The Government is Fast Becoming an Investment Bank. Is That What We Want?

(Continued from Part I)

These sorts of loans, big and small, paint a picture of Washington engaging in “venture socialism,” a term coined by former Sen. Jim DeMint. Labeling anything “socialist” these days raises the hackles of liberals and the eyebrows of skeptical young adults, but in this case the descriptor seems apt – government is making investment decisions, taxpayers are bearing the risk, and Washington-favored interests are raking in the rewards.

In that sense, government is not merely an insurance company, as Ezra Klein noted, it is an investment bank, making substantial, if ill-thought-out, bets on economic ventures. These subsidized loans and loan-guarantees inevitably nudge the economy in directions it may not otherwise go, and all without the slightest bit of oversight or transparency.

One of those bets has been on higher education. Typically, that’s not something this blog would be critical of given that colleges and universities are where our organizations and members live. But the Obama Administration’s attempt to hide the true cost of its foray into student loans has had the effect of pushing the cost of college higher and made the financial burdens of young adults heavier.

The Department of Education, who oversees the government’s student loan portfolio, has done everything it can to make the program appear cost-free, even profitable. A recent report from the Congressional Budget Office, using Obama administration figures, projected a $50 billion profit on student loans in 2013, more than the profits of ExxonMobil. The report led to calls from advocates to cut the interest rates on student loans, after all, in what world does it make sense for the federal government to be profiting off the backs of young adults?

But as POLITICO reported earlier this year, the government’s projections are utter bunk. Rather than run any sort of profit, the student loan portfolio could lose more than $10 billion per year, the result of “agencies hav[ing] a natural inclination to make their credit programs look cheap,” an assumption that advocates have little reason to challenge. Grunwald writes:

The stakes are huge; the CBO reported in May that if the U.S. budget used “fair-value” accounting that assessed the market value of federal credit the way a private bank would, student loans and FHA guarantees would be scored as costing $118 billion through 2024. Those two programs are currently scored as producing $198 billion in budget savings through 2024, money the committees overseeing education and housing are already spending elsewhere

Even those estimates may be low. A new story by Grunwald, who digs into the little-discussed intricacies of the president’s budget, reveals some startling projections.

“In obscure data tables buried deep in its 2016 budget proposal, the Obama administration revealed this week that its student loan program had a $21.8 billion shortfall last year, apparently the largest ever recorded for any government credit program,” Grunwald writes.

That figure is incredible for two reasons. First, it represents an automatic 5 percent increase in the deficit, and because it stemmed from White House policy changes, it will happen without appropriation or approval from Congress. Second, the expected annual shortfall is now about 430 times the total annual budget of the Direct Loan Program as recently as 2008.

The red ink that will be splashed across the budget is an enormous problem, but there is an argument to be made that the bigger issue is the impact that debt is having on the higher education marketplace. The government assumption of student loan losses provides a guilt-free incentive for colleges to continue driving up the cost of attendance.

“Because the government has almost ensured anyone who applies will get the loan they need, schools have been able to drive prices up with no concern as to where funding will come from,” Jonathan Whaley, a 25-year-old attorney with $250,000 in student loans told USA Today. “With prices skyrocketing, students are taking on way more debt than they can handle, but have no other option to compete in the modern economy.”

In essence, the Obama Administration is feeding a vicious cycle. Students face exorbitant college costs and thus take out enormous student loans, the Obama Administration caps the financial hit to students by offering forgiveness programs then sends the bill to taxpayers, and colleges see the opportunity for more revenue and respond by increasing tuition prices. The result is soaring tuition cost, ever-rising student loan debt figures and unsustainable deficits.

Perhaps neither insurer nor investment bank is ultimately the best descriptor of our federal government after all. Instead, the best label appears to be debtor.