Banks are more efficient at making student loans than the government, the Department of Education's inspector general has concluded.
It costs the government $17 per loan to manage its direct lending program. But private-sector lenders could run the same program for $13 per loan, according to the report, which was dated March 18 but surfaced only last week.
"I expect the report to precipitate a fresh review over the wisdom of direct loans," said Joe Belew, the president of the Consumer Bankers Association.
Asserting that the government could lend more cheaply than banks, the Clinton administration instituted the Federal Direct Loan Program in 1993. The intention was for it eventually to replace the Federal Family Education Loan Program, which guarantees loans for banks.
Because direct lending never won the market share that had been projected, the two programs compete with each other to this day.
Though the inspector general's report acknowledges that economic conditions and fluctuations in interest rates could have affected the analysis, much of the differences in costs were attributed to bureaucratic inefficiencies.
For example, the government does not keep close enough track of what it spends, the report says.
"We found that management has not instituted a cost accounting system to accurately identify the costs incurred," according to the report. Also, "the department did not possess sufficient data to effectively oversee" schools participating in the direct loan program.
The report cited a previous study that said Education Department senior and lower-level managers and the support staff were not properly trained in computer systems.
"This contributed to several widely publicized problems, including interruptions in services to students, inability to bring systems on-line on a timely basis, and the awarding of unneeded contracts."
Also, computer systems used by the government are incompatible with each other, which makes it difficult to track a particular student through the phases of loan application and servicing.
The report suggests the Education Department should allocate its costs to administer student loans on the basis of need, rather than the funding it receives. The department should monitor how much time employees spend on various functions, the report adds, and should develop models to predict borrower behavior, loan volume, and the cost effects of management decisions.
The administration's point man in improving the student loan programs criticized the report.
Greg Woods, chief operating officer of the Office of Student Financial Assistance Programs, said the report is based on data from 1996 and 1997 and that improvements have been made since then.
"I think that the study's interesting ... as to the basic message that we want to improve performance, (which) we do," he said. But as far as its conclusions, "I don't think it's very useful."