The federal government provides student loans for college and graduate school in two ways: by: (1) guaranteeing bank loans; and (2) by lending directly to students. Approximately three-quarters of federal student loans are guaranteed and one-quarter are direct. In the guaranteed loan program, a 40-year-old system, banks lend students money and profit from the interest payments while the government guarantees the loans against default and makes subsidy payments to the banks. In the direct loan system, the alternative President William J. Clinton enacted in 1993, middlemen are cut out of the process. The government provides low-interest loans directly to students, using borrower interest payments to help cover the costs of the program. The General Accounting Office (GAO), the Congressional Budget Office (CBO), and the Office of Management and Budget (OMB) have all found that switching completely to direct lending would save billions of dollars a year. Following their lead, President George W. Bush's latest budget tells Congress that the guaranteed student loan program is structurally flawed, with "unnecessary subsidies" and "inefficiencies." The president's budget concludes: "Significantly lower Direct Loan subsidy rates call into question the cost effectiveness of the [guaranteed student loan] program structure, including the appropriate level of lender subsidies." As analysts from across the political spectrum have pointed out, the money that would be saved by reforming the student loan program could be used to help more students. This nation, cannot afford to waste the potential of deserving young people. Congress should move all campuses to direct lending--or to an equally efficient guarantee approach if one can be designed--and capture those savings for the benefit of American families who are struggling to afford higher education. (Contains 8 endnotes, 2 charts, and 1 table.)