[Congressional Record Volume 142, Number 122 (Monday, September 9, 1996)]
[Senate]
[Pages S10049-S10051]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      DIRECT STUDENT LOAN PROGRAM

  Mr. SIMON. Mr. President, although it is unusual for me to speak from 
a prepared text, I want to spend a little time providing my colleagues 
with some of the history and facts regarding an item that appeared in 
the Republican Party's platform last month. The issue is a successful 
Direct Student Loan Program which has saved students and taxpayers 
billions of dollars by streamlining a complicated system and enhancing 
competition. It is a great disappointment to me that an issue with such 
strong bipartisan roots has been turned into a one-line rhetorical 
attack on the President. That is unfair to the program, unfair to the 
President, and it is unfair to the Republicans who spent years 
promoting these reforms.
  Five years ago, I teamed up with David Durenberger, then a Republican 
Senator from Minnesota, in proposing to shift to a direct loan program 
with income-based repayments for all students who desire it. We 
proposed using the billions saved with that proposal to restore the 
buying power of the Pell Grant Program, which has suffered from years 
of underfunding.
  The loan reforms we put in our bill were not original. They were 
borrowed, with a few minor changes, from Representative Tom Petri, a 
Republican from Wisconsin with conservative credentials, with whom you 
and I served, Mr. President, in the House.
  My colleague, Senator Al D'Amato, now the head of the National 
Republican Senatorial Committee, cosponsored the Petri plan in the 
Senate. Republican support for direct lending was broad. Original 
cosponsors of the Petri legislation included my House colleague from 
Illinois, John Porter, now the chairman of the appropriations 
subcommittee that handles education, and three Members who have now 
joined us in this body: Senator Rick

[[Page S10050]]

Santorum, Senator James Inhofe, and Senator Ben Nighthorse Campbell.
  Cosponsors also included the current Speaker of the House and spanned 
the Republican spectrum from Susan Molinari to Dana Rohrabacher. Their 
support did not stop at cosponsorship. Thirty-three Republican House 
Members wrote to President Bush urging him to make direct lending part 
of his domestic agenda. They argued that Republicans--and I am quoting: 
``should be advancing our own innovative, cost-effective solutions'' to 
help the middle class pay for college.
  But after President Clinton proposed their innovative, cost-effective 
solution, many of those Republicans became silent, or worse, opposed 
their own proposal. The basic policy did not change. It was pure 
partisan politics. The Republican party platform ratified last month 
included the following two sentences:

       Congressional Republicans budgeted a 50 percent increase in 
     student loans while fighting Bill Clinton's intrusion of Big 
     Government into their financing. Heeding the outcry from the 
     nation's campuses, we will end the Clinton Administration's 
     perverse direct lending program.

  That is the end of the quote from the Republican platform.
  Mr. President, the program that was innovative and cost-effective 
when it was a Republican idea somehow became perverse and an intrusion 
of Big Government--with a capital ``B'' and a capital ``G''--when 
President Clinton decided to promote it.
  Mr. President, I want to respond to these statements. And I speak not 
only for myself. Members should know that every national higher 
education association and student group that has taken a stand supports 
direct lending. If there is any outcry on college campuses, it is for 
the reforms that President Clinton has championed, not against them.
  I have a chart here that compares the old Government guarantee 
program with the direct lending. I ask my colleagues to look closely 
and tell me which program is the so-called perverse, big Government 
system that the Republican platform would eliminate.
  Is it the program on the left, with fewer than 500 Government 
employees, or the one on the right with more than 2,500 Government 
employees?
  Which is big Government?
  Is it the one that uses competition to determine how much to pay 
private-sector participants or the one in which Congress sets the 
prices?
  Is it the one where a low default rate is rewarded or where more 
defaults can bring more money to middlemen?
  Mr. President, which is ``perverse''?
  Is it the program that uses taxpaying private-sector companies and 
investors or the one that gives away tax subsidies? And again, you have 
these comparisons here.
  Is it the one that chooses contractors based on performance or the 
one in which Congress gives entitlements to middlemen regardless of 
performance?
  Is it the program that can be audited or the one that requires 
taxpayers to give away money in the dark?
  Is it the one with or without costly conflicts of interest that 
threaten billions in lost taxpayer dollars?
  If we change the chart here, you will see at the bottom obviously 
this is the one that Congressman Petri and Senator Durenberger and 
others of us have proposed and is now in effect on about 1,700 campuses 
that really makes sense.
  Mr. President, strange as it may seem, the program that the 
Republican platform has labeled ``perverse, big Government,'' is the 
one that has fewer Government employees, no entitlements to middlemen, 
uses competition to set prices, and rewards only the good performers.
  Congressman Tom Petri warned his Republican colleagues last September 
that they were going down the wrong road. Let me repeat what he had to 
say. This is Congressman Petri talking.

