Direct Lending: ’Reinvented Government’ That’s the Same Old Nonsense

By Michael Fumento


Copyright 1995 Investor’s Business Daily

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It was "a giant step toward reinventing government," that would "make college more affordable and save taxpayers substantial sums of money."

So said Education Secretary Richard Wiley two years ago about President Clinton’s scheme to replace the student loan system, in which banks made the loans and the government merely acted as guarantor, with loans directly from the government.

Yes, at the same time the former Eastern Bloc countries were privatizing their industries, the folks who brought you such successes as Amtrack and the Post Office sallied forth to nationalize a huge highly-successful industry with benefits to everyone but those nasty capitalist pig banker middlemen.

In fairness, 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 which was to help students. All it actually does is to stretch out payments, the oldest trick in a 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.

"Are these the people
you want cleaning up
after student loans?"

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.

Still, at least schools aren’t being forced to participate. Or so Clinton has said repeatedly, including as late as April of this year when 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. 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 bailed out of the program.

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 guaranteed student loan system is preferable to direct lending. Legislation currently before Congress would cap the program at 40% of schools. But 40% of a bad deal is still a bad deal, just as reinvented government has turned out to be the same old government.

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