Petri Champions Direct Loans for Students,

$87 Billion Saved for Taxpayers and Student Aid

Rep. Petri spoke on the floor of the House this afternoon in support of H.R. 3221, the Student Aid and Fiscal Responsibility Act of 2009, which is likely to be approved by the House tomorrow.  Among other initiatives, this bill will eliminate the Federal Family Education Loan (FFEL) program (aka "guaranteed loans") in favor of the vastly more cost-effective Direct Loan program.  Rep. Petri has been working toward this since 1983. 

Following is a transcript:

Madam Speaker:

I rise in support of the Student Aid and Fiscal Responsibility Act which eliminates the Federal Family Education Loan Program and moves origination of all federal student loans to the Direct Loan Program.  For over two decades, I have championed direct loans as the most cost-effective way to provide student loans.

But, the defenders of the archaic FFEL guaranteed loan program remain confused.  So let me be clear:  currently we have two federal student loan programs which provide the exact same loans to students.

FFEL is a federal program -- not a private loan program.  Private lenders make the loans with two separate subsidies from the federal government: a guaranteed interest rate that is determined through the political process -- not the markets -- and a guarantee against default losses.  Thus, if a student defaults, the taxpayers are on the hook - not the private lender.  The profits are private but the losses are socialized.  FFEL is not free enterprise.

Over the years, FFEL has proven to be fraught with scandal and an unreliable source of funds, and it costs billions of dollars more for the taxpayers.

A writer for conservative columnist Bill Kristol's Weekly Standard magazine aptly described the FFEL program as "a textbook example of crony capitalism."

In contrast, the Direct Loan program eliminates the middleman, lending directly from the Treasury, and all servicing and bill collection is handled by private companies operating through performance-based contracts. 

Over the years, there has been unanimous agreement by budget experts under both the Clinton and Bush Administrations on the excessive costs of FFEL.  Earlier this year, an estimate by the CBO once again reiterated this conclusion  when it reported that switching to 100 percent direct lending would result in nearly $87 billion in savings.