CBO Says Lending Community's Loan Proposal Costs More Than Direct Lending

The Congressional Budget Office (CBO) released its scoring of the lending community's alternative student loan proposal on Friday, showing that it would cost $13 billion more over ten years than the Democrats' proposal to originate all loans through the Direct Loan Program. The net savings from turning to 100 percent Direct Lending is $80 billion whereas the net savings from the lenders' alternative proposal is $67 billion, according to CBO.

The Student Loan Community Proposal would reduce federal outlays by eliminating the Federal Family Education Loan Program (FFELP), a savings of $87 billion (the same amount of savings generated by the Direct Loan Program). But where the Direct Loan program would only result in an increase of $7 billion of discretionary spending, the Community Proposal would increase costs by $7 billion for the Department to administer the loans and another $13 billion in direct spending for new payments to lenders, according to CBO.

The Student Loan Community Proposal would eliminate the Federal Family Education Loan Program (FFELP), but would permit federally designated private lenders to originate new loans using capital derived from the sale of student loans to the Department of Education, according to CBO. Within 15 days of the origination of a loan, a private lender would enter into a loan participation agreement with the Department of Education, requiring that the department pay to the lender:

100 percent of the principal balance, within one day of signing the agreement;
A loan administration fee equal to 0.69 percentage points per annum times the principal balance of the fully disbursed loan for the number of days between the date of first disbursement and the legal transfer of the title to the department; and
An origination fee of $20 when the lender signs the participation agreement and $55 when the lender transfers title to the department.

Media Coverage

With Student-Loan Showdown Looming, Lenders Suffer Setback The Chronicle of Higher Education

Private Student Lenders’ Proposal Falls Short in Cost Estimate New York Times

Sallie Mae’s Loan Plan May Save $13 Billion Less Than Obama’s Bloomberg

Lenders' Alternative More Costly Than Obama Loan Plan, CBO Says Inside Higher Ed

Posted 09/14/09 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web site questions or comments to Web@NASFAA.org.