Bush Treasury Secretary Identifies Student Loan Inefficiency

Bush Treasury Secretary Henry Paulson has good news. The federal budget deficit for Fiscal Year 2006 was $48 billion less than the Department of Treasury previously predicted. The bad news is that's no thanks to federal student loan spending, which was higher than initial projections because of increased use of the Federal Family Education Loan program as opposed to the more cost effective Direct Loan alternative.

It's ideologically inconvenient for some that a government program consistently is found to be cheaper than the taxpayer-subsidized, private alternative. But facts (see page 18 of GAO's report) are facts (see page 1 of CBO's report). And now there are more facts buried in the latest Treasury Department report.

According to the Bush Administration's Department of Treasury, government spending on federal student aid programs was $6 billion higher in Fiscal Year 2006 than Treasury's most recent estimates, primarily because of a substantially higher number of consolidated student loans.

Here are the important lines from Treasury's report.

"Consolidation loan volume increased by $36 billion in the Federal Family Education Loan Program over MSR (Mid-Session Review) estimates. . .The subsidy cost for this increased loan volume was $5.6 billion."

"In the William D. Ford Federal Direct Loan Program, consolidation loan volume was . . . $7 billion over the MSR (Mid-Session Review). The volume increase in the Direct Loan program led to increased outlays of $0.5 billion."

Given that FFEL consolidation volume grew more than Direct Loan consolidation volume, one would expect taxpayer subsidy costs to grow more in the FFEL program than the Direct Loan alternative. But it should be proportionate. It's not.

According to this latest report by the Bush Administration's Department of Treasury and the figures quoted above, for every extra $100 borrowed in FFEL consolidation loans in Fiscal Year 2006, taxpayers had to pay $15.55 in subsidy payments to lenders.

And again according to the Bush Treasury Department, for every extra $100 borrowed in DL consolidation loans in Fiscal Year 2006, taxpayers had to pay an additional $7.14 in subsidy payments.

If just the unexpected increase in Fiscal Year 2006 consolidation loans were provided through only the DL program instead of mainly through the Sallie Mae-dominated FFEL alternative, taxpayers would have saved $3 billion in Fiscal Year 2006.

And yet the government doesn't encourage folks to use the Direct Loan program. Eventually, fiscal hawks are going to realize that just doesn't make sense and act accordingly. Taxpayers and students await.