Trouble Brewing in the CBO Loan Estimates

The Congressional Budget Office (CBO) released their latest estimates of Pell grant and student loan program costs for the next 10 years.

For the Pell grant, much of the attention focuses on the funding “shortfall” or surplus, which is unfortunate. This figure is important for Beltway insiders as they play their budget gimmick games, but has pretty much no real-world effect. The same goes for the distinction between the mandatory and the discretionary portions of Pell. Most of the information worth paying attention to is in the bottom portion (Total Pell Grant Program) of Table 2 of the CBO’s estimates, which tells two stories. First, and maximum award is currently scheduled to grow from $5,645 in FY 2013 to $6,100 in FY 2017, and then hold steady. Second, spending on the program in FY 2013 will be around $32.7B, and is scheduled to grow by a little under a billion dollars a year. Not much new, but this does undercut the message of some who operate under the assumption that funding is perpetually declining.

But there is quite a bit of new and interesting information in the student loan release:

• The government is predicting it will make a profit of $37B on student loans issued in 2013. (See Table 1, outlays for the Direct Loan program, and note that a negative number means the government will bring in more money – in present value terms – than it spends.)
• But this drops to around $8B in the 2020s. This is caused by the sharp drop in the subsidy rate (see Table 2, subsidy rate for Total All New Loans). This is due to the current historically low interest rates that are projected to rise (this affects the discount rate, which is used in determining the present value of future loan repayments) (see Table 5).
• The average GRADPlus and Parent Plus loans ($16,049 and $12,185) are much higher than the average Stafford loan ($3,001 for Subsidized and $5,467 for Unsubsidized). The high average loans of GRADPlus and Parent Plus are another indication that reasonable loan limits are crucial and very much needed for GRADPlus and Parent Plus.
• The government thinks it will make a profit of $0.63 on every dollar it lends in the GRADPlus program. I’m inclined to give the CBO the benefit of the doubt in general, but this strikes me as way off base. The recent work of Jason Delisle and Alex Holt shows that much of this debt will never be collected as students with large debts have much of it forgiven by the misnamed income based repayment program.

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