Director, Policy Futures
Advocating so-called “fair-value accounting” for student loans and other federal credit programs, National Review’s Jason Richwine claims that current accounting rules showing that student loans generate a profit for the federal government “disregard market prices.” That’s exactly backwards: the current system does reflect market prices — namely, the actual cost of the loans to the government — and “fair-value accounting” doesn’t.
The debate over “fair-value accounting” can get very complex, but here’s the basic story.
For all programs, the federal budget records the cash flowing into and out of the Treasury. For a federal loan, the budget shows those cash flows up front, when the loan is made. The budgetary cost (or profit) of a new student loan, for example, is the difference between what the government lends out and the “present value” — that is, the value in today’s dollars — of the interest, principal, and associated fees that the student will repay over time, taking full account of the risk that the student will default.
Under today’s credit accounting rules, the present value of those future repayments is calculated using the interest rates that the Treasury pays when it borrows in private credit markets. That’s what it actually costs the federal government to finance student loans.
Under “fair-value accounting,” in contrast, the present value is calculated using the higher interest rate that a private lender would charge if it, not the federal government, made the student loans. As a result, “fair-value accounting” overstates the loans’ actual cost to the federal government.
No one argues that the federal government should calculate the cost of financing its debt using the interest rates that a private borrower would face. Federal borrowing costs rightly reflect the actual interest rates that the Treasury pays — rates that are determined in the marketplace.
For the same reason, the budget should measure the cost of federal lending programs using actual Treasury borrowing rates. Adding an extra amount above and beyond what the government expects to spend would untether the budget from reality.