On Monday, Congressional Budget Office (CBO) Director Douglas Elmendorf issued a revised estimate in a letter to Senator Judd Gregg (R-NH) on the savings that would come from eliminating the Federal Family Education Loan Program (FFELP). The revised estimate came from a request by Gregg who asked the CBO to do an estimate that accounted for the cost of market risk.
Last Friday, CBO issued its official estimate that placed the total savings from eliminating the FFEL program $80 billion over ten years ($87 billion in savings - $7 billion in discretionary costs). Those estimates were based on a standard loan-valuation procedure called for in the Federal Credit Reform Act of 1990 (FCRA). However, FCRA does not include costs to the government stemming from the risk that the cash flows may be less than the amount projected. Elmendorf listed unknown defaults as one of the unknown risks that are not included in the $80 billion projection.
"CBO found that after accounting for the cost of such risk ... the proposal to replace new guaranteed loans with direct loans would lead to estimated savings of about $47 billion over the 2010-2019 period - about $33 billion less than CBO's estimate under standard credit reform treatment," Elmendorf wrote.
Estimates that have been adjusted for the cost of risk generally improve the ability to compare financial programs, according to Elmendorf. But there continues to be some concerns about projecting federal student loan savings and costs accurately. Student loans can fluctuate wildly in value and those fluctuations can lead to large changes in market-based estimates from year to year, according to Elmendorf.
Republicans and Democrats quickly issued statements on Elmendorf's letter.
John Kline (R-MN), ranking member of the House Education Committee, accused Democrats in a press statement of spending nonexistent money through the Student Aid and Fiscal Responsibility Act of 2009 (H.R. 3221) under the guise of savings that would instead leave taxpayers on the hook for billions of dollars.
"Democrats herald an alleged $87 billion in savings and government earnings as evidence that billions in new government borrowing is sound fiscal policy," Kline said. "This analysis from the Congressional Budget Office confirms once and for all that these savings are a myth."
In an equally strongly worded statement issued yesterday, House Education Chairman George Miller (D-CA) called the letter a "desperate attempt to confuse the American people about a landmark bill to make college more affordable and reduce the deficit."
Miller went on to contend that the revised estimate ignores current student loan market conditions and standard scoring methods. Miller also pointed out that CBO's "official estimate" remains at $87 billion over ten years and it is that official estimate that is being used to mandate increases in the Pell Grant and other higher education and K12 programs through SAFRA.
SAFRA passed the House Education Committee last week and was expected to come to a full House vote as early as this week. The Senate has yet to take up similar student aid legislation and isn't likely to do so until after the August recess.
Media Coverage
Alternative Price Tag for Obama Student Loan Plan
Inside Higher Ed
Obama's Student-Loan Plan May Save Less Than Thought Bloomberg
By Justin Draeger
Vice President of Public Policy, Advocacy, and Research
Posted 07/29/09 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web site questions or comments to Web@NASFAA.org.
