Fair Market Valuation; CBO, Student Loans, Food Stamps, Etc.
Earlier in 2013, CBO’s Douglas Elmendorf’s forecasted return on Student Loan’s resulting in a positive return for the Government. Later Elmendorf reversed the forecast claiming student loans would cost the government and the taxpayers by generating a negative return. Using one cost model (FCRA) to estimate the return, the government will make $184 billion on student loans in the next 10 years. Using another cost model (Fair Market Valuation ) to estimate return, the government will lose $95 billion over the same period. So why the difference? Utilizing the Fair Market Valuation methodology would necessitate additional compensation for investors to accept the risk that losses may exceed those already reflected in the cash flows. A premium for the possibility that debtors will default in large numbers is added into the calculation. Wait a minute, these are students locked in by signature to these loans which can not be discharged through bankruptcy. So why?
I happened upon a New America Foundation article by a former senior analyst in the Republican staff of the U.S. Senate Budget Committee Jason Delisle, who proclaims much the same as the CBO’s Douglas Elmendorf positing the Fair Market Valuation methodology being a fairer and more accurate way to assign risk to student loans. Beneath Jason’s article and within the comments section associated with the article by Jason were comments by Alan Collinge of the Student Loan Justice Org disputing Jason’s assumptions on Fair Market Valuation (The New America Foundation agreed to a discussion with Alan and reneged. Alan has gone unanswered by Jason and The New America Foundation). Alan’s argument is the Fair Market Valuation methodology uses the less abundant commercial data to evaluate the return on student loans as opposed to the more readily available and abundant Department of Education student loan data (which has been used in the past by the CBO). The difference between the two databases is the Fair Market Valuation uses commercial loan data reflecting riskier loans than what occurs from the Federal Direct Loans program. While there exists a level of default within the student loan program administered by the Federal Direct Loans program; remember too, Federal Direct Loans can not be discharged through bankruptcy proceedings. Additionally, the collection percentage on Federal Direct Loans is much higher than commercial credit collections which can be disposed of via bankruptcy proceedings. Griffith and Caperton of the Center for American Progress add to the criticism of using Fair Market Valuation stating government loans of all types has cost taxpayers 94 cents for every $100 loaned over the last 20 years. While the FHA took a huge hit when Wall Street crashed, it still performed better than the commercial counterparts. Government programs appear to be on pretty stable ground in their projections yet The New America Foundation and the CBO arbitrarily claim otherwise. Reviewing the history of government lending over the last 20 years shows it has overestimated the total costs to government by $3 billion. For those who may not know, Federal Student loans are like a Roach Motel, checking in by loan signature is near to impossible to negate or check out except to die, become disabled, or pay it off . . . a bankers dream. CBO’s Douglas Elmendorf is showing a partisan preference for the Fair Market Valuation of Student Loan which in the end favors commercial interests over students and the Direct Loan program.
Most recently, another supporter of the Fair Market Valuation methodology of loans, Jason Richwine formerly of the Heritage Foundation and the AEI, wrote an article at the National Review on Farm Subsidies. Myself, I am not a big fan of farm subsidies; but if it comes to eating, I would prefer my food to be homegrown rather than controlled by an out-of-country food cartel the way oil is today. ~ 50% of the US food base is imported today, so why more? There is a need to control subsidies to food manufacturing farms which differ from the family farms as many know them; but to throw the baby out with the wash, I am not sure is necessary. The SNAP program has been heavily contested in Congress with the Repubs looking to balance the budget on the back of the poor. One comment by Jason Richwine within his Farm Subsidy article challenges the ~$4.50/day food stamp recipients get daily and its correlation to health:
“Henry Olsen criticized House Republicans for seeking to cut food stamps but not crop-insurance subsidies in the recently passed ‘farm bill.’ Point taken. But personally I think he is being too hard on conservative activists. To say that cutting the food-stamp budget by a small percentage is ‘the taking of food from the mouths of the genuinely hungry’ and will ‘cut back on your dinner’ is a bit overblown. In fact, I would guess that a randomized controlled study, were it done, would show that food stamp recipients are no healthier than non-food stamp recipients in the long run.”
