How to make college affordable: no one is talking about the best and cheapest solution - income-contingent long-term student loans - includes related article on cost of student loans

Washington Monthly, April, 1997 by Nurith C. Aizenman

Clinton estimates that by lowering the 27 percent rate to 18.5 percent, taxpayers would save $457 million over five years. In addition, he predicts a five year savings of $110 million by making banks pay the allowance guaranty agencies get for attempting to prevent defaults--money they keep regardless of whether they are actually successful. Then there's the $690 million students would save if guaranty agencies were prohibited from charging them a one percent fee. That's on top of the administrative fee the agencies charge the government. Finally, there are the $25 billion in government reserves the agencies are sitting on. The reserves were originally intended to help agencies cover defaulted loans. But since almost all reimbursements come directly from the government, the reserves are unnecessary.

Clinton is right to try to cut all this fat out. But he faces a tough fight against a powerful foe. Although the biggest guaranty agencies are technically not-for-profit corporations, these enterprises are some of the most lucrative in America. The largest, part of a company called USA Group, earned over $100 million in tax-free revenues above its expenditures in 1995. USA Group's then-CEO Roy Nicholson got a $1 million salary that year, and its top 6 officials averaged $400,000 a piece. These executives have their offices in the company's sleek $32 million Fishers, Indiana headquarters. And they make large campaign contributions to sympathetic Republicans. The Baltimore Sun's David Folkenflik reports that USA Group executives gave out more than $30,000 in personal contributions in 1994 and almost $70,000 in 1996. The firm has also paid over a million dollars to Washington "consultants"--all for the purpose of preserving the system which has served it so well.

USA Group argues that the fees it charges allow it to provide high quality service, and the salaries it pays attract executives who must also run for-profit affiliates.

But this raises the question of why guaranty agencies need to be non-profit in the first place. They should either be privatized, and forced to offer competitive prices and pay taxes on their profits, or they should be replaced by the IRS, which would simply add loan repayment to the tax it already collects--eliminating much of the 22 percent in overhead the government currently spends to generate student loans.