 
     banks providing? They can't assess risk. They take no risk. 
     We can get cheaper capital. And we wouldn't even need their 
     servicing if we collected these loans as income taxes through 
     the IRS.
       Make no mistake--guaranteed student loans contain an 
     enormous bank subsidy. That's one of their four main sources 
     of waste (the others are default costs, administrative 
     complexity, and mistargetted subsidies for students). If we 
     don't get rid of this corporate welfare, we'll have to cut 
     more somewhere else.
       The choice is clear--are you for the banks or for the 
     taxpayers? True fiscal conservatives should have no doubt 
     about whose side to take.
           Sincerely,

                                     Thomas E. Petri, M.C.
     

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