Well Jason Richwine is correct on one thing, the Food Stamp recipients would be no healthier than the poor non Food Stamp recipients not on SNAP. Consider the SNAP ~$4.50/ day could not buy a one time saltier and higher fat content Quarter pounder meal (soda + fries) at McDonalds. So why quibble over 5 or 10 cents? The true issue is ~$4.50 per day does not go far in many sections of town or in the suburbs and at the store as it now stands. If health is truly the issue here, maybe the program should be expanded to include others and increased in daily dollars? Health is not so much the issue as being hungry or hungrier and then being expected to work while hungry in order to gain the Food Stamps as expected by many states. Or perhaps they can eat cake?
Jason Richwine claims the Fair Market Valuation methodology (based upon commercial data) will give a more accurate picture for the farm subsidies which he also asserts are also less risky than the Food Stamp and the Student Loan Programs. Jason may have a point here since the economic growth of recent has been driven by wild swings on Wall Street and Repubs always look to the poor to make up the difference. I would want to look to past projects to determine what the historical difference has been before making radical changes resulting in phantom deficits. This seems to have been throw to the side with the push to use Fair Market Valuation for relatively stable programs with good returns. The Food Stamp program is but one area for Fair Market Valuation to come from Jason Richwine.
“Right now, the cost of almost every government credit or insurance program – from crop insurance, to student loans, to public pensions – is underestimated. The movement for ‘fair value’ accounting is intended to fix that problem.”
What Alan Collinge points out does makes sense. Jasons Delisle and Richwine and CBO Director Douglas Elmendorf scrapped decades of data on student loans and other programs which show a return even after historical cost. In place they assume higher risk as taken from commercial loan data, a riskier environment which is not reflective of degree of risk within these programs. We are not talking MBS or CDOs here and the end game are students locked into these loans whether they default or not. The long arm of the government extends much further for students than it does for AIG, Lehman, or Goldman’s Executives to the extent it will garnish Social Security or Disability benefits and future wages. The risk of default Delisle and Richwine, which is so prevalent in commercial loans, is mitigated substantially in Student Loans. The wild swing seen in the CBO’s projection of Student Loan Return was caused by using the riskier data of FMV and assuming the interest rate charged no longer covers the cost of the Student Loan program. Commercial Investors would demand a higher interest rate to cover losses in case Wall Street blows up the economy again or risk as taken from commercial data (Fair Market Value) rather than the historical data (FRCA) of the US Department of Education. In the end, this will drive interest rates higher for student loans and other loan programs to cover projected potential phantom deficits or costs. This makes sense on Wall Street and for TBTF who failed to mark down investments when they defaulted; but, it does not make much sense for student loan borrowers who are locked into it. there are other things to consider.
An Invitation to Jason Delisle of The New America Foundation by email on September 25, 2013:
from: run75441 aka Bill H
Good morning Jason:
I write on Angry Bear Blog and I have also helped many soon-to-be college students apply for grants and loans.
I have been reading and watching the discussion going back and forth on Fair Market Valuation of student loans and the resulting change in return as projected by Douglas Elmendorf’s CBO. This change in valuation establishes a basis for a dramatic change in how student loans rates are calculated for risk and return which in most cases does not exist in the same manner as what exists for commercial loans when using commercial loan data. There is no bankruptcy for student loans which would mitigate the risk factor and is also reflected by the collection rate as opposed to lets say credit cards?
Allan Collinge has rasied several points challenging Douglas Elmendorf and your conclusions on the utilization of Fair Market Valuation in determining the return on student loans. Reviewing all of the posts, I have not come across a response to Allan’s points arise from The New America Foundation. His points go unchallenged and I would offer you an opportunity to respond in dilogue to Allan on Angry Bear Blog in your own and unaltered words. Is this a possibility?
Please let me know. Thank you for your time and consideration.
