The Agenda

Sorry Slate, There’s Still No Such Thing as Federal Student-Loan Profits

Slate’s Jordan Weissmann, whose work I normally enjoy, has written a column analyzing something that does not exist — namely, the “profits” earned by the federal government on student loans. As I’ve explained in more detail elsewhere, federal student loans appear to earn a profit only because the government disregards the market risk associated with expecting future repayments. Fair-value accounting (FVA) would incorporate the cost of that risk.

Arguments against FVA usually amount to special pleading. Weissmann’s attempt is a case in point:

Conservatives will argue that the government’s student loan profits are an illusion created by bad accounting. The debate is long and technical, but their basic qualm is that when the government calculates its expected returns, it misleadingly chooses not to factor in all of the same risks that a bank would, such as a possibility of a downturn in the entire market. But the feds do not actually face the same risk as a private investor, because, among other things, it doesn’t have to worry about going bankrupt. Pretending that it does would only inflate the on-paper cost of its lending programs.

But why do the feds not worry about going bankrupt? Because the government can raise taxes when it needs money. So the government does not make risk disappear, it merely passes it on to the taxpayers. Put another way, government ownership does not confer a free lunch in lending markets, it just makes taxpayers responsible for the check.

Think about it this way: If the government really could eliminate market risk, then it should buy up every outstanding private-sector loan — for tuition expenses, houses, cars, credit cards, everything — all at market prices. The loan values supposedly increase once the government owns them, so the purchases will be scored as a huge revenue gain!

And if we’re going to disregard market prices, why stop with loans? The government could also make money by purchasing a warehouse full of straw and declaring the straw to have the same value as gold. I call this Rumpelstiltskin’s First Law of government accounting.

In all seriousness, FVA should not be a partisan issue, as Weissman seems to suggest it is. The CBO has endorsed it, for example, and so has the Washington Post editorial board. It’s a matter of objective accuracy about the government’s financial position.

Yes, conservatives are naturally attracted to an accounting system that reveals the full cost of government programs, but partisans have actually switched sides on FVA in the past. I’m currently working with New America’s Jason Delisle on a long article showing how politicians from both parties have historically accepted or rejected FVA depending on how it impacts their favorite programs.

Jason Richwine is a public-policy analyst and a contributor to National Review Online.

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