[Congressional Record Volume 141, Number 135 (Friday, August 11, 1995)]
[Senate]
[Pages S12343-S12344]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


   SAVINGS AND BENEFITS OF THE ``DIRECT LENDING'' REFORM FOR COLLEGE 
                             STUDENT LOANS

  Mr. KENNEDY. Mr. President, 2 years ago, after a major battle with 
special interest groups, Congress enacted a far-reaching reform of the 
College Student Loan Program. We did so with strong bipartisan support, 
because the reform was so clearly beneficial to colleges and students 
alike.
  The reform is called direct lending, because it permits college 
students to obtain their loans directly from the Federal Government 
through their colleges, rather than through assorted banks and guaranty 
agencies under the complex and costly Government Guaranteed Loan 
Program.
  The 1993 reform brought major advantages to students. It cut student 
loan fees in half, reduced interest rates on all student loans, and 
created more flexible repayment terms. According to estimates by the 
Congressional Budget Office at that time for the 5-year period 1994 to 
1998, direct lending as phased in by the 1993 legislation yields $2 
billion in savings for the 4 million college students who rely on 
student loans to finance their education, and it yields $4.3 billion in 
savings to taxpayers over the same period.
  Direct lending also addresses the need for a more efficient and 
streamlined Federal Government. The Guaranteed Loan Program--far from 
being a private sector enterprise--operates through a system of Federal 
subsidies and Federal loan guarantees to 7,000 lenders and 41 guaranty 
agencies, as well as 25 secondary markets, which are entities that buy 
loans in bulk from lenders and then process the loan payments made by 
the students. The guaranty agencies alone have over 5,000 employees--25 
percent more than the entire Department of Education and 10 times more 
than the 450 Department employees who would manage a full Direct 
Lending Program. Taxpayers--not the private sector--pay for the gross 
inefficiencies of the complex Guaranteed Loan Program.
  Despite the obvious advantages to students, colleges, and taxpayers 
of the direct loan system, there was a major battle in 1993 to enact 
this reform. Banks, guaranty agencies, and other middlemen in the 
Guaranteed Loan Program did not want to give up the profits they made.
  The key to breaking the deadlock and enacting direct lending was the 
savings to the Federal budget. My own preference at the time would have 
been to use the full $6.3 billion in estimated savings to benefit 
students. But the compromise enacted--allocation of $2 billion to 
students and $4.3 billion to deficit reduction--was acceptable because 
it ensured the enactment of the reform.
  Under the Student Loan Reform Act of 1993, direct lending is being 
phased in over a 5-year period--5 percent of student loan volume in the 
1st year, 40 percent in this, the 2d year, 50 percent in the 3d and 4th 
years, and 60 percent in the 5th year. Beginning in 1996, direct 
lending is permitted to exceed these percentages if a larger number of 
colleges and universities decide to participate in the program. This 
gradual phase-in enables the Department of Education to implement the 
program in a sensible and efficient manner, and it permits all colleges 
and universities to decide whether to participate in direct lending.
  The Direct Student Loan Program is now entering its 2d year of 
operation on college campuses across the country, and it is an 
outstanding success. Colleges and universities participating in direct 
lending are virtually unanimous in their praise for the program. As the 
financial aid director of the University of Idaho put it:

       How do we measure the success or failure of our program? 
     It's obvious. The students. Our students continue to praise 
     the program for its simplicity and ability to provide loan 
     funds to them in a short period of time.

  A college president in New York writes:

       With our first year of experience in direct lending behind 
     us, I can say confidently that this is a system that works. 
     It is more efficient for us, far better for the students, and 
     it saves the taxpayers a significant amount of money.

  But the banks, guaranty agencies, and other middlemen who profit from 
the Guaranteed Student Loan Program have never accepted the direct 
lending reform. They have constantly sought to undermine it and undo it 
in order to restore their special interest profits, even if it means 
higher costs and more redtape for colleges and students. Now they have 
found their opportunity--as part of the antieducation budget adopted by 
the new Republican majority in Congress.
  This budget contains the largest education cuts in U.S. history. 
Federal aid to college students will be slashed by $30 billion over 7 
years--a one-third cut by the year 2002. Individual students face an 
increase in their student loan debt of up to 50 percent.
  The Republican budget resolution passed last spring also contained a 
special interest provision designed to lay the groundwork for 
eliminating direct lending. It orders the Congressional Budget Office 
to recalculate the cost of student loan programs under new guidelines 
intentionally skewed to make direct lending seem more expensive than 
guaranteed loans.
  Congressmen Goodling and Kasich released the new CBO estimates last 
month. Predictably, they assert that direct lending no longer saves 
taxpayers money. They claim taxpayers will save $1.5 billion over the 
next 7 years by eliminating direct lending and returning to the 
Guaranteed Loan Program that the banks and guaranty agencies prefer.
  Nothing could be farther from the truth. CBO's 1993 estimates, 
showing that direct lending would save $2 billion for students and $4.3 
billion for taxpayers over 5 years, were based on budget rules adopted 
on a bipartisan basis in 1990 and signed into law by President Bush as 
part of a comprehensive, congressionally mandated reform of Federal 
credit programs. These rules applied to all 60 loan programs of the 
Federal Government, not just the Student Loan Program.
  The rules adopted in 1990 were designed to calculate the real costs 
of all Federal loan programs more accurately--including both direct 
loans and guaranteed loans. There was no intention to slant the figures 
one way or another. The goal was to provide greater accuracy in budget 
estimates for all Federal credit programs.
  However, the 1993 estimates inadvertently disadvantaged the 
Guaranteed Loan Program compared to the Direct Loan Program in one 
respect--the manner in which the administrative 

