Making a killing or getting fleeced? Differing accounting models muddy student loan debate
Kessler did make at least one mistake; he wrote that the alternate CBO numbers were requested by congressional Republicans. In fact, the report makes clear that the request was bipartisan, coming from the chairman and ranking member of the Senate Budget Committee.
The CBO report lays out the reasoning behind the fair-value estimates, focusing on the premiums private investors would be required to take on the risk of that loan. The CBO focuses particularly on the "fact that investors demand additional compensation to accept the risk that losses may exceed those already reflected in the estimates of cash flows and that those losses may occur when resources are scarce and particularly valuable."
In other words, fair-value accounting adds a premium for the possibility that debtors will default in large numbers at the very moment that the investor is most in need of liquid assets.
Using that standard, the CBO examined 38 direct loan and loan guarantee programs. It reported that for 33 of the 38, switching to the fair-value accounting model moves the program out of profit and into the loss column for 2013.
A thought experiment
Jason Delisle, director of the Federal Education Budget Project for the New America Foundation, illustrates the CBO approach with a thought experiment.
According to Delisle, "the government's magical ability to lower cost of capital" is purely a function of its ability to tax and print money to make good on losses.
The only proper way to measure the risk borne by the taxpayer-as-investor, he argues, is to set aside the taxpayer guarantee and see how the market would price the risk without it.
"Let's say the government is going to finance the cash flow of its entire student loan portfolio by issuing special treasury bonds backed only by the cash flow from the student loans," Delisle proposed. His trust would already factor in estimated defaults, but it would not have access to any more federal money. It would have to be self-funding.
The bonds, Delisle argued, would not trade at treasury rates. "Suddenly the bond buyers would say, 'Hey, now I care about the risk of those student loans.’ ”
The only way the bonds would trade at treasury rates, according to Delisle, is if the government put an unlimited guarantee on the bonds, promising that if the bonds failed the taxpayers would make up the difference.
A responsible lender?
Not everyone agrees. Among the resistors are those who fear that fair-value accounting will make books look bad and constrain the government from pursuing social policy through lending.
"It's an empirical question," said Jared Bernstein, a senior fellow at the Center on Budget on Policy Priorities. "You have to look at the history of government lending and loan guarantees and see if, in fact, this has been a burden on the taxpayer."
Bernstein believes the track record of government loans has been good, pointing to a 2012 report by John Griffith and Richard Caperton for the left-leaning Center for American Progress. The authors argued that the U.S. government has historically "proven to be a safe and responsible lender," often overestimating risks rather than understating them.
Griffith and Caperton found that over the past 20 years, government loans of all types only cost taxpayers 94 cents for every $100 loaned. They acknowledge the huge hit the housing crisis took on Federal Housing Administration loans, but argue that the FHA actually weathered that storm better than most of its private counterparts. And setting aside the housing crisis, they found that government lending "actually overestimated the total costs to government by $3 billion over the past 20 years."
"Government underpricing of risk is a convenient theory for free-market ideologues but it runs contrary to the overwhelming evidence," Griffith and Caperton wrote.
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