Thursday, December 14, 1995
The Washington Post
Letters to the Editor
Student Loans: 'Direct Lending Is a Winner'
The recent op-ed column by economists Dennis Zimmerman and
Barbara Miles ["Student Loans: No Simple Way to Cut Costs," Nov.
30] underscored the complexity of the battle over the future of
student loans. However, their case against providing colleges and
their students the use of the direct loans is flawed.
First, they considered the merits of direct loans and the old
guaranteed loan system within an economic vacuum.
Accountability, regulatory burden and customer service are
important standards to consider when evaluating a government
program. Direct lending is superior on all of those counts, as
evidenced by the high marks it has received from students and
administrators at more than 1,350 colleges.
More to the point, direct lending beats guaranteed loans on the
economic arguments as well. Mr. Zimmerman and Ms. Miles claim
that the budget scorekeeping rules have been "corrected" so that
"direct and guaranteed lending should now be seen as equally
costly." In reality, Congress voted earlier this year to change federal
accounting rules as they apply only to direct loans. The change
required that the Congressional Budget Office calculate up to 30
years' worth of projected federal administrative costs for the direct
loan program in the budget for each fiscal year. Guaranteed student
loans and the 60 other federal credit programs need only count those
costs for one year at time.
Further, direct lending offers administrative efficiencies not
achievable in the guaranteed loan program. Direct lending uses
competitive bid contracting with private collection agencies, offering
improvement in cost efficiency and accountability. By contrast,
banks and guaranty agencies participating in the guaranteed student
loan program receive billions of dollars in fixed taxpayer subsidies,
without the price pressures of competitive bidding.
As for accountability, the Education Department can closely monitor
a handful of private contractors. No agency-public or private-can
effectively monitor the guaranteed program, which has mushroomed
into a mass of more than 7,000 financial institutions. The General
Accounting Office and the Education Department's inspector general
have said repeatedly that the guaranteed program cannot be policed
effectively because of the multitude of participating institutions.
Direct lending offers better prospects than the guaranteed program
for reining the biggest problem in student borrowing: defaults. Over
the last four years, the Education Department has eliminated 668
high-default schools from the program, but default rates can still be
improved. Direct lending offers the best opportunity to reduce
defaults through a simpler repayment and collection system for
students and the availability of flexible repayment options. For
example, "income-contingent repayment" lets students set their loan
payments as a percentage of their earning when their income is low.
We think direct lending is better for students and families, while the
majority in Congress supports guaranteed loans, which are best for
the people who profit from a more complicated system-namely,
certain banks and other financial institutions. The numbers,
however, favor direct lending as long as we all play by the same
rules. And for students, families and colleges, direct lending is a
RICHARD W. RILEY
U. S. Department of Education