March 3, 2005
PriceWaterhouseCoopers Study Identifies Biases in Student Loan Program Scoring
FOR RELEASE MARCH 3, 2005
Washington, DC -- Federal Budget scorekeeping biases are distorting comparisons of the cost of two federal student loan programs, underestimating the costs of the Federal Direct Loan Program and overestimating the cost of the Federal Family Education Loan Program, according to a PriceWaterhouseCoopers study released today.
The study, The Limitations of Budget Score-keeping in Comparing the Federal Student Loan Programs, details how federal budget scorekeepers distort measurements of the cost of the two major federal student loan programs -- the Federal Family Education Loan Program (FFELP), where private lenders make guaranteed loans, and the Federal Direct Loan Program (FDLP), where the government makes the loans itself.
The biases in comparing how much the programs cost -- or save -- the federal taxpayer tend to make the direct loan program appear cheaper to the Federal Government than the FFELP. These biases include:
1. Methods for estimating interest rates that underestimate the gap between long term and short term rates, which make direct lending appear to be less expensive than it is;
2. Failure to take into account the tax revenues produced by the FFELP program; and
3. The omission of administrative costs from direct loan cost estimates, but not from FFELP estimates.
These and other biases make it difficult to compare the relative cost of the two loan programs, according to author Lin Smith, an economist with PriceWaterhouseCoopers. "Federal budget estimates are inadequate for the purpose of evaluating the relative economic costs of the loan programs," Smith said. "As a result, the use of such estimates to measure program efficiency could distort policy decisions." Smith has performed budget scorekeeping in the public and private sectors for more than 30 years, including service with the Joint Committee on Taxation of the U.S. Congress and with the U.S. Treasury.
Smith's paper estimates the effect of several scoring biases that can be quantified relatively easily. Other biases were not quantified by the paper due to data limitations, but are also important. This includes the use of a market-based discount rate for direct loans -- an issue that Congressional Budget Office (CBO) Director Douglas Holtz-Eakin raised at a recent Senate hearing, saying that the current discount rate, "appears to understate the economic cost of federal credit programs."
CBO is currently re-examining the Credit Reform Act -- which sets the guidelines under which federal credit program cost estimates are made, Holtz-Eakin indicated. The co-sponsors of the PriceWaterhouseCoopers study applauded this effort today, while cautioning that major student loan policy changes should not be made based on the current baseline scores of the two loan programs.
The PriceWaterhouseCoopers study was commissioned by three major student loan groups -- the Consumer Bankers Association, the Education Finance Council, and the National Council of Higher Education Loan Programs.
The report is available at:
http://www.studentloanfacts.org/NR/rdonlyres/81D7AFB7-FAC8-4F0F-8675-0F71DA0F478F/2454/PWCReport.pdf
Contacts:
Peter Warren
Phone: (202) 955-5510
Email: peterw@efc.org
The Education Finance Council's (EFC) mission is to promote and expand access to higher education by ensuring the availability of student loan funds while striving to make paying for college easier and less expensive for all students and families. EFC represents non-profit student loan secondary markets that participate in the Federal Family Education Loan Program (FFEL) as well as affiliated entities including guaranty agencies, lenders, rating agencies, insurers and investment bankers.
Harrison Wadsworth
Phone: (202) 289-3900
Email: hwadsworth@wpllc.net
The Consumer Bankers Association is the recognized voice on retail banking issues in the nationÂ’s capital. Member institutions are the leaders in consumer financial services, including auto finance, home equity lending, card products, education loans, small business services, community development, investments, deposits and delivery. CBA was founded in 1919 and provides leadership, education, research and federal representation on retail banking issues such as privacy, fair lending, and consumer protection legislation/regulation. CBA members include most of the nationÂ’s largest bank holding companies as well as regional and super community banks that collectively hold two-thirds of the industryÂ’s total assets.
Shelly Repp
Phone: (202) 822-2106
Email: shelly_repp@nchelp.org
NCHELP represents a nationwide network of guaranty agencies, secondary markets, lenders, loan servicers, collection agencies, schools and other organizations involved in the administration of the Federal Family Education Loan Program (FFELP). NCHELP members promote student access and choice for post-secondary education and training.
Over the past 38 years, the FFELP has provided more than $400 billion in loans to more than 75 million students and their families.
