IT'S COMPLICATED, byzantine and -- let's face it -- not the world's most fascinating subject. Even so, it's hard to understand why the federal student loan program attracts so little outside scrutiny. The Senate is likely to vote today on a budget reconciliation measure in which the largest source of "savings" by far comes from the student loan program. The authors of that measure, which the House will tackle next week, say that money comes from cuts in subsidies to lenders. Read the fine print, though, and it seems that, in fact, the "savings" come from increased revenue. And that revenue comes from students, who will be paying higher interest rates to generate it.

That, at least, is the conclusion of a report published this week by the New America Foundation. The report is by Michael Dannenberg, a former Senate staffer who has helped write student loan laws in the past. It notes that under the new rules, students and parents, instead of paying slightly less than the market rate, with the difference made up by the government, will be paying slightly more, with the extra going to the government. (Although lender fees have also gone up, there is no guarantee that those won't be passed along to students as well.) Some of that "saved" money will apply to the budget deficit, and some will go to pay for more tuition grants to the very poorest students. But in either case, the end result is that Congress, rather than cutting the program, as the measures' advocates imply, is actually expanding it.

Even odder, Congress has still made no attempt to cut the cost of student loans in one obvious way that would not harm students. The Congressional Budget Office, the Office of Management and Budget and now the Government Accountability Office, in a newly released report, have all concluded that subsidized, guaranteed student loans, made through lenders, are costing taxpayers significantly more than would direct loans, which cut out the lenders. Should anyone on the Hill care to point it out, there is an obvious source of genuine savings in the student loan program: Offer students small incentives to choose direct over subsidized loans. But are there fiscal conservatives, in either party, who are willing to risk the wrath of lenders and say so?

© 2005 The Washington Post Company

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New Math For College Loans
By Albert B. Crenshaw
Sunday, October 30, 2005; Page F01

The House Committee on Education and the Workforce, working to meet deficit-reduction goals set by the Republican leadership, has approved a bill that could take a significant bite out of government-subsidized student loans.

There is no way of knowing at this point how much, if any, of the bill will actually become law, but its progress is something that families expecting to depend on student loans for much of their college expenses -- and that's just about everyone -- should be watching.

The measure comes as other federal education-assistance programs, such as the Pell Grant program for low-income students, are being held flat in nominal terms, and therefore are shrinking after inflation is figured in.

"It is our sense that the federal student-aid programs are careening toward some sort of calamity here," David L. Warren, president of the National Association of Independent Colleges and Universities, an organization of private colleges, said last week.

The education panel's bill would produce savings for the government of about $15 billion from the student-loan program over five years, leaving lenders to grumble that, overall, student loans account for less than half of 1 percent of all entitlement spending but 30 percent of all the spending cuts being proposed by the House.

Total federal financial assistance for "post-secondary" students is more than $67 billion this year, according to the Education Department.

The bill would raise revenue largely in the form of additional fees on lenders. So in most cases, the impact on students would be indirect, depending on the extent to which either the fees can be passed on or lenders leave the market or find other ways to squeeze borrowers.

And for those entering college in the next few years, there is a benefit of sorts: The bill would increase the maximum that freshmen and sophomores would be allowed to borrow under the federal program, to $3,500 (from $2,625) and $4,500 (from $3,500), respectively.

However, the limit of $5,500 for third and later years would remain the same, as would the overall loan limit of $23,000, meaning that students who find they need a fifth year to finish, and many do, could see their borrowing ability limited in their final year.

Other provisions in the bill would give borrowers a choice between a variable or fixed interest rate when they consolidate student loans. Rates on consolidated loans are fixed under current law, under a formula that created very low rates last summer, triggering a rush to consolidate.

But it also imposes a variety of fees on lenders in the guaranteed student loan program. Lenders say that marketplace competition makes it likely that they will end up paying most of these, but they also contend that such an outcome, which would reduce profit margins, would drive many lenders out of the business.

Educators are complaining that these cutbacks, along with limitations already in place, are making it tougher and tougher for both students and colleges. Students and their families have to dig deeper and borrow more, while colleges try to fill the void left by federal cutbacks with their own money, a move that creates budget pressures of its own.

The Senate Budget Committee last week beefed up some federal grants, especially for math, science and language students deemed important for national security. But that isn't likely to make a large difference, assuming -- and there's no certainty of this -- that it survives to enactment.

As it is, many schools are giving an edge in admissions to students who can pay full tuition. Combined with increasingly popular "merit-based" aid for top applicants and the marshaling of resources to make sure some of the poorest, "full-need" students can enroll, these institutions are seeing subtle changes in their student bodies. Academically marginal applicants who need aid are increasingly replaced by academically marginal applicants who can pay.

Other schools are "gapping" students, meaning that they give less aid than the amount they know the student really needs to attend.

"I see a lot of little signs that students and families are being pushed closer to the edge -- issues about bills getting paid on time, students asking for extensions, looking for unusual loans," said Douglas Bennett, president of Earlham College, a small liberal arts school in Indiana.

One student, Bennett recalled last week, even took out a personal ad in a newspaper looking for someone who would help with his college bills. "These are painful moments, to see people stretch that hard."

Of course, families and some economists increasingly wonder why college needs to be so expensive, and perhaps in some theoretical sense, it doesn't.

But in practice, two key attractions colleges use to compete for students are prestige and facilities. Prestige typically means faculty members who do more research and publish more. But giving professors more time for research means they teach less, and the school thus needs more of them. And few schools feel they can do without shiny new dorms, labs, gyms and dining halls.

And they're right. Kids and parents are attracted to both prestige and plant. And why not? In a classic case of the tragedy of the commons, students' immediate personal interests are best served by attending a prestigious school on a plush campus, even though such behavior in the long run may be bad for the entire system.

So what we can look forward to is a steadily more desperate struggle among families, colleges and government over who pays for higher education, with no resolution in sight.

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The Internal Revenue Service won a couple of signal enforcement victories this month, with the conviction of longtime tax resister Irwin Schiff and the sentencing of the last of the 10 defendants in the Anderson's Ark & Associates case.

Schiff, who has fought the IRS in court for years, arguing that there is no legal obligation to pay taxes, owned Freedom Books, which sold books, tapes and packets encouraging customers not to pay income tax. Last week, a federal jury in Las Vegas convicted him of aiding and assisting in the preparation of false returns filed by others, of conspiring to defraud the United States, and of income-tax evasion and filing false income tax returns for the years 1997 through 2002.

This was the third time Schiff has been convicted of tax offenses, the Justice Department said. He faces a maximum sentence of 43 years in prison and $3.25 million in fines, the department said.

Earlier, a federal judge in Seattle sentenced Gary Kuzel, a certified public accountant from Downers Grove, Ill., to 24 months in prison for his role in Anderson's Ark, an organization that sold fraudulent tax shelters and investment scams to taxpayers. From 1996 through 2001, AAA had about 1,500 clients, nearly 300 of whom reported more than $120 million in fraudulent income-tax deductions, according to the government.