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The Daily OrangeFederal government underestimates college loan program costs
By Nicky Corbett
Posted: 3/7/05, 11:40 PM EST Section: News
Now, about 30 percent of schools participate in the direct loan program, while 70 percent use the FFELP, Warren said.
Universities generally prefer there be two loan programs so they can compete against one another, Warren said.
"That way (universities) can choose one or the other," Warren said.
Both the Office of Management and Budget, for the executive branch, and the Congressional Budget Office, for the legislative branch, handle federal budget scorekeeping for programs like FFELP and the direct loan program.
The principal cost calculation biases the study found include underestimating the gap between short- and long-term interest rates, failure to include the FFELP's tax revenues and leaving out the direct loan program's administrative costs in its cost estimates while including them in the FFELP's estimates.
Debates over distortions in the cost estimates of the two loan programs are nothing new.
"There's been a lot of discussion over which loan is cheaper," Walsh said.
However, Warren said the interest rate bias is a new and significant finding.
Repp said the gap between short- and long-term interest rates has historically been greater than the government assumes it to be. This means the direct loan program has cost the government more than it realizes.
The biases partly result from the Credit Reform Act of 1990, which outlined a new way to measure the costs of federal credit programs, such as loan programs, Warren said.
The loan programs used to be measured on a cash-flow basis, which created biases that did the reverse of the current system; it overestimated the costs of the direct loan program and underestimated the costs of FFELP, Repp said.
The Credit Reform Act was then created to eliminate the biases of the former cost-calculating system, but overcompensated.
Harrison Wadsworth, special council for Consumer Bankers Association, another of the study's sponsors, said he thinks the Credit Reform Act, written before the direct loan program was created, needs to be changed.
"The bias is built into the way the scoring is done according to the law," Wadsworth said.
The CBO is currently in the process of reviewing the Credit Reform Act.
It is important the baseline scores be accurate when passing legislation affecting student loan programs.
"Those policy decisions should be made on the best information available," Repp said.
The Price Waterhouse Coopers study came out in time for the reauthorization of the Higher Education Act. The act gets updated every five to seven years, Warren said.
The reauthorization will update federal student loan program interest rates and the Pell grant eligibility formula, Warren said.
Universities generally prefer there be two loan programs so they can compete against one another, Warren said.
"That way (universities) can choose one or the other," Warren said.
Both the Office of Management and Budget, for the executive branch, and the Congressional Budget Office, for the legislative branch, handle federal budget scorekeeping for programs like FFELP and the direct loan program.
The principal cost calculation biases the study found include underestimating the gap between short- and long-term interest rates, failure to include the FFELP's tax revenues and leaving out the direct loan program's administrative costs in its cost estimates while including them in the FFELP's estimates.
Debates over distortions in the cost estimates of the two loan programs are nothing new.
"There's been a lot of discussion over which loan is cheaper," Walsh said.
However, Warren said the interest rate bias is a new and significant finding.
Repp said the gap between short- and long-term interest rates has historically been greater than the government assumes it to be. This means the direct loan program has cost the government more than it realizes.
The biases partly result from the Credit Reform Act of 1990, which outlined a new way to measure the costs of federal credit programs, such as loan programs, Warren said.
The loan programs used to be measured on a cash-flow basis, which created biases that did the reverse of the current system; it overestimated the costs of the direct loan program and underestimated the costs of FFELP, Repp said.
The Credit Reform Act was then created to eliminate the biases of the former cost-calculating system, but overcompensated.
Harrison Wadsworth, special council for Consumer Bankers Association, another of the study's sponsors, said he thinks the Credit Reform Act, written before the direct loan program was created, needs to be changed.
"The bias is built into the way the scoring is done according to the law," Wadsworth said.
The CBO is currently in the process of reviewing the Credit Reform Act.
It is important the baseline scores be accurate when passing legislation affecting student loan programs.
"Those policy decisions should be made on the best information available," Repp said.
The Price Waterhouse Coopers study came out in time for the reauthorization of the Higher Education Act. The act gets updated every five to seven years, Warren said.
The reauthorization will update federal student loan program interest rates and the Pell grant eligibility formula, Warren said.
