WASHINGTON, DC— Today, Senator Edward M. Kennedy, Chairman of the Senate
Committee on Health, Education, Labor, and Pensions, released new data from the
Congressional Budget Office reaffirming that the Federal Direct Loan Program costs less
to taxpayers than the Federal Family Education Loan Program, the program that
subsidizes banks to make federal student loans. According to CBO’s analysis, the FFEL
program currently costs taxpayers $14.55 more per $100 loaned than the Direct Loan
program. CBO’s analysis takes into account changes to FFEL program subsidy rates
enacted in the College Cost Reduction and Access Act (CCRAA), which was signed into
law in September 2007, and is based on the updated budget baseline released by CBO in
“This analysis proves once again that Direct Loans are more efficient and less costly than
the government-subsidized program funded by the private lenders,” said Senator
Kennedy. “These figures not only validate the subsidy reductions Congress passed in last
year’s college aid bill, but clearly indicate that there’s even more room to cut lender
subsidies further and give those funds to students, where they belong.” Last year, the
CCRAA reduced lender subsidies in the FFEL program by one-half of one percentage
point for for-profit lenders, and just over one-third of one percentage point for non-profit
lenders, and used the funds to increase student aid by more than $20 billion – the largest
increase in student aid since the G.I. Bill.
CBO’s analysis was released the same day as the Administration’s FY 2009 budget
proposal, which also estimates that for all types of loans except for consolidation loans,
the FFEL program costs taxpayers significantly more than the Direct Loan program.
When consolidation loans are included, the Administration estimates that the Direct Loan
program costs $2.26 per $100 loaned, and the FFEL program costs $1.44 per $100 loaned
for FY08. As the President’s budget proposal explains, however, the estimate of higher
overall costs in the Direct Loan program is largely due to the fact that roughly half of
Direct Loan consolidation loan volume comes from consolidations of defaulted loans,
mostly from the FFEL program. Many FFEL lenders use the Direct Loan program as a
“dumping ground” for defaulted loans, which artificially drives up OMB estimates of
Direct Loan program costs.
OMB and CBO are both required to follow federal Budget Act requirements in scoring
the loan programs. However, OMB does not conform to these rules, and treats
consolidation loans differently, inappropriately adding the cost of defaulted FFEL loans
to the Direct Loan program.