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An Open Letter to Members of the Committee on Education and the Workforce: Say "No" to the Student Aid Rewards Act and its False Promises of Savings
October 25, 2005
Dear Mr. Chairman, Mr. Ranking Member, and Members of the Committee:
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," which will likely be offered as an amendment to the Higher Education Reauthorization Act now before the Committee. Whether in amendment or stand-alone form, this proposal 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 (FFELP) 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 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 assess the financial health of both FDLP and FFELP before making decisions about the future of the student loan program.