The Wall Street Journal’s editorial board (WSJ) recently suggested that the Obama administration pulled off “the biggest accounting fraud in history” with student loans when eliminating the role of private lenders in the federal student lending market.
Experts who spoke with Yahoo Finance acknowledged the issue with the general policy in hindsight, though they disagreed on who exactly is to blame.
In 2010, Democrats “nationalized the market to help pay for Obama Care,” WSJ asserted. “The Congressional Budget Office at the time forecast that eliminating private lenders would save taxpayers $58 billion over 10 years. This estimate was pure fantasy, and now we’re seeing how much.”
The WSJ op-ed also highlighted the rising number of severely delinquent student loans since then and blamed the Obama administration for expanding plans in 2012 for new borrowers “to reduce defaults, buy off millennial voters and disguise the cost of its student-loan takeover.”
The editorial board then added: “This may be the biggest accounting fraud in history.”
‘There’s no way around that’
WSJ argued that eliminating private lenders from the student loan market severely hurt Americans and that by using fair-market accounting, it becomes clear that student loans will actually cost taxpayers nearly $307 billion over the next 10 years.
Douglas Holtz-Eakin, former director of the Congressional Budget Office (CBO) during the George W. Bush administration and currently president of the center-right American Action Forum, agreed that the accounting discrepancy manifested because of the “technique” used by the CBO to evaluate the cost of these loan programs.
“A widely known deficiency of the Federal Credit and Reform Act is that it does not allow the CBO to incorporate [market risk] into assessments,” Holtz-Eakin told Yahoo Finance. “So the loans, when they’re evaluated are evaluated as safer than they truly are, and thus, the losses are smaller than they may truly be. And there’s no way around that — the techniques force you to do that.”
He added that “that’s why when you when they switched from the private loans to the government loans, it appeared to save money… that is misleading. I don’t disagree, but it’s not the CBO’s fault — those are the rules.”
Sheila Bair, the chair of the U.S. Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011, agreed that the WSJ was “right to call out the government” on the accounting issue and stressed that it is “a huge problem with federal budgeting and transparency generally.”
Income-based repayment plans were ‘poorly designed’
The WSJ argued that the key catalyst for the student debt crisis today — $1.48 trillion student loans outstanding, with 35% of the consumer loans in the “severely derogatory” category — was a result of the Obama administration’s policies regarding income-driven repayment (IDR) plans.
IDR plans allow borrowers to cap monthly student loan payments based on how much money they are making at a given time. As of September 2018, “almost half of the $898 billion in outstanding federal Direct Loans [were] being repaid by borrowers using IDR plans,” according to the Government Accountability Office.
Holtz-Eakin agreed with WSJ, arguing that the CBO “cannot anticipate a future action of either the Congress or the administration.”
If the government chooses “to move to a whole bunch of loan forgiveness and income-based repayment models, they can’t anticipate that and both of those things bring in less money,” he explained. “The money goes out and it doesn’t come back and they’re bigger losses.”
Holtz-Eakin added that the Obama administration “did that on a regular basis — there was nothing CBO could have done about it.”
Former FDIC Chair Bair, who headed the agency during part of both the Bush and Obama administrations, argued that the issue arose from the poor design of the repayment plan system.
“This has been a couple decades in the making, frankly,” said Bair. “I think that the concept of a payment based on income is a good one — it’s not a bad one. But the way these things have been designed, it’s like the worst of all possible worlds.”
With borrowers often in thousands of dollars in student debt, IDR plans are seen as an alternative for borrowers with high debt and low income. But the current income-based repayment plans is “very poorly designed… [and] confusing,” Bair said.
The WSJ pointed out that borrowers end up owing more than they borrowed even though they’re repaying their loans — called negative amortization — which Bair acknowledged.
“With a true income share, you have higher earners paying more and lower earners paying less, but you let the higher earners pay more to help with the cross-subsidization of the lower earners, and also just to mitigate the budget impact,” said Bair. “But what the government does do now is they cap you out.”
In other words, if a borrower decides that they want to increase their monthly repayment amounts, instead of being able to pay back loans quickly, they’re capped out because the repayment structure is based on their income. Hence, the borrower — despite being able to increase payments — is stuck with a loan that’s accruing interest for possibly 20 or 25 years.
‘Recreated the worst aspects of the subprime… crisis’
The other issue was underwriting.
Previously, the government guaranteed student loans that borrowers took out from private lenders. Today, it controls more than 90% directly.
When the Obama administration “got rid of the guarantee program with the private sector out of the process and made it a direct federal loan, they got rid of all underwriting,” Holtz-Eakin noted.
