You may have heard that lawmakers in Washington struck a deal last week to preserve the current low student-loan rates for at least another year. You may not have heard that for fiscal year 2013 the federal government booked $32 million in revenues–profits, if it were a private entity–for every $100 million in loans for students. The year before, it booked revenues of $4.4 billion on its $233 billion mortgage-insurance program for low-income families.
These high returns make it appear that Uncle Sam is an unusually skilled lender. In reality, they are a testament to the fantasy world of government accounting.
The federal government books all future interest paid by a borrower as income in the year the loan is made–and does the same for all current and future costs associated with servicing the loans. The phony accounting problem arises because Congress forces the federal government to underestimate the default rate for its loans, as well as the cost of administering them.
These underestimates make it look like the loans are profitable for taxpayers. Instead, the government will ultimately lend more money to borrowers than borrowers will repay.