[Congressional Record Volume 142, Number 9 (Wednesday, January 24, 1996)]
[Senate]
[Pages S348-S349]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                  STUDENT LOANS AND CORPORATE WELFARE

 Mr. SIMON. Mr. President, in his State of the Union Address, 
President Clinton made a reference to the successful effort to 
streamline the college student loan process and make repayment easier.
  Some of my colleagues may be surprised to learn that much of the 
credit for these improvements should go to a conservative Republican 
from Wisconsin, Representative Tom Petri. He developed one of the 
earliest models for a direct loan program and for income-contingent 
repayment, and he has been a consistent proponent over the years.
  Earlier this month, Congressman Petri appealed to fellow 
conservatives to help save the direct loan program, which has come 
under attack by banks and agencies that do not want to lose their 
Government-guaranteed income.
  I urge my colleagues to read Mr. Petri's article which appeared in 
the Washington Times on January 9. I ask that the article be printed in 
the Record.
  The article follows:

            Student Loans: Direct Lending vs. Special Pleas

                          (By Thomas E. Petri)

       How's this for a switch? The Clinton administration stands 
     firm for private enterprise and competition, against 
     Republican attempts to stomp out a successful competitor and 
     perpetuate an inefficient monopoly.
       That's exactly what's occurring in the ongoing student loan 
     debate. Administration officials accuse congressional 
     Republicans of caving in to loan-industry lobbyists by 
     eviscerating the Direct Student Loan program. And on this 
     issue, the administration actually occupies the conservative 
     high ground.
       The loan industry (banks, secondary markets and guaranty 
     agencies) wants to protect its lucrative, fraud-infested, no-
     risk student loan program from any meaningful competition. 
     It's losing in the marketplace; so it mounted a multi-
     million-dollar lobbying campaign this year to persuade 
     Congress to eliminate direct student loans.
       By casting the debate in simple, ideological terms, the 
     loan lobbyists have won some allies. they've equated the 
     Department of Education's Direct Student Loan (DSL) program 
     with Big Government--and they've successfully portrayed it as 
     a Clinton initiative. That guarantees enmity from 
     conservative Republicans.
     
[[Page S349]]

       Unfortunately, it's a hoax. One creator of the DSL program 
     was a Republican with solid fiscal conservative credentials--
     me. It was developed not by the reviled liberal Clinton, but 
     by the Bush administration.
       And there is far more free enterprise in DSL--and less 
     bureaucracy--than in the bloated Guaranteed Student Loan 
     (GSL) program. I dislike the term ``corporate welfare,'' but 
     if any program deserves that title, it's guaranteed student 
     loans.
       Here are conservative principles I believe in: substituting 
     market forces for political forces; simplifying programs and 
     cutting bureaucracy; saving taxpayers money.
       On all counts, killing the DSL program goes in the wrong 
     direction.
       All major functions under DSL are run through private 
     sector services under competitively bid contracts. This 
     competition is bringing down the cost of those contracts via 
     market forces.
       Under the guaranteed student loan program, all payment 
     levels are determined politically by Congress--not by the 
     free market. Here's just one example of the resulting built-
     in profits: While the student is in school or during the six-
     month grace period following school (a period averaging 2.5 
     years for each loan), the lender does nothing but collect 
     interest directly from the government at 2.5 percent above 
     the Treasury-bill rate on paper that's as good as a Treasury 
     bill. It's a system of political entitlements, and any 
     conservative ought to prefer the competitive bidding system 
     under direct loans.
       The Education Department says it can manage all direct 
     loans with only 400 employees. All important business 
     functions--loan origination, servicing, debt collection--are 
     handled by private firms, with Education Department 
     supervision.
       But overseeing 7,100 guaranteed bank lenders takes 525 
     Education Department employees and another 5,000 employees in 
     41 federally subsidized guaranty agencies. It's a 
     bureaucratic nightmare.
       Congress can easily oversee the direct program because it 
     involves relatively few contractors, all of whom have have 
     incentives to do a good job in order to win additional 
     contracts.
       But there's little supervision of the guaranteed program's 
     guaranty agencies. Congress isn't looking over their 
     shoulders because they're not federal entities. State 
     legislatures aren't interested because the guaranty agencies 
     aren't state-funded. And they have no stockholders to answer 
     to. Unsurprisingly, the result is abuse.
       In one case, a guaranty agency's chief executive officer 
     earns $700,000 a year plus untold benefits. Some 15 other 
     employees in the same agency earn more than the U.S. 
     secretary of education. In another, board members set up a 
     for-profit corporation to provide services to the guaranty 
     agency that they controlled. More taxpayer money goes largely 
     unchecked in these agencies for platinum parachutes, perks, 
     lavish pensions, executive cadillacs and dining rooms and 
     retreats at posh resorts.
       Little wonder the lending moguls want to kill direct 
     lending. Their cause is helped by various scoring errors 
     (including some they lobbied for) that make direct lending 
     look more expensive than guaranteed. The worse is the 
     assumption of a high long-term interest rate as the cost of 
     the federal funds used to make the direct loan. That would be 
     appropriate if the interest rate that student borrowers paid 
     were fixed, but it's not. It's variable, based on 91-day 
     Treasury bills; so these loans do not carry the kind of 
     interest-rate risk that a long-term rate discounts. Indeed, 
     no private bank treats variable-rate loans the way the 
     Congressional Budget Office treats direct student loans.
       In general, it's inconceivable that a simpler program based 
     on competitive bidding could be more expensive than a vastly 
     more complex one based on politically negotiated 
     entitlements. Especially when the complex one actually 
     encourages defaults--because guaranty agencies get to keep 27 
     cents of every dollar they collect after a default and their 
     costs for those collections average only 13 cents on the 
     dollar.
       Some Republicans believe that if President Clinton supports 
     a program, that program must be opposed. Right now, Mr. 
     Clinton is telling the American people that the GOP Congress 
     is trying to shut down a conservative reform effort, which is 
     good for both students and schools, in order to keep the 
     gravy flowing to powerful special interests.
       In this case, the president is right.

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