Over at the Quick and the Ed–by far the best named education policy blog in the world–Ben Miller has crunched some numbers and made yet another lender myth about student loan reform implode. Loan companies have been arguing that, by cutting them out of the federal student loan program to save billions (which will be invested in education), students will be loosing the world-class default prevention programs provided by guarantee agencies.

As it turns out, borrowers the Direct Loan Program (DLP)–who do not “benefit” from the activities of these guarantee agencies–have lower chance of defaulting on their loans in all but one (very small) category of school. If the Student Aid and Fiscal Responsibility Act (SAFRA) passes, all federal student loams will be awarded through the DLP.

Part of the problem may be that, in the bank-based federal loan program (FFELP), guarantee agencies are tasked and paid by taxpayers to both prevent default, and collect or rehabilitate loans that are already in default. This is a clear conflict of interest (they get paid either way, and often more if a loan defaults). It is also makes little sense to put guarantee agencies in charge of collection, since they usually just subcontract this out to a collections agency.

In 2008, these agencies get paid five times more ($948.8 million vs. $177.3 million) from the federal government for collections activity and the rehabilitation of defaulted loans than for default prevention. This problem is replicated in the Student Loan Community Proposal, an alternative to SAFRA proposed by Sallie Mae that would mean $4-8 billion less for investments in education.

Lenders and some conservatives have described the DLP as some kind of communist gulag, complete with long lines, horrible service, high default rates, and staffed entirely with people fired from departments of motor vehicles for being too rude. The truth is very different – the loan origination process actually becomes easier, your loans won’t be sold off to companies you’ve never heard of, the private company that services your loans when you enter repayment will be forced to compete on cost and quality for the privilege, and you will be slightly less likely to default.