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Letter


An Open Letter to Congress: Say "No" to The Student Aid Rewards Act of 2005 and its False Promises of Savings

October 25, 2005

Dear Member of Congress:

On behalf of the 350,000 members of the National Taxpayers Union (NTU), I write to express our opposition to legislative efforts that would give a significant advantage to the Federal Direct Loan Program (FDLP) relative to the Federal Family Education Loan Program (FFELP). Specifically, I urge you to oppose the "Student Aid Rewards Act of 2005," introduced today by Senator Edward Kennedy and others, which would provide unnecessary financial incentives for schools to participate in the FDLP.

As you may know, federal student loans are administered through two separate programs. The Federal Family Education Loan Program is a public-private partnership created in 1965. This program makes federally guaranteed loans to students through the private sector. The FDLP, on the other hand, was created in 1993 by the Clinton Administration. This program borrows funds from the Treasury and makes loans directly to students through postsecondary schools.

When the FDLP was created, its supporters argued that direct loans would "save money for taxpayers." Their claim was based on the premise that by eliminating banks from the process, the federal government would earn the interest on the loans and make a "profit" for the Department of Education. Unfortunately, this has not been the case. According to a Government Accountability Office (GAO) report released in March of 2004, since 1994, the FDLP has a cumulative negative cash flow of $10.7 billion, meaning that the program has never made a profit. In FY 2003, the FDLP net loss was $2.9 billion, because the program paid $5 billion in interest to the Treasury but received only $2.1 billion in interest and fees from borrowers. The promise of savings is based on faulty forecasts that the FDLP would earn net interest income on the loans it makes. However, GAO found that the Department of Education overestimated FDLP's interest income by 67 percent. As a result, the Department of Education has had to retroactively add $7 billion total to the baseline of the FDLP budget.

Although NTU has long been critical of any direct federal role in education, it is clear that any effort to expand FDLP at the expense of FFELP will only exacerbate the inefficiencies within the student loan system. Therefore, Congress should reject any legislation that would bestow upon the FDLP a competitive advantage over the FFELP. Lawmakers should instead fully assess the real financial health of both the FDLP and the FFELP before making decisions about the future of the student loan program.

Sincerely,

John Berthoud
President