President Obama has proposed ending one of the more wasteful crony capitalism programs currently funded by the federal government. The government provides students loans in two ways–the first and most effective of which is to just directly loan money to students. This is done through the William D. Ford Federal Direct Loan Program. The other way is to guarantee student loans provided by private companies, through the government-guaranteed Federal Family Education Loan Program (FFEL). Not surprisingly, adding a private middleman adds waste and inefficiency. Eliminating this would save the government $80 billion:
CBO estimated that replacing new guarantees of student loans with direct lending would yield gross savings in federal direct (or mandatory) spending of about $87 billion over the 2010–2019 period.2 (Mandatory spending is governed by existing provisions of law and does not require future appropriations.) About $7 billion of those savings would represent a reduction in the administrative costs of the guaranteed loan program, which are recorded in the budget as mandatory spending. In contrast, most of the administrative costs for the direct loan program are funded in appropriation bills and recorded as discretionary spending. Thus, of the $87 billion reduction in direct spending, roughly $7 billion would be offset by an increase in future appropriations for administrative costs, for an estimated net reduction in federal costs from the President’s proposal of about $80 billion over the 2010–2019 period.
Sen Judd Gregg (R-NH), like several other Republicans, was not happy with this conclusion. It seems Republicans don’t like proof that the government is more efficient than private businesses at some things. So, Gregg asked the CBO to re-analyze the cost of eliminating the subsidizing of private loan companies, assuming an extremely high default rate. Even in this doomsday scenario, the change would still save the federal government $47 billion:
The FCRA methodology, however, does not include the cost to the government stemming from the risk that the cash flows may be less than the amount projected (that is, that defaults could be higher than projected). CBO found that after accounting for the cost of such risk, as discussed below, the proposal to replace new guaranteed loans with direct loans would lead to estimated savings of about $47 billion over the 2010–2019 period—about $33 billion less than CBO’s estimate under the standard credit reform treatment.
The simple fact is that it is between 10-20% more efficient for the government to directly provide loans when compared with using a private middleman.
CBO estimates that over the 2010–2019 period, the subsidy cost for each dollar of a guaranteed loan will exceed the subsidy cost for each dollar of a direct loan by between 10 cents and 20 cents.
With everyone in Washington right now pretending to really care about the deficit, there is no excuse to not make this reform. Which senators are going to step up to be the defenders of crony capitalism? Who will be the champions for these finance firms to protect them from Obama’s attempt to cut off their gravy train of wasted tax payer money? We may soon find out because the lobbyists are out in force to kill reform.