April 28, 2013
By Jason Richwine, Ph.D.
The Congressional Budget Office 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.
A similar analysis conducted by the CBO, just for FY 2013, also shows a large difference between current accounting practices and the fair value approach. Interestingly, however, the CBO still found a small net budgetary gain in 2013 from student loans even with the fair value approach.
If the federal government is truly able to turn a profit from its student loans in 2013, that raises the question of why private lenders have not offered similar loans to students. 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.
It may be useful to query private lenders about the interest rate they would need to charge if they were to offer student loans on the same terms that the federal government does. That rate may be higher than even the CBO's fair value discount rate, but it is likely the more appropriate rate to apply.
The federal government claims that student loans make money for taxpayers, but there is a strong possibility that they actually cost the government money. ... If Congress again acts to prevent interest rates from rising to 6.8 percent, the extended subsidy would likely increase participation in the program, creating even more unknown costs. Congress should not expand the student loan program before the cost to taxpayers is fully understood.
First appeared in The Washington Examiner.
Jason Richwine, Ph.D.
Senior Policy Analyst, Empirical Studies
Read More >>
Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.
The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.
The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.
More than 450,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.
Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"
Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."
Sign up to start your free subscription today!
The Heritage Foundation is the nation’s most broadly supported public policy research institute,
with hundreds of thousands of individual, foundation and corporate donors. Heritage, founded in
February 1973, has a staff of 275 and an annual expense budget of $82.4 million.
Our mission is to formulate and promote conservative public policies based on the principles of free
enterprise, limited government, individual freedom, traditional American values, and a strong national
defense. Read More
© 2014, The Heritage Foundation Conservative policy research since 1973