What if a “Senator Pro-DL” (none actually exists) asked CBO to perform a similar “Gregg” tolerance analysis for FFELP? Then the hypothetical savings for switching from 100% FFEL to 100% DL could be $150 billion. The financing risks, “market risks,” operational risks, compliance risks, oversight risks and enforcement risks of FFELP, from the government’s standpoint, are far more significant than in DL, and FFELP still represents the majority of new loans.

Thus an apples-to-apples Gregg request would have included a far-end FFELP market risk comparison while noting that legislative changes over the past 15 years have quietly shifted large parts of the market risk from lenders to taxpayers, none of which has CBO ever agreed to estimate. Index risk is only one example. Look into the quiet change — tacked on to an SSDI/SSI reform bill at the end of 1999, for example, that shifted interest rate hedging costs from lenders to the American taxpayer. CBO explicitly refused to score the cost. This was less than 15 months after the Higher Ed Amendments of 1998, yet there were no hearings. The student groups don’t understand this stuff and the college associations don’t care, as long as their clients get their funding. In any case, scoring that change would add significant cost to the FFEL program.

The Gregg ‘scoring’ is one of a long line of “special,” i.e., one-sided, requests sent to GAO and CBO over the years. By law and general practice, when GAO and CBO receive a request from a Member of Congress, they not only do not explore issues outside of the parameters of that request, they usually try to narrow it even further, because they are busy and also “human,” i.e., lazy. The bottom line is that the Federal Credit Reform Act (FCRA) is startlingly similar to the GAAP approach used by financial services corporations such as banks. The Gregg approach is not compliant with either but its most significant flaw is that it does not use an objective baseline, for example, 100% FFEL. Comparing a “risk-rated” 100% DL to a current FCRA FFEL (70%)/DL (30%) is a red herring. Compare it to a “risk-rated” 100% FFEL and you will find more than $100 billion in savings from shifting to DL. The default rate on student loans is low, even after 10 or 15 years into repayment.

The Gregg analysis is reminiscent of a GAO request several years back that ignored payments of principal and focused on cash-accounting-based flows of interest — from years not even associated with the loans. Of course it made direct lending look bad, as that was the purpose of the exercise. The whole rationale behind lending, whether it is GMAC, the first national bank, the neighborhood credit union, or direct lending is accrual accounting. For some reason people’s common sense flies out the window when the word “government” is mentioned. What makes CBO’s scoring of the Casey, Greg and Sallie Mae proposals even more shocking is that CBO always had a rule against scoring any bill that has not even passed a committee somewhere in either the House or the Senate. They don’t score hypothetical legislation. None of these proposals were ever introduced as bills, never mind passing a committee. Apparently the opponents of direct lending are so powerful that they can get the rules bent. Look a little further and you will find the most powerful opponents aren’t the banks — FFEL isn’t really a “private sector”-driven approach. It is the state governments — 40 of whom operate a state lending operation or a state guaranty agency, or both. In comparison to the more high-tech federal operations, the state agencies are quite inefficient, antiquated, and non-compliant, as we saw with the so-called, 9.5 scandal.