A government plan to collect defaulted student loans would cost $38 million and require an 1,100% increase in collections to break even, a Department of Education audit says.

The department's inspector general said in a report last month that the agency's plan to let 80,000 borrowers in default make payments based on their income would cost the department roughly $38 million. The report did not estimate how much revenue would be raised.

Under the consolidation program, the Department of Education would take defaulted student loans originally made by private financial institutions and revive them as federal direct loans.

Banking industry representatives, who view the direct loan program as a major competitor, cheered release of the report.

"Historically, there has been a reluctance to release reports that fly in the face of administration priorities," said John Dean, special counsel to the Consumer Bankers Association. However, Mr. Dean did not view the report as a major setback for the direct loan program.

"This isn't the crack in the dike," he said. "The direct loan program isn't going to come tumbling down because of this."

The administration has touted its income-based repayment plan as one that would increase default collections and reduce the cost of collecting these loans.

While a Department of Education official agreed to stop consolidating defaulted borrowers into the income-contingent repayment plan, he disagreed with the inspector general's findings.

"Efforts to offer direct loan consolidation to defaulters has considerable advantages for the borrowers and the taxpayers, as well as very low risk," Leo Kornfeld, senior adviser to Education Secretary Richard W. Riley, wrote in response to a draft of the report.

The inspector general said, however, that the program would preclude proven collection methods such as garnishing wages or seizing tax refunds.

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