Budget Matters: Student Loans
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MARGARET WARNER: The Republican-passed budget plan seeks to make a major change in the way federally- subsidized student loans are administered. We start with a report by Elizabeth Brackett of public station WTTW-Chicago on how the loan program currently works.
ELIZABETH BRACKETT: Northwestern University, a private institution in suburban Chicago. The cost for room, board, books, and tuition this year, $23,000, up 54 percent from 10 years ago.
JANAE BAKKEN, Northwestern Student: It was all resting on financial aid, whether I could go here, because there’s just no way we could have covered it by ourselves.
ELIZABETH BRACKETT: Add rising tuition costs, subtract declining grant scholarships and family contributions, and that adds up to the need for more student loans. Rebecca Dixon, provost of university enrollment at Northwestern, says 45 percent of undergraduates here have loans.
REBECCA DIXON, Provost, Northwestern University: For most students, particularly those with high financial need, they are going to get not only grants from Northwestern, a work-study job, but they’re going to have to borrow some money. So we’re absolutely dependent upon loans.
ELIZABETH BRACKETT: Even at cheaper state schools, more and more students are borrowing money. Marsha Weiss heads up the University of Illinois at Chicago’s student loan program which serves one out of every three undergraduates.
MARSHA WEISS, University of Illinois at Chicago: Right now, there are 50 percent of the aid that we give to our students, and that has been an increase. It has been slowly creeping up over the last ten, fifteen years. As the grant programs have diminished, the loan programs have filled the gap.
ELIZABETH BRACKETT: Federally-backed student loans make up the bulk of student financial aid packages. There are a variety of types, depending on financial need, repayment terms, and the source of the funds. Banks, backed by state guarantee agencies, provide the money for one category of loans. Students apply for them through their schools but pay the bank back directly. Needy students are eligible for Stafford loans, which the government pays interest on until six months after graduation. Students without financial need can get non-subsidized Stafford loans, meaning they have to pay the interest while still in school. And non-needy parents who want to borrow money can apply for a Plus loan, which requires payments on both principal and interest during the college years. Chicago banker Rich Koretz says lending to students makes good business sense.
RICK KORETZ, Banker: And we look at student lending as kind of community reinvestment at its, at its finest. It’s our opportunity to get our foot in the door with an up-and-coming bank customer.
ELIZABETH BRACKETT: Last year, the federal government got a piece of that business with the direct student loan program started by President Clinton. Like the banks, the government funnels money through schools for needy students, non-needy students, and parents, and the loan is paid back directly to the government. Officials at the University of Illinois at Chicago said the new federal program had significantly cut loan processing time. And that’s good news for students like Roy Matthew.
ROY MATTHEW, University of Illinois Student: This year I got my loan in about two weeks, two to three weeks, as opposed to, I think, four or five weeks the last time around.
ELIZABETH BRACKETT: And does that make that much difference, just that two weeks?
ROY MATTHEW: A great deal, a great deal of difference for a student who’s wondering who’s going to pay his rent.
ELIZABETH BRACKETT: But as happy as they are to get their loans, students also worry about paying them back. Janae Bakken will owe $17,000 when she graduates from Northwestern.
JANAE BAKKEN: I think it comes out to be about a hundred or two hundred a month for your loans, and that’s only if you pay it in ten years. I really personally would like to pay it off as soon as possible to get rid of all that extra interest and just get it out of the way, and so I want to pay more, but I don’t know how I’m going to, and you can’t expect to make more than about $20,000, unless you’re an engineer or an econ major. So I’m very concerned.
MARGARET WARNER: The Republicans’ reconciliation budget bill would reduce the Department of Education’s new direct loan program to no more than 10 percent of the total $25 million a year student loan business. Currently, the Education Department is providing about 40 percent of student loans nationwide. The proposed change is controversial, and lobbying has been intense. President Clinton opposes the measure and has said it’s one of the reasons why he plans to veto the reconciliation bill. We debate the issue now with Congressman Lindsey Graham, Republican of South Carolina, a freshman member of the House, Economic, & Educational Opportunities Committee, and Sen. Paul Simon, Democrat of Illinois, a long- time advocate of the direct loan program. Welcome, gentlemen. Congressman Graham, you’re one of many Republicans who wants to get the federal government out of the direct loan business. Why?
