Dispursed Student Loans

The publishing of a budget will invariably involve major public policy debates on taxes and spending. In last week's budget, a minor storm for a smaller audience of those studying, regulating and disbursing student loans resulted. The Office of Management and Budget came up with a definite answer to a long-standing debate on government-guaranteed student loans through subsidized private lending institutions in cost as against direct loans from the education department. The budget calculators are clear that the government-guaranteed loans are over 10 times more costly. For every $100 on student loans the US government pays subsidy of $12.09 on government-guaranteed loans and only $0.84 for direct loans.

However the figures are in dispute with the student loans industry. A new group, Partnership to Protect Affordable Student Loans circulated a letter last week on Capitol Hill alleging that despite the budget figures; over $1.4 billion is the cost to taxpayers of the direct loan program as against guaranteed loans. But the group run by Mercury Public Affairs, which handles public relations for Sallie Mae, the largest student lending institution, bases these figures on comparisons with dissimilar numbers. 

Sallie Mae student loans put more complex arguments forth on relative costs of the two programs. But analysts cannot definitively disprove assessments of OMB or Congressional Budget Office, which has a similar conclusion. The complexity of the numbers has led many in Congress to believe in hidden costs in the direct loan program. Consequently the House and Senate budget and education committees have requested a reexamination of costs by the Government Accountability Office.

As long as the results are taken seriously it doesn't really matter. If critics of subsidized lending are correct billions of dollars at stake can easily be diverted. Currently universities have a choice of the types of loans but no incentive for direct loans. In contrast financial institutions strongly urge universities for their services, with the result that only 25% of universities choose direct loans. Even a slight shift of the number to 40% would ensure $12 billion in savings over 10 years as per the CBO. This provides over $1,000 each in Pell Grants to low-income students in the form of student loans. Compare this with the announcement by President Bush of $1000 annual increase in Pell Grants. Education committee Democrats and some Republicans including George Miller and Thomas E. Petri in the House and Thomas E Petri in the House and Edward M Kennedy in the Senate favor the proposed legislation to give universities incentives to switch programs in permitting the use of savings to increase students' Pell Grants. 

This solution though not the only one, is worth serious consideration. Arguments on student loans have increasingly been complicated by phony dichotomy between the so-called free market government-guaranteed loans and the big government direct loan program. The government-guaranteed loans are actually corporate welfare. The time is right for changing rules to ensure that more of the student loans' money reaches students instead of banks.

Occasionally consolidation of student loans makes repayment easier even with a slight increase in the interest rate. Those facing difficulty in making payments for student loans need to consider alternatives in repayment terms for federal loans. An example is the income contingent payments adjusted for lower monthly income. Graduated repayment for borrowed student loans involves lower payment for the two years after graduation. With extended repayment the loan term is extended without consolidation. But the increase in the total interest amount in each option is less than that of consolidation.

This may not be the only solution to the problem, but it is worth taking seriously. For too long, the arguments about Student loans have been clouded by a phony dichotomy between the supposedly free market government-guaranteed loans and the big government direct loan program. In fact, the government-guaranteed loans are a form of corporate welfare. Maybe it's time to change the rules and make sure that more of the student loan money goes to students, not banks.