The Congressional Budget Office released a report late Thursday that said if the government used accounting methods that consider real market risks, it would not be able to treat federal student loan programs and other government lending programs as cash inflows, as it now does.
Instead, it would have to mark these programs down in the books as hundreds of billions of dollars in additional spending.
CBO’s report analyzed federal student loan programs, as well as programs that guarantee people’s mortgages and help companies finance exports. According to the report, the government says today that these programs can be expected to generate an estimated $212 billion in revenues over 10 years.
But CBO said if fair-value accounting methods were used, these programs would actually be seen as a huge loss of $332 billion. That’s a swing of more than $500 billion over the next ten years.
That means while the government considers these programs as revenue generators, taxpayers could be on the hook for the real costs of these loans that are obscured by the government’s accounting methods.
The report noted that the government currently uses accounting rules spelled out in the Federal Credit Reform Act, or FCRA. Those rules require the government to discount expected payments from the various loans and guarantees it makes, and use that discounted number in its calculation of whether the loan will ultimately cost the government money, or result in a profit.
But CBO said the estimated cash inflows are not discounted nearly as much as the private sector would discount similar loans. It said that using fair-value accounting, which considers real market risks associated with these loans, makes these loans far more costly than the government is anticipating.
“The cost of a direct loan reported in the federal budget under FCRA procedures is lower than the cost that private institutions would assign to similar credit assistance on the basis of market prices,” the report said.
The different calculations are most noticeable when assessing the cost of student loans at the Department of Education. CBO said under current accounting rules, the government expects a net cash inflow of $135 billion over the next ten years resulting from various student loan programs.
But CBO said using a fair-value approach, those loans will actually cost the government $88 billion, a swing of $223 billion.
That finding gives more ammunition to critics of the government’s student loan program, who say the government’s involvement has created an atmosphere of easy credit terms that has allowed tuition costs to soar over the past few decades.
CBO made similar findings for other federal credit programs. It said loan guarantee programs at the Export-Import Bank are now expected to generate $14 billion for the U.S. government over the next ten years, even though using a fair-value accounting shows a $2 billion loss.
And while the Federal Housing Administration’s mortgage guarantee program is thought to generate $63 billion over ten years, fair-value accounting says that program will actually cost $30 billion.
On Thursday, Rep. Jeb Hensarling (R-Texas) pointed to the report as evidence that the Export-Import Bank does not save taxpayers money, as the Bank suggests, but instead costs them money.
“As I have said previously, the Export-Import Bank’s supposed profits are nothing more than an illusion,” said Hensarling, who opposes efforts to reauthorize the Bank.
“If the Export-Import Bank were to use fair-value accounting, as the CBO recommends, the Bank’s ledger would actually show a loss of money for the taxpayers – not a profit,” he said. “I have long believed that many taxpayers feel it is indeed time to exit the Ex-Im, and this CBO report certainly reinforces that belief.”