The Real Cost of Student Loans

Among House Majority Leader Eric Cantor’s (R­) “ambitious” agenda for May is a goal to address the issue of student loan rates (sub. req’d).

Rep. Cantor states that he seeks a bill that “takes congress and politics out of setting interest rates and provides a long-term fix to the interest rate cliffs initiated in 2007.”

As lawmakers seek to address the issue of student loans, the Heritage Foundation’s Jason Richwine suggests that they set out to determine the true cost of the student loan program to taxpayers.  To date, the government has been using an accounting method that does not reveal the true cost to taxpayers:

 The federal government claims that student loans make money for taxpayers, but there is a strong possibility that they actually cost the government money. The hidden cost comes from the market risk taxpayers incur from expecting loan repayments that may not materialize. Current government accounting methods do not account for this risk, but “fair value accounting” properly incorporates the risk into cost estimates.

The lack of fair value accounting raises doubts about expanding student loans. 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.

Only after this knowledge is obtained can taxpayers rest assured that we are not on the hook for student loans that are never repaid to the federal government.

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