NCPA - National Center for Policy Analysis

Abolish The Direct Student Loan Program

April 10, 1996

Many of those familiar with the president's Direct Student Loan Program want to terminate it. They charge that this Department of Education program -- which substitutes direct government loans for the previous program guaranteeing loans to students from commercial banks -- is a vastly expensive boondoggle.

  • Over the next 20 years, the department would be transformed into the nation's third-largest consumer lending institution, managing a $350 billion loan portfolio.
  • Under the Clinton program, taxpayers will get stuck with a bill for $1.5 billion in additional losses over the next seven years, since they will be responsible for all defaults - rather than students, parents, banks or schools.

Few federal activities need reinvention more than the student loan program, experts say, because government is a terrible banker. In 1994, it held $11 billion in unpaid or delinquent student loans, many to former students with well-paying jobs in the private sector. In most cases, miscreants fail to pay with impunity.

Not that the federal government's record is spotless in other loan programs:

  • Direct lending programs administered by the Small Business Administration, the Export-Import Bank, the Farmers Home Loan program and others have experienced rivers of red ink.
  • The SBA's direct lending programs had default rates approaching 20 percent until the programs were ended.
  • The Farmers Home Loan program has amassed losses in the tens of billions of dollars, and in the mid-1980s had programs with delinquency rates eclipsing 50 percent.

Critics also advocate reducing taxpayer losses in the guaranteed loan program by capping the federal guarantee at 95 percent -- rather than the current 98 percent and charging students market interest rates. Finally, they want to permit tax-free savings accounts for education, so that parents and students - rather than taxpayers -- pay for college.

Source: Stephen Moore (Cato Institute), "Student Loan Boondoggle?" Washington Times, April 10, 1996.


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