[[Page S 12344]]
costs of the programs are calculated. An adjustment was needed to 
provide a more accurate comparison of the costs of the two programs.
  But the special rule prescribed in the Republican budget is not an 
honest adjustment--it is a rule designed to put the Direct Student Loan 
Program at a disadvantage when the costs are compared.
  Under that rule, all Federal administrative costs related to specific 
loans in the Direct Lending Program are included in the cost of direct 
lending. These costs include default management, collection of loans, 
oversight, and printing and processing loan forms. These same costs, 
however, are not included in the new CBO estimate of the cost of 
guaranteed loans.
  In addition, one of the major costs of guaranteed loans as compared 
to direct loans--administrative payments to guaranty agencies amounting 
to $175 million per year--is also excluded from the new CBO estimates 
of guaranteed loan costs.
  In other words, the special rule adopted in the Republican budget 
resolution is a flagrant attempt to stack the deck in favor of 
guaranteed loans. I do not blame CBO for this slant. CBO is simply 
providing estimates required by the rule devised by the Republican 
majority. I do not know whether this devious rule was adopted 
innocently at the instigation of lobbyists for the Guaranteed Loan 
Program, or whether it was adopted intentionally in order to slant the 
estimates. But I do know that the rule must be changed, so that a fair 
comparison can be made between the two programs.
  If the figures are adjusted honestly, the Direct Loan Program is 
still much cheaper to administer than the Guaranteed Loan Program and 
still brings substantial savings to students and taxpayers.
  According to preliminary estimates I have obtained from the Office of 
Management and Budget, under a fair rule, the savings from direct 
lending are cut in half, but direct loans are still 20 percent cheaper 
than guaranteed loans. If direct lending is eliminated entirely, it 
will not save $1.5 billion over the next 7 years, as Congressmen 
Goodling and Kasich claim. Instead it will cost the taxpayer $1.5 to $2 
billion over that period.
  I have asked the Department of Education and OMB to work with CBO to 
provide a fair estimate in time for the battle in Congress in September 
between direct loans and guaranteed loans. But the bottom line already 
seems clear. Direct loans save money compared to guaranteed loans, and 
are a major benefit to colleges and students.
  In addition, included in the alleged Republican savings of $1.5 
billion from the repeal of direct lending are excessive cuts in 
management and oversight functions for both the Guaranteed Loan Program 
and the Direct Loan Program. If enacted, these cuts would seriously 
strain the ability of the Department of Education to manage student 
loans--whether direct loans or guaranteed loans. Ultimately, the 
taxpayer will pay--in the form of increased loan defaults, and 
increased fraud and abuse by unscrupulous institutions. Preliminary 
estimates based on studies by the congressional General Accounting 
Office and the Inspector General of the Department of Education suggest 
that these oversight and management cuts could cost the taxpayer up to 
$4 billion over 7 years in increased defaults, fraud, and abuse.
  Finally, in order to prepare its estimates under the special budget 
rule, CBO had to recalculate overall Federal spending to reflect $6 
billion in additional costs assigned to direct lending for the period 
1996 to 2002. In other words, for the banks and guaranty agencies to 
get their way, the Republican majority had to quietly add $6 billion to 
the Federal deficit for the next 7 years. This fact goes unmentioned in 
the distorted analysis used by Congressmen Goodling and Kasich to 
compare direct lending and guaranteed loans. In their zeal to repeal 
the Direct Loan Program, they are willing to accept a $6 billion 
addition to the Federal deficit.
  I intend to do all I can to see that Congress rejects this unseemly 
Republican assault on direct lending. If the assault succeeds, it will 
result in higher up-front fees for student loans and higher interest 
rates on the loans. Repayment conditions for students will be harsher. 
The debts of individual students will go up. Students and colleges will 
once again be forced to endure excessive redtape. Colleges will have to 
wait for tuition payments well into the semester while students try to 
obtain loans from various lenders.
  Under direct lending, students and colleges are the clear winners. 
Under this misguided Republican attack, banks and guaranty agencies 
will win--and colleges and students will lose. It is unconscionable for 
the Republican majority to make the widely respected CBO an accomplice 
in this scheme by cooking the budget numbers. This attempted giveaway 
to banks and guaranty agencies is corporate welfare of the worst kind, 
and it ought to be soundly repudiated by Congress.
  Mr. President, I ask unanimous consent that two graphs be printed in 
the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:
                                                                    ____


  What's Fair and What's Unfair About the Republican Special Rule for 
        Comparing Costs of Direct Loans Versus Guaranteed Loans


                                  FAIR

       To calculate Direct Loan costs on the same basis as 
     Guaranteed Loans.


                                 UNFAIR

       To include Federal administrative costs for specific loans 
     in cost of Direct Loans and not in cost of Guaranteed Loans.
       To exclude from cost of Guaranteed Loans Federal payments 
     to guaranty agencies.


                                 RESULT

       Direct Loans appear more expensive than Guaranteed Loans, 
     when in fact they are 20 percent less expensive.
                                                                    ____


           Who Wins on Proposal to Eliminate Direct Lending?

       Republican claim: $1.5 billion savings over 7 years.
       True cost to taxpayers over 7 years: $1.5 to $2 billion 
     cost using fair budget rule; up to $4 billion cost in 
     increased defaults, fraud, and abuse from cuts in oversight 
     and management of guaranteed loan program; $6 billion cost 
     from increase to deficit caused by special budget rule.
     

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