“And so they recreated the worst aspects of the subprime mortgage lending crisis,” he stated. “They gave anyone who walked up a loan, without any notion of their capacity to repay.”
It is my sincere desire to provide readers of this site with the best unbiased information available, and a forum where it can be discussed openly, as our Founders intended. But it is not easy nor inexpensive to do so, especially when those who wish to prevent us from making the truth known, attack us without mercy on all fronts on a daily basis. So each time you visit the site, I would ask that you consider the value that you receive and have received from The Burning Platform and the community of which you are a vital part. I can't do it all alone, and I need your help and support to keep it alive. Please consider contributing an amount commensurate to the value that you receive from this site and community, or even by becoming a sustaining supporter through periodic contributions. [Burning Platform LLC - PO Box 1520 Kulpsville, PA 19443] or Paypal
-----------------------------------------------------
To donate via Stripe, click here.
-----------------------------------------------------
Use promo code ILMF2, and save up to 66% on all MyPillow purchases. (The Burning Platform benefits when you use this promo code.)
Audit the Federal Reserve. For SURE, they have committed the greatest accounting fraud in history.
As for Obama, just throw him in Gitmo and be done with it. The entire student loan program was designed to buy votes, enrich banks with “safe” risky loans (safe for them that is), and ensure that hundreds of billions of dollars poured into the coffers of useless colleges and universities handing our worthless degrees in subjects no lender would EVER lend for in a free market. All part of the plan to turn yet another generation of college “graduates” into brainwashed, progressive, boot-licking, democratic party voters who hate freedom and liberty.
That about sums it up perfectly
Too bad there are masses of ignoramuses out there that don’t understand this
Nailed it. ^
I see the student loan bubble as just another place for the Necessary Debt to go. It has to go somewhere, so it cycles between commercial fads (tulips, dotcoms), housing, and now cars and student loans.
In our system 1.) the amount that needs to be re-paid is always more than the amount of money in existence, and 2.) these amounts need to grow exponentially, regardless of conditions on the ground.
best comment you’ve ever made mr liberty–
Wait, what. Are you insinuating my masters degree in lesbian underwater dance theory and minor in basket weaving are worthless. I will have you know I am voting for universal basic income and my 20 hours a week at starbucks pays for my girlfriends condoms for her black boytoy. So there. I told you. Huh.
Make the colleges/universities responsible for repayment of the loans if the student defaults. They are the beneficiary of the money in the first place. Such a rule would eliminate a lot of degree programs like women’s studies and black history.
Soon and when our currency enters its ass wiping stage, the colleges will get theirs. They will get it real good and real hard.
Obama cooked the books? Who would even imagine?
Remember the 2012 election unemployment stats?
Obama should be hanged for treason.
among other reasons
Bad financial decisions made by individuals are their problem . As for a bail out of those young people with the degree in lesbian underwater basket weaving ok sure . As long as the tax paying public and the bags of shit in congress are willing to refund the $250 grand my wife and I spent on our child’s education . We deprived ourselves , drove old cars into the dirt stayed local on vacations , made do and did without dedicated to our child’s education . Meanwhile I see new cars , beach condos and cruises other families enjoy while their child runs up debt and is now working some low paying job and still living at home because they can’t qualify for a car loan or an apartment due to a loan payment . How about a little equal protection under the law for doing the responsible accountable thing instead of getting fucked again like in the pension collapse bankruptcy in the late 80’s & 90’s or the bubble of 2008 the wizards of Wall Street and Washington were made whole . It’s our turn now you swamp dwelling slithering
cocksuckers !
Our child is gainfully employed in a professional medical career and now reaps the benefits of her hard work and our love and support so don’t think it’s ok to send her or us somebody else’s debt for a worthless degree !
Anon and soon she will be taxed at 90% of her earnings”……..
Somehow I think this is focusing on the bugs instead of the bed. Cathy Fitts and the prof from U of Michigan found $22 Trillion missing and unaccounted for in just the DOD and HUD. Doesn’t include other gov agencies.
We’re not just broke as a nation, we’re fat fucking broke.
It wont matter. They print it then burn it when it returns to them. They are the reserve currency. The fed is never audited. Who is to challenge them? China. Lmao. This will come down to nationalism and protectionism at its finest for most of the developed world. This will cause inflation as needed. They will destroy those accounting books as if that 22 trillion never existed. And the politicians that took their fair share will get away again.
Obummer was a communist. His goal was to indebt this country as much as possible in hidden ways so it would bankrupt us later so he would not be blamed. And other politicians knew it and allowed it and voted for it. The media and many other crushed the one senator that screamed at obummer in the chamber that he was a liar. That senator was a true patriot.