Government Tricks Hide Student-Loan Swindle

From Forbes.com: 

With interest rates on federal student loans set to double on July 1, Congress is considering new legislation that would prevent the increase. But there’s a problem—no one seems to know how much the student loan program costs in the first place.

According to the official accounting ledgers, the federal government earns tens of billions of dollars in profit from running the student loan program. But economists, including those at the Congressional Budget Office (CBO), strongly disagree.

Government accounting standards dramatically underestimate the cost of student loans, and Congress appears happy to go along...

But student loans are not the only government programs with costs obscured by faulty accounting. Federal loan programs for homeowners, farmers, and businesses are all priced in ways that disregard market risk.

The biggest offenders are public pensions. Whereas the federal government treats its student loan assets (the expected loan repayments) as guaranteed even though they are uncertain, state and local pensions treat their liabilities (the future pension payments they must make) as uncertain even though they are guaranteed. Both errors have the effect of making costs to the government appear lower than they really are.

Public pensions are infamous for claiming they can lower their costs simply by taking on more risk with their investments. Fair value accounting exposes this fallacy. Pensions are not reducing costs by taking more risk. They are shifting costs away from today’s taxpayers and on to future ones, who must pay the difference if the risky investments fall short.

Fair value accounting is sometimes seen as a partisan issue, with Republicans in favor and Democrats more skeptical. Among academic economists, however, there is no serious debate. The CBO, the Federal Reserve, and even the editorial board of the Washington Post agree that the government should value its assets at market prices.

Fair value accounting is a prerequisite for a healthy debate over any federal credit program. Rather than continue to conceal costs—in a student loan bill or any other spending measure—Congress should mandate fair value accounting across the board.

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Link: http://www.forbes.com/sites/realspin/2013/06/20/how-government-uses-accounting-tricks-to-hide-the-student-loan-swindle/