Buried in a Republican budget blueprint released on Tuesday is a one-paragraph proposal that would change how the federal government calculates the cost of its student-loan programs, updating federal scoring rules to account for market risk. The change, if enacted, would make student loans appear less profitable to taxpayers than they currently are.
In the budget proposal for the 2013 fiscal year, Rep. Paul D. Ryan of Wisconsin, chairman of the House Budget Committee, said that accounting for market risk in student lending “would simultaneously reflect their true cost to taxpayers and make risky expansions of these programs less likely to occur.”
The proposal was welcomed by the Education Finance Council, an association of nonprofit and state-based lenders. In a statement, the group argued that “there has been a heavy focus on supervision of private student lenders, but not much on holding accountable the largest student lender in the country: the federal government.”
Private lenders, including state-based and nonprofit lenders, were cut out of the federal loan program in 2010, when Congress passed a law that abolished bank-based guaranteed lending in favor of 100 percent direct lending from the federal government.
Though the Republicans’ broader budget proposal is unlikely to survive in the Senate, where Democrats have already denounced it for cutting too deeply, the change in the cost calculation could be enacted as a freestanding bill or be included in a future budget compromise. Last month the House passed a bill, HR 3581, that would apply such “fair value” accounting principles to all direct loans and loan guarantees made by the federal government. Federal student loans account for 60 percent of all outstanding federally backed credit, according to the Congressional Budget Office.
In its cost estimate for that bill, the budget office predicted that switching to a “fair value” credit basis would increase the size of the federal deficit by $55-billion.
But changing the accounting rules isn’t likely to help lenders hoping for a return of bank-based lending, said Jason Delisle, director of the federal education-budget project at the New America Foundation. That’s because government lending remains cheaper than bank-based lending, even under “fair-value” rules, he explained.
“The risks are similar,” he said, “but guaranteed lending requires subsidies for lenders that no accounting rule can make disappear.”
Correction (4:17 p.m.): This article originally misnamed the association of nonprofit and state-based lenders. It is the Education Finance Council, not the Education Finance Committee. The article has been updated to reflect this correction.