(Washington, D.C.) – The Council for Citizens Against Government Waste (CCAGW) today criticized Senators Ted Kennedy (D-Mass.) and Gordon Smith (R-Ore.) and Representatives Thomas Petri (R-Wis.) and George Miller (D-Calif.) for reintroducing the Student Aid Reward Act, which will use taxpayer dollars to stimulate the growth of the money-leaking Federal Direct Loan Program (FDLP).  A March, 2004 report from the Government Accountability Office (GAO) raised questions on whether FDLP was saving money.  The report found that in fiscal years 1995-2003, total cash outflows for FDLP exceeded total cash inflows by $10.7 billion.

“With a straight face, these members of Congress tell us that we should use tax dollars to bribe colleges and universities away from more efficient private source loans to the failing direct loan program, all in the name of ‘saving money,’” CCAGW President Tom Schatz said.

According to a GAO report released in November, 2003, the FDLP share of total new loan volume steadily decreased from its peak of 34 percent to 28 percent.  Many colleges and students flocked to the privately-run Federal Family Education Loan Program (FFELP) for its more attractive terms to borrowers. 

The direct loan program, first implemented in 1993 with the promise to save tax dollars by cutting out the “middle man” of commercial banks, is similar to the private FFELP, but differs in a fundamental way.  FFELP uses private sources such as banks or other lenders to provide federally guaranteed student loans.  Private lenders issue, service, and are paid back the loans.  In contrast, FDLP loans are taken directly from the U.S. Treasury, and recipients pay the money back to the federal government.  FDLP is losing money because origination fees and receipts from borrowers are less than the amount of interest the Department of Education (DoED) pays on the money it borrows from the Treasury.

In 1999, the DoED inspector general estimated it cost the government $17 per loan to manage the FDLP while it would have cost private lenders $13 per loan to manage the same program.  In fiscal 2005, the DoED will provide nearly $84 billion in student aid grants and loans to 10 million students and parents.  Considering the large percentage of loans still outstanding, the FDLP is digging itself into a deeper financial hole.  Senator Kennedy claims that the savings in his legislation will be used to increase Pell Grants, costing taxpayers nothing.

“We have heard this siren song before,” Schatz concluded.  “Whenever Senator Kennedy talks about a government program that will save tax dollars, taxpayers should hang onto their wallets.  Congress needs to wake up to the real costs of direct lending instead of expanding a program that continues to waste tax dollars it was purportedly designed to save.”

CAGW will issue a report this spring on why the direct loan program has not delivered on its promised savings.     

The Council for Citizens Against Government Waste is the lobbying arm of Citizens Against Government Waste, the nation's largest nonpartisan, nonprofit organization dedicated to eliminating waste, fraud, abuse, and mismanagement in government.