WHEN A BUDGET is published, its contents invariably launch big public policy debates about taxes and spending. Last week's budget also touched off a minor storm among a much smaller audience: those who study, regulate and disburse student loans. For in just a few paragraphs -- on Page 371 of the budget, to be exact -- the Office of Management and Budget unexpectedly provided its definitive answer to a long-standing argument over whether government-guaranteed student loans, provided through subsidized private lending institutions, cost more or less than direct loans provided by the Education Department. According to the budget calculators, the answer is clear: The government-guaranteed loans are more than 10 times as expensive. More precisely, the budget numbers show that for every $100 spent on student loans, the U.S. government pays $12.09 of subsidy on government-guaranteed loans and only 84 cents for direct loans.
Not surprisingly, the student loan industry disputes these figures. Last week a new group called the Partnership to Protect Affordable Student Loans circulated a letter on Capitol Hill claiming that despite the budget figures, the direct loan program costs taxpayers "$1.4 billion more" than the guaranteed loans. But the group -- which is run by Mercury Public Affairs, a company that among other things does public relations for Sallie Mae, the largest student lending institution -- has obtained its figure by comparing dissimilar numbers. Sallie Mae itself provides more complex arguments about the two programs' relative costs, but its analysts cannot definitively disprove the assessments of OMB or of the Congressional Budget Office, which has come to a similar conclusion. Nevertheless, the complexity of the numbers -- reinforced by the enormous amount of money the industry spends on lobbying -- has left many in Congress feeling that there may well be "hidden costs" to the direct loan program. With this in mind, the House and Senate budget and education committees recently asked the Government Accountability Office to examine the question of costs once again.
That's fine -- as long as they take the results seriously. Billions of dollars are at stake if the critics of subsidized lending are right, and could be easily redirected. At the moment, universities can choose which kind of loan to use, but they have no real incentive to use direct loans. By contrast, financial institutions lobby heavily to persuade universities to use their services. As a result, only 25 percent of universities opt for direct loans. If that number were to shift even slightly, to 40 percent, $12 billion would be saved over 10 years, according to the CBO. That could provide upward of $1,000 more apiece in Pell Grants to low-income students. By way of comparison, President Bush announced this year with great fanfare a $100 annual increase in Pell Grants. Knowing these numbers, education committee Democrats and a few maverick Republicans -- George Miller (D-Calif.) and Thomas E. Petri (R-Wis.) in the House and Edward M. Kennedy (D-Mass.) in the Senate are among them -- have proposed legislation that would give universities an incentive to switch programs, by allowing them to use the savings to increase their students' Pell Grants.
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.