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It must have been frustrating for officials at the Congressional Budget Office to read Sen. Lamar Alexander’s op-ed in Sunday’s Washington Post. In the column, the Republican Senator from Tennessee mistakenly cites work done by the CBO to argue that a bill Congress is currently considering to eliminate the Federal Family Education Loan (FFEL) program in favor of direct lending would “overcharge” students for their federal loans.
At issue is a July 2009 letter that CBO sent to Sen. Judd Gregg (R-NH) showing that the pending legislation would save the government $47 billion over ten years using private market estimates. As Senator Alexander correctly points out, that figure is considerably less than the $87 billion in savings CBO identified under official accounting rules, and it does indeed more accurately reflect the bill’s true savings. But here’s where he gets into trouble. Somehow the Senator came to believe that the $47 billion in savings is the result of the government earning money off direct loans by “overcharging” students.
“The Education Department will borrow money at 2.8 percent from the Treasury, lend it to you at 6.8 percent and spend the difference on new programs,” Senator Alexander writes.
“… if there really is $47 billion in savings to be found, Congress should return it to students as lower interest rates, not trick students by overcharging them...”
The CBO letter, however, shows that all of the $47 billion in savings comes from eliminating subsidies to private lenders in the FFEL program. Yes, every last penny. That’s because the estimate Senator Alexander touts actually assumes the government will not make money off of direct loans.
In other words, Senator Alexander got it backwards.
In fact, CBO’s market cost estimates show that students with direct loans get a subsidy on their loans from the federal government, not the other way around. That means under 100 percent direct lending the government won't be "overcharging borrowers," nor will the loans make money for the government. Rather, students will get loans at terms more generous than those offered in the private market, which results in a cost to the government. Thus the $47 billion is purely and simply the private market value of the government subsidies offered to private lenders under the FFEL program. A switch to direct loans eliminates those subsidies.
It’s all the more surprising Senator Alexander didn’t see that $47 billion as subsidies for lenders given that he proudly tells readers, “Nonprofit lenders such as Edsouth use the revenue generated under the [federal] student-loan system to operate and provide these valuable benefits [college-admissions assistance, etc.].”
Revenue, huh. Generated under the federal student-loan system, you say. Senator, I think we found the $47 billion you want to give back to students.
Disclosure: The author worked as a staff member for the U.S. Senate Budget Committee and Senator Judd Gregg.
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"The CBO letter, however,
"The CBO letter, however, shows that all of the $47 billion in savings comes from eliminating subsidies to private lenders in the FFEL program. Yes, every last penny"
Not true. If it is quote it verbatim. Most if not all of the savings is in the interest spread as the senator points out. If this was not true then, let's make all the loans at the Fed borrowing rate plus say 10 to 15 basis points to cover admin costs and try to fund your expanded PELL grant program. It can't be done.
To quote a now famous line "You lie!"
Relevant Sections from CBO Work
" tends to understate the
" tends to understate the subsidy provided under each program…"
Are you absolutely certain they are not refering to the relative cost of providing a subsidized loan to a borrower under both programs? And, if it is, that is not the subsidy that is referred to when claiming, eliminating the subsidy saves $87Billion. Or is it $67B or the $47B or some other number. The word subsidy is used in at least two different context in the CBO report to which the referenced letter ultimately refers. In a subsidized Stafford loan for example, under both programs, the subsidy is the borrowers -- it is not a lender subsidy.
Further, references to private sector loan markets are reference to loans that are not guaranteed by the government. They have no place in the FDSL vs. FFELP debate. In fact eliminating FFELP may have the effect of further drying up or narrowing the number of players in the private sector market. And, few can actually afford to go to school without truning to that recource in addition to the FDSL or FFELP market.
While you reply post is appreciated, it still lacks the open, tranparent truth that this administration promised. While I realize you are in the private sector, if you are going to weigh in on this one, please step back from your partisanship and be honest.
Despite the
Despite the author's attempts to cloud the issue with wonkishness, I'm reminded of Led Zeppelin, as in the "Song Remains the Same": If the feds borrow at an extremely low interest rate (Sen. Alexander's piece states 2.8%), then lend the money to you at 6.8% or 7.9%, they are making a profit on that loan. End of story.
