college student debt money

Student Loans: Obama’s Shady Bookkeeping

Imagine a world where you could get a loan with flexible repayment periods, no credit check, no cosigner, and the possibility of loan forgiveness.

Well that world currently exists for students wishing to obtain a college degree.  This is all made possible by taxpayers, of course, and bad federal policy.  Congress will soon be weighing in on student loans yet again.  Will they change course?

If they continue to use the same methods for evaluating the costs of student loans to American taxpayers, they will likely make the same mistake they’ve made before with regard to giving out too many student loans to individuals unlikely to repay them. 

Before getting into their accounting methods, here’s some background.

The federal government has adopted student loan policies and effectively nationalized the student loan industry to the detriment of many students and all American taxpayers.

Congress halved the interest rate for new student loans in 2007 from 6.8 percent to 3.4 percent, which resulted in a substantial number of students taking out student loans who were slated never to repay those loans or who would fail to repay them in full.  The government compounded that problem by nationalizing the student loan industry, with the intention of making loans more efficiently than private-sector lenders.  (Yes, you just read that correctly.)

But here’s the thing about low interest rates and the federal government expediting the loan making process by centralizing it in their control.

Generous taxpayer funded federal subsidies do little to fundamentally reduce the cost of college.  Moreover, students can get loans from the federal government regardless of credit history or repayment potential, meaning virtually anyone is eligible for a student loan and taxpayers are on the hook.

Apart from the political brownie points the government was going to get by providing loans at low interest, the federal government has also used flawed accounting methods when determining an appropriate student loan interest rate.  According to their methods, they believed that they would profit from the student loan industry.

Heritage’s Jason Richwine explains that the government has systematically understated the costs of the federal government’s student loan program, because they choose not to use the “fair value accounting” method, a method considered superior by the Congressional Budget Office (CBO) and academic economists.  Instead they fail to take into account market risk.

Richwine lays out how Congress budgets for student loans, but suffice it to say, according to government accounting practices the CBO estimates that federal student loans would actually create $36.6 billion in revenue in fiscal year (FY) 2013, again specifically because the federal government does not take into account market risk.

He explains:

The CBO has applied a risk-appropriate discount rate to student loans based on what private lenders would offer for a similar level of risk. In contrast to the government’s current accounting practices, which show student loans making a “profit” for the government of 9 percent, the CBO’s alternate—but more accurate—analysis found that between 2010 and 2020 the program would cost 12 percent more than it brought in.

That said, the CBO also performed a similar estimate for FY 2013 alone, and that estimate indicated that there was a small net budgetary gain from student loans even with the “fair value” approach.

But again, there’s a catch.  This estimate may demonstrate a net gain because even their “fair value” discount rate is still too low.  Evidence for this is that private lenders have not offered similar loans to students.

Richwine states:

The lack of private competition suggests (but does not prove) that the CBO is using a fair value discount rate that is still too low, not fully reflecting the risk that private lenders perceive. Given the generous terms of federal student loans—flexible repayment periods, no credit check, no cosigner, the possibility of loan forgiveness, etc.—this would not be surprising.

He concludes that the government should determine the true cost to taxpayers before Congress once again manipulates the interest rate by preventing it from returning to its pre-recession level.

Suggested Tweets
How much is the student loan industry truly costing taxpayers? The federal gov't doesn't really know.

Tweet This

Congress needs to get its bookkeeping act together BEFORE manipulating student loan interest rates again

Tweet This

Please Share Your Thoughts

One thought on “Student Loans: Obama’s Shady Bookkeeping

Leave a Reply

Your email address will not be published. Required fields are marked *