Parties divided on college loan programs

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Congressional Republicans and Democrats at loggerheads over saving Social Security are waging the same fight over cutting costs of federal college loan programs.

House and Senate Democrats intend to introduce legislation as early as today to expand an $89 billion, government-run, direct-loan program, saying it will save taxpayers money because the federal government can borrow more cheaply than the private sector.

Also, they argue that by cutting commercial banks out of the process, the William D. Ford Federal Direct Loan Program (FDLP) actually would make a profit from loan interest for the U.S. Department of Education.

"The Student Aid Reward Act is a sensible bipartisan bill that would provide more than $12 billion in college scholarships over the next decade to low- and middle-income college students at no new expense to the taxpayers," said Rep. George Miller of California, ranking Democrat on the House Education and the Workforce Committee.

The bill provides an additional $1,000 for each student Pell Grant as an incentive for schools to switch from the private-sector Federal Family Education Loan Program (FFELP) to the FDLP.

Republicans say that the FDLP actually has lost billions of dollars and that administrative costs are much higher.

According to the Government Accountability Office (GAO), the FDLP never has made a profit since it started in 1994. As of last March, the program had a negative cash flow of $10.7 billion, and department officials say the gap continues to grow.

In 2003, the FDLP lost $3 billion because the program paid $5 billion in interest to the Treasury but received only $2 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 the GAO found that the Department of Education overestimated FDLP's interest income by 67 percent," said Paul J. Gessing of the National Taxpayers Union in a letter to members of Congress.

As a result of wrong estimates in the past decade, the department "has had to retroactively add $7 billion total to the baseline of the FDLP budget," Mr. Gessing said.

More than 500 colleges and universities have dropped out of the FDLP since 1998 to return to the private-sector FFELP.

"A major reason that these schools say they leave is that the FFEL program provides better services to their students, families and to the school," said Rep. Peter Hoekstra, Michigan Republican and former chairman of the House select education subcommittee.

Mr. Hoekstra and other Republican leaders have asked the GAO to study "hidden costs" of the FDLP, saying subsidy costs have been underestimated by $4.1 billion over the life of the program, while FFELP subsidy costs were overestimated by more than $6 billion from 1993 to 2003.

According to a study released by Pricewaterhouse Coopers, an auditing firm, the FFELP had $245.3 billion in outstanding loans last year and the FDLP had $89.2 billion in outstanding loans.

However the FDLP's administrative costs were $389 million -- about five times greater than the FFELP's costs for every $10,000 in loans.