1. Deseret News; August 14, 2013 “Making a Killing or Getting Fleeced?”
2. The New America Foundation; March 23, 2012, “Fair Values Accounting Shows Switch to Guaranteed Student Loans Costs $102 Billion”
4. Forbes, July 11, 2013 “Interview with Student Loan Activist Alan Collinge – Fair Value In An Unfair System?”
5. The Center for American Progress, May 2012 , “Managing Taxpayer Risk”
6 National Review, September 23, 2013; “Farm Subsidies, Even Worst Than You Think”
7. The Center for American Progress, April 26, 2006, “Understanding Mobility in America”
8. The Heritage Foundation; May, 2012 “The Real Cost of Pensions”
HI Run, I myself am running out the door. But quickly:
the word you want is “discharged” and not “disbursed” in regards to bankruptcy. Trust me I know, I went through a bankruptcy at a time when I had non-dischargeable student loans.
Corrected . . .
Well, here is an impractical idea
The banks now own the country. And banks will do what they have always done… drive borrowers into bankruptcy so they can seize their assets, which they can make better use of than the borrowers.
I would advise any young person I know to avoid taking out a student loan. College is not the ticket to prosperity it once was. And a year out of college earning money so you don’t have to borrow a Javert loan may pay dividends in other respects. You may find something you would rather do with your life.
And if the kids stop borrowing, or showing up at the colleges, the masters of the universe might have to rethink their business plan.
That’s not a bad idea Dale. College degrees have been over sold and have only lost value in today’s economy. On top of that I understand, though I’m not very well versed on the matter, that a very high percentage of the total outstanding student loan amount has been generated by Fly-By-Night University (the one’s that commonly advertise on late night TV) whose students may not have otherwise gone to college and have a very high drop out rate. The ads for such places generally focus on what were once thought of as trades not requiring a college degree; nursing aide, computer tech, etc. The schools, and that’s a generous description, get to keep the tuition, but the dropped out student has only the loan balance to show for their efforts. Think WaPo and Kaplan University. What was once little more than a cram for the exam tutorial business morphed into a full fledged university. Well, maybe not so fully fledged.
In the current economic downturn, I wonder if the models consider the amount of capitalized interest that is most likely being added to a substantial amount of outstanding student debt. As noted the difficulty, near impossibility of discharging student debt in bankruptcy makes capitalized interest have a positive effect on the rate of return to lenders.
I am not a lawyer, but I’ve always wondered how one class of citizens, student loan borrowers, can be treated differently under bankruptcy law than say, corporate citizens. It would seem to me that this would possibly violate the equal protection clause of the constitution.
Re equal protection, there are a number of debtors who cannot get a discharge under the bankruptcy act. Among them, are tort defendants guilty of egregious conduct resulting in punitive damages. Basically the courts require some “rational basis” for the discrimination to allow it. Similarly, homeowners in default on mortgages cannot get a redo on the terms of their mortgages under the bankruptcy act unlike corporations going through Chapter 11. It isn’t fair but it is legal.
I knew about the criminal side of it. After bombing abotion clinics and being fined, convicted defendants would plead bankruptcy. Homes, I did not know about.
Another aspect of value goes further than whether or not the student loans are profitable for the national government in a direct manner. The redirected income sent to pay student debts and credit problems associated with these debts often makes it impossible or very difficult for those subjugated by these to buy property, newer cars or etc. And that is bound to be a major loss to local governments who are very reliant on those revenues for operations-and that would in turn force these bodies to turn to the federal government for remedy. So even it appears that student debt is profitable in another context it is probably a loss to the federal system due to the demands place upon it to bolster local systems who’ve lost out as a result of the debt problem.
Of equal concern as far as negatives are considered is the systemic loss of faith in our overall system of which belief in higher education is instrumental. Once large numbers adopt the strategy advocated by Coberly of opting out then it would not be a major conceptual decision to drop the support or belief in other social systems. Essentially student debt could, in the longer term, assist in propagating a disbelief similar to the loss of faith by the educated/skilled which was instrumental in the end of the Soviet system.
