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Direct Loan vs. Guaranteed Loans

  1. A direct loan is delivered by the Department of Education and given directly to the student. Traditionally, Democrats have supported the direct-loan program; however, there is clear bipartisan support for this federal program.
  2. A guaranteed loan (FFEL program) is delivered by a private bank rather than the government. If a student defaults (meaning, cannot pay the loan), then the government "guarantees" the private bank a subsidy. Traditionally, Republicans have supported this effort in order to privatize the service; however, it is clear that most Republicans have concerns about this "corporate welfare."
  3. "Government figures show that direct loans typically bring in 22 cents for every $100 borrowed, after deducting for administrative expenses. FFEL (government assistance for-profit private lenders), meanwhile, costs the Treasury $12.80 for every $100 borrowed. [Consequently] Sallie Mae earned $792 million [in 2002] and its chief executive, Albert Lord, pocketed $33.6 million in salary, bonus, and stock option payments [in 2001]." Julian Barnett, et al. "Big Money on Campus: How Taxpayers are Getting Scammed by Student Loans," U.S. News and World Report, 27 October 2003.
  4. Shireman (2004) states that if all loans from 1995 to 2003 had been direct loans rather than through for-profit banks (i.e., guaranteed loans) then more than $20 billion could have gone directly to students. This $20 billion in savings could "fully finance the first three years of the No Child Left Behind Act, or provide an extra $4,000 to every one of the 5 million low-income students in college today." R. Shireman, "What School Loan Scandal?" New York Times, 14 June 2004.
  5. President Bush's FY 2005 budget submission to Congress declares that direct loans are more efficient than guaranteed loans. It says: "Significantly lower direct loan subsidy rates call into question the cost effectiveness of the Federal Family Education Loan Program structure [where the federal government "guarantees" payment of student defaults to private for-profit lenders], including the appropriate level of lender subsidies." (www.whitehouse.gov/omb/budget/fy2005/pma/education.pdf, page 34).
  6. Furthermore, "the FFEL plan [guaranteed loans] costs the treasury far more than direct loans, even after deducting administrative costs," M. Barnett, J.E. Barnes, and D. Knight U.S. News and World Report, 27 October 2003: 32.
  7. Republican Senator Thomas Petri describes guaranteed (for-profit) lending as "a government-assistance program for private lenders." Petri clarifies that "taxpayers end up subsidizing private agencies to recover [default] loans" Petri, "Putting Students First," New York Times, 14 June 2004.
  8. "For the giant student loan corporation Sallie Mae, increased tuition means increased profit because of the increases in both the number of people who need to borrow money and in the amount they have to borrow." H. Orlans, "Sallie Mae Prospers," Change, November/December 2003, 35(6): 9.

Loan Consolidation

  1. Specifically, the U.S. General Accounting Office found that the consolidation loans in the direct loan program brought a "net gain to the government" of more than $1 billion in 2002–3. See "Student Loan Programs," 17 March 2004, GAO-04-568T, pages 7 and 9. Also see R. Shireman, "What School Loan Scandal?" New York Times, 14 June 2004.

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