One could argue that all of this is a bit wonky for the senior senator from Massachusetts, but she claims her argument is based on “the numbers.” Numbers like these, for instance: The predatory federal government makes a 36-cent profit for every dollar it lends to students.
But, as might be expected, Warren’s numbers are partial. The Congressional Budget Office typically measures the cost of a loan according to the standards of the 1990 Federal Credit Reform Act, but that act does not account fully for the cost of the risk the government assumes when it issues a loan. An alternative is the “fair value” approach, which does take into account “market risk,” that component of financial risk that remains even when every caution is taken — the risk of simply being in the market. When student loans are assessed using the fair-value approach, it is clear that the government is not making money on lending, as Warren claims; it’s losing
money. The CBO projected that every dollar lent in 2010 by the William D. Ford Federal Direct Loan Program (FDLP), administered by the Department of Education, would add 13 cents to the federal deficit. Given that the government disbursed $27.7 billion in subsidized Stafford loans, that 13-cents-on-the-dollar ended up costing $3.6 billion. Subtract what the government made back at the current student-loan interest rate (a paltry $91.8 million), and the Department of Education added $3.5 billion to the federal deficit in 2010, only on subsidized Stafford loans. And that was with an interest rate nearly ten times what Warren wants.
But it gets worse. One of the numbers Warren conveniently forgot to consider was the cost of student-loan defaults. In fiscal year 2011, 9.1 percent of students defaulted on their federal student loans within the first two years of payment. Moreover, the Department of Education anticipates that 23 percent of the subsidized Stafford loans it makes this year will default. Jason Delisle, director of the New America Foundation’s Federal Education Budget Project, notes that this makes Stafford one of the federal government’s riskiest loan programs. The Federal Housing Administration mortgage program, which also lends to high-risk borrowers, expects only 7 percent of its borrowers will default. Delisle explains:
To be sure, the student-loan program should serve high-risk borrowers. By their nature, students generally do not have collateral, earnings, or credit histories. But when nearly a quarter of the loans are expected to default, charging a 6.8 percent interest rate is hardly the usury Senator Warren suggests. A non-profit credit union would charge at least double that rate.
But all of these numbers are tiresome for Warren, whose first Senate bill turns out to be a rehash of her campaign: shameless populist demagoguery.
— Ian Tuttle is an intern at National Review.