Washington, D.C. – Citizens Against Government Waste (CAGW) today released The Direct Loan Program Flunks Out, a report that debunks the supposed benefits of the Federal Direct Loan Program (FDLP).  The FDLP was established in 1993 to provide direct loans to students for college education.  Proponents argued that “cutting out the middleman” of private lenders would save taxpayers money.  However, participation in FDLP has declined by 29 percent over the past seven years and the program has a deficit of $13 billion.   

CAGW analysis and recent studies show the Federal Family Education Loan Program (FFELP), which uses private sources such as banks or other lenders to provide federally guaranteed student loans, to be superior to the FDLP.  In January 2005, one financial aid director told the Manitowoc Herald Times Reporter, “Direct lending has been around for 10 years.  If it is so wonderful, we all would have joined.”       

“Not surprisingly, government bureaucrats fail to duplicate the customer service and savings offered by competitive private lenders,” CAGW President Tom Schatz said.  “Congress needs to examine the full costs of direct lending when it considers reauthorizing the Higher Education Act this year.”

FDLP loans are taken directly from the U.S. Treasury, and recipients pay the money back to the federal government.  But the Department of Education’s (DoED) cash flow estimates have consistently been off the mark.  From fiscal years 1995 to 2004, DoED overestimated expected interest payments on outstanding loans by $11.2 billion, or 49 percent – almost double what was actually received.  The DoED continues to pay more interest to the Treasury than it collects from borrowers. 

CAGW’s report points out other problems with FDLP.  The cost to administer FDLP has skyrocketed from $10 million in fiscal 1993 to $600 million in fiscal 2005, a 600 percent increase. 

“Federal loans represent almost half of all financial aid for undergraduate and graduate students,” Schatz concluded.  “With the enormous taxpayer investment in higher education, taxpayers should be getting the best possible deal, and unfortunately, direct lending is not living up to its promise.”

The Direct Loan Program Flunks Out, authored by Elizabeth L. Wright, CAGW Vice President for Government Affairs, is available at www.cagw.org.

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