Wall Street Journal Says $68 Billion in Student Loan Savings is “Bogus.” What About That $40 Billion?

Today the Wall Street Journal ran an editorial (Washington’s Quietest Disaster, September 30, 2011) that among other things called the savings generated from the elimination of the guaranteed student loan program in the 2010 Health Care and Education Reconciliation Act a “mirage.” That law moved the entire federal student loan program to direct lending, ending costly interest rate subsidies provided to private lenders making student loans. The editorial must have been written in quite a rush because the authors forgot to finish reading the CBO cost estimate that they themselves cite.

Here’s the relevant section of the WSJ piece:

The student-loan takeover also advanced the mirage that ObamaCare would save money. Thanks to only-in-Washington accounting, making the Department of Education the principal banker to America’s college students created a “savings” of $68 billion over 11 years, certified by the Congressional Budget Office. Even CBO Director Douglas Elmendorf admitted that this estimate was bogus because CBO was forced to use federal rules that ignored the true cost of defaults.

It would sure be important to the WSJ’s argument here if the CBO had produced an estimate of the student loan changes that was not bound by the federal rules that “ignored the true cost of defaults” as the paper put it. After reading the editorial, one couldn’t help but assume such an estimate would have shown that the savings didn’t exist.

In fact, CBO did provide such an estimate back in 2009 and again in 2010, at the request of Senator Judd Gregg, then the top Republican on the budget committee. For that estimate, the CBO calculated the “fair-value” of the savings – in other words, an estimate similar to what private investors would have come up with. Under that methodology, the CBO said that switching to 100% direct lending saves the federal government $40 billion over 11 years.

Sure, that figure is $28 billion less than the $68 billion in savings that CBO estimated under official federal accounting rules. But it’s still $40 billion in savings. That’s far too important of a fact to leave out of an editorial that calls savings in the student loan reforms both “bogus” and a “mirage.”

We agree that federal accounting rules (the Federal Credit Reform Act of 1990) understate the cost of loan programs by not accounting for the market risk that taxpayers bear when they back loans. But even after that flaw was corrected, the guaranteed loan program was still more expensive – $40 billion more expensive – than the direct loan program. And, according to the CBO, every single penny of those savings came from eliminating interest subsidies to private lenders.

The Wall Street Journal may well disagree with how those savings were spent – on Pell Grants and student loan repayment benefits – but $40 billion in savings is real money.