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Education & Labor Committee Republicans

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ICYMI: Elizabeth Warren and Harry Reid fight Obama and the GOP on student loans



                       

If you think the federal student-loan program looks like a bad deal for taxpayers, imagine how it would look with honest accounting. And now you don't need to imagine thanks to a new report that's receiving far too little attention. Turns out that the official "savings" for taxpayers of $184 billion over the next decade really add up to $95 billion in losses.

Here's the scam: Lawmakers peddle what is a massive subsidy for universities while claiming that student loans generate a windfall for the taxpayer. This phony windfall is conjured by creative accounting that politicians mandated via the Federal Credit Reform Act of 1990. Specifically, the law requires a deliberate under-counting of the cost of defaults.

This is partly how a Democratic Congress and President Obama managed to enact ObamaCare in 2010 while claiming that their big entitlement expansion would reduce costs. The health plan was paired with legislation that made the U.S. Department of Education the originator of roughly 90% of all student loans, which in turn generated billions in imaginary budget "savings."

To its credit, the Congressional Budget Office has noted on various occasions that while the law forces it to use this Beltway math, CBO knows it's not accurate under fair-value accounting. And in a new report on the costs of student loans made in the decade ending in 2023, CBO quantifies the size of this discrepancy at $279 billion. CBO adds with its typically wry understatement that Washington's mandated accounting method "does not consider some costs borne by the government."

That's for sure. Now keep in mind that the $95 billion net loss for taxpayers happens under current law. This includes Monday's doubling of rates that pushed subsidized Stafford loans for undergrads up to 6.8% from 3.4%. Politicians on both sides of the aisle say they don't want the rate increase to stick, and they are working on a bipartisan compromise that would be retroactive to July 1.

It's too much to hope that the politicians will swear off fraudulent accounting or try to reduce defaults. But one positive development is a growing bipartisan consensus that student-loan rates should rise as the government's own costs of borrowing rise.

The House has already passed a bill that would prevent student rates from doubling but would also protect taxpayers in the future by floating the rates at some spread above the 10-year Treasury note rate, depending on the type of loan.

Senate liberals like Tom Harkin (D., Iowa) came into the debate demanding that subsidized Stafford loans remain at a fixed 3.4%. Freshman Elizabeth Warren (D., Mass.) even introduced a plan to lend to kids at the Federal Reserve's discount window rate, currently 0.75%. Senator Warren claims to understand finance, by the way.

Refreshingly, someone at the White House budget office figured out that offering low fixed rates to students could be disastrous as the Treasury's own borrowing costs start to go north. Since Mr. Obama and Democrats have driven private firms almost entirely out of this market, the private lenders can't be squeezed anymore to pay for the next round of subsidies. So the President's budget also calls for tying rates to the 10-year Treasury note, though his plan is more taxpayer-unfriendly than the House bill.

The President's baby step toward fiscal sanity seems to have caught his liberal allies by surprise. Hence the recent hilarious spectacle of Ms. Warren, a Democrat, resisting a GOP effort to force a vote on the President's proposal.

Ms. Warren feared the vote because moderate Democrats increasingly accept that rates have to be tied to something resembling economic reality. Last week Senators Joe Manchin (D., W.Va.) and Tom Carper (D., Del.) joined Maine Independent Angus King and Republicans Lamar Alexander, Richard Burr and Tom Coburn to introduce a compromise plan that ties rates to the 10-year Treasury.

But bitter-enders including Majority Leader Harry Reid still want to gore the taxpayer with a fixed 3.4% rate, financed by tax increases. When Congress returns after this week's recess, expect Mr. Reid to force a vote on a one-year extension of his sweetheart rate for colleges. Fortunately for taxpayers, the Senate will also likely vote on the bipartisan plan that moves toward market rates.

If Mr. Reid wins, a $95 billion taxpayer hit will look like a lowball estimate. Either way, you can count on politicians like him to keep claiming they're saving you money.
                                                                   

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