I had a few moments so I thought I would quickly skim the recently released CBO estimate for details about education spending. I look forward to seeing more expert commentary than I can provide as this is another example of me showing my ignorance.
I found myself thinking about the old adage about economists with a proclivity towards "on the one hand, but on the other hand" pronouncements:
So, on the one hand, CBO thinks that "interest rates will rise",
- CBO projects that interest rate increases will increase the cost of student loan programs: "Outlays for mandatory higher education programs are projected to be negative in 2010 primarily because of a temporary program under which the Department of Education buys federally guaranteed student loans from the private sector. That program is set to expire on July 1, 2010. Federally guaranteed loans have higher costs or lower savings than comparable direct loans made by the government.8 Thus, converting guaranteed loans to direct loans is estimated to yield budgetary savings in 2010. Over the 2011–2020 period, CBO projects, interest rates will rise, driving up the cost of the student loan programs and resulting in positive net outlays for student loan activity in future years. Over that period, mandatory outlays for higher education will total $43 billion, CBO estimates."
But on the other hand, CBO projects that lower interest rates will reduce expected outlays in the federal student loan program:
"Student Loans. In CBO’s updated economic forecast, projections of lower
interest rates reduce expected outlays in the federal student loan
program by $29 billion between 2010 and 2019. As required by the
Federal Credit Reform Act of 1990, CBO estimates most of the costs of
the federal student loan programs on a net present-value basis. In
particular, the present value of all loan-related cash flows is
calculated by discounting those expected cash flows to the year of
disbursement, using the rates for comparable maturities on U.S.
Treasury borrowing. When Treasury rates decline, the estimated present
value of future cash flows associated with student loans increases
(that is, such cash flows are discounted less) and payments to lenders
decrease. Thus, relative to the August baseline, the projected costs of
the federal student loan programs have declined."
Anyone confused yet? Love to have a CBOologist provide some clarification on this one.
Here were some other items dealing with student loan issues in the 179 page report:
- ECASLA, more schools shifting to direct lending and increases in loan volume all led CBO to lower outlays by $21 billion over the 2010-19 period: "CBO lowered its estimate of outlays for the federal student loan programs by $21 billion over the 2010–2019 period for several technical reasons. First, under a temporary program begun late in 2008 and in effect through July 2010, private lenders can sell to the government federally guaranteed loans they have issued; those loans then become direct loans, which have lower costs than guaranteed loans. Sales of those loans have been much higher than CBO had anticipated in August. Second, many schools have switched from the guaranteed loan program to the direct loan program. And third, loan volume increased significantly, which lowers costs in the early years because the subsidy calculations under credit reform indicate budgetary savings from new direct and guaranteed loans in those years.5 Those changes all result in lower estimated program costs for new student loans."
- Stimulus provided $12 billion to states for education expenses: "The new State Fiscal Stabilization Fund (which provides money to state and local governments, primarily for their education expenses) spent more than $12 billion in 2009."
- Pell Grant spending significantly higher than projected for 2009: "In addition, ARRA spending by the Department of Education for Pell grants was about $6 billion greater
than CBO’s original estimate—but those higher-thanexpected outlays were partly offset by lower-thanexpected spending from funds provided through the annual appropriation process."
- For 2010, higher ed. outlays primarily to State Fiscal Stabilization Fund: The majority of the Department of Education’s ARRA spending in 2010 ($31 billion) is projected to go for the State Fiscal Stabilization Fund, with another $19 billion expected to be spent on Pell grants and other education programs
- Strategy to lower interest costs by borrowing in shorter-term notes: "Over the 10-year period, CBO has reduced projected interest costs by $196 billion as a result of changes to the projected mix of Treasury borrowing and increased receipts from nonbudgetary credit-financing accounts apart from the TARP. CBO has altered its projected mix of Treasury borrowing by shifting borrowing in later years away from 10-year notes to shorter-term notes (2- 3-, 5-, and 7-year notes), thus lowering projected interest costs during the baseline period. In addition, two programs—the direct student loan program and an incentive program for the manufacturing of advanced technology vehicles—are now projected to issue more loans than anticipated in CBO’s previous baseline. Direct loan programs require up-front funds from the Treasury to issue the loans, and the nonbudgetary credit-financing accounts then pay interest on those borrowed funds. Accordingly, higher volumes of direct loans lead to higher interest payments to the Treasury."
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