Explaining Negative Funding for Higher Ed

Every year the federal government provides billions of dollars worth of grants, loans, and other forms of assistance through mandatory funding to students pursuing a postsecondary education. Yet, according to the president’s 2010 budget request, total mandatory funding (funding not provided through the appropriations process) for education programs in 2009 is negative $20.3 billion. Although a negative funding level is counterintuitive, it can be explained by the budgeting methods required for federal student loan programs.

The way the federal government reports the costs of new student loans makes up part of the negative 2009 funding figure. Most spending in the federal budget is accounted for on a cash basis — that is, money appears in the budget as it is made available and spent. Loan program costs, however, are presented as the subsidy conferred by the federal government to borrowers and private lenders administering the loans. Even though the federal subsidy will be conferred to borrowers and lenders over the life of the loan, its total value shows up in the budget all at once, in the year the loan is made.

When accounting for the total value of federal student loans made in 2009, federal budget analysts assume that fixed borrower interest rates of 6.8 percent and other fees will more than offset the federal cost of the loans. In other words, estimated collections exceed estimated costs, and this is presented as a negative subsidy rate in the budget. In total, federal budget analysts estimate that loans issued in 2009 will cost negative $12.7 billion.

Subsidy rates for 2009 loans, however, explain only some of the negative education funding reported in the president’s fiscal year 2010 budget request. “Reestimates” of all student loans made from 1992 through 2008 explain nearly all of the rest. The same budget rules (established in the Federal Credit Reform Act) that require all new loan costs to appear in the budget when the loans are made also require budget analysts to annually update the original estimates for all loans issued since 1992. These updates, called reestimates, are “booked” in the current fiscal year when the president’s budget is released. In other words, any changes to prior estimates for loans issued from 1992 through 2008 are accounted for in 2009. If costs are higher, then the reestimate is positive. If they are lower, then the reestimate appears as a negative number.

According to budget analysts, reestimates of these older loans total negative $18.5 billion, which is reflected in the fiscal year 2009 mandatory funding level for the U.S. Department of Education. This is due to dramatically lower interest rate projections that will reduce the costs of older loans compared to previous estimates. Additionally, loan purchase programs implemented in 2008 and 2009 are expected to lower the cost of the federal subsidy on loans issued in prior years.

To sum up, the negative $20.3 billion fiscal year 2009 funding figure that appears in the mandatory budget for federal education programs reflects negative costs for both 2009 loans and updates to estimates for all loans made since 1992. Although mandatory funding for other education programs, such as Pell Grants, is positive, the large negative numbers for student loans produces a net negative number for 2009.