When you think about it, making unsecured loans to unemployed teenagers does not sound like a super-profitable business model, which is presumably why private lenders don’t copy it. But it’s the Department of Education that has the models, as well as a financial division with a $1 billion budget and a staff about 300 times larger than the four-person credit crew. Incredibly, the cost of that staff, and of other federal employees who administer credit programs, is excluded from the analysis of their profitability. NJ pawn stores For scoring purposes, the programs are effectively run for free.
Some experts, including the CBO, believe even if you ignore whether budget estimates are too optimistic about loans going bad, government accounting quirks still make credit programs look much cheaper than they really are
The agencies have a natural inclination to make their credit programs look cheap, joining forces with the congressional committees that fund them and the special interests that love them to push generosity over fiscal responsibility. After all, the Department of Education is in the business of promoting access to education, just as the Department of Agriculture (which provides farmers with operating loans, marketing loans, storage loans, even boll weevil eradication loans) aims to promote agriculture and the Department of Veterans Affairs (which runs a $350 billion mortgage business) aims to help veterans. Conservative underwriting is not their top priority.
“The programs are run by advocates,” says MIT’s Lucas. “Some of them are worthy programs, but from a taxpayer perspective, the foxes guard the henhouse.”
Brian Deese, Obama’s deputy budget director, downplays the battles with departments like Education, saying OMB’s goal is to get the costs right, not to cut costs. But he doesn’t deny that battles happen: “There are constructive tensions, as there should be.”
Overall, the government expects to earn $45 billion on the $635 billion in loans it backed in 2013; fair-value rules would estimate $11 billion in costs instead
The reason that student loans can look profitable despite their high default rate is that they aren’t dischargeable in bankruptcy. That means the government can still collect from borrowers who default by garnishing their wages, tax refunds or, eventually, Social Security benefits. Whatever government’s shortcomings as an underwriter, originator or servicer of loans, it can be a very patient and resourceful collection agency. And since it can borrow at extraordinarily low interest rates, its loans can go delinquent for decades and still generate positive returns, at least according to its own budget rules.
But this gets to the second big dispute over federal credit. It boils down to a fight over the government’s ultralow capital costs and whether they skew the “discount rate” used to calculate the costs of federal credit.
The stakes are huge; the CBO reported in May that if the U.S. budget used “fair-value” accounting that assessed the market value of federal credit the way a private bank would, student loans and FHA guarantees would be scored as costing $118 billion through 2024. Those two programs are currently scored as producing $198 billion in budget savings through 2024, money the committees overseeing education and housing are already spending elsewhere. That discrepancy amounts to the state of Louisiana’s budget for the next decade, or more than a year of funding for the U.S. Army.
In 2012, the CBO reviewed 38 credit programs scored as moneymakers and found 33 of them would be money-losers under fair-value accounting. The difference would add as much to the deficit as the hotly debated package of tax breaks that Congress passed in December.