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UPDATE: Budget Rule May Kill President's Perkins Loan Proposal

Published:  June 21, 2011

Note: This post has been updated to clarify that the recently released CBO estimate is an alternative to the official estimate and was produced at the request of a member of Congress. It is up to the chairman of the House Budget Committee to decide how the alternative estimate will be used for budget enforcement.

Last month, we wrote about how a new budget rule adopted earlier this year in the U.S. House of Representatives would make passage of President Obama’s Perkins Loan proposal unlikely. The rule changes how budget analysts calculate the costs of federal loan programs to fully incorporate all of the risks of the loans, although the House Budget Committee must request this alternative estimate. We wrote that, as a result of this rule, the House Budget Committee might request a “score” of the president’s Perkins Loan proposal that would show the proposal increases federal spending. In contrast, accounting methods (which are mandated in law) used by the U.S. Department of Education and the White House Office of Management and Budget show that the proposal would produce savings that could be redirected to shore up the Pell Grant program. Today, in an alternative estimate released to a select group of congressional staff, the Congressional Budget Office confirmed that the proposal would indeed increase federal spending under the “fair-value” budget rule.

The president’s Perkins Loan proposal would revamp the existing program and replace it with a new direct loan program that lets the most financially needy students take out larger federal Stafford loans. The current program is structured as a revolving federal loan fund administered by individual schools. The proposal was part of a series of legislative proposals (called the “Pell Grant Protection Act”) President Obama included in his fiscal year 2012 budget to reduce spending on various higher education programs and move the money to the Pell Grant program. Costs for the Pell Grant program have risen steeply in recent years.

According to the fair-value estimate that CBO released today, enacting the president’s Perkins Loan proposal would increase federal spending by $986 million over five years, and $3.8 billion over 10 years. Those numbers stand in contrast to CBO’s estimate of $3.3 billion in savings over five years and $4.5 billion in savings over 10 years based on accounting rules currently in law, and the same rules that Obama Administration used when it proposed the Perkins Loan program as a way to generate savings that could be put into the Pell Grant program. It should be noted, however, that this estimate—the estimate that shows the proposal reduces spending—is the official estimate according to rules spelled out in the Federal Credit Reform Act of 1990. The Congressional Budget Office produced the “fair-value” estimate as an alternative and supplement to its official estimate in response to a request from a member of Congress, as it has done in similar situations in the past. It will be up to the chairman of the House Budget Committee to decide how the alternative estimate will ultimately be used for budget enforcement in the House.

As we wrote last month, if the Perkins Loan proposal doesn’t result in savings, Congress can’t use it to offset the costs of funneling more money to the Pell Grant program. At that time, there was no official estimate of the Perkins Loan proposal using fair-value accounting, making it unclear whether the House Budget Committee would apply the new budget rule to the proposal. With the release of today’s CBO score, it is all the more likely that the House Budget Committee will seek to use the fair-value estimate for the president’s Perkins proposal if it comes before the House.

We’ve argued—as have many budget experts—that a fair-value estimate provides the most comprehensive measure of a loan program’s costs. Specifically, that accounting method more fully reflects the risks that taxpayers bear in making subsidized loans. Fair-value estimates tend to show that federal loan programs aren’t profitable for the federal government when borrowers get loans at terms more generous than those available in the private market.

To be sure, the new cost estimate does address one of the big drawbacks of the proposal.  To paraphrase one financial aid officer in attendance at last week’s Perkins Loan summit at the Department of Education: there’s something not quite right with a government program that “makes money” by lending to some of the most financially needy college students. After all, the proposal should stand or fall on its merits, not its purported profitability.

Now we know the proposal won’t make the federal government any money. However, it does provide a subsidy and much needed assistance to students for whom a Perkins Loan could put a higher education within financial reach.

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