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President Bush’s budget for Fiscal Year 2007 will direct approximately $8 billion in net subsidies to private student lenders next year through the government-guaranteed loan program—even though taxpayers will subsidize that program at a rate nearly 4.5 times higher than that of direct loans in 2007, according to the President’s own budget. If 100 percent of loans were disbursed through the direct loan program, the savings could be redirected to the Pell Grant Program to provide up to 1.5 million new grants to students.[1] The figures released today from the White House’s Office of Management and Budget (OMB) confirm past findings of both the Congressional Budget Office (CBO) and the Government Accountability Office (GAO) that the guaranteed-government loan program is significantly more costly to taxpayers than the direct loan program.

The government-guaranteed loan program, formally known as the Federal Family Education Loan (FFEL) program, currently accounts for approximately 77 percent of the total volume of student loans. The William D. Ford Direct Loan Program currently comprises the remaining 23 percent of the total volume of student loans. The competing loan programs offer essentially the same products to students. However, under government-guaranteed loans, the government makes significant payments to private lenders to cover or subsidize interest and to shield the lenders from the risks of default.

Although the administration claims to have “worked to improve the way the loan programs perform,”[2] projections in the President’s budget for 2006 and 2007 do not indicate that his administration anticipates substantial changes in the relative efficiencies of the two loan programs, nor does it anticipate shifting the loan volume in favor of the more efficient direct loan program.

Key Findings from this Report:

  • According to figures from the President’s new budget, the government pays a subsidy of 11.0 percent on guaranteed loans, while it pays a subsidy of only 3.65 percent on direct loans – a difference of 7.36 percentage points. For every $100 lent, taxpayers spend more than $7 more on guaranteed loans than they do on direct loans.
  • The government could have saved $37 billion between 1992 and 2005, had 100 percent of the student loan volume been disbursed through the direct loan program. Recovered funding could have then been reallocated to the Pell Grant Program to issue additional support for college attendance. For funds lent in 2007 alone, close to $6 billion would be saved if loans were made exclusively through the direct loan program.
  • The student loan industry has benefited from the use of federally subsidized student loans and has become highly profitable as a result. In turn, many of the largest private lenders have made significant financial campaign contributions. The largest private student loan lender disbursed more than $900,000 to campaign funds in this most recent cycle.

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Kate Sabatini is the Special Assistant for Economic Policy at the Center for American Progress and John S. Irons, Ph.D., is the Director of Tax and Budget Policy at the Center for American Progress.

[1] Calculations based on the maximum grant of $4,050.

[2] Budget of the U.S. Government, FY2007, p. 83.Read the full report (PDF)

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