       If at the end of this whole process we do kill off direct 
     lending, President Clinton and others will tell the American 
     people that the Congress, under Republican control, shut down 
     a conservative reform effort that was good for students and 
     schools in order to keep the gravy flowing to powerful 
     special interests. And that argument will resonate with the 
     American people because it was right.

  Mr. President, I would like to take a few moments to describe to my 
colleagues how the Government guarantee program really works. The banks 
and Sallie Mae like to brag they now share the risk of defaults of the 
student loan program because they are reimbursed 98 percent rather than 
the 100 percent they insisted was necessary before direct lending came 
along as an alternative.
  That 2 percent is a nice contribution, but it is also deceptive. A 
bank that makes a loan of $1,000 is guaranteed, by the Government, not 
just $980, but also full interest on the $1,000 at a rate 3.1 
percentage points above the Government's cost to borrow. That is set by 
us in Congress. Some of these bankers who denounce welfare for poor 
people will end supporting this welfare for bankers. If it cost us 5 
percent to borrow, we pay them 8.1 percent every year. Then they offer 
to absorb 2 percent of any loan that defaults.
  So if interest is included, what is the real guarantee? After 4 years 
of college, the Government, which will have paid about $324 in interest 
on $1,000, then will reimburse $980 of the default, for a total payment 
to the bank of $1,304. The real Government guarantee is more than 130 
percent, not the 98 percent that they advertise.
  What about all those guarantee agencies, the middlemen in the 
Government guarantee system? They claim that they are the Federal 
Government's partner, sharing the risk of loan defaults.
  Mr. President, that has not been true since 1976. These guarantee 
agencies have no private contributors, no private investors, no State 
funds that contribute to the cost of the Federal loan program. Instead, 
the funds that they ``share'' with us are the funds that we give them; 
entitlements such as a percentage of the student's loan, 27 percent of 
any defaults they collect, and administrative payment, and on and on. 
It is like your child saving up his allowance to pay a small part of 
the cost for a new bicycle. It is a nice exercise, but the money really 
all comes from your pocket.
  It is true that the amount we pay to the banks and middlemen is lower 
than it was before 1983. But it is lower only because direct lending 
forced the lobbyists to admit that they were fleecing taxpayers and 
students.
  For 25 years the banks and student loan middlemen kept asking 
Congress for more subsidies, more entitlements, and less risk. Congress 
had little choice but to comply. No elected official wants to risk 
students not getting loans. The banks and middlemen told us that to cut 
the subsidies would risk loan access.
  As recently as 1991, the banks warned that some borrowers could lose 
access to loans if Congress did not increase the return to lenders.
  Until President Clinton proposed a viable alternative to the 
Government guarantee program, there was no safe way to call the bluff. 
The Republican platform's plan to eliminate direct lending would return 
us to that time when we had no choice but to follow orders from the 
banking industry, the guaranty agencies, and their lobbyists.
  This leads me to some questions about the Government guarantee 
program:
  Why do we pay banks 3.1 percentage points over the Treasury rate? Not 
because of any market competition that led to the price, not because of 
any study by economists, but because that is what the lobbyists said 
the industry could live with.
  Why do we pay guaranty agencies 27 percent of any defaulted loan they 
collect? Incidentally, that is an encouragement to default. We 
subsidize that, not because of competition, not because of careful 
study, but because the lobbyists told us that was the right number.
  Why did last year's appropriations bill require the Education 
Department to pay $176 million to guaranty agencies on top of the more 
than $1.8 billion in Federal funds they already hold? Because that is 
what the lobbyists said they wanted. I could go on and on.
  Mr. President, is this any way to run a program? Instead of lobbyist-
set rates, why not use auctions to determine how much we should pay to 
get capital for student loans? That is direct lending.
  Rather than Congress setting the rates, why not use competition to 
determine how much to pay the loan collectors? That is direct lending.
  Why not give all borrowers a wide variety of repayment options 
instead of

