Warren Refinancing Bill Costs Less Under Fair-Value Accounting

Senate Democrats have done a good job ignoring the Congressional Budget Office when it says the federal student loan program does not turn a profit if all of the costs of the program are factored in. One wonders if they would change their view if they realized that under that more comprehensive accounting methodology – fair-value accounting – the cost of Senator Elizabeth Warren’s bill to cut interest rates, which failed in the Senate this week, is substantially lower.

Wait a minute. Doesn’t fair-value accounting show that the student loan program is more expensive than under official budget rules? Yes, it does. So why is an interest rate cut less expensive than under the official rules?

Fair-value accounting differs from the official budget rules for loan programs by factoring in uncertainty around the expected performance of the loan. In technical terms, it discounts expected future payments at a higher rate, thereby making them worth less than under the official budget rules.

Now apply that concept to Senator Warren’s interest rate bill. The government is, under current law, expected to be paid some amount of interest in the future on the outstanding student loans. The Warren bill cuts those payments. Thus it reduces a future stream of payments that the government will earn. Put another way, the government books a loss relative to its current position and those losses occur out in the future.

What happens when you take a future loss and discount it to the present at a higher rate (i.e. using fair value rather than the official budget rules)? It gets smaller. Therefore, the impact that the rate cut would have on the budget is smaller under fair value than the official budget rules because fair value incorporates a higher discount rate. It’s unclear, however, how big the difference would be because the CBO never produced a fair-value estimate of the Warren bill.

Imagine if it had. Republicans who oppose the Warren bill but support fair-value accounting would have had to insist that the Senate use the smaller cost estimate figure. And Democrats, who oppose fair-value accounting, would have had to insist that the Senate use the higher cost estimate figure. That is assuming lawmakers would never use accounting rules selectively to help advance their own agendas, of course.”