[Congressional Record Volume 141, Number 176 (Wednesday, November 8, 1995)]
[Senate]
[Pages S16813-S16815]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         DIRECT LENDING PROGRAM

  Mr. SIMON. Mr. President, it so happens that today is the 30th 
anniversary of the signing of the Higher Education Act of 1965 by 
President Lyndon Johnson. Everyone knows it was a great step forward.
  Today, according to press reports, the conferees on reconciliation 
agreed that they would cut back on assistance to higher education and 
direct lending, which is now used by more than 1,300 colleges and 
universities in this Nation, including some colleges and universities 
in Oklahoma, every one of whom wants to keep the system.
  There is not a college or university that is using direct lending 
that wants to shift back into the old system. Let me just say, the new 
system reduces paperwork, makes it much easier for students and 
colleges and universities, and the new system is good for taxpayers. 
The old system has all kinds of paperwork. The old system says, ``If 
you have a student loan, you have to pay back x number of dollars 
whether you're employed or unemployed.''
  The new system permits a student to have an income-contingent loan, 
so that if a student wants to become a teacher and not earn so much, 
then the student could pay back a smaller percentage or a smaller sum; 
while if a student became a lawyer, or a stockbroker, maybe earning 
quite a bit of money, that student would pay back a larger sum. If a 
student was unemployed, while that student was unemployed, you would 
not pay back anything.
  What happened in conference is they have agreed to cut back from 40 
percent assistance, 40 percent of the schools, which is the cap now, 
down to 10 percent.
  Now, I do not know who is going to tell those students in Oklahoma 
which three out of four of them are going to be out of the direct loan 
program. I am glad I am not going to have to make that decision. And I 
am pleased that the President, I think, is going to veto this.
  Who benefits by cutting it back to 10 percent, giving a 90 percent 
monopoly to the banks and to the guaranty agencies? The banks and the 
guaranty agencies do. The guaranty agencies, incidentally, were created 
by us. These are not free enterprise operations. The guaranty agencies 
have the Federal Government guarantee. The one in Indianapolis, for 
example, the chief executive officer of the guaranty agency in 

[[Page S 16814]]
Indianapolis is paid $627,000 a year. We pay the President of the 
United States $200,000 a year. And they are spending $750,000 to lobby 
against us.
  It is very interesting, Mr. President, my chief cosponsor on direct 
lending was the distinguished Republican Senator from Minnesota, 
Senator David Durenberger. And Senator Durenberger said in response, 
when he was asked about this, ``Shouldn't we let the free enterprise 
system work?''--that is what I want; I want to see competition; I want 
to see the schools in Oklahoma and Illinois and every other State have 
a choice between the old system and the new system and have 
competition--but Senator David Durenberger said, ``This is not the free 
market. It is a free lunch.''
  It is not competition. We say in the law, banks get the Treasury rate 
plus 3.1 percent. We write into the law what their profits are, and 
they do not want to give it up.
  Now, if we want to have a banking assistance act, let us call it 
that. But if we want to have a student assistance act, then let us try 
and see what we can do to help the students.
  I hear all kinds of speeches about paperwork on both sides of the 
aisle. Here is a program that cuts down dramatically on paperwork, and 
we are going to put it back in. I just do not think it makes sense.
  There is an article in Rolling Stone. I confess, I am not a regular 
reader of Rolling Stone, Mr. President, but here is an article on this. 
I ask unanimous consent to have this article printed in the Record.
  There being no objection, the article was ordered to be printed in 
the Record, as follows:

                [From the Rolling Stone, Oct. 19, 1995]

                  Student Loans--The Price of Politics

                           (By David Samuels)