REP. LINDSEY GRAHAM, (R) South Carolina: Well, the whole effort of this Congress is to downsize the size and scope of the federal government. What you do with direct lending is you replace private capital with government-borrowed money, and you allow the Department of Education to manage that loan portfolio to become bankers. And that’s the best opportunity I’ve seen in this new Congress for the great society to repeat itself again. To go to direct lending I think is a big mistake, because you’re replacing, like I say, private capital with government-borrowed money, and you’re allowing a bureaucracy in Washington, D.C., basically to become a bank and a banker. And that’s a great opportunity for the Department of Education to grow and in the long-term, I think it is a very wasteful program and we’ll lose more than we’ll gain. The federal government doesn’t need to be in the banking business.
MARGARET WARNER: All right. Sen. Simon, why are you such an advocate of the direct lending program? Why not let the banks handle it?
SEN. PAUL SIMON, (D) Illinois: Well, the banks would love to do it. And we heard a great speech that unfortunately is not too accurate of why we should do away with direct lending. It’s very interesting, over 1300 colleges and universities now have direct lending, not a single one, including more than a dozen in South Carolina, want to go back to the old system. When he says we’re increasing the risks for banks, the, the increase is from 98 percent now guaranteed by the federal government to 95 percent, and this is something–the banks make more money on student loans than they do on house mortgages, car loans, or any other loans other than their credit card loans.
MARGARET WARNER: Okay. But you just said that the universities and colleges seem to prefer the new direct lending program. Why?
SEN. SIMON: No question about it.
MARGARET WARNER: Why?
SEN. SIMON: It is much simpler. As you heard from the University of Illinois, they can process this without having to deal with hundreds of banks, plus the guarantee agencies, which is another middle man in this process that hasn’t been mentioned. And that’s government money. Lindsey talks about this as though this is not government money. This is government either way, except the new system requires one fourth as many government employees. I think we ought to be taking a look at the realities, and while the banks like it and these middle men guarantee agencies like it, I think we ought to say what helps students and what helps taxpayers.
MARGARET WARNER: Let me ask you both a question just to clarify something. And Congressman Graham, you take a crack at this first. If, on the one hand, this is a business that all the banks want to be in, because they think they can make a profit–
REP. GRAHAM: Right.
MARGARET WARNER: –why when we’re looking at the government’s role, are we saying that it’s costing the government money? In other words, why are you–do you Republicans believe you’ll actually save in budget terms if you get out of the business?
REP. GRAHAM: My goodness, to go to direct lending where the federal government assumes all of the risk, has to borrow the money to lend it to begin with and allow the bureaucrats at the Department of Education to become bankers is not the way to go. The Congressional Budget Office has said in evaluating our program if we eliminated direct lending altogether, we’d save $1.2 billion over a seven-year period which shows you the bureaucracy that’s going to be created to manage this huge loan portfolio that currently exists at the Department of Education. And if you want to allow the Department of Education to grow and to become a larger entity, then allow them to get into the banking business. That’s not the purpose of this Congress. You do save money if you reduce the bureaucracy in Washington. We’d save $1.2 billion by eliminating direct lending–
MARGARET WARNER: All right. Sen. Simon.
REP. GRAHAM: –because of the bureaucratic maze that you create.
SEN. SIMON: It is very interesting, because what they did in setting up the budget resolution, they, in the words of the “Chicago Tribune,” cooked the books so that direct lending would not look like it saves money for the taxpayer, and it would be a bonanza for the banks and the guarantee agencies. The reality is in seven different ways they say don’t count this in calculating the difference between the old system and direct lending.
MARGARET WARNER: So you’re saying–
SEN. SIMON: For example–
MARGARET WARNER: Go ahead.
SEN. SIMON: For example, under direct lending, the federal government pays interest on bonds, but collects money because it’s revenue. These are not income tax-free bonds. While when the guarantee agencies do it, it’s the other way around. That alone saves $1.3 billion for the federal government. There are six other ways that that is done.
MARGARET WARNER: So you’re saying–
SEN. SIMON: So they have cooked the books, and the Congressional Budget Office says if you take the present law established in the bipartisan way, if you take the present law, the taxpayers pay $4.6 billion under direct lending.
MARGARET WARNER: So you’re saying actually direct lending in the long-term is more advantageous financially for the government?
SEN. SIMON: No question about it. And let me just give you one other example, because Lindsey talks about the free enterprise system. Sen. David Durenberger, who is my co-sponsor in this program and a Republican from Minnesota, in talking to a group of bankers said very candidly, said this isn’t free enterprise, this is a free lunch.
MARGARET WARNER: Let me ask Congressman Graham, what about that point that the guarantee program, the old program, isn’t really free enterprise, because if these loans go bad, the federal government comes in and makes the banks almost whole?
