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Guaranteed versus Direct Lending

Guaranteed versus Direct Lending

The Case of Student Loans

(p.163) 7 Guaranteed versus Direct Lending
Measuring and Managing Federal Financial Risk
Deborah LucasDamien Moore
University of Chicago Press

The existence of two competing government programs—the Federal Family Educational Loan Program (guaranteed program) and the Federal Direct Loan Program (direct program)—provides a unique opportunity to compare the cost to the government of direct federal lending versus loan guarantees. Both the direct and guaranteed student loan programs offer their borrowers very similar loan products and terms, but they differ significantly from the perspective of other key stakeholders, including educational institutions, commercial lenders, and state guarantee agencies. This chapter proposes a methodology to provide a comprehensive cost estimate for the two programs in market value terms, and analyzes the sources of the differential. There are several reasons for emphasizing market values. Arguably, they are the best estimate of the cost of federal obligations from the perspective of taxpayers.

Keywords:   direct lending, student loans, Educational Loan Program, Direct Loan Program, loan guarantees, federal lending

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