[Congressional Record Volume 141, Number 94 (Friday, June 9, 1995)]
[Extensions of Remarks]
[Pages E1211-E1213]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


             H.R. 1501, THE STUDENT LOAN PRIVATIZATION ACT

                                 ______


                       HON. ERNEST J. ISTOOK, JR.

                              of oklahoma

                    in the house of representatives

                         Thursday, June 8, 1995
  Mr. ISTOOK. Mr. Speaker, please include the following remarks in the 
Record regarding H.R. 1501, The Student Loan Privatization Act.
                Statement of the Honorable Ernest Istook

       Mr. Chairman, I am pleased to speak with you today 
     regarding the federal student loan programs. I congratulate 
     you on holding this hearing on an area of federal policy so 
     important to America's future.
       I am one of over four dozen members of the House of 
     Representatives who have come to the conclusion that the 
     Federal Direct Student Loan Program enacted two years ago is 
     a mistake and that corrective action needs to be taken. The 
     direct government loan is being implemented too quickly. 
     Federal funds and the educational opportunities of students 
     are being placed in jeopardy. [[Page E1212]] 
       My bill, The Student Loan Privatization Act of 1995 (H.R. 
     1501) calls for a phase-out of the Federal Direct Student 
     Loan Program. This approach reflects an unambiguous vision of 
     the direction in which federal student policy should be 
     moving. I would like to explain why I, and my colleagues, 
     believe we should move immediately to terminate the direct 
     loan program.
       There are three principles that I believe should guide our 
     consideration of student loans and other federal education 
     policy:
       First, the Federal government should only carry out those 
     responsibilities that cannot be performed by the private 
     sector.
       Second, programs should be structured to minimize federal 
     employment, whether that employment is direct--as reflected 
     in the number of bureaucrats at the Department of Education--
     or through government contractors; and
       Third, the opportunity for private sector participation in 
     federal programs should be structured to promote innovation 
     and efficiency.
       Mr. Chairman, the William D. Ford Federal Direct Student 
     Loan Program violates all three of these principles. That is 
     why I propose eliminating this cumbersome federal program.
       The Direct Loan Program was enacted as part of the Clinton 
     Administration's massive budget bill in 1993. It was not 
     subject to any in-depth examination or hearings and, in my 
     view, would not have been enacted if it had not been buried 
     in the larger budget legislation. It was adopted less than a 
     year after Congress passed legislation to test direct 
     government student lending in a pilot project in 1992. That 
     was unfortunate.
       Direct lending is nothing more than a government-run, 
     multi-billion dollar consumer loan program. It is premised on 
     three assumptions:
       Sole-source government monopolies are more efficient and 
     customer-oriented than the private sector; (This has yet to 
     be proven true, given our experience with Public
      Housing, the Tennessee Valley Authority, and other 
     government monopolies.)
       The federal government is an efficient collector of loans 
     (We have problems collecting other debt owed to the 
     government.); and
       Centralized administration of a program is consistent with 
     assuring accountability and continued innovation (This flies 
     in the face of all that the private sector is currently 
     experiencing with their rightsizing and decentralization 
     efforts made necessary by international competition and 
     information technology).
       Mr. Chairman, we have heard much over the last few months 
     about the initial success of the direct loan program and the 
     savings it has allegedly produced. These claims would be 
     amusing if they were not being used to justify the massive 
     expansion of the federal government now underway at the 
     Department of Education.
       First, we hear that schools like direct government loans. 
     Let us examine this.
       I was unaware that anyone on Capitol Hill doubted the 
     federal government was efficient in giving away money. 
     Unfortunately, it is this aspect of the direct loan program 
     that is getting the rave reviews from schools and others--
     schools are getting student loan funds to their students with 
     less paperwork and less hassle than before: That is the crux 
     of the success story for direct loans. In fact, there are 
     numerous higher education organizations opposing direct 
     lending. My own Board of Regent in the State of Oklahoma is 
