There’s much to like about Matt Taibbi’s colorful and over-the-top Rolling Stone article entitled “Ripping Off Young America: The College-Loan Scandal.” There’s also a major problem with it.
Taibbi tells us that the real issue regarding student loans isn’t so much the interest rate charged as it is the ballooning principal that burdens students. (I agree.) He notes that universities keep tuition high in part by shifting so much of the cost to students and taxpayers through the federal loan program. (Right.) And he says that politicians looking to appear pro-student and pro-education are actually enabling this unfair system. (Exactly!)
But then he claims that the federal government itself profits off the student-loan program, collecting far more from students than it needs to. Taibbi says that politicians love the system because it rakes in the cash, and he describes the “massive earnings” as “a crude backdoor tax” on America’s poor and middle-class youth.
But there’s a basic problem with this theory. The profits don’t exist. The federal government projects $184 billion in student-loan profit over the next ten years only because it ignores the market risk inherent in expecting a given amount of loan money to be repaid. When the CBO instead applied fair-value accounting methods to the student-loan program, the $184 billion profit became a $95 billion cost. And if it were not for the government’s “ruthless” attempts to collect from delinquent borrowers, which Taibbi deplores, the cost to taxpayers would be even greater.
Because it incorporates the price of market risk, fair-value accounting is embraced by nearly all economists, including those at the CBO, as a more accurate way to report costs. (For those interested in the details, I wrote a Heritage Foundation issue brief on the topic last spring.)
In a limited sense, Taibbi is still correct – politicians do enjoy using the student-loan program to make the budget appear healthier. But these are phantom profits. There’s no income transfer from young people to government coffers as Taibbi alleges. The money is actually flowing first from taxpayers to students, then from students to universities.
So although the student-loan program helps prop up a costly higher-education system and should be abolished, the government is not “ripping off” students with the loans it offers. Inflated tuition aside, the loan terms themselves are actually quite generous to students. Taxpayers are the ones who lose money on the deal.