By Jennifer C. Wang
Some members of Congress are trying to change the rules on how the federal government budgets for student loans. They call the new system “Fair Value Accounting” (FVA). Sounds reasonable, right?
Not so fast. FVA would require the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) to add an extra amount above what the government expects to spend on loan and guarantee programs. The idea is that because private investors would charge more if they, rather than the federal government, issued loans and loan guarantees (because they tend to fear losses more), the federal government should also charge more.
But it doesn’t add up. In fact, everyone — even the proponents of FVA — agrees that the CBO does a good job of accurately reflecting the true costs and benefits of lending and, thus, the overall costs of government programs. That’s because it already accounts for all kinds of risks inherent in federal student loan lending. Indeed, the risk of default is included in the cost of lending, and loans likely to default more than others already cost more, according to CBO. FVA adds an extra penalty on top of that. And here’s why adding that extra “loss aversion” penalty makes no sense:
First, the federal government is not a private person or a business. It’s true that many private investors psychologically fear big losses more than they value big gains, and as such, they should set their interest rates accordingly. But the federal government has no such fears — and it doesn’t make sense to pretend it does. In fact, the government’s ability to accept risks over a lengthy period of time is precisely why it is well-placed to provide all sorts of services — from student loans to flood insurance — that the private market would underprovide or not provide at all. Because of that, there is no need for an extra penalty to cover a risk that is not felt.
Second, under FVA, the federal government’s revenue and expenditures would become unbalanced. Yes, you heard that right. Normally, the sum of all government deficits and surpluses over time adds up to the total debt held by the government. However, FVA would hide the profits the federal government is making off of student loans (and several other loan programs), meaning that the deficits would look much bigger than they actually are. Total debt would end up being smaller than the CBO predicts. FVA undermines the whole point of keeping a federal budget in the first place: to add up the estimated revenue and costs of running the government.
The point is clear: FVA would require federal budgeters to create phantom accounting schemes to account for non-existent problems. We don’t need the government to pretend that it loses money on student loans when it actually makes money. Nor can we afford to use accounting tricks to justify cuts to important investments in students. We need to make it easier, not more difficult, for students to afford college.
Jennifer Wang is the Policy and Advocacy Manager at Young Invincibles. She is responsible for building and maintaining relationships with policymakers, partner groups, and other stakeholders. She also analyzes policy across YI issue areas and craft reports, fact sheets, and issue briefs.