       It was a nightmare,'' says Karen Fooks, director of 
     financial aid at the University of Florida, recalling the bad 
     old days of guaranteed student loans. ``We have about 35,000 
     students, who come from all over the country, and so every 
     time a student came in to find out what was going on with his 
     loan, it became a game of hide-and-seek: Was it a student 
     problem, a bank problem, a guarantee-agency problem? Nobody 
     knew,'' With 8,000 banks making loans and 38 guarantee 
     agencies backing the loans with support from the government, 
     Fooks' confusion is understandable. ``At the beginning of the 
     year,'' says Susan O'Flaherty, acting director of financial 
     aid at the University of Colorado at Boulder, ``we ran a 
     phone bank with six or seven full-time people. And 70 to 80 
     percent of the calls that came in had something to do with 
     student loans.''
       Vanishing checks and bureaucratic red tape, however, are 
     only bad memories now at Florida, CU-Boulder and more than 
     100 other schools nationwide, where last year the federal 
     direct-lending program replaced multiple applications, banks 
     and guarantors with a single application and a single lender: 
     the federal government. This fall, direct lending is debuting 
     on an additional 1,400 campuses nationwide and will cover 
     close to 40 percent of all student loans. What should 
     students expect from the new direct-loan system? ``We can 
     answer students' questions,'' O'Flaherty says. ``And our 
     counseling staff was like `Wow! We're not spending all our 
     time chasing paper. We're actually talking to students.' '' 
     Karen Fooks is more enthusiastic still. ``Students understand 
     it; we understand it; the money comes in faster,'' she says. 
     ``We think we died and went to heaven.'' Students have even 
     more reason to like direct lending: They can pay back their 
     loans over 25 years as a percentage of income--between 3 
     percent and 15 percent, depending on their salary and number 
     of children.
       If direct lending is a success on campus, however, a very 
     different story is now unfolding in Washington, where 
     Congressional Republicans are threatening this fall to use 
     the budget-reconciliation process to kill what one Colorado 
     State University student called ``the best thing since 
     microwaveable brownies.'' What is odd here is that direct 
     lending is as much the brainchild of Republicans as of 
     Democrats: Direct lending was proposed--and a pilot program 
     implemented--by George Bush's Department of Education; Rep. 
     Tom Petri, R-Wis., has long been direct lending's leading 
     advocate in the House. With the Republican Congress having 
     promised to balance the federal budget, direct lending should 
     be more appealing than ever: Slashing federal subsidies to 
     banks and guarantors will save taxpayers as much as $12 
     billion during the next five years.
       Why are Republicans turning against a program they 
     sponsored? One explanation may be what Sen. Paul Simon calls 
     ``pure commercial politics'': What students and taxpayers 
     gain under direct lending, banks and guarantee agencies will 
     lose. Short of high-interest credit cards, guaranteed student 
     loans are the most profitable loans a bank can make, miles 
     ahead of auto loans and home mortgages. The ``guarantee'' in 
     every guaranteed student loan means that it is impossible 
     for the banks to lose money: 98 to 100 percent of every 
     loan is guaranteed by the government, along with a built-
     in profit of 3.1 percent above the prime lending rate, 
     plus fees and bonuses. The subsidies paid out to guarantee 
     agencies alone--including the interest on $1.8 billion in 
     taxpayer funds they control, a bonus of 27 percent of 
     every defaulted loan on which they collect and borrowers' 
     fees that can climb as high as $80 for every $1,000 in 
     loans--add up to an annual $638 million tax-free gift from 
     the federal government. ``This is not the free market,'' 
     former Republican Sen. Dave Durenberger famously remarked 
     of the guaranteed student loan, ``it's a free lunch.''
       Students struggling to make ends meet on borrowed dollars 
     will be interested to learn how the guarantee agencies divide 
     their share of the student-loan pie. Assistant Inspector 
     General Steven McNamara, a nonpartisan Education Department 
     employee, has conducted audits of guarantee agencies under 
     presidents Reagan, Bush and Clinton. ``We looked at 12 
     guarantee agencies, which accounted for 68 percent of new-
     loan volume,'' McNamara says, citing the inspector general's 
