- The Washington Times - Tuesday, April 26, 2005

This year marks the 40th anniversary of the guaranteed student loan program for college students. Created by Lyndon Johnson as part of the Great Society, the program has made college affordable for thousands of students.

But it also has had a scandal-plagued past, with billions of dollars of unpaid loans and massive taxpayer losses and has contributed to runaway college tuition costs.

In theory at least, student loans are to be paid over time after students graduate and start working. Throughout the 1970s and ‘80s, the default and delinquency rates on student loans were scandalously high, with tens of thousands of financially successful professionals walking away from their loans with relative impunity. Stories were common of high-paid doctors, engineers and lawyers defaulting on student loans. It was as if these deadbeats believed loan repayment optional. As a result, taxpayers got socked with a multi-billion dollar tab.

Fortunately, in the Reagan years, credit reforms were made to push participating banks and collection agencies into clamping down on loan scofflaws. Consequently, the program’s monetary losses have diminished.

But just as the program’s business practices began improving, the Clinton administration in 1995 launched a new program called the Direct Student Loan Program. This allowed students to apply for student aid directly from Uncle Sam and thus bypass private lenders. This was supposed to cut costs by eliminating the middle man and leveraging the government’s lower borrowing costs.



In reality, the program was a kind of “privatization in reverse.” Rather than contract out the lending function to professional borrowers, the government decided to play banker, credit agency and debt collector all at once under the auspices of the Education Department.

It turns out that this was about as good an idea as the “Charlie’s Angels” sequel. The government is a lousy banker. It is a poor assessor and pricer of risks, funds manager and debt collector. The program’s net losses have sky-rocketed.

Since 1997, the Direct Student Loan Program has lost ever-escalating amounts of money for taxpayers every year. In 2003, the most recent available-data year, the program’s net exceeded $2.8 billion. The U.S. General Accountability Office estimates the government loan program has a cumulative net balance of minus $10.7 billion. The program bleeds money.

One original program fan, former Federal Reserve Board member Lawrence Lindsey, recently conceded: “I once argued that the cost to the taxpayer of having the government lend directly to students would be less than the cost of guaranteeing student loans issued by the private sector. But the direct lending program has been losing more money every year.” Some 500 colleges have stopped participating because of shoddy management and financial losses.

But what is it about Uncle Sam that operating losses and failure to meet performance standards never provide enough congressional rationale to end a program? Ironically, now that it is a demonstrable failure, Sen. Ted Kennedy of Massachusetts has a plan to essentially bribe schools to use it. His scheme would increase Pell Grants to colleges enrolled in the program.

It is hoped that House conservatives will recognize a scam when they see one. The House Committee on Education, headed by the able reformer John Boehner of Ohio, is expected to decide the fate of the Direct Student Loan Program over the next few weeks. Mr. Boehner should put the taxpayers’ interests first and close this money-losing operation. Private banks are best able to run a loan program.

In addition to mothballing the inefficient direct student loan program, the U.S. government must do better at clamping down on unpaid student loans. By some estimates, there are more than $10 billion of unpaid student loans that could be collected and repaid into the Treasury to reduce federal debt.

Moreover, the federal government should impose more stringent income tests on students and especially their parents, to ensure loans are only issued to kids from families in financial need. Finally, market interest rates, not subsidized rates, should be imposed on the students to provide an incentive for a speedy repayment. Studies have shown most college graduates will earn enough income — certainly well above the national median — to repay the loans at a true market rate.

If Congress is even half-serious about cutting the federal budget, a good way to start would be reform of the student loan program. It has a deplorable record on protecting taxpayer dollars. The Clinton Direct Student Loan program in particular has a decadelong mismanagement legacy. It belongs in a category of feel-good Clintonite programs like Americorps and Goals 2000, advertised as ways to make government more efficient but that in the end never lived up to their hype.

Stephen Moore is president of the Free Enterprise Fund and a fellow at the Cato Institute.

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