It costs the federal government substantially less in the long run to make college student loans out of its own funds than to subsidize loans issued by private banks, the Education Department reported yesterday.
The cost comparison prepared for Congress calculated the government will actually make a profit of $4 for every $100 a student borrows directly over the life of a loan, but will pay out $18 to subsidize every $100 in federally guaranteed loans made by a private bank during a similar period. Those figures were computed over 50 years and take into account projected inflation.
The department estimated the direct student loan program has saved the government $4 billion over the past five years and will save another $2.3 billion in the current fiscal year.
Currently, the government makes about a third of student loans, with the rest coming from banks and other private lenders that receive federal payments to compensate them for offering below-market interest rates and to protect them from losses on defaults. The Education Department expects to lend $15 billion directly to 2 million students this year.
"The direct loan program is much less expensive for taxpayers because it does not require federal subsidies for lenders," said Marshall S. Smith, acting deputy secretary of education. "In addition, interest earned on direct loans accrues to the U.S. Treasury, not to private lenders."
Ever since the department began making student loans in 1993, a debate has raged in Congress over whether government or private lending is more cost-effective. A previous study by the department's inspector general concluded that banks spent less servicing loans than the department did--a different basis of comparison.
Smith called the department's study "the most complete apples-to-apples comparison of the two programs' costs ever undertaken."
It has hardly settled the debate, however.
"This is an internal report. It's not independent. Clearly, they have a political agenda to show that direct loans have been a success," said Fritz Elmendorf, spokesman for the Consumer Bankers Association, which represents most banks that make student loans.
Sallie Mae, a major private player in the student loan market, also pointed out the department's conclusion conflicted with the inspector general's finding earlier this year. Rep. William F. Goodling (R-Pa.), chairman of the Education and the Workforce Committee, said he would ask the inspector general to examine the methodology used in the department's study.
There was no immediate comment from Rep. John Edward Porter (R-Ill.), chairman of the House Appropriations subcommittee with jurisdiction over education spending, who asked the department to do the study. But Dave Kohn, a spokesman for Porter, indicated the congressman has been skeptical of what the department has long asserted are substantial cost savings. "His instinct is that the private sector probably can achieve some cost savings because of their experience and interest in maintaining a bottom line," Kohn said.
According to department officials, the direct loan program has been an instance where government has proved more efficient than the private sector--so much so that banks began upgrading their service and offering discounts to borrowers to stay competitive.
"It's an extraordinary success story," Smith said. "There was no competition. The private sector thrives from competition."