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Student Loans Ain't Broke. Don't Fix `Em


Finance: Commentary

STUDENT LOANS AIN'T BROKE. DON'T FIX `EM

As a candidate, Bill Clinton sold himself as a "New Democrat" willing to forge business-government partnerships that would help him "reinvent" government. But now that he's ensconced in the White House, some of Clinton's proposals seem at odds with his rhetoric. A case in point: his plan to overhaul the federally insured student-loan program.

The system currently operates through some 7,800 commercial banks, several dozen state agencies and private companies that back the loans, and a handful of companies such as the Student Loan Marketing Assn. (Sallie Mae), which have created a vibrant secondary market for the $127 billion or so in student loans guaranteed since the program began in 1965. Clinton insists he can shave billions from the program, which he blasts as "wildly expensive," by letting the government make the loans directly. The savings would help finance the Administration's service-for-education program.

STOCK DROP. He can't be serious, can he? The notion that some bureaucrats in the bowels of the Education Dept. could run the program more efficiently than private companies borders on the ludicrous. And replacing private loans with government ones would boost an already bloated budget deficit.

Clinton's eagerness to nationalize the loan program could also make investors wary of public-private ventures the Democrats are considering. In the weeks since he advanced the plan, Sallie Mae's stock has plummeted more than 40%. Who would invest in Sallie Mae-like government-backed ventures that have been proposed to fund small-business and transportation lending? Investors, says a major holder of Sallie Mae stock, "are going to look at new [public-private ventures] pretty skeptically."

Clinton is simply too optimistic in his calculations of the savings. Take the projections of $3.2 billion in savings over five years by switching over to direct government lending. Critics predict the government would just shunt many administrative tasks now done by banks onto colleges, which would likely pass along the additional expenses through higher tuition. And according to a Congressional Research Service study, some $500 million more in annual "savings" actually comes from accounting sleight of hand: The government wouldn't have to create reserves for projected losses from defaults and prepayments. "The estimates of...[billions of dollars in] savings are suspect," says CRS economist Dennis Zimmerman.

Nor is it likely that Washington would be more efficient. Sure, the government would have lower borrowing costs. But the Education Dept. has been criticized for its management of the program, including its slowness to weed out fly-by-night trade schools that bilk students and taxpayers for millions in guaranteed student loans.

What's more, the government would have to invest millions of dollars in proprietary software and other technology to match banks' speed in handling the clerical tasks the program entails. "The government would have a hard time matching the technology that the banks and others have in place," says Roy A. Nicholson, chairman of USA Group, an Indianapolis-based guarantor.

Then there's Sallie Mae, which Congress chartered in 1972. The company purchases, securitizes, and services about a third of all student loans. Chief Executive Lawrence A. Hough has driven its servicing costs down 21% since 1986 (chart) and its profits up 172%. So Sallie Mae's board awarded Hough salary, options, and perks worth $2.1 million in 1991--raising hackles on Capitol Hill. But the hefty compensation was well-deserved, since it was tied to his strong performance.

The current system isn't perfect, of course. But rather than junking it, Clinton should fine-tune it. Right now, for instance, the government pays banks 3.1 points above the three-month Treasury rate while students are in school and haven't begun to repay their loans. That premium has dropped periodically, and it may be time to ask banks to reduce it further to share some of their recent efficiency gains with taxpayers. Trimming this payment by half a point would give banks roughly the same return they make on many other consumer loans--and save taxpayers upwards of $970 million over five years.

When Clinton made his promises about reinventing government, no one thought he meant replacing well-run private businesses with an even more bloated government bureaucracy. The Administration must realize that public-private partnerships will mean profits for those who perform well.

Hough's $2 million salary and Sallie Mae's healthy earnings are a small price to pay for keeping the cost of student lending down. They should be congratulated--not put out of business.Dean Foust


Steve Ballmer, Power Forward
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