Newspaper article The Christian Science Monitor

Shaky Plan for Student Loans Clinton's Reforms Based on Dubious Economic Assumptions

Newspaper article The Christian Science Monitor

Shaky Plan for Student Loans Clinton's Reforms Based on Dubious Economic Assumptions

Article excerpt

AMERICA at its best." That is how President Clinton has characterized his national-service initiative. Who could argue with his vision of Americans helping others, rebuilding their communities and being rewarded? A bold, beneficent aspect of the president's national-service initiative is his proposal to provide students with improved financial access to an education beyond high school.

But some aspects of this sweeping change do not add up: in particular, his proposal, which passed in the House of Representatives as part of the budget package, to shift the management and implementation from private-sector lending and guarantor institutions to the government. The administration estimates that this would save billions of dollars.

This is optimism beyond the bounds of credibility: The revenue estimates rely on assumptions about the efficiency of government that do not stand up to scrutiny.

The Congressional Budget Office, which backed away from earlier projections of large savings from direct government lending (from $6 billion to $4.27 billion), has lowered its estimate again, saying that earlier estimates failed to factor in a significant portion of the costs of administering student loans: $2.19 billion. The CBO also did not take into account transition costs of moving to a direct-lending program and relied on overly optimistic projections for servicing costs and likely defaults.

The impartial Congressional Research Service (CRS) has come out with three reports, each noting that the cost-savings argument is unrealistic and warning of the negative consequences if the government does not run the program efficiently.

This is not the first time that rosy assumptions about direct government lending have wilted under close scrutiny. Last fall, the General Accounting Office (GAO) concluded that a complete government takeover of student loans would save $4.8 billion during the first five years of the program. But the GAO staff recognized the fragility of its assumptions: "The values we assume for certain key variables strongly influenced our estimate of the savings achievable from direct lending."

Unfortunately, the staff's cautions were ignored, and the GAO's optimism helped whip up support for a radical shift to direct government lending, leading to its inclusion in the president's national-service plan. Pulling apart the GAO's assumptions layer by layer clearly reveals the study's flaws, some of which were repeated by the CBO. These flaws include:

* Out-of-date economic assumptions. Updated assumptions about interest rates and inflation and corrected miscalculations of the savings that accrue from new provisions in Higher Education Act amendments combine to reduce purported savings by $1.1 billion.

* Understated estimates of the costs of servicing loans. The GAO based these on what the Student Loan Marketing Association charges. But high volume, preferential costs of borrowing, and selective accounts keep those charges artificially low. …

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