Looks like from an economic or social view whoever wins by student debt will lose…
When I wrote this after talking to Alan Collinge, it was twice as long at it is today. I ended up cutting many parts of it out to accommodate a fewer issues which I believe are key to the student loan issue. Fair Market Value methodology for Student Loans in the manner Jasons Delisle and Richwine use it is entirely inappropriate. Utilizing commercial data to rate loans captive by signature to borrowers who have no recourse except by death, disability, or 25 years of little or no income is indentured servitude or just plain silly. There is no or little risk in making these loans. Jason Delisle has been asked questions by Alan Collinge and invited to engage in discusion by Alan and myself. Instead, Jason Delisle chooses to ignore the invitation of Alan Collinge of Student Loan Justice Org. and continue with his unsubstantiated defense of the usage of Fair Market Valuation for rating the risk of Student Loans.
To get to your points and probably the subject of future posts, I would offer this up:
– http://www.demos.org/what-cost-how-student-debt-reduces-lifetime-wealth “How Student Loans Reduce Lifetime Wealth”
– http://libertystreeteconomics.newyorkfed.org/2013/04/young-student-loan-borrowers-retreat-from-housing-and-auto-markets.html Young Student Loan Borrowers Retreat from Housing and Auto Markets”
– http://www.consumerfinance.gov/newsroom/the-cfpb-before-the-senate-committee-on-banking-housing-and-urban-affairs/ “Testimony of Rohit Chopra Before the Senate Committee on Banking, Housing, and Urban Affairs”
– http://www.newyorkfed.org/regional/householdcredit.html “Household Credit” 4 articles.
Opting out for young people is truly not an option when the need for higher education is mandatory in order to be successful and is the ticket to the middle class. Why cut your nose off to spite your face? I do not see this as a solution. Alan Collinge is adament in his beliefs that the Department of Education take a stance on student loans in order to control the cost of college educations which has increased 2 and 3 times CPI beating out the rise in healthcare costs. There is truth to this. One question is why the increase in College tuition.
Trust me there was increasing distress by this dad when he signed Plus Loans for sons and daughter who attended the Ohio Wesleyans and Lake Forests of the nation. Even with Scholarship, Grants, subsidized and unsidized Stafford loans, the remainder was substantial. Together in payment, we are nearing the end of it and I can retire debt free and they go on in life without the Dept of Education Student Loan albatross around their necks.
There some bloggers of the Brookings Institute ilk claiming interest rates do not matter in the end when determining month to month costs of student loans. They are correct in saying such; but, there still remains total cost of the loan and how many more months will it take to pay it off. They were deriding Senator Warren’s proposal of using Fed Loan Rate for student loans saying it would not make much of a difference. The Fed loans money at almost zero percent interest to banks when in trouble (2008) and also on a short term basis. Many former commercial interests were made banks since 2008 in order for the Fed to loan them money and become eligible for TARP. Banks such as Goldman Sachs now enjoy low interest rates in which to utilize for investment with good returns and at taxpayer expense. The question really becomes why, why can not similar be done for student loans? Why change to a variable rate when the market begins to recover and the Fed will loosen policy? Also why did they not propose a variable rate in 2008 when interest would have been far lower and we would have had one or more classes successfully graduate with low rate loans? Then too, this would not have solved rising costs as colleges would have continued the increases in tuition (including books and R&B). There is something else going on here.
When I finished college after USMC, there was no tsunami of young adults wishing to be a teacher muchless a professor. The money was not there and everyone opted for private enterprise. After all, those who could do went into business and those who could not went into teaching (tongue in cheek here). I sometimes wonder if I should have gone the other direction as I was a few years from the the doctorate. In this economy, it appears those who have traveled a diferent road are arriving at retirement in better shape and with much jealousy from those who went into business. Fair Market Value would have dictated lower rates of return which would have given most pension funds the 85% funding needed. Then too, states, etc. would not be able to raid them for other expenses. There is a purpose for FMV when necessary and in a commericial environment. Student Loans does not appear to be one of those instances.
