Rep. John Kline (R-MN), the top Republican on the House Education and Labor Committee, today expressed alarm at a new analysis from the Congressional Budget Office that shows tens of billions of dollars in hidden costs lurking in the Democrats’ pending legislation to orchestrate a complete government takeover of student loan programs.
“We’ve known all along that eliminating the private sector from student lending would cost students and schools the benefits of choice, competition, and innovation,” said Kline. “Now, we learn it will cost taxpayers as well, contributing billions to the deficit.”
In a letter to Senator Judd Gregg (R-NH), CBO Director Douglas Elmendorf explains how billions in savings in the so-called Student Aid and Fiscal Responsibility Act (H.R. 3221) are illusory.
“About $7 billion of those savings would represent a reduction in the administrative costs of the guaranteed loan program, which are recorded in the budget as mandatory spending. In contrast, most of the administrative costs for the direct loan program are funded in appropriation bills and recorded as discretionary spending,” Elmendorf explains. “Thus, of the $87 billion reduction in direct spending, roughly $7 billion would be offset by an increase in future appropriations for administrative costs, for an estimated net reduction in federal costs from the President’s proposal of about $80 billion over the 2010–2019 period.”
Elmendorf goes on to explain how market risk influences the projected cost of switching to a system of 100 percent direct lending. As the CBO letter notes, federal budget estimating rules do 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).
“CBO found that after accounting for the cost of such risk … the proposal to replace new guaranteed loans with direct loans would lead to estimated savings of about $47 billion over the 2010–2019 period—about $33 billion less than CBO’s estimate under the standard credit reform treatment.”
Kline pointed out that Democrats plan to spend the vast majority of the $87 billion in so-called savings, leaving taxpayers to shoulder a cost of billions through legislation that purports to promote fiscal responsibility.
According to the official CBO cost estimate of the legislation, “On balance, CBO estimates that enacting H.R. 3221 would reduce direct spending by … $7.8 billion over the 2009-2019 period. Assuming appropriation of the necessary amounts, implementing the bill would increase discretionary spending by at least $13.5 billion over the 2009-2019 period.”
When the estimated spending increase of “at least $13.5 billion” is combined with the $7.8 billion in savings, the Democrats’ plan will actually end up costing American taxpayers at least $5.7 billion over the next ten years, Kline explained. Moreover, as CBO has noted, this estimate does not reflect the cost of market risk, which reduces savings by another $33 billion.
“Democrats herald an alleged $87 billion in savings and government earnings as evidence that billions in new government borrowing is sound fiscal policy,” Kline said. “This analysis from the Congressional Budget Office confirms once and for all that these savings are a myth. A government takeover of our student loan programs is just a budgetary gimmick designed to finance the latest entitlement spending spree, leaving our children and grandchildren to pick up the tab.”
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