REP. GRAHAM: Well, under direct lending there is–the federal government loses the entire loan, because there’s no one to share the risk with. We’ve created an artificial market, because a high school student getting out of school doesn’t have the assets to get a loan on their own, so we made a public policy commitment to allow them access to education. There’s two ways you can do that. You can use private capital, where the government and the private sector share the risk, allow banks to make a profit, or you can center everything into the federal government, allow the federal government to borrow the money, lend it out, be managed by the Department of Education, assume all the risks. There are problems in the student loan guarantee program that are being fixed. When we sent our proposal to the Senate, we saved $5 billion by doubling the origination fee to banks to participate in the program, doubling the risk that they share now in a bad loan, we saved $5 billion. When we sent it to the Senate, it came back at $3.9 billion. We’re going after the super good deal and trying to make it a fair deal, but direct lending takes all the risk out of the private sector, puts it all on the federal government, allows the Department of Education to become a bank, and replace private capital with government borrowed money. This is not the theme of the Congress.
MARGARET WARNER: All right. Let me just ask you–wait, let me just ask the Congressman the one point you already raised, Senator, which is–and the taped piece raised too–that most students and universities think the direct lending program by the Department of Education gives better service. It’s more efficient. It works better.
REP. GRAHAM: My goal is not to please the loan officers at schools. They get their money quicker because they cut a check from Washington, D.C., much quicker. When you go through a bank, it takes some time to get the loan established, but we’ve got a system to collect that loan that is much more aggressive. There’s risk being shared with the private sector. There is none in direct lending. I guarantee you, politicians would love to take about a $36 billion pot of money, hand it out like it’s candy, pay it back when you can, rewrite the rules, and let some bureaucrat in Washington, D.C., chase the money. That is not a good system for the American taxpayer.
MARGARET WARNER: Okay. Senator–
REP. GRAHAM: I’m not concerned so much about making it efficient for schools. I want to make it efficient for the taxpayer, share the risk, and use private capital versus government-borrowed money.
SEN. SIMON: Well, let’s take a look at what the schools, themselves, think, and lets take a look at what the students, how the students benefit. And then let’s set up a program that is for students and schools and taxpayers. And if you use those criteria, direct lending is the way to go or what we–what we want to do is not say go 100 percent direct lending, as the administration originally requested, but say to the colleges and universities, you can have a choice. Now, what’s wrong with that in a competitive situation? But instead, we have set up a system that is a bonanza for banks. Now, if you want to have a Banking Assistance Act, call it that, but don’t, don’t let it fly under the title of student assistance. That’s what our friends in the Republican Party have done. They are trying to–and I shouldn’t make it that categorically Republican, because the idea originally was by Congressman Tom Petrie of Wisconsin, a Republican, who did a great job in coming up with the idea.
MARGARET WARNER: All right. Gentlemen, we’re almost out of time. Let me ask you about the political prospects. This is part of the reconciliation bill. The President is opposed to this cap. Sen. Simon, do you think this is a deal breaker for the President? Do you think he would continue to veto a reconciliation bill as long as it included this cap?
SEN. SIMON: Let me tell you, the President understands this one, and he is committed. He understands it is a classic confrontation of special interest over against the public interest. And this is one I don’t think the President of the United States is going to back off on. He has been solid on this. He can be very proud. It’s one of the major steps forward by his administration, and I don’t think you’re going to see Bill Clinton back off on this one.
MARGARET WARNER: All right. And Congressman, how important do you think this is to all of your Republican colleagues, when the horse trading really begins in the budget bill?
REP. GRAHAM: This is very important. This fits in with Bill Clinton’s philosophy to allow the federal government to run the program completely, borrow the money, lend it out, let politicians write the payback scheme. Don’t worry that we are 100 percent at risk on the direct lending. This is big government at its best. This is exactly what we’re trying to get away from. Let’s make it a better business deal for the 2/3 of the students that don’t go to college. Let’s rework the student loan guarantee program, but my goodness, let’s don’t create a bank at the Department of Education, let bureaucrats run it. Let’s get tough on the bankers. And the Senate needs to help us because they–we saved $10.1 billion in our rescission reconciliation package. The Senate would only go with us $4.1 billion. So we need to get the Senate talking like Sen. Simon. Let’s make it a better business deal for the taxpayer, but my goodness, don’t center everything in Washington, D.C..
MARGARET WARNER: All right. Congressman, thank you, and Sen. Simon, I’m afraid we’ll have to leave it there, but thank you both very much.