New America Foundation Releases Report Exposing Spin on Student Loan Costs

Is there another round of fighting brewing between the government’s two competing student loan programs? Consider recent events:

• In the wake of the credit crunch, more colleges are opting to join the Direct Loan program, driving up its volume as a share of student loans for the first time in well over a decade.
• Recent government efforts to shore up the Federal Family Education Loan (FFEL) program have moved us closer to letting lenders make loans with federal capital (looks a lot like the Direct Lending model to us).
• Democratic presidential candidate Barack Obama has proposed the wholesale elimination of the FFEL program in favor of moving to 100 percent Direct Lending.

The stars appear to be aligning for a renewed debate about which loan program is better for students and cheaper for taxpayers.

Should hostilities be renewed, expect the student loan industry to switch into high gear to try to discredit Office of Management and Budget (OMB) and Congressional Budget Office (CBO) estimates that show that Direct Lending is cheaper for the government to run. In evaluating the loan industry’s claims, lawmakers, journalists, and the public should be especially wary of one line of argument that surely will be made. In recent years, the loan industry has put out a number of reports arguing that the private market would assess the costs and risks of the loan programs differently than OMB and CBO (which must abide by government accounting rules) and that this discrepancy explains away any cost advantage Direct Lending is shown to have.

Today, the New America Foundation is releasing an in-depth report examining the lending industry’s claims about determining “market costs” for student loans. We have found that trade associations and consulting organizations working on behalf of the student loan industry have twisted a legitimate budgeting concept into a half-truth. In trying to use the market cost concept to discredit government estimates that show subsidizing lenders to make student loans is more expensive than having the government make loans directly, they have made serious errors in their reasoning and methodology, and many of their conclusions are just plain wrong. Making matters worse, the GAO has made similar errors in its own work on the topic.

To bring more clarity to this debate, our report includes the following:

• A discussion and explanation of the market cost concept for federal student loan programs.
• A detailed analysis and critique of the market cost reports published by government agencies, private consulting companies, and trade associations representing student loan companies.
• An identification and explanation of the major errors and misleading information in the work published on the market cost concept for federal student loans.
• A discussion of student loan cost estimates by Northwestern University’s Deborah Lucas and the Congressional Budget Office’s Damien Moore that corrects many of the errors made in other market cost work.

We hope this report will correct the record and serve as an important reference for those interested in the student loan cost debate.