Heynorm, thanks for reading and commenting.

As you say, in 2005 CBO published an analysis of student loan costs. Here is the text you quote and the surrounding paragraphs:

Using the procedures specified in the Federal Credit Reform Act, the Congressional Budget Office (CBO) estimates that loans made under the FFEL program have higher budgetary costs to the government than direct loans do. According to CBO’s estimates, the overall subsidy rate (that is, the net budgetary costs measured as a percentage of the amount lent) for loans originated in 2006 in the FFEL program is about 15 percent, whereas the rate for the direct loan program is about -2 percent—earning that for every $1 in loans, the federal government incurs budgetary costs of $0.15 in the FFEL program and realizes budgetary savings of $0.02 in the direct loan program.

The government does not really “make money” providing student loans—the subsidy calculations under the Credit Reform Act are not designed to fully capture the economic costs to the government of the assistance that the student loan programs provide, nor do they capture all of the effects of the programs on federal spending and revenues. This paper deals only with the subsidy estimates as currently calculated under the credit reform framework, which are the present values of estimated cash flows for the two types of loans.

I wouldn't say that CBO is "disputing" its own estimates here. Qualifying maybe. But the phrase you quote seems like a thin reed for concluding that any excluded "economic costs" that are so large and fall so disproportionately on direct loans that they make up the 17-cent difference.

Sure, the budget numbers aren't perfect, but I'm not sure why this is supposed to be so damning. As previously discussed on this blog, the budget figures for Head Start don't include the economic costs of taxes and debt to finance the program, the taxes paid by Head Start teachers, the future economic gains from Head Start students, etc. Somehow no one claims that we don't know the "true" cost of Head Start.

Finally, the Inspector General is also correct: a certain relationship between interest rates could make guaranteed loans cheaper. We haven't seen it yet, but might someday. However, I don't read that quote to indicate that the OIG "disputes" the official budget numbers that -- year after year -- find direct loans to be cheaper. Do you?

Posted at January 7, 2007 5:26 PM in response to Wall Street on Sallie Mae

Looks like it applies to new subsidized student loans and to parent loans, but not refinancing (bill summary here).

In the article Jason found, I thought this statement by soon-to-be-former Chairman McKeon was interesting:

"I'll be as blunt as possible: you will never convince me -- never -- that the federal bureaucracy can do a better job than the private sector in managing the student loan program," Republican Rep. Howard "Buck" McKeon, the outgoing chairman of the House education committee, said in a recent speech to bankers.

Posted at December 12, 2006 4:44 PM in response to Reducing interest rates on student loans

JCC, thanks for your thoughtful comments. It's true that some lenders offer students substantial discounts. However, the cost to taxpayers (compared to the cost of offering the same loan through the Direct Loan program) is many times larger than the benefit to students.

It seems to me that the best solution would be to expand direct lending and use the savings to reduce student rates. A second-best solution is to encourage competition among lenders, also to drive down student rates. 

Posted at October 16, 2006 6:03 PM in response to MyRichUncle: The New Kid in Town

Starrjordan, thanks for your continued interest in discussing this subject.

One strange part of the student loan debate is this nihilistic idea that we just don't know the cost of a student loan. Somehow this is a big mystery, even though the numbers are right there in black and white in the OMB budget.

True, the GAO figures don't include administrative costs, but those costs are included in the OMB figures and presented elsewhere in the GAO report. Direct loans are still far cheaper.

True, the budget figures do not include all economic consequences until the end of time, but the same is true for every federal program. We don't count taxes paid by banks on guaranteed loans or by Education's contractors on direct loans. Likewise, when budgeting for Head Start, we don't count the taxes paid by the teachers or the higher taxes the children might pay someday.

It's not clear why student loans are singled out for all this skepticism. A year ago, though, the Chronicle of Higher Education suggested one possibility. It reported that the loan industry fears that the budget numbers are compelling enough to lead to cuts in lender subsidies. According to independent experts, it is "misleading" people to obscure those numbers.

Posted at July 6, 2006 8:46 PM in response to New Year Brings Higher Rates on College Loans

In fact, numerous government and independent studies have found that direct loans save money.

The Office of Management and Budget estimates the costs of the two programs every year. In the 2007 budget, the table appears on page 367 of the budget appendix.  It indicates that guaranteed loans cost $7.69 for every $100 loaned in 2007, while direct loans cost only $1.70.

Last fall, the General Accountability Office examined student loans made between 1994 and 2004.  It concluded (on page 18 of this report) that guaranteed loans cost $9.20 for every $100 loaned, while direct loans again cost only $1.70.

The Congressional Budget Office has estimated that legislation encouraging more schools to leave guaranteed loans and join direct loans could create nearly $2 billion a year in savings for additional student aid.

Studies by the Center on Federal Financial Institutions and the Progressive Policy Institute have also found potential direct loan savings.

Holtz-Eakin and the Inspector General are correct: a certain relationship between different interest rates could make guaranteed loans cheaper than direct loans.  We haven't seen it yet, though.  That is why Holtz-Eakin has also said, "If we went under current law to the direct-student-loan program, we'd save money basically because we'd subsidize those loans less heavily."

Posted at July 5, 2006 7:07 AM in response to New Year Brings Higher Rates on College Loans