Would Republicans Destroy Even Good Government Programs?

Date: 21 Nov 1995 | posted in: From the Desk of David Morris, The Public Good | 0 Facebooktwitterredditmail

Would Republicans Destroy Even Good Government Programs?

by David Morris

November 21, 1995

When President Clinton assumed office he promised to reinvent government by making it smaller, more efficient and more responsive. Washington skeptics laughed. Undaunted, Bill Clinton and Vice President Al Gore set about their task. And although they would be the first to admit that they have miles to go before they can sleep, they can point to several major successes.

Their greatest success may be the Department of Education’s direct lending program. The concept behind the program is simple. For decades student loans have been guaranteed. That allowed banks to earn handsome profits while taking no risk and doing very little work. Paperwork costs were high and banks rarely if ever tailored repayment schedules to the specific needs of student borrowers.

In 1993 the Department of Education began making loans directly to students. This eliminated the middle men, cut red tape, reduced paper work and spurred competition. The Department of Education also allowed students to repay their loans as a percentage of their income. This allowed graduates to start a business or work in low paying occupations like teaching. Income contingent loans, by the way, was an idea originated by Milton Friedman.

Direct lending has worked and worked well. Universities and colleges can choose to participate in either program. Increasingly they are choosing direct lending. This year 40 percent of the $25 billion in student loans are direct loans, the maximum permitted by current law. In 1995 more than 2 million students borrowed from the Department of Education.

Education Daily, a trade publication surveyed 104 participating institutions in March and found that more than 90 percent of them rated the program as “excellent”. As David Levy, financial aid director at the California Institute of Technology told USA Today, “It’s the best program the federal government has come up with in 20 years.” Levy estimates direct lending has cut the time it takes to receive a loan from 4 to 6 weeks under the old system to 5 to 7 days.

Under either system the federal government guarantees most of the costs of defaulted loans and pays the interest on loans while students are in school. By law interest rates for direct and guaranteed lending are the same. Therefore the programs compete only on the basis of service. As one Duke University official says, “The competition has certainly been good for both students and institutions. Administrative costs have been reduced and students have saved money.”

Spurred by the much more efficient and flexible federal program, private lenders themselves have become more efficient and responsive. Sallie Mae now offers several kinds of repayment options for students In Texas, private bank loans that used to take 3 weeks to process now take 5 days .

By any measure this is one government program to applaud. Yet the Republicans would gut it. The budget bill they sent to President Clinton reduces direct lending by 75 percent and limits it to no more than 10 percent of total loans. That would force 1,000 schools off the program and reduce the number of students on the program by more than 1.5 million.

Why are the Republicans targeting direct lending? One reason is that it upsets a key Republican constituency–big banks. As the New York Times has noted, “Banks have long treasured the guaranteed student loan program, which offers profits with much less risk than they have on other loans.” Next to credit cards. government guaranteed student loans are the most profitable lending line for banks. Representative Dick Gephardt estimates that adoption of the Republican measures could generate as much as $9 billion in additional profits for banks, lenders and others who hold guaranteed student loans.

Republicans may also oppose direct lending precisely because it does work so well. While Democrats propose to reinvent government, Republicans propose to eliminate it. The idea that the public sector may provide a service better than the private sector contradicts Republican orthodoxy and enrages them.

Some Republicans justify their opposition by pointing to their own studies that show that direct lending costs more than guaranteed loans. Two years ago the Democratic Congressional Budget Office(CBO) estimated that direct lending would save taxpayers $4.3 billion over five years. The new Republican CBO estimates that it will cost taxpayers $1.5 billion over 7 years. I look forward to a vigorous public debate about whose numbers are correct. But let’s be frank here. Common sense tells us that more competition, less paperwork and fewer middlemen saves money.

No Democrat proposes to eliminate guaranteed loans. No one is talking about limiting the participation of the private sector. So why should we limit the participation of the public sector? Why not accept the pragmatic advice of Thomas Keane, acting director of financial aid at Cornell University? “Let the two programs go along”, he recommends, “and let the two programs compete.”

Follow David Morris:
David Morris

David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.