The U.S. House of Representatives will soon consider H.R. 3221,
the "Student Aid and Fiscal Responsibility Act of 2009,"
legislation that will terminate the Federal Family Education Loan
(FFEL) program, expand the Federal Direct Loan program, and
increase spending on other post-secondary education programs. If
enacted, the legislation will mark a dramatic shift in the federal
government's approach to student lending and result in a
consolidation of federal power over education financing.
In addition, the legislation proposes to use potential cost
savings achieved by these lending reforms to further increase
federal subsidies for higher education grants and other spending
programs. These spending increases are ostensibly intended to help
address the problem of college affordability and access.
Unfortunately, past experience suggests that simply increasing
government subsidies for student aid and higher education will not
solve the issue of college affordability. Policymakers should
instead address the real problem: continuously rising college
An Alternative Approach for Student
The primary policy change proposed in H.R. 3221 is the
elimination of the FFEL program and the shift toward the Direct
Loan program. Under the FFEL, private lenders provide loans to
post-secondary education students. The private lenders receive
subsidies to make these loans, and the federal government provides
a guarantee for the majority of the loan if the borrower defaults.
In contrast, under the William D. Ford Federal Direct Loan program,
the federal government makes and administers loans to borrowers
H.R. 3221 would end the FFEL program in 2010, shifting all
student aid lending into the federal government's Direct Loan
program and the Federal Direct Perkins Loan program. This proposed
changed is premised on the belief that ending subsidies to
private-sector lenders will reduce government costs and that the
federal government will administer student loans more efficiently
than private lenders do.
The Congressional Budget Office (CBO) has projected that
eliminating FFEL would lead to significant cost savings for the
government, enough to more than offset increases in the costs of
the Direct Loan program and the other spending increases included
in the bill. However, there are questions about whether
the CBO's projected cost savings will fully materialize if these
reforms are enacted.
In July, CBO Director Douglas W. Elmendorf acknowledged that the
original CBO projection did not adjust for the cost of market risk
of increasing defaults that the federal government will assume with
the shift to direct lending. In addition, there is a danger that
taxpayers' costs could balloon if the federal government proves
less efficient in administering and collecting loans than current
private-sector lenders, which have an incentive to administer and
collect loans efficiently in order to maximize profits.
There are also concerns that the elimination of FFEL and shift
toward direct loans would lead to worse service for borrowers.
Right now, college students have the opportunity to originate loans
with the federal government through the Direct Loan program;
however, most borrowers choose to take loans from the
private-sector providers. If the federal government is given
responsibility for making and administering all loans, there the
quality of service in loan administration could be poor, presenting
challenges for borrowers and colleges.
Instead of simply ending FFEL, Congress could reform the federal
government's student lending programs to achieve savings for
taxpayers while maintaining a level and competitive playing field
between lenders. Instead of eliminating the FFEL program entirely,
Congress could reform FFEL to reduce subsidies to lenders to
achieve the projected cost savings that CBO estimates would occur
if FFEL is eliminated. The private sector lenders should be able to
provide lending services at a higher quality and as
cost-effectively as the government. By reducing subsidies made to
lenders participating in the FFEL program, the less efficient
private lenders would be driven from the market while the more
efficient lenders would be left to compete with the federal
government's Direct Loan program on an equal playing field. Moving
forward, this competition would help ensure quality services for
borrowers and efficiency for taxpayers, since the private lenders
would have an incentive to continuously lower costs to maximize
profits. Given the current concerns about the credit market and the
challenges that private lenders may be facing in raising capital,
these reductions in subsidies could be phased-in over time.
An Alternative Approach for Addressing
the Problem of College Affordability
In addition to reforming student lending, H.R. 3221 also
includes significant funding increases for current and new federal
programs. For example, the legislation includes significant changes
for the Pell Grant scholarship program, making it mandatory in the
federal budget process in 2010 and requiring that the Pell Grant
award would grow by the Consumer Price Index plus 1 percent in
future years. These changes guarantee continued spending increases
for this program in future years.
The legislation would also create a number of new programs and
increase spending on a variety of existing programs. For example,
the legislation would provide mandatory funding for new "College
Access and Completion Innovation Fund" programs. It also creates
new mandatory spending on post-secondary education modernization
and repair programs. The legislation even includes mandatory
funding for state preschool programs through the Early Learning
Challenge Fund, which would receive mandatory funding. The nation's
long-term fiscal health is unarguably in serious trouble driven by
mandatory entitlement spending. Adding new mandatory programs is a
misguided step in the wrong direction.
But federal policymakers should reconsider whether continuing to
increase spending on student aid (not to mention unrelated
programs) will address the reason for the college affordability
problem: continuously rising college costs.
Years of consistent increases in federal spending on higher
education have not solved the problem of college affordability.
During the 2008-09 school year, total federal spending on student
aid programs (including grants, loans, and tax benefits) was $96
billion. Total federal aid in 2007-08 was 84 percent
higher than in 1997-98 after adjusting for inflation.
But college costs have continued to rise, too, during that
period. The College Board reports that published tuition and fees
at public and private four-year institutions rose at an average
annual rate of 4.2 percent (2.4 percent after inflation) over the
past decade. Given past trends, college students and
taxpayers should expect college costs to continue to rise along
with the growth in federal subsidies in student aid.
Instead of simply increasing subsidies for higher education,
policymakers should challenge state governments as well as public
and private colleges to improve their efficiency and reduce college
costs. One promising strategy for lowering costs and improving
efficiency is online learning. As higher education instruction
increasingly becomes available online, post-secondary students have
growing access to online academic content at significantly lower
costs than in the traditional college setting.
Public and private colleges have an opportunity to facilitate
this process by making more content available online for lower
costs and by establishing partnerships with other higher
educational institutions to improve efficiency and facilitate
low-cost online learning. While public colleges may resist
strategies to improve efficiency (and reduce their budgets), state
governments could push these changes in an effort to ease higher
education costs that burden state budgets. Regardless of how this
transformation happens, the proliferation of low-cost online
learning opportunities could be a major factor in solving the
problem of college affordability and access.
Inefficiency in student lending and college affordability are
important issues that federal policymakers should address. However,
expanding the Federal Direct Loan program and increasing spending
on other federal student aid programs is not the way to solve these
To reform and improve student lending, Congress should reduce
subsidies to private lenders to create a level playing field
between the private sector and the federal government to encourage
competition, efficiency, and quality customer service. Moreover,
experience has shown that simply increasing higher education
subsidies has not solved the problem of college affordability and
runaway college costs. Solving this problem will require state
governments and public and private universities to increase
efficiency and lower costs.
Dan Lips is Senior Policy Analyst in Education
in the Domestic Policy Studies Department at The Heritage
an overview of H.R. 3221, see David P. Smole et al., "The
Student Aid and Fiscal Responsibility Act of 2009," Congressional
Research Service, July 31, 2009.
Douglas W. Elmendorf, director, Congressional
Budget Office, letter to Senator Judd Gregg, July 27, 2009.
Richard Vedder, "The Real Cost of Federal Aid to Higher Education,"
Heritage Foundation Lecture No. 984, January 12, 2007.