     on record as opposing this takeover.
       But what about the repayment process? Can anyone here show 
     me a federal loan program where getting loan recipients to 
     repay their loans has not been a problem? Loans made under 
     the direct government loan program are only now entering 
     repayment. Only after we get significant feedback on the 
     repayment process will any meaningful statement be possible 
     on the ``success'' of the program. At this point, all we can 
     say is that the Department of Education has proven again it 
     is good at giving money away. The real test will be whether 
     they can convince students to repay.
       Second, we hear that the program ``saves'' more than $12 
     billion over a five year period.
       Mr. Chairman, the Department of Education itself has 
     admitted that the current Credit Reform Act fails to account 
     for the administrative costs associated with direct 
     government student loans. Ironically, in criticizing Chairman 
     Goodling's bill, the Department itself admits that the 
     amendment proposed to the Credit Reform Act in that bill does 
     not increase federal costs, but merely the point in time at 
     which they are recognized. This is a $4.5 billion distortion 
     over 5 years that the direct lending program is not showing 
     as a cost of the program. It is thus impossible to compare 
     one program to the other under current credit reform rules.
       Given the budget scoring distortions produced under the 
     current Federal Credit Reform Act, is it any wonder that 
     direct government lending appears cheaper than the private 
     sector-based program?
       More important perhaps than any analysis of Credit Reform 
     is the work of the Congressional Research Service on the 
     subject of student loans. The paper recently produced for 
     Rep. Gordon unambiguously states the following: ``There may 
     be a logical rationale for direct lending, but low cost is 
     not it.''
       To make the revenue stream to the government appear better 
     than it really is, the administration has used 90-day 
     Treasury note interest rates for loans that are actually on 
     the books for 10 years. This results in a 2 percentage point 
     difference in interest rates. It certainly does not take into 
     account the risk the government is experiencing as a result 
     of the dramatic increase in lending the pilot schools have 
     experience (in the neighborhood of a 20% increase in the 
     amount of direct lending.)
       Finally, one item that greatly disturbs me is the move from 
     a Guaranteed Student Loan program, where the government has a 
     contingent liability, to a Direct Student Loan program where 
     the taxpayer is liable for 100% of the amount of the loan, 
     not just the default portion. The chart with me today, 
     ``Direct Lending's Impact on the National Debt,'' 
     demonstrates this clearly. Using conservative assumptions 
     throughout, assumptions clearly listed on the graph included 
     with my testimony, after 20 years of Direct Lending, given 
     default rates, growth in the program, repayments, and the 
     ``profit'' from repayments, the National Debt will increase 
     by $348 billion between FY95 and FY2014.
       Mr. Chairman, the enactment of the direct loan program 
     effectively precluded exploration of innovations in the 
     private sector-based program that may very well equal or 
     surpass the ease in access to funds that many schools in 
     direct government loans find so attractive. I understand that 
     notwithstanding the fact that the Congress and Department of 
     Education have not required or even encouraged program 
     improvements in Federal Family Education Loans (FFEL), that 
     the student loan industry is unilaterally undertaking 
     implementation of such improvements on its own. Two of the 
     most promising innovations are the Educational Loan 
     Management initiative and the Nation Student Loan 
     Clearinghouse. I also understand that much of the work of the 
     industry is taking place in spite of poor cooperation from 
     the Department of Education.
       It seems the Department is reluctant to cooperate with the 
     private sector when it sees itself as a direct competitor. I 
     was very disturbed to see a quote from Mr. Leo Kornfeld of 
     the Department of Education in a May 22nd Forbes article 
     where he states, ``I want to go toe-to-toe against the 
     industry.'' This is clearly inappropriate and reflects the 
     belief of some at the Department that the private sector is 
     the enemy.
       Mr. Chairman, I would respectfully suggest that this 
     subcommittee pay careful attention to Mr. Kornfeld's 
     activities in his capacity as Senior Advisor to the 
     Secretary. A situation where the regulator of the private 
