Editor-At a time when Washington is focused on reining in the budget, dangling the prospect of saving billions of dollars is understandably attractive to policymakers. Unfortunately, the student aid windfall that Robert Shireman claims for federal direct student loans in his article in the Winter 2005 edition of National CrossTalk hangs on precarious projections.
If future interest rates fail to follow the forecasts of the Congressional Budget Office (and who can really predict future interest rates with any accuracy?), and if loan servicing and loan default performance fail to measure up to the hopes of direct loan program advocates, the treasure chest of new student grant dollars promised could easily turn out to be full of fool's gold. Federal taxpayers would wind up shouldering higher costs, and worse yet, colleges and universities, as well as students and parents, could lose the benefits of choice and competition that have spurred significant enhancement of student aid services.
Few government finance experts are as certain as Shireman is about the cost efficiency of the direct loan program. For example, in 1999 the Inspector General for the U.S. Department of Education concluded that in any given year the total cost of either student loan program (the direct student loan program and the private-sector-based guaranteed student loan program) may be greater given the impact of prevailing economic conditions on federal subsidy costs.
Also, the Department of Education has had to increase the estimated costs of the direct loan program by $8 billion over the past five years (while at the same time reducing its estimates of the cost of the guaranteed loan program by $10 billion). Last year the direct loan program paid almost three times as much in financing costs as it received in interest from borrowers. Over the past few years, almost 500 schools have returned to the guaranteed student loan program.
To divert attention from the direct loan program's dismal record, Shireman critiques the guaranteed loan program that has been successfully delivering loans for 40 years. Shireman's description of the role of student loan guarantors fails to reference any of the vital services these government and non-profit agencies provide. Student loan guarantors have played a pivotal role in helping to reduce the program's default rate to a historically low 5.2 percent. In fiscal year 2002, the nation's guarantors prevented default on more than $22 billion in loans on which borrowers were experiencing significant payment problems.
Student loan guarantors also deliver services that promote access to higher education for American families, and two out of three guarantors serve as their states' grant and scholarship agencies, administering billions of dollars in additional aid to support needy students in their states.
Prudent policymakers should think carefully about turning the student loan program upside down to pursue illusory cost savings. We need to ensure that access to postsecondary opportunities for students and families is guaranteed for the next 40 years and beyond.
President, National Council of Higher Education Loan Programs
The wrong president
Editor-David L. Kirp (in the Winter 2005 issue of National CrossTalk) tells the story of Leland and Jane Stanford's famous visit to the president of Harvard when they were considering founding a university to honor their deceased son. But he has the wrong Harvard president. It was Charles W. Eliot, president from 1869 to 1909, not his successor, A. Lawrence Lowell, who told the Stanford's they would need $5 million-which, fortunately, they had on hand.
Richard W. Lyman
Former president of Stanford University