Direct Lending Clunker Is Already Running Out of Gas

By Michael Fumento


Copyright 1996 Michael Fumento

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Picture a car salesman screaming at you from the television. "My plan will save you billions, BILLIONS, in tax dollars by taking student loans away from the banks and cutting out the middleman’s profits! But there’s more! Students will save money, too, because I’m offering them lo-lo E-Z payments! I must be crazy to offer such a deal! That’s why they call me Crazy Billy!"

That, if you pardon a wee bit of rhetorical flourish, was President Bill Clinton of two years ago. And his pitch worked, as Congress enacted his student loan direct lending program.

And as is so often the case, the vehicle that on the lot looked so pretty has turned out to be little more than a bucket of bolts.

The timing on the direct loan scheme couldn’t have been more ironic. At a time when former Soviet republics were privatizing everything in sight, our government was nationalizing a major industry. Still, two government studies, one by the Congressional Budget Office (CBO), and the other by the General Accounting Office, did calculate that direct lending could save money, about $4 billion over the next four years.

The Clinton Administration made things look sweeter by arbitrarily doubling that to $8 billion. What’s a measly $4 billion among friends, right?

A pilot direct-loan program was already in the works, but in the atmosphere of arrogance that characterized those early Clinton months, the Administration decided there was no need to wait.

Now even government agencies are saying that this act of reinventing government is closer to reinventing the Edsel.

A new CBO study has actually reversed that agency’s position and concluded that the best way for government to save money with direct lending is to scrap it. This could save taxpayers $1.5 billion over the next seven years.

The reason for CBO’s about face is that its original report compared the administrative costs of only a year of the direct lending scheme with the full administrative costs of the guaranteed student loan system. When Congress directed the CBO to compare both programs on an equal footing, it became clear the result was a jump in government spending.

A new Congressional Research Service report also concludes that the Administration was not calculating fully the cost of taking over the administration of the program.

Also a fraud is the part of Crazy Billy’s plan which was to help students, the E-Z payment part. All it actually does is to stretch out payments, the oldest trick in the car salesman’s repertoire. Currently, students are given 10 years to repay, while under direct lending it’s 25.

Sure, payments are lower. But at the end of the 25-year period a student borrowing the maximum amount allowed, $88,000, would end up paying back $167,723 in interest and principle instead of $128,400 under the existing plan.

Moreover you would also have students paying off their college loans even as their own children were going off to college. Instead of a chicken in every pot, Clinton’s promise is two generations of student loans in every family.

But there’s one huge difference between Crazy Billy and other used car salesmen. No one forces you to buy from a used car lot.

Crazy Billy says he won’t force anyone to buy his plan, either. Repeatedly he’s stated that direct government lending will be a matter of choice for schools. As late as April of this year he spoke of making "the student loan program available to all the schools on a voluntary basis . . . "

Yet Clinton’s current budget proposal indicates that all colleges and universities will be in the program by 1997-98. Education Secretary William Riley has affirmed in a letter to Tennessee Democratic Representative Bart Gordon, a direct lending opponent, that under the presidents’s plan, by the 1997-98 school year "all schools would be required to participate."

So much for "voluntary."

The obvious reason for this conscription is the same as for any - that volunteerism isn’t working. While the law allows up to 40% of loan volume by 1995-96, recent reports from the GAO and the Advisory Committee on Student Financial Assistance state that direct lending participation will actually be around 30%. Far from flocking to join the program, institutions have been scrambling to get out.

Earlier this year the GAO stated that 104 institutions have abandoned their Crazy Billy direct lending vehicle by the side of the road. Yet while legitimate four- and two-year institutions have been steering clear of the government program, it has become a haven for hundreds of high-default trade schools with questionable credentials.

Almost half the direct loans are to students of trade schools, with a third of all loans going to students of barber or beauty academies. The default rate for student loans from trade schools averages 30%, compared with only 7% for four-year colleges. For all his trouble in taking over the student loan program, Uncle Sam is going to get stuck holding a lot of useless notes.

A recent poll sponsored by direct lending opponents indicates that almost three-fourths of the public believes that the pre-Clinton system of private industry making loans which the government guarantees is better than the Clinton program.

Congress should tell Crazy Billy that taxpayers aren’t the tire-kicking yahoos he thinks we are and that we want direct lending sent to the junk yard.


Read Michael Fumento’s additional work on the Clinton administration and on education.