[[Page S10051]]

leaving their options up to the whim of whatever secondary market 
happened to purchase their loan from the bank? That is direct lending. 
I might add, direct lending is open to every student while in the old 
system you have to be below a certain level of income.
  Why not provide the funds through the same system that delivers Pell 
grants, work-study and other student aid rather than confusing schools, 
parents, and students with a plethora of agencies, offices, and forms? 
That is the simplicity that direct lending provides.
  What about savings for taxpayers? A few direct loan opponents have 
implied that direct lending never was cheaper than the Government 
guarantee program. That is just plain nonsense, and it is easy to see 
why. Everyone agrees that the 1993 reforms forced several billions of 
dollars of reduced subsidies in the Government guarantee system. Now, 
according to the Senate Budget Committee, the cost of the two programs 
are virtually identical. By definition, if the cost of the Government 
guarantee system has come down and now matches direct lending, then 
direct lending must have been cheaper.
  In fact, the cost of the direct loan program has been overstated for 
a variety of reasons that I have explained in detail previously in the 
Record, including the choice of discount rates, the cost of tax-exempt 
bonds used by secondary markets but not in direct lending, and the 
handling of conflicts of interest and other costs of the Government 
guarantee system. Not only was direct lending cheaper 3 years ago when 
the loan industry was forced to ante up, but it is still cheaper today.
  Whether you agree with the Republican staff of the Budget Committee 
or with Congressman Tom Petri or Paul Simon, there is no question that 
the 1993 student loan reforms have saved billions of dollars for 
taxpayers because of the efficiency of direct lending.
  Mr. President, millions of dollars have been spent in lobbying to 
sully direct lending, and there are two other charters to which I have 
not yet responded. First, there was the cost-shifting scare. Before 
direct lending had a track record, Sallie Mae provided colleges with 
sophisticated-looking analyses showing that direct lending would cost 
the average college an additional $219,000 to administer each year. 
Banks and middlemen also got into the fray, hiring a CBO Director to 
say that costs were being shifted to schools. Of course, colleges were 
concerned.
  But time has erased all those claims. Direct lending turned out to be 
exactly the opposite of the Sallie Mae scare tactic. Colleges saved 
money through a welcome relief from excess paperwork and redtape. In 
your State of Colorado, Mr. President, the State auditor found that 
direct lending in the first year reduced costs by $325,245, at two of 
the State's universities.
  That is why 1,700 schools have now joined the direct loan program. 
Schools now have the option. That is what we want to keep.
  Next, there came the haven for defaults claim. Long-time opponents of 
direct lending held a press conference to announce a rush of high-
default schools into the direct loan program. They pointed to several 
shady trade schools but failed to point out that the schools, under the 
law, had to already be participating in the Government guarantee 
program. Still, they persisted in their claims for as long as no data 
were available to refute them.
  In March, the data arrived. That lie was put 6 feet under. The truth 
is that schools in the direct loan program last year had a lower 
average default rate than those in the guarantee program. More data on 
the performance of the two programs at similar schools is still to 
come.
  Mr. President, over time, every allegation made by the industry has 
turned out to be misleading or just plain groundless.
  I have said very little about students. They, after all, are the 
reasons that these programs exist. How have they been helped by the 
Student Loan Reform Act proposed by President Clinton and enacted by 
the Congress in 1993?
  I touched briefly on the repayment options. Direct lending makes a 
wide variety of repayment options available to any borrower. Borrowers 
can even choose to make payments that vary according to their post-
college income. That is critical, as students are increasingly relying 
on loans to finance their continuing education.
  USA Today reported that the direct loan program's ``simplicity has 
proved hugely popular at colleges across the country.'' In the 
Government guarantee program, the maze of agencies, lenders, and 
purchasers often cause confusion, delays, and errors. They are not only 
frustrating but costly to colleges and students.
  As millions of college students begin this academic year, one of the 
things that is foremost on their minds is money. Whether they 
participate in the direct loan program or the guarantee system, the 
changes that were enacted in 1993 will send students this week back to 
their dorm rooms with $650 million more than any would have had 
otherwise. In other words, $650 million savings this school year to 
students because of the direct loan program and because the old 
guarantee program has been forced to come down in its expenditures 
because of direct lending. That savings would never have happened 
without the leadership that President Clinton and Congressman Petri, 
Senator David Durenberger, and Senator Ted Kennedy showed in standing 
up to the special interests and promoting the direct lending.
  I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The bill clerk proceeded to call the roll.
  Mr. KENNEDY. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. KENNEDY. Mr. President, as I understand it we are on general 
debate?
  The PRESIDING OFFICER. Yes.
  Mr. KENNEDY. Is there a time limit on morning business?
  The PRESIDING OFFICER. There is a 10-minute time limitation.
  Mr. KENNEDY. I ask unanimous consent to be able to speak for 20 
minutes.
  The PRESIDING OFFICER. Without objection, it is so ordered.

                          ____________________