THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Friday, January 26, 1996 TAG: 9601250034
SECTION: FRONT PAGE: A12 EDITION: FINAL
TYPE: Letter
LENGTH: Medium: 51 lines
Among the legislation in limbo due to the budget impasse in Washington is the student-loan program. President Clinton wants the Education Department eventually to make all loans directly to students, beginning with a pilot program. Congress wants to retain the present method of using private lenders to make government-guaranteed loans.
One rationale for making a change is supposed cost efficiency. But the Congressional Budget Office, an arbiter in such matters, believes the pilot program alone could cost taxpayers $1.5 billion more in overhead than continuing the existing method unchanged.
That's partly because banks are in the loan business and know how to do it efficiently already; government doesn't. In fact, government-loan programs are notorious for high default rates and poor collection results.
Education Secretary Richard Riley recently announced that student-loan defaults have been cut in half since 1990 when they were running at an unconscionable 22.4 percent. But that improvement flows from tougher collection tools voted by Congress. They will be available if loans continue to be administered by the private sector or if they become solely a government responsibility.
But the private sector has a far better record of collecting on loans in default than the government, probably because profits depend on it. And if the direct-government-loans proposal were approved, the government would contract with a private firm to do collections anyway.
Letting the private sector do the lending also keeps the debt off the public ledger. Doing the loans direct would not only turn the government into a huge consumer lender but would add an estimated $348 billion to the national debt over the space of 20 years. Not only would the government bear all the costs of a direct-student-loan program, it would take all the risk. When private lenders are used, they earn rewards for participating but also shoulder some of the risk.
At a time when a consensus supports privatizing government functions and streamlining bureaucracies, President Clinton is swimming against the current in trying to turn student loans into a direct government responsibility.
Privately administered, government-guaranteed loans have worked well in the past. Collections rules with teeth are having a positive impact on default rates. There seems little reason to change course. Congress should vote No on direct student loans that four former education secretaries call ill-conceived. by CNB