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Last Friday, the President signed into law the student loan “compromise,” promising it would help rein in college costs.
The bill pegs interest rates on federal student loans to Washington’s cost of borrowing (the Treasury rate) plus 2.05 percent and caps interest rates at 8.25 percent. Congress says that this bill will cover 18 million loans, totaling about $106 billion this fall, and reduce the deficit by $715 million over the next decade. But Congress’s promises do not account for the $500 billion in student loans that are currently not being repaid and the one-eighth of students defaulting on their loans.
What will the unpaid loans and student defaults do to Congress’s promise? Likely force Congress to break it—at the expense of taxpayers.
The details are in the accounting practices. The Congressional Budget Office (CBO) has used two different accounting measures to evaluate the cost of the student loan compromise: the Federal Credit Reform Act (FCRA) and fair-value accounting (FVA). Currently, the CBO evaluates student loan costs under FCRA accounting practices, which require that the cost of federal student loans be estimated on “market rates,” but this accounting method does not account for the risk that some students receiving loans will not pay back the government as expected. This is especially problematic when about $180 billion of the $1 trillion in student debt is in default or forbearance.Continue reading on blog.heritage.org