NAICU Washington Update

Scoring Changes on Student Loans Could Have Big Impact on Borrowers

October 16, 2017

The budget resolution that is making its way through Congress to facilitate tax reform contains a change in accounting methods for federal credit programs that could have a big effect on student loans.  Both the House and Senate budget plans include a change from Federal Credit Reform Accounting (net-present value) to Fair Value Accounting (risk-based), also known as “dynamic scoring.”

If enacted, the new accounting rules will make the student loan programs look like they cost more to the federal government than they currently do.  If this accounting change happens, policymakers will have a ready-made fiscal rationale to cut student loan benefits.  

According to the Congressional Budget Office June 2017 Baseline Projections, total direct loans would provide a return of $9 billion to the Treasury under current Credit Reform accounting, some of which funds the mandatory add-on to the Pell Grant maximum.  Much of that return comes from high interest rates on parent loans. However, under Fair Value Accounting (FVA), those same loans would now cost the federal government $12 billion.  Likewise, subsidized loans (those with an in-school interest subsidy for low- and middle-income students) currently cost the government $806 million, but would cost $6 billion under FVA.  Meanwhile, Parent Loans, which currently return $4 billion to the government, would return $1.6 billion under FVA.

Fair Value Accounting is intended to take market risk into consideration when figuring the cost of a loan program.  The method imposes a market-risk penalty to student loan scoring, inflating the cost of student loans by valuing them as if they incurred the same risk as in the private market.  Critics of this approach say attempting to value federal student loans this way ignores fundamental differences between the federal government and the private sector.  The federal government does not value risk the same as a private lender because the risk is mitigated by the government’s ability to collect on loans.

With the education committees already considering a one grant-one loan strategy, having the budget resolution change accounting to FVA gives policymakers even more reason to eliminate the in-school interest subsidy, lower loan limits and make other changes to the federal student loan programs during the upcoming HEA reauthorization. 

MORE News from NAICU