Who’s Right on Student Loan Cost Estimate?

Congressional Democrats missed a golden opportunity this week.

On Monday the Congressional Budget Office (CBO) published a letter to Senate Budget Committee ranking member Judd Gregg (R-NH) regarding the estimated savings of eliminating the Federal Family Education Loan (FFEL) program and making all loans through the Direct Loan program. The letter states that savings from shifting all FFEL schools to direct lending — the centerpiece of legislation adopted by the House Education and Labor Committee last week — would be $47 billion over ten years when using market-based estimates, compared to $87 billion when using rules dictated by the Federal Credit Reform Act.

Republican lawmakers immediately went on the attack, accusing Democrats of misrepresenting the savings the legislation would produce. In separate press releases, Senator Gregg and Rep. Jon Kline, the senior Republican on the House Education and Labor Committee, trumpeted the new CBO estimate, saying it presented a more accurate picture of how much money would be saved if the legislation was enacted.

In other words, by embracing the CBO study, senior Republican lawmakers appear to have conceded that Direct Loans are much cheaper than FFEL loans, and that continuing the FFEL program, rather than transitioning to 100 percent direct lending, would cost taxpayers an extra $47 billion over ten years.

Unfortunately, instead of saluting the Republicans for their new understanding that FFEL is the more costly program, Rep. George Miller, the chairman of the House Education and Labor Committee, went on the counterattack — accusing Republicans (and by default, CBO) of “trying to cook the books,” in requesting the market-based cost estimate.

At Higher Ed Watch, we believe that this was entirely the wrong tack to take. As we’ve argued previously, market costs are superior to the current Credit Reform rules. Such estimates show the price private entities would charge taxpayers to offer the same benefits and services currently funded by the government. In the case of government-subsidized student loans, the market cost reflects the price private entities would charge taxpayers to fund low interest rates for borrowers, the gov­ernment’s administrative costs, and the subsidies it pays to private lenders, among other things.

The method thus represents a fairer and more transparent estimate of the costs that the programs impose on taxpayers. Credit Reform rules, on the other hand, are not designed to reflect private market values for loans and have been shown to significantly understate the costs of both Direct Loans and FFEL. What is more, because the student loan reform bill sponsored by Representative Miller includes new spending that is greater than $47 billion over ten years, critics can accurately claim that the bill does not include any deficit reduction when using a market-cost estimate.

Unfortunately, we do not know many specifics about the CBO market cost estimate. The letter states that a market-based discount rate was used in the estimate, but the discount rate is only one important factor in a market cost estimate; cash flows for guaranteed loans must also be treated differently than they are under Credit Reform rules for a proper estimate. It is unclear from the letter if such adjustments were made.

In short, Republicans are right to back a market-based estimate of the savings achieved from eliminating the FFEL program. They must realize, however, that such estimates still show that 100 percent direct lending is the lower cost policy and should be adopted. This is the point that Miller and his Democratic colleagues should have made, instead of picking a fight over the merits of the CBO market-based estimate. This was a missed opportunity indeed.

Disclosure: The author is a former member of the Republican staff of the U.S. Senate Budget Committee.