Reducing costs and improving efficiency in the student loan program.” National Tax Journal

Abstract- In theory, the costs of the federal student loan program can be reduced in four ways: eliminate more-than-competitive (excess) returns to private lenders; eliminate excess administrative costs; raise the price (reduce the subsidy) to induce students to reduce their demand for loans; and ration directly by denying loans to particular classes of students. This article evaluates the budget savings potential of these four options. Previous legisla-tive changes have eliminated most of the more-than-competitive returns and excess administrative costs. Additional savings can only be achieved by reduc-ing loan volume. Raising the price is likely to be circumvented by student access to the direct lending program and the “lender-of-last-resort ” provision of the guaranteed program. That leaves rationing. Rationing that focuses on denying loans to low-risk students who are likely to attend school absent a federal loan guarantee has the greatest potential cost savings relative to social benefits foregone. This process could begin with graduate and professional students. Denying loans to high-risk students who are poorly prepared but would not attend school without the loan would save more money, but the Nation would lose significant social benefits. Denying loans to these latter students might better be left to schools, who could be induced to make such rationing decisions by requiring them to pay some portion of the guaranteed loan default costs imposed by their own students