WASHINGTON -- A new General Accountin Office study estimates that giving colleges the responsibility for making and serving student loans and eliminating the role of banks in such transactions could save the federal government more than $1 billion a year.
The GAO's endorsement of the so-called direct-loan approach comes as the House Education and Labor Committee prepares to vote this week on a controversial measure that would eliminate the existing system of federally guaranteed bank loans to students by July 1, 1996, and set up in its place revolving loan funds administered by colleges.
State education officials have said the switch would eliminate the need for tax-exempt student loan bonds.
A direct-loan program "would reduce some of the [federal government's] administrative burden, and it could improve accountability," says the report, prepared at the request of Rep. William D. Ford, D-Mich., chairman of the education panel.
Currently, the federal government guarantees loans made to students by commercial banks, which in turn sell the loans to state higher education authorities. The authorities often finance those purchases with tax-exempt bonds, and some operate bond-financed loan programs of their own to supplement the federal system.
The Education Department pays the interest accumulated on student loans while the student is in school, and it gives lenders a "special allowance payment" -- an interest subsidy through the life of the loan.
The agency estimated the current annual cost of the guarenteed student loan program at $2.71 billion, compared with about $1.55 billion for a direct loan system. Depending on the economic assumptions made, the annual savings to the federal government could be between $620 million to $1.47 billion, according to the report.
"These savings result primarily from the absence of in-school interest and special allowance payments to lenders," the report states.
While a direct-loan system would saddle the Education Department with some new administrative responsibilities, it would lessen the agency's burden in other areas, the GAO said.
"The department would no longer monitor lenders or guaranty agencies, make special allowance payments to lenders, nor reconcile special allowance and origination fee accounts with lenders," the report says. "With fewer participants, the department's ability to monitor the flow of funds in the program might improve."
The agency also said colleges could benefit from a direct-loan system as well, even though they would become the primary lenders.
"Education institutions' paperwork and reporting requirements could be simplified," the report says. "Schools would work with one or several servicers rather than hundreds of lenders and multiple guaranty agencies."
But the agency also acknowledged that the other cost factors could lower its estimate of how much a direct-loan program would save the federal government. The agency said it did not account for costs entailed during a transition from one system to another. It also did not try to estimate the costs of any unforeseen administrative problems under the new system, such as possible problems in negotiating servicing contracts as favorable as the current ones.
The program under consideration by the education committee would require the federal government to give seed money to colleges to set up revolving loan funds for student aid. State education officials have said such a program would obviate the need for their student loan agencies and, in turn, for issuance of student loan bonds.
The system would be phased in over a two-year period beginning July 1, 1994, when 500 colleges would be selected from around the country to participate in the program. The following year another 1,000 colleges would begin participating, and on July 1, 1996, all other eligible colleges would be in the program.
Student loan bond underwriters and lawyers said they still do not believe the direct-loan proposal has a good chance of being enacted this year, but acknowledged they would have to begin to take it more seriously if the committee approves it. On the Senate side, lawmakers are scheduled to begin drafting student-loan legislation this week but are not expected to include a direct-loan proposal.