     sector student lending sees itself as a competitor is most 
     untenable.
       There are several other observations I would like to make 
     about the direct government loan program. These observations, 
     among others, prompted me to introduce my bill:
       First, I am concerned about how the Department of Education 
     is marketing the program. Direct government lending is 
     supposedly a break-through in administrative simplicity that 
     all schools should be rushing to join. Instead, the 
     Department is using part of the $2.5 billion made available 
     for poorly defined ``administration'' of the program to fund 
     newspaper advertisements, to contract with a New York City 
     advertising firm, and to send dozens of employees to 
     financial aid conferences to sell the program. If direct 
     government loans are so good, shouldn't the program be able 
     to sell itself?
       In these times of serious budget problems, should the 
     Department of Education be spending hundreds of thousands of 
     dollars on advertising and public relations? I don't think 
     so.
       I would suggest, Mr. Chairman, that the administrative 
     funds available for the direct government loan program have 
     been subject to inadequate and deficient oversight at the 
     Department. I urge your subcommittee to fully review the 
     types of activities the Department is undertaking with monies 
     that were understood by many of us to have been made 
     available solely to service student loans.
       Second, I am concerned about the types of schools that seem 
     anxious to get into direct loans. Mr. Gordon has documented 
     the disproportionate number of high-default schools that have 
     applied for, or been accepted into the program.
       What does the fact that problem schools seem to like direct 
     government loans so much tell us? It tells us that the 
     program appears an easy to source of virtually unlimited 
     federal funds to these schools. It tells me that the direct 
     government loan program is a disaster waiting to happen. 
     Remember that the Savings and Loan debacle was about $50 
     billion.
       Third, I am very concerned about the level of 
     responsibility placed in the Department of Education. The 
     Department of Education has a record of administrative 
     inefficiency. As you know, it was the Department of Education 
     that ran the Federal Insured Student Loan Program, the failed 
     program that led to the concept of a decentralized, private 
     sector based student loan program.
       I simply do not believe that the management problems at the 
     Department have disappeared, notwithstanding the fact that 
     the 520 new bureaucrats being hired to run direct government 
     loans, in direct contradiction of the premises of reinventing 
     government.
       I see no evidence whatsoever that the Department is doing a 
     better job in policing the types of schools that get into the 
     federal student aid programs. In fact, Mr. Chairman, the only 
     real progress in reducing defaults resulted from imposition 
     of cut-offs of schools for high default rates, something that 
     Congress enacted on its own.
       It is time for us to admit the mistake of enacting direct 
     loans in 1993 and to get on [[Page E1213]] with the project 
     of making sure the private sector loan program works 
     efficiently. The longer we delay getting rid of this ill-
     conceived government monopoly, the greater the problem will 
     be in getting rid of it later.
       I would like to close my statement by emphasizing that my 
     reasons for objecting to the direct government loan program 
     are reasons which appear to have strong bipartisan support.
       On January 19, 1995, the President stood with the Vice 
     President and several members of the Cabinet at the White 
     House and said to the American people ``We propose to stop 
     doing things that government doesn't do very well and that 
     don't need to be done by government.'' The Vice President 
     went further. He declared to the American people who sent a 
     clear mandate in November to reduce government that ``over 
     the next several months, we will be looking at every other 
     agency and program asking the direct question, do we really 
     need this agency; do we really need this program; there is a 
     better way to do it; is there an opportunity here to give 
     middle-class Americans a break? We have already eliminated 
     over 100 programs. We will eliminate a lot more in the weeks 
     and months ahead.'' Mr. Chairman, I urge all of my 
     colleagues, Republicans and Democrats alike, to join in my 
     efforts to help the President achieve these stated goals by 
     supporting H.R. 1501 to eliminate direct government student 
     loans.
     

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