     recent report on the seamier side of the student-loan 
     business. ``Nine of the 12 were affiliated with organizations 
     that they were required by law to monitor, and our conclusion 
     was that these potential conflicts of interest placed about 
     $11 billion in student-loan funds at risk.''
       State by state, the guarantee agencies' record of fraud, 
     conflict of interest and other abuses demonstrates that they 
     are as cavalier with taxpayer dollars year-round as they are 
     with loan checks at the beginning of the semester:
       In South Dakota, the directors of the Education Assistance 
     Corp. used federal funds to purchase an office building from 
     themselves for $150,000, while buying furs, artwork and cars 
     for the enjoyment of the corporation staff. Board meetings 
     and retreats were held in such educational locales as the Don 
     CeSar resort, in Florida, and the Marriott Desert Springs 
     resort, in California.
       Indiana's USA Group built itself a palatial 30-acre 
     headquarters, including a 450-seat employee cafeteria and a 
     150-seat theater--and paid its CEO, Roy Nicholson, $619,949 
     in 1993. Nicholson's salary is exceeded only by the amount 
     USA plans to spend this year on lobbying Congress--$750,000, 
     according to one published report.
       In Massachusetts, officers of American Student Assistance 
     set up a corporation that billed their own guarantee agency 
     $540,000, a use of public-sector funds that--under current 
     law--is legal.
       The Texas Guaranteed Student Loan Corp. gave the Austin law 
     firm of Ray, Wood & Fine a loan-collection contract worth $5 
     million. Subsequently, the firm contributed at least $10,000 
     to the reelection campaign of Lt. Gov. Bob Bullock, who sat 
     on the Texas board. ``Buck Wood happens to be a good friend 
     of mine,'' Bullock told the Houston Chronicle. ``I talk to 
     him frequently about a lot of things.'' The inspector 
     general's investigation found that Wood's law firm didn't 
     bother to write the required semiannual collection letter to 
     104 out of 136 randomly selected students. Conflicts of 
     interest at the Texas guaranteed-student-loan agency have 
     reportedly cost taxpayers $178 million.
       Pennsylvania's state guarantee agency has 2,000 employees--
     as many as are employed in the Department of Education's 
     headquarters in Washington. Jobs at the agency are such 
     political plums that President Jay Evans was offered a $1 
     million ``platinum parachute'' to retire so Gov. Robert Casey 
     could put a top aide in the job. When Evans declined to 
     retire, he was given a no-show job with the agency at a 
     salary $20,000 higher than the governor's.
       Inefficiency and outright fraud are so common under the 
     guaranteed-student-loan system that even some Republicans 
     have broken with their party's traditional support for 
     corporate interests. According to Charles Kolb, assistant 
     secretary for planning, budget and evaluation in the Bush 
     Education Department, ``Conservatives in Congress are being 
     terribly misled'' by loan-industry lobbyists anxious about 
     preserving their profits. ``I'm a conservative Republican,'' 
     Kolb says, ``and I'm a big believer in what Newt Gingrich has 
     done. If what you're trying to do is reduce the role of the 
     government, you ought to be in favor of eliminating the 
     middlemen and all the red tape.'' Asked whether direct 
     lending will replace private enterprise with hundreds of 
     government bureaucrats, as some Republicans have charged, 
     Kolb laughs. ``If socialized profits are private enterprise, 
     then, yeah, maybe, sure.''
       Rep. William Goodling of Pennsylvania, chairman of the 
     Committee on Economic and Educational Opportunities, which 
     will determine the fate of direct lending in the House, has 
     his doubts. ``We have no idea whether the Education 
     Department can be the biggest bank in the country,'' he says, 
     ``and the biggest debt collector as well.'' Legislation that 
     Goodling sponsored last term in the House would have limited 
     direct lending to 40 percent of existing loans; he is now in 
     favor of eliminating direct lending entirely, he says, 
     because he believes it will save money, and because of the 
     ``arrogance'' of the Education Department officials. ``I'm 
     not the person who drove us to this point,'' Goodling says, 
     sounding--in this moment, at least--less like a believer in 
     the merits of the old guaranteed student loan than like a man 
     whose toes have been stepped on once too often. ``It was 
     their president who said to us, bluntly, `You go jump in a 
     lake. We're 

