Obama’s Student-Loan Plan May Save Less Than Thought

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Obama’s Student-Loan Plan May Save Less Than Thought (Update2)

By Molly Peterson

July 28 (Bloomberg) -- President Barack Obama’s plan to end federal subsidies to student-loan providers such as Sallie Mae may save $47 billion over 10 years instead of the $87 billion originally projected, the Congressional Budget Office said.

Incorporating market risk into the proposal, which would switch all new federal student loans to the Education Department’s direct-lending program, could reduce projected savings by $33 billion, CBO director Douglas Elmendorf said in a letter yesterday. The direct-loan program’s administrative costs would cut the savings by an additional $7 billion, he said.

The new CBO calculation, requested by Republicans, raises questions about plans by Obama and congressional Democrats to spend most of the projected savings on education programs and deficit reduction. Those proposals would cost taxpayers billions because the $87 billion in savings is a “myth,” said Representative John Kline of Minnesota, the House Education and Labor Committee’s senior Republican, who opposes the measure.

Committee Democrats said Republicans were trying to “cook the books” by asking CBO to ignore current student-loan market conditions. Yesterday’s letter didn’t change the official projection of $87 billion in savings over 10 years, they said.

“It’s clear that Republicans didn’t like the truth -- that our legislation generates almost $90 billion that could be used to help students, families, and taxpayers -- so they shamelessly decided to have a little fun with the numbers,” Committee Chairman George Miller, a California Democrat who sponsored the House bill that includes Obama’s proposal, said in a statement.

Market-Risk Cost

Senator Judd Gregg of New Hampshire, the Senate Budget Committee’s senior Republican, had asked CBO to adjust its projection to include the market-risk cost -- the prospect that student-loan defaults over 10 years will exceed the default rate used in CBO’s standard procedure for calculating the value of loans. CBO used a similar methodology in estimating the Troubled Asset Relief Program’s budget impact, Gregg said today in an e- mailed statement.

“I’m pleased that CBO has told Congress what it needs to know about the real economic and budgetary impact” of Obama’s proposal, Gregg said.

Elmendorf said in his letter, addressed to Gregg, that relying on a market-risk analysis “does raise some concerns” because “risky assets, including student loans, can fluctuate wildly in value” from one year to the next.

CBO’s official projection is based on a more accurate methodology than the market-risk analysis, said Justin Hamilton, an Education Department spokesman.

‘Longstanding, Neutral’

“This methodology is required by federal statute and provides a longstanding, neutral, and objective basis” for comparing the costs of government lending programs, Hamilton said in an e-mail.

Obama and Miller seek to end the 43-year-old Federal Family Education Loan Program, which subsidizes and guarantees loans made by private lenders. All new federal student loans would be made through the 16-year-old Direct-Loan Program, which lets students borrow directly from the government. Miller’s proposal, like Obama’s, would let companies compete for loan-servicing tasks such as processing payments and collecting on defaults.

Miller’s legislation, approved last week by the education panel, would direct the projected $87 billion in savings into other programs. The bill would channel $40 billion into Pell Grants for low-income college students and $10 billion into early childhood education grants. It also would use $10 billion to help reduce the deficit.

‘Budgetary Gimmick’

“A government takeover of our student loan programs is just a budgetary gimmick designed to finance the latest entitlement spending spree,” Kline, the Republican lawmaker, said today in an e-mail.

Reston, Virginia-based SLM Corp., known as Sallie Mae, is the biggest U.S. provider of student loans, followed by Citigroup Inc.’s Student Loan Corp. in Stamford, Connecticut, and Lincoln, Nebraska-based Nelnet Inc. Sallie Mae made $24.2 billion in student loans last year, 74 percent of them federally guaranteed.

The three companies are among 30 organizations pushing an alternative plan that would let private lenders continue to market federal student loans, which they would then sell to the government.

The new CBO calculations “will be used to highlight the risk inherent in the president’s proposals and could possibly bolster the industry plan” in Congress, Matt Snowling, an analyst with Friedman Billings Ramsay Group Inc., said today in a note to clients.

Sallie Mae lost 28 cents, or 3.1 percent, to $8.87 at 4 p.m. in New York Stock Exchange composite trading. Student Loan Corp. fell $1.56 to $46.02, and Nelnet slid 13 cents to $14.50.

To contact the reporter on this story: Molly Peterson in Washington at mpeterson9@bloomberg.net.

Last Updated: July 28, 2009 17:12 EDT