H.R 3221, the Student Aid and Fiscal Responsibility Act of 2009

The House of Representatives passed H.R 3221, the Student Aid and Fiscal Responsibility Act of 2009, on September 24, 2009. If the Senate passes the bill and the President signs it, this legislation will significantly influence the way we fund student loans in this country. In its present form, the bill would eliminate the Federal Family Education Loan Program (FFEL), which uses private companies to issue government backed loans. The new program would be a government-run, taxpayer financed system, managed by the Federal Direct Loan program (DL). Will this change of program ownership reduce costs for the government, reduce interest costs for students, and improve the availability of student loan funds for all students, as promised?

From the start, this sounds too good to be true, and it is a piece of legislation worth investigating. According to the Congressional Budget Office Cost Estimate for H.R. 3221, created on July 24, 2009, transferring FFEL to the government run DL will not increase program revenue, but it will save:

Direct Spending Costs for 2009-2013 $13.3 Billion
Direct Spending Costs for 2009-2019 $ 7.8 Billion

It will also increase:

Discretionary spending for 2009-2019 $13.5 Billion (minimum, probably more)

According to the report, most of the increase in discretionary spending above relates to additional needs based funds allocated to the Pell Grant Program, and the added costs of administration for the DL. In addition, the CBO reports that there is substantial risk of increased default rates going forward. They have not been able to estimate those costs, and does not include estimates for those costs in the budget. After reviewing this report, the cost savings promised appear to be dubious at best.

It does appear that interest rates for students will decrease because of a change in the index used to calculate the rate. This will also increase the cost to the government, and tax payers for the program. It is also interesting to note that the DL was created in 1993 by President Clinton, and has lost money for the government every year since it was created. A 2004 GAO report measured the cash flows for the program from 1995 – 2003, and the total cash outflows exceeded the total cash inflows by $10.7 billion. The deficit was the result of higher interest rates paid to the treasury than those collected from borrowers. With this kind of a track record someone should question how the government plans to do things differently going forward.

As mentioned earlier, there is definitely a plan to increase the allocation of funds available through Pell Grants (free money), which will reduce the amount available for interest bearing loans. Pell Grants are needs based funds available only for undergraduate studies. Right or wrong, this will shift funds, previously available for graduate studies, to undergraduate programs, and to students that qualify for needs-based grants. The DL managed program does not benefit all students equally.

In the end, it appears the program will save interest costs for students after they receive their education. This appears to be one of the significant reasons that over time the cost savings to tax payers start to decline. The new DL program also significantly increases the amount of needs based Pell Grants. Less effective management, and changes of how funds will be allocated within the DL programs could easily cost the government, and taxpayers more than the current FFEL program. In addition, the increased DL Pell Grant funding limits will reduce the funds available to higher income families, and graduate students in favor of lower income households, and undergraduate studies.

The Utopian claims made by supporters of H.R 3221 are misleading. This is not to say that the goals of the project are wrong. It is simply time for politicians to tell the truth, and for citizens to learn to accept the truth. There is a cost for everything in the real world, and the business world knows it. If government wants to manage money, it needs to look at the numbers realistically, and stop promising it has the ability to save the world. What entitles a lower income family to $6000 a year that they don’t have to repay once they receive their education, and get a better job? Everyone that works hard should be entitled to an education if they want one, but it should not be free. Students need to quit whining about paying 6 points of interest once this country pays to educate them. Finally, the Federal Government needs to balance its budget, and until this task is handled, it has no business managing student loans.