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Making a killing or getting fleeced? Differing accounting models muddy student loan debate

Published: Wednesday, Aug. 14 2013 7:45 p.m. MDT

President Barack Obama signs the bipartisan bill to cut student loan interest rates, Friday, Aug. 9, 2013, in the Oval Office of the White House in Washington. The bill has been awaiting Obama's signature since earlier this month, when the House gave it final congressional approval after a drawn-out process to reach a compromise in the Senate. The bill links student loan interest rates to the financial markets. It would offer lower rates for most students now, but higher ones down the line if the economy improves as expected. From left are, Charlotte Etier; Central Connecticut State University; Sen. Brian Schatz, D-Hawaii; Sen. Angus King, I-Maine; Senate Majority Whip Richard Durbin of Ill.; Rep. Joe Courtney, D-Conn.; and Rep. John Kline, R-Minn.

Pablo Martinez Monsivais, Associated Press

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In a rare Washington compromise last week, Congress passed and President Obama signed a bill that temporarily lowered interest rates for student loan borrowers.

The rate each new borrower will get will change each year, sliding up and down based on U.S. Treasury bond prices. If the economy picks up, rates will climb.

The relief was welcomed by all sides, but some continue to argue rates should go even lower because the federal government now administers them. The debate is muddied by two dramatically different estimates from the same reliable source.

Using one model, the government will make $184 billion on education loans in the next 10 years. Using another, it will lose $95 billion.

It's a $279 billion accounting dispute. They can't both be right, and the dispute has enormous implications not just for student loans but for all kinds of federal loan programs, including home loans. One side cites enormous profits, the other enormous losses. Those stuck in the middle have few tools to navigate the divide.

Two numbers

“Instead of helping our students, the government is making a profit on student loans,” Sen. Elizabeth Warren, D-Mass., said in July. “That is wrong. It is morally wrong. That is obscene.”

Warren sponsored an amendment, rejected by the Senate, that would have lowered the cap for undergraduate loans to 6.8 percent. Not everyone agrees with Warren that the government is making a killing on student loans. Some very serious voices are arguing that taxpayers actually are getting fleeced.

Warren has a point. The Congressional Budget Office estimated in June that under existing law the federal government would have raked in a $184 billion profit from student loans over the next 10 years. The figure was widely circulated in the student loan debate.

Since the CBO has long been widely recognized as the most objective and competent number cruncher around, Warren's use of its numbers should hardly be controversial.

But the CBO report also offered another number that got less attention — a $95 billion loss. That's what CBO projects using an alternate standard known as "fair-value accounting." Unlike standard government accounting, FVA factors market risk as private investors would, with the same perspective on risk.

On the same page and in the same table that the CBO says the government would likely earn $184 billion profit it also says that the government may instead lose $95 billion on the same loans over the same time period.

Two Pinocchios

When Warren cited CBO numbers to bolster her claim that rates should come down, Glenn Kessler, the Fact Checker at the Washington Post, called her out. He awarded Warren two Pinocchios because she failed to mention that the CBO itself paired her more optimistic numbers with totally different fair-value estimates.

As Kessler noted, it is quite clear that the CBO favors the more skeptical model, but he still hesitated to make the call, indicating he did not really feel qualified to referee the competing accounting standards. His two Pinocchios out of four seemed almost a gesture of futility, arms thrown in the air, splitting the difference for lack of real clarity.

"We obviously are not going to take a position on the correct accounting method," Kessler wrote, adding that "ordinarily a CBO projection is worth its weight in gold. But this is an unusual situation. The respected and nonpartisan budget agency clearly has concerns about the method mandated by Congress — and the differences over the next 11 years are stunning."

The CBO position

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