PriceWaterhouseCoopers Study Identifies Biases in Student Loan Program Scoring
FOR RELEASE MARCH 3, 2005
Washington, DC -- Federal Budget scorekeeping biases are distorting comparisons of the cost of two federal student loan programs, underestimating the costs of the Federal Direct Loan Program and overestimating the cost of the Federal Family Education Loan Program, according to a PriceWaterhouseCoopers study released today.
The study, The Limitations of Budget Score-keeping in Comparing the Federal Student Loan Programs, details how federal budget scorekeepers distort measurements of the cost of the two major federal student loan programs -- the Federal Family Education Loan Program (FFELP), where private lenders make guaranteed loans, and the Federal Direct Loan Program (FDLP), where the government makes the loans itself.
The biases in comparing how much the programs cost -- or save -- the federal taxpayer tend to make the direct loan program appear cheaper to the Federal Government than the FFELP. These biases include:
1. Methods for estimating interest rates that underestimate the gap between long term and short term rates, which make direct lending appear to be less expensive than it is;
2. Failure to take into account the tax revenues produced by the FFELP program; and
3. The omission of administrative costs from direct loan cost estimates, but not from FFELP estimates.
These and other biases make it difficult to compare the relative cost of the two loan programs, according to author Lin Smith, an economist with PriceWaterhouseCoopers. "Federal budget estimates are inadequate for the purpose of evaluating the relative economic costs of the loan programs," Smith said. "As a result, the use of such estimates to measure program efficiency could distort policy decisions." Smith has performed budget scorekeeping in the public and private sectors for more than 30 years, including service with the Joint Committee on Taxation of the U.S. Congress and with the U.S. Treasury.
Smith's paper estimates the effect of several scoring biases that can be quantified relatively easily. Other biases were not quantified by the paper due to data limitations, but are also important. This includes the use of a market-based discount rate for direct loans -- an issue that Congressional Budget Office (CBO) Director Douglas Holtz-Eakin raised at a recent Senate hearing, saying that the current discount rate, "appears to understate the economic cost of federal credit programs."
CBO is currently re-examining the Credit Reform Act -- which sets the guidelines under which federal credit program cost estimates are made, Holtz-Eakin indicated. The co-sponsors of the PriceWaterhouseCoopers study applauded this effort today, while cautioning that major student loan policy changes should not be made based on the current baseline scores of the two loan programs.
The PriceWaterhouseCoopers study was commissioned by three major student loan groups -- the Consumer Bankers Association, the Education Finance Council, and the National Council of Higher Education Loan Programs.
The report is available at:
http://www.studentloanfacts.org/NR/rdonlyres/81D7AFB7-FAC8-4F0F-8675-0F71DA0F478F/2454/PWCReport.pdf
Contacts:
Peter Warren
Phone: (202) 955-5510
Email: peterw@efc.org
The Education Finance Council's (EFC) mission is to promote and expand access to higher education by ensuring the availability of student loan funds while striving to make paying for college easier and less expensive for all students and families. EFC represents non-profit student loan secondary markets that participate in the Federal Family Education Loan Program (FFEL) as well as affiliated entities including guaranty agencies, lenders, rating agencies, insurers and investment bankers.
Harrison Wadsworth
Phone: (202) 289-3900
Email: hwadsworth@wpllc.net
The Consumer Bankers Association is the recognized voice on retail banking issues in the nationÂ’s capital. Member institutions are the leaders in consumer financial services, including auto finance, home equity lending, card products, education loans, small business services, community development, investments, deposits and delivery. CBA was founded in 1919 and provides leadership, education, research and federal representation on retail banking issues such as privacy, fair lending, and consumer protection legislation/regulation. CBA members include most of the nationÂ’s largest bank holding companies as well as regional and super community banks that collectively hold two-thirds of the industryÂ’s total assets.
Shelly Repp
Phone: (202) 822-2106
Email: shelly_repp@nchelp.org
NCHELP represents a nationwide network of guaranty agencies, secondary markets, lenders, loan servicers, collection agencies, schools and other organizations involved in the administration of the Federal Family Education Loan Program (FFELP). NCHELP members promote student access and choice for post-secondary education and training.
Over the past 38 years, the FFELP has provided more than $400 billion in loans to more than 75 million students and their families.
