| PublicationDate: 1/17/96 Summary: Letter to the Editor - Washington Post Author: OPE - Office of the Assistant Secretary for OPE 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 winner. RICHARD W. RILEY Secretary U. S. Department of Education Washington |