[[Page S 16815]]
     doing this in two years no matter what happens.' ''
       The fate of direct lending in Congress this fall may have 
     more to do with partisan politics than with the merits of 
     either the old guaranteed student loans or the new direct 
     loans. What Bill Goodling objects to the most, it seems, is 
     what he describes as a White House ploy to turn direct 
     lending into ``the cornerstone of this president's term in 
     office.'' He points to the multimillion-dollar Education 
     Department publicity campaign--including television 
     commercials, print ads and millions of individual letters to 
     borrowers--trumpeting the merits of what it calls ``President 
     Clinton's New Direct Student Loan Program.'' Are the 
     Democrats playing politics with student loans, too? Secretary 
     of Education Richard Riley defends the advertisements, noting 
     that ``if the program was a failure, it would surely be 
     President Clinton's program.''
       With both Democrats and Republicans intent on turning 
     direct loans into a political football, students may find 
     themselves facedown in the dust. Which is a shame, because, 
     as Richard Riley puts it, ``borrowing is easier and faster, 
     and students I talk to are almost elated about the 
     difference. And it's clearly a savings for taxpayers.'' The 
     banks and guarantee agencies that disagree with Riley are 
     already having their say in Congress; students, so far, have 
     been silent.

  Mr. SIMON. Mr. President, it says:

       State by State, the guarantee agencies' record of fraud, 
     conflict of interest and other abuses demonstrates that they 
     are as cavalier with taxpayer dollars year-round as they are 
     with loan checks at the beginning of the semester.

  Another quotation:

       The fate of direct lending in Congress this fall may have 
     more to do with partisan politics than with the merits of 
     either the old guaranteed student loans or the new direct 
     loans.

  It should not be political. One of the things--and I am sure the 
Senator from Oklahoma, who is presiding, has heard me say this before--
one of the things that is bad about Congress, worse than when I came to 
Congress 21 years ago, is the increasing partisanship on both sides. 
Both parties are to blame. But this is an issue that should not be 
partisan. It was originally conceived of by Congressman Tom Petri of 
Wisconsin, a Republican. I took the idea from him and introduced it in 
the U.S. Senate.
  It is interesting, the ``Bond Buyer,'' a publication also I do not 
read regularly, I have to say, Mr. President, talking about this new 
agreement of a 10-percent limit, says:

       This is an important step in the right direction for State 
     guarantee agencies.

  I want to take an important step for students, for colleges and 
universities.
  It also points out that these agencies have tax-exempt bonds for 
those who are interested in the tax-exempt bond market. One of the 
pluses of direct loans is, frankly, they do not use tax-exempt bonds, 
so the Federal Treasury gets additional income, one of the things that 
is not calculated in this skewed calculation we make.
  This is one program the President of the United States really 
understands. He came to my office when he was a candidate, and we 
talked about this. He gave a speech at Georgetown University about 
direct lending and how we have to simplify loans and reduce the 
paperwork and do a better job for the students of the United States. He 
spoke about it frequently on the campaign trail. He was down in 
Carbondale, IL, which is near my home, just a few weeks ago at Southern 
Illinois University and spoke about the program. He has spoken about it 
at Rutgers and elsewhere.
  I hope when we get past the Presidential veto; that we sit down and 
ask ourselves, No. 1, what is best for the students; No. 2, what is 
best for the colleges and universities; and No. 3, what is best for the 
taxpayers. I think if we ask those three simple questions, then I hope 
we will come to the conclusion the best way is to give people the 
option: If you want to go with the old program, you can go with the old 
program. If you want to go with the new program, you can go with the 
new program. But to say to the schools in Oklahoma and Illinois, three-
fourths of you who like the new Direct Loan Program, three-fourths of 
you are going to have to get rid of that program, I do not think we 
should do that. Talk about unfunded mandates. They not only reduce 
paperwork, they reduce the work of personnel in colleges and 
universities. That is what we ought to be about.
  So, Mr. President, I hope we do the right thing after we get through 
this first phase of reconciliation that is going nowhere, and then sit 
down and work together and come up with what is sensible for the 
students, for the future of our country.
  It is interesting that some years back, prior to your being here or 
my being here, Mr. President, right after World War II, there was a big 
debate among veterans organizations. The American Legion wanted to have 
an education program, and the other veterans groups wanted to have a 
cash bonus. Fortunately, the American Legion won out, and we had the GI 
bill, which has been a huge plus for the country. If we had had the 
cash bonus, it would have been frittered away, and we would have gotten 
nothing out of it.
  We kind of face the same thing now. Do we cut back on assistance to 
students, or do we have this tax cut? The tax cut is $345 billion, and 
the cutback on students is only $10 billion. We can have both, but I do 
not think you build a better, finer America by cutting back on 
educational opportunities.

                          ____________________