If you would like to dig and find out more for yourself, check out page 392 in the FY11 Budget Appendix for the Department of Education: http://www.whitehouse.gov/omb/budget/fy2011/assets/edu.pdf. It shows the feds expect a return of 17-18% for Unsubsidized Staffords (6.8% interest rate) and 22-23% for PLUS (7.9% interest rate) in 2010 and 2011, respectively.
End of Story, Yes
You never addressed OMB's
You never addressed OMB's negative subsidy rates. It is my understanding (gotta love that qualifier, you used it so well on Sen. Gregg's motivations) that OMB uses market-based estimates for the loan programs. That is why their estimates their estimates are so much lower than CBO's. Yet the folks at OMB still believe the government will earn a handsome return on these loans.
OMB Estimates Not Market Based
Thanks for clearing that
Thanks for clearing that up. The one thing that is clear is that FCRA applies to both CBO and OMB for their official estimates.
Now if these two agencies are requried to use the same accounting methods, how on earth could there be such a delta between their final projections? In the past two years, OMB has placed the savings from eliminating FFEL in the $45-47 billion over ten years, yet CBO has offered $67-$87 billion under the same rules, which don't account for market risk.
Given the importance placed on these numbers and the plans to spend nearly all of the supposed savings , shouldn't we expect a little more consistency in the budget projections? Also, if you believe that market risk should be accounted for, it seems this proposal may "save" as little as $25-$30 billion over 10 years, but would spend $80 billion.
Missing the point
The author is missing the point of Senator Alexander's Op-Ed article. President Obama says that the savings ($87 or $47 billion, whatever it is) in converting to 100% Direct Loans will be used to fund Pell Grants and other programs. The Senator is saying that instead of taking those savings and using them to fund more grants, the savings should be extended to the borrower in the form of LOWER INTEREST RATES.
If there is that much to be saved, why isn't the federal government lowering the interest rate it will charge on Direct Loans so the student who is borrowing is directly benefited? Instead, the federal government will continue to charge the same interest rate private lenders charge, then use the "savings" to give grants to other students.
Yes, some of the borrowers will benefit from the increased grants if they get them, but the borrowers who do not qualify for grants get ZERO benefit from making this change - they still pay the same interest rate, they just pay it to the federal government now.
So, the federal government is not truly interested in reducing the cost of borrowing to the student borrower. It is simply tyring to find more money so it can control how the money is doled out. Classic case of rob Peter to pay Paul, because the government has deemed Paul is more deserving.
Service to the Student
As a working Financial Aid Administrator, I experience on a daily bases a large number of students who continue to over borrow to meet their college cost. The benefits that I see with this program is that the saving will be redirected into gift aid for eligible students reducing the need for a student to borrow as much as they have been to meet their college cost.
I appreciate these
I appreciate these sentiments--after all, everyone wants to give more money for grant aid--but this proposal will do very little to nothing for the millions of students who do not qualify for Pell aid (currently less than 15% of families with incomes below $40K receive the Grants), and the average increase in the first year is $121.
Do we really think giving the average Pell recipient an additional $121 is a panacea for the student debt issue? Should we charge middle income families more than necessary to pay for these increases?
What's more, the Pell increases will be dwarfed by rising tuitions if both stay on their current path. In fact, despite the talk of the "largest investment in student aid since the GI BIll," Pell's purchasing power will continue to decrease under this plan, with the projected grant covering less than half of in-state tuition in 10 years.
It is time for our politicians to get serious about financial aid issues. I'm afraid they will pass this bill, pat themselves on the back, and consider the issue done. That seems to be lost in the government vs. private debate--relative to the costs they are facing, this bill will actually provide very little relief for students from all backgorunds.
To Regular Citizen's point
To Regular Citizen's point and to address Working FA Administrator, why should I have to pay for the needy student's free Pell Grant with the cost savings from eliminating the FFEL program? I won't qualify for a Pell, but I do need to take out federal student loans to pay for college. I'd much rather see that savings in eliminating FFEL come back to me who has to borrow the loans and would benefit in an interest rate reduction to help ME, the borrower.
This is Obama's socialist approach to spreading the "wealth" off of my back. Nice.