7/02/96 Riley Calls Direct Loan Cuts 'Backdoor Cap'

US Education Department Press Releases, Jul 01, 1996

Today, as more than 400 additional schools begin to offer popular direct loans, U.S. Secretary of Education Richard W. Riley called a congressional committee's action to cut administrative funds a backdoor cap' that would "undermine the department's capacity to guard against fraud and abuse in all student aid programs."

The House Appropriations Committee has voted to limit fiscal year 1997 administrative funds for the William D. Ford Federal Direct Loan Program at $420 million, a funding level $16 million below the FY96 level and $71 million below the administration's FY97 request.

"Failing in efforts to impose an outright cap on direct lending , the House leadership has tried to slip this latest stealth cut by schools, students and taxpayers," Riley said. "The funding cut is particularly damaging because it threatens the overall integrity of student loan programs and hampers our ability to collect on defaulted loans."

Riley noted that additional funds to pay private contractors for direct loan origination and servicing are necessary because: direct loan volume will increase from 32 percent of overall loan volume in academic 1995 96 to as much as 50 percent in 1996 97;

the number of direct loan schools is growing by 30 percent -- from 1,300 in 1995-96 to over 1,700 as of today -- and hundreds of additional schools are scheduled to join the program in 1997; and

the number of direct loans scheduled for repayment will grow by 60 percent (from 1.9 million in FY 96 to more than 3 million in FY 97). Riley said direct lending, begun in 1994 at 104 schools, is well liked by students and aid administrators because it's simple to use and offers convenient repayment options based on income.

During the FY96 appropriations process, the House initially sought to eliminate direct lending and failing that, proposed capping the program at 10 percent of overall loan volume. The final FY96 appropriation bill, however, allowed open competition between direct loans and the old program.

Riley said the reduced funding proposed in the House would have other adverse effects: funding for the department's successful default collection activities would have to be reduced. In FY95, collections totaled $2 billion, twice the amount collected only four years earlier. During this same period, default rates dropped from more than 22.4 percent to 11.6 percent; and

funding for oversight systems such as the National Student Loan Data System would be reduced. The department's inspector general, the General Accounting Office, and congressional oversight committees have repeatedly noted the vital role these systems play in avoiding fraud, waste and abuse. Riley added that $134 million of the $420 million proposed in the House has been earmarked for guaranty agencies that administer the lender run program.

"Despite numerous independent studies that show direct lending's effectiveness and popularity, the House leadership is tenacious in its efforts to protect the special interests that benefit from the lender-run program," Riley said. "This backdoor attack is unacceptable to students, families and taxpayers. It will not succeed.."

--