Senate Student Loan Proposals are Nonstarters, Lack Fair Value Accounting Method

All too often, politicians in Washington are more concerned with playing games than with doing what is best for the American people.  The debate surrounding student loans is no exception, as Senate Democrats and Republicans bicker over two student loan proposals that are both bad.  This emotionally charged debate is under the guise of fighting for affordable education for students – though there is scant mention of the cost to taxpayers.

There are two proposals being considered in the Senate that would pose an unknown cost on taxpayers.  Without fair value accounting mechanisms in place (the Congressional Budget Office does not use it), it is impossible to ascertain how much these rates will cost taxpayers.  Moreover, if we enter into another recession, Congress will once again find itself under pressure to repeat the same mistakes as before and artificially subsidize these rates.

Though tensions have been escalating, Sen. Harry Reid (D-NV) pushed forward the Democratic bill designed to keep rates at 3.4 percent for subsidized student loans, applying the rate to any loans made between July 1, 2013 and June 30, 2014.  The bill will face its first procedural hurdle on Wednesday, needing at 60 votes to advance.

Sens. Joe Manchin (D-WV), Richard Burr (R-NC), and Tom Coburn (R-OK) have offered a bipartisan bill (S. 1241) that pegs the interest rate at 10 year Treasury note plus 1.85 percent for Stafford loans, pegs the interest rate at 10 year Treasury note plus 3.45 percent for Graduate loans, and puts a cap on the rates at 8.25 percent.

Sens. Coburn and Lamar Alexander (R-TN) also offered a bill (S. 1003) that would reset interest rates for new student loans by pegging them to a 10 year Treasury not plus 3 percent for all loans.  There would be no interest rate cap.

The House voted on an alternative, the Smarter Solutions for Students Act, which would tie the interest rate to the high-yield 10-year Treasury rate plus 2.5 percent for Stafford loans, making it a variable rate.  It would peg the interest rate to the 10-year Treasury note plus 4.5 percent for graduate loans.  Finally, it would put caps on the rates at 8.25 percent and 10.5 percent respectively.

What do these numbers really mean for students and taxpayers?  Are our representatives in Congress making good proposals or are they just making proposals that sound good politically? Moreover, should the government be in the business of subsidizing student loan rates in the first place?  The answer is an unequivocal “no.”  Government meddling in the student loan business simply perpetuates the status quo: higher college prices, more student debt and more taxpayer liability.

It’s worth reemphasizing a fair value accounting method has not been used for these proposals.  Heritage’s Lindsey Burke has laid out the dangers of failing to use fair value accounting:

The federal government’s current accounting practices, by and large, fail to account for market risk, likely understating the cost of student loans to taxpayers. Unlike the federal government, private lenders take into account factors such as the quality of university a student attends, how likely a student will be to pay back the loan, the student’s credit history and major, and whether the student has a co-signer.

Because federal student loan programs fail to take these factors into account, it is likely that federal student loans cost the government money, as opposed to making money, as is currently claimed. Employing fair value accounting would help determine exactly how much federal student loans cost taxpayers, and how heavily subsidized the program is.

As long as the federal government is in the student loan business, any loan program should use a non-subsidizing interest rate, i.e., the rate at which the program breaks even. But absent fair value accounting, it is impossible to tell the extent to which the student loan program is providing a subsidy.

The ultimate goal for conservatives is to get the government out of the student loan business altogether.  A free-market approach would better serve taxpayer and young people seeking college degrees.  In every area, the free market outperforms the government – and that includes making things “fair.”  In fact, Burke states that government subsidies have done nothing to fundamentally reduce the cost of college.  She adds:

Students are now borrowing double what they borrowed a decade ago, with student loan debt now exceeding credit card debt (approximately $1 trillion). Limiting federal subsidies while better targeting Pell grants would do more to limit increases in college costs than increasing such aid would.

There are innovative ways to reduce college costs – which conservative researchers have pointed out and promoted – but one thing is clear: government intervention has not helped students. From 1985 to 2012, the cost of college increased 439 percent.  Politicians don’t talk about that, though.

American students and American taxpayers alike deserve better than politicians bickering over solutions that are no solutions at all.



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