Clever Accounting in the 2012 Budget
Last week, the White House released the President’s FY 2012 budget proposal. There's tons of stuff to sift through in the budget, and we now turn your attention to a piece written by one of our New America Foundation colleagues, Jason Delisle, focusing on one of the many gimmicks used in this year’s budget (check out our analysis to learn about some other gimmicks and "magic asterisks").
So you (and we) don’t have to, Jason likes to spend his time looking into arcane federal education budget issues. In this case he’s writing about a provision of the Federal Credit Reform Act of 1990 that enables budget scorekeepers to create the illusion that by creating a new federal lending program, with the admittedly laudable goal of increasing low-income students’ access to higher education, the federal government actually can appear to reap a profit.
Make sure to go to the full article for all the details, but here’s the gist of how it works:
[A] loophole in the Federal Credit Reform Act of 1990 makes many government loan programs appear as though they both provide subsidies to borrowers and earn profits for the government. This apparent “free lunch” arises not because the government is inherently better at lending than private companies, but because the current budget rules that are used to calculate loan costs don’t factor in any cost for market risk. That is, by discounting expected loan performance at risk-free U.S. Treasury interest rates, the rules ignore the fact that loan performance is unpredictable over time and that defaults will be more frequent and costly in bad economic climates. As a result, risky loans made at below-market rates can appear profitable, but only when the government makes them. No private lender would risk its capital to make similar loans because the risks do not justify the potential gains.