Rather, the broad question will be how to improve the existing programs.

The present set of mechanisms by which the federal government intervenes in the student loan business has been criticized on a number of grounds, and not just on account of the very large costs involved. Despite frequent amendment of student loan legislation, a loan is not yet available to every student who is qualified for and in need of a loan. Different interest rates are charged to borrowers whose circumstances appear in many cases to be the same. The default rates are disturbingly high. The systems themselves are vexingly cumbersome to all the participants---the borrowers, the lenders, the educational institutions and the state and federal agencies involved.

My testimony this morning will include a brief history of the two major federal student loan programs, and how they work, followed by a discussion of some of the issues the Congress may wish to consider during the current reauthorization cycle. CBO is working on an in-depth analysis of the So my statement today

government's student loan programs.

should be regarded as preliminary.

The history begins with the National Defense Education Act of 1958. That law authorized the appropriation of $295 million over the next four years, to provide capital for student loans to be made by colleges, with the institutions putting up $1 for each $9 in capital from the federal government. The 1958 law fixed the life of the program at eight years; only borrowers during the first four years were to be eligible for loans in the second four years. The interest rate to be paid by borrowers after they left school was

3 percent, a compromise figure between differing House and Senate versions, but approximately equal to the then Treasury cost of money.

But the program was not stopped in 1966. Though every president since President Eisenhower has recommended a stop, the Congress has instead always reauthorized it and provided increasingly generous annual appropriations, leveling off at about $310 million in recent years. The accumulated federal capital contribution is now almost exactly $4 billion, and the one-tenth share put up by institutions means that nearly $4.5 billion is invested. When the Congress has finished legislating for fiscal year 1980, the likely total in the National Direct Student Loan program will approach $5 billion.

There are about 3,400 educational institutions who are NDSL lenders, and this academic year, according to

Administration estimates, there will be 874,000 borrowers. The interest rate remains what it was when the law was first passed, zero while in school and 3 percent thereafter.

At the end of June 1978, over $700 million in outstanding NDSL loans were in default. That sum is more than a sixth

of all the capital ever put into the program. The total today probably exceeds three-quarters of a billion dollars, spread among 900,000 or more former students.

Some observers have

blamed the rising NDSL default on the 1972 decision to allow proprietary institutions to become lenders under the program. But though such institutions now make up 30 percent of all NDSL lenders, their accumulated share of the federal capital is only $132 million---or less than 3.7 percent---so the great bulk of the default problem remains with the 2,400 non-profit institutions.

After twenty years of depending on colleges and universities to be diligent and expert in collecting the federal money they had lent to their students---with the results I have just mentioned---the U.S. Office of Education this spring has begun a pilot program to take over the defaulted NDSL paper. It is too early to know whether the effort will cost less than the amounts collected.

Viewed in isolation, the NDSL program has much to

commend it. The lending decisions are made in financial aid offices, so the availability of the loan---and its size---can depend on informed estimates of need. The borrowing transaction itself is quick, simple and straightforward, with only the student and his institution involved. And of course,

a loan at 3 percent is a popular one among those who must borrow for their college expenses.

There

But NDSL loans are not available universally. are thousands of postsecondary institutions that do not participate in the program, so their student bodies are excluded from it. Furthermore, those who do participate have shown that overall they are not very good at collecting on those loans when the time comes. The NDSL default rate is 17.4 percent.

Furthermore, some observers question the propriety of the very low interest rate on NDSLs, asserting that not only is so large a subsidy unnecessary---in that it has no apparent effect on the decision to attend---but that it is distributed mainly by chance---that is, that luck more than anything else determines whether a student borrower must pay 3 percent rather than 7 percent for his loan after leaving school.

The counter-argument is made that NDSL monies are reserved

percent

for specially needy borrowers. If this is so, the facts to prove it have never been gathered. The statistics on the family income distributions of borrowers under the Guaranteed Student Loan Program are neither recent nor comprehensive, so there is a one-hand clapping problem when making comparisons with the income distributions of NDSL borrowers. For the latter, there are statistics showing that a great many colleges make NDSL loans to students from families that cannot fairly be classified as poor. For example, in fiscal year 1977, 41 percent of undergraduate dependent students who got NDSLs came from families with 1975 incomes above $12,000---when $12,000 was more than the median income for all American families.

Since all borrowers---NDSL or GSL---pay zero interest while they are students, the difference in interest rates only becomes real after they have left school. But there have apparently never been any studies of comparative incomes of NDSL and GSL borrowers once they enter repayment status. For all that we can tell, the extra subsidy for the NDSL borrower is just a $100 million a year gift that some young people get after leaving college and others do not.