Federal Spending on College Aid is Nowhere Near $145 Billion

Has federal spending on student aid for higher education really reached $145 billion under President Obama? In the run-up to today’s mid-term elections for the U.S. House and Senate, the news media has repeatedly trotted this number out – as a statement of fact, accomplishment or a sign that spending in Washington is out of control:

For example, an article in The Chronicle of Higher Education last month gave President Obama credit for keeping his word on increasing student aid:

President Obama campaigned on a promise to provide billions more dollars to students and colleges, and he has delivered. Since he took office, almost two years ago, spending on student aid has grown by nearly 50 percent, to $145-billion, while aid to colleges has exploded.

Meanwhile a columnist for The Washington Times uses the $145 billion figure to criticize the growth in higher education spending:

Since taking office, [President Obama] has increased spending on student aid by nearly 50% to $145 billion…

There is just one problem: federal spending on college aid is nowhere near that amount. If it were, spending on higher education alone would be greater than that for all but the five largest federal agencies (the Departments of Defense, Labor, Health and Human Services, Social Security, and the Treasury, which pays the interest on the debt). In fact, in fiscal year 2010 the total budget for the Department of Education was $59.2 billion.

So what does this number really mean? The $145 billion figure is reported by the Department of Education as “total aid available to students” which includes the face value of all federally-backed students loans issued in a given year. This is by no means a measure of government spending and here’s why:

As most readers are aware, the federal government helps students pay for college by providing them with loans that carry below-market interest rates with flexible, generous repayment options and no credit checks, earnings, or collateral requirements to get the loans. Undergraduates can borrow between $5,500 and $7,500 a year and graduate students can borrow up to the full cost of attendance through Stafford Loans and Grad PLUS loans. Parents of undergraduate students can also get federal loans.

When a student takes out a $5,500 federally backed Stafford loan she has not received $5,500 in government aid. Nor has the federal government spent $5,500 on the aid she received. Ask a recent college grad struggling to pay back $30,000 in loans if she thinks the federal government provided her with $30,000 in college aid. But that type of reasoning accounts for $110 billion of the oft cited $145 billion in aid. The rest is made up of grant aid, such as Pell Grants (see table above). The only aid the student actually gets — and the only spending actually undertaken by the government — is the subsidy that the student receives on her loan, such as the below-market interest rate, the option to defer repayment until after school, fixed interest rates, etc. After all, just about every student can get loans for college that aren’t backed by the federal government if they are willing to pay the price.

The costs of the subsidy for federally-backed student loans according to the President’s budget are estimated to be a negative $10.4 billion for fiscal year 2011 as the Department of Education believes it will earn more in interest on the loans than it costs to make them. (A more accurate estimate, however, takes fair market values into account and results in a positive cost, albeit still well below $145 billion. For an explanation see here.)

It strikes us as odd that the $145 billion number is often used to show how much federal student aid spending has grown under President Obama. True, in 2008 the comparable figure was $98 billion, and $145 billion is indeed a 50 percent increase. But this doesn’t represent an increase in actual spending. The press has it wrong. The $145 billion is neither an accomplishment nor an example of runaway government spending. It is more students borrowing – and students borrowing more.