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Dubious Budgeting Behind White House Take Over of Student Loan Market

Anthony Randazzo
September 14, 2009, 1:25pm

The House currently has a bill under consideration that would essentially have the federal government take over all student loan origination. The plan, driven by the White House, would make the current federal "public option" for getting a college loan more appealing, since the current funding option is largely disliked for its poor customer service. The Wall Street Journal reported this weekend:

The Obama plan calls for the U.S. Department of Education to move from its current 20% share of the student-loan origination market to 80% on July 1, 2010, when private lenders will be barred from making government-guaranteed loans. The remaining 20% of the market that is now completely private will likely shrink further as lenders try to comply with regulations Congress created last year. Starting next summer, taxpayers will have to put up roughly $100 billion per year to lend to students.

Under the current system, the federal government guarantees loans to students, taking a fee for the protection against default, and mandates how much profit the private vendor can make. In 2007, Congress reduced the profit margin so low that the market stopped lending, even previously granted loans. The credit freeze a year later certainly didn't help matters. The government began buying originated loans, but with the plan to exit the market in the summer of 2010. Now the government wants to switch the situation.

But that's not even the worst part of this story.

This turns out to be a budget issue more than anything. Democrats writing the budget believe that a virtual full government take over of higher education student loans will save $80 billion in mandatory spending. This savings has been scored as thus in the budget. However, WSJ reports that the CBO has separately admitted the statutory methodology "does not include the cost to the government stemming from the risk that the cash flows may be less than the amount projected (that is, that defaults could be higher than projected)."

The actual savings the government is capable of achieving, and this assumes they are capable of effectively taking over the college loan business, is only $47 billion according to CBO director Douglas Elmendorf. Yet, Congress has already built in spending for the $33 billion difference into the budget.

So not only is Congress building into its budget $33 billion that won't be achieved, it is counting on $47 billion savings that probably won't be achieved, simply because government incentives to loan wisely and effectively collect on the loans are not the same as private lending companies. And none of this is scored in deficit.

Certainly, a new era of fiscal responsibility.


Anthony Randazzo is Director of Economic Research


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