With the passage of healthcare reform, I was curious how a $940 billion spending program over the next decade was going to result in a $143 billion reduction in federal deficits. So I followed up by looking at the scoring of the bills by the Congressional Budget Office (CBO). Depending on how you sort the numbers the details come up slightly different than above, but the way I see it is basically as follows: healthcare reform program spending – $928 billion, reductions in other program spendings (primarily in Medicare, Medicaid, and the Children’s Health Insurance Program) – $546 billion, and increases in fees and taxes – $525 billion. If you net these numbers you arrive at a $143 billion reduction in spending over the next ten years.
With that as a reference point, what I found most interesting was that the CBO estimates $61 billion of reductions (43% of the $143 billion) will be derived from eliminating the federal program that provides guarantees for student loans and replacing those loans with direct loans made by ……….the Department of Education.
The current program provides for federal guarantees on loans for higher education that are administered and funded by private lenders (e.g. local community banks). Under this program, the federal government makes the loan payments during the student’s deferral period, guarantees the lenders against default losses, and funds guaranty agencies to help administer the loans. In other words, it is a federally subsidized program that should benefit students and communities – similar to the concept of loans guaranteed by the Small Business Administration (SBA).
Between 2005-2008, this program accounted for 78% of the total loans originated (in dollar terms). In 2009, the CBO points out that this had fallen to 69% attributing the decline to difficulties experienced by private lenders during the financial crisis and uncertainties surrounding the future of the program. I’m sure uncertain job prospects for fresh graduates also doesn’t help.
So the House’s reconciliation proposal provides that beginning in July 2010 all future loans originated would be made by the Department of Education. CBO estimates that this would shift approximately $500 billion of loans that would have been made under the current program and guaranteed by the federal government to loans directly originated.
You may ask, “well, how do they come up with a $61 billion savings?” Interesting enough, the accounting for these programs are governed by the Federal Credit Reform Act (FCRA). Under FCRA guidelines, the cost of a new loan or guarantee is calculated as the net present value of the government’s expected cash flows over the lifetime of the loan or guarantee, using interest rates on Treasury securities (of comparable maturity – typically 10 years) to discount the cash flows. Take note that this calculation excludes administrative costs like originating, servicing and collecting on loans.
So the CBO figures that the difference between the old vs. new program will result in $61 billion of savings. If the government had to use market rates to do the calculation vs. the Treasury rate, it would probably knocked about $20 billion off that savings implying $40 billion of profits from expanding the government further into the banking business. Unfortunately I don’t think we have $500 billion sitting around to make these loans. I suspect associated interest costs, coupled with administration costs, will wipe out the rest of the savings.
I remember going to the Farmers State Bank with my dad to get my first student loan. It felt like real business, offering a sense of responsibility as I sat with a real banker across the table. I doubt those feelings will resonate at the DOE.
BA