Bruce Webb on another thread gives a nice review of the issue in funding for SS and Defense. Just substitute education for SS.
Me: “Net present value is the amount of money that would have to be invested today in order to have enough money on hand to pay deficits in the future. In other words, Congress would have to invest $11.3 trillion today in order to have enough money to pay all of Social Security’s promised benefits through 2086. This money would be in addition to what Social Security receives during those years from its payroll taxes.”
Seriously, if you desire a good read for a China trip; pick up, “The Rise and the Fall of the Great Powers” by Paul Kennedy. He goes into numerous examples of why it is a mistake to out spend GDP growth on Defense as opposed to domestic prodcutivity. I would add to this Finance or TBTF and Wall Street also. Your initial comments would fall in the domestic productivity realm. And yes, losing some of these studies would be tragic.
Finally, I do agree with your comments concerning the Sallie Mae and Nel. Does Direct Loans really need them as servicers? I do not believe so and they add to cost. Sorry for the length of this. Would you also be writing on Common Core also?
I do not see it as a solution either but in academe there is a increasing distress by students over what they are getting into and many of the professorial contingent have become disillusioned by their part in what has become a lifelong burden for students. A burden which many current professors share and in the future in certain fields may be the effective end of terminal degrees. And the attendent social and economic losses of not having those people to drive innovation, teach or at the least stabilize belief in American systems.
About Fair Market Value Methodology some of the impetus behind that seems to be a means to increase the already enlarged profits associated with student debt. As noted in your article one method of measure seems to be being used as a rationale for increased compensation for investors. Which alas looks like very much like another attempt to revive the old sub loan system or to reinflate the SLAB’s bubble.
And its interesting that in all the talk about cost to government no mention is made of the ‘liquidity’ payments made to the old sub loan corporations or if there is a substantial additional amount going out under various other bailouts and possibly in the QE’s which may be stabilizing the over inflated or bad paper in the SLAB’s market.
. I would like to get out of the roach motel. Have been paying for over 27 years and still in major debt. Business when under in 2008 and working part time and still owe the direct loan. I wish someone had warned me.
What happened to Obama’s you “can write it off after 20 years?”
The first President to offer a solution (although mediocre), in that it requires you to be almost destitude with little income which applies in quite a few instances today for students, still exists. Why attack him when this issue has existed for decades, Repubs and TBTF resist any resolution to it, etc.? If you choose to do this, it is still not an easy course to follow. I would call Federal Direct Loans, explain your situation, and see if you can write the balance off after 27 years. Understand too, it may show up on your income tax as income.
run75441 Quite true that educational debt has become distressing for virtually everyone who has had to deal with the situation. A conceptual trend which may be very detrimental to our body politic is the idea which a increasing number of desperate people are embracing which is hoping for systemic collapse so these debts might be ended. Obviously they know that due to the draconian laws about student debt normal consumer protections do not work. And Obama’s/Duncan’s IBR ICR have helped somewhat but these are largely diffusion rather than solution.
The development that a rising number of people are looking to systemic collapse as a solution to their intense problems with student debt should be of greater concern to our leadership. These are after all the definition of our future systemic stability.
i believe there is in fact ‘a global food cartel’, or at min. one in becoming .
Well the dominant mode of wealth production is now in the extractive wealth sector with some 42% of US wealth in that arena. And student loans are equivalent to more traditional commodities speculation in many ways. For example the lending companies have long interposed themselves in education in which they do not teach (providing the direct ‘production;) and as would be evident in both the old sub loan abd Direct Lending often do not provide all the money or arrange it so there is little actual risks for them due to government sweetheart regulations (hardly ‘free market”). And then we have the various derivatives in the SLAB’s market. End result gross inflation of tuitions and incredibly detrimental expansion of student debt. So whether its the price of wheat in Egypt or the price of education here in the US once these various groups place themselves into the chain of distribution the costs for the common man often escalate beyond the ability to bear it all…