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February 7, 2013

Student Loans to Cost at Least $35 Billion More Than Expected

Buried in a new Congressional Budget Office report is the revelation that the CBO now thinks federal student loans will add $35 billion more to the deficit in the next ten years than it previously thought. "The Budget and Economic Outlook: Fiscal Years 2013 to 2023," released this week, details the changes in the CBO's baseline projections for the federal deficit for the coming decade.

The CBO scores student loans as a "net negative subsidy"; this means that student loans will bring in $35 billion less of a profit, thus increasing the deficit by that amount.

This $35 billion figure should be taken with a big lump of salt. The basic problem is that the CBO used the standards set forth in the Federal Credit Reform Act of 1990 (FCRA) to arrive at the increased cost figure for the net present value of student loans, a procedure which fails to include both some administrative spending (which are accounted for elsewhere in the budget) and the risks associated with student repayment. If anything, perhaps the best way to think of this is that the $35 billion increase in the budget deficit baseline is a floor for the true impact of the student-loan program. After all, as the CBO observed in a report issued last year comparing FCRA budget estimates to "fair-value" estimates (which account for the risks associated with issuing loans or loan guarantees), costs estimates are higher for the latter approach than the former because "it accounts more fully than FCRA procedures do for the cost of the risk the government takes on when issuing loans or loan guarantees." If we account for the risks to student-loan defaults (including collection costs), the costs to taxpayers is larger, even to the extent that student loans drive up the deficit rather than turning a profit to the government.

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Jonathan Robe is the Administrative Director at The Center for College Affordability and Productivity. 

Comments (2)

mbecker908:

They also don't add in the implicit cost of increased tuition driven by Federal Student Loans, also known as "Free Money" to colleges and universities.

I wonder if the net cost estimates include the promise of forgiveness 20 years out in Income Based Repayment and the new Pay As You Earn approach to student loan repayment. There is no history on the amount of forgiveness so curious if they estimate them yet and what they base the estimates on if they are included.

Great article.

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