Cutting federal student loans to save taxpayers money is not the best idea

Cutting federal student loans to save taxpayers money is not the best idea
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In a recent opinion piece in The Hill about the Prosper Act and federal spending on higher education, the authors contend that student financial aid advocates are wrong to object to the bill’s cuts in student aid because the Republican-led Higher Education Act reauthorization bill will actually increase federal spending on student aid.

But the authors conflate two facts that are not mutually exclusive in the world of federal budgeting and accounting. First, the Prosper Act would increase federal spending, after taking into account both mandatory and discretionary spending, according to the Congressional Budget Office. Second, the Prosper Act also cuts federal aid dollars available to students.

Usually, when the government spends money on any program, it costs taxpayers money but comes with societal benefits. Think infrastructure spending that keeps roads paved, defense spending that protects against foreign aggressors, or federal work-study and Pell grants that help needy students pay for college, which are two programs that would be expanded in the Prosper Act. Similarly, when the government cuts spending in federal programs, common sense again dictates that those cuts would result in comparable savings to taxpayers.

This logic holds true in the vast majority of federal programs, except the federal student loan programs. Loans are considered an asset of the taxpayer and in most cases when interest and fees are attached, the federal government will actually earn money on that asset. This results in an accounting perversion because the further in debt students and parents go, the more “savings” is generated for Treasury.

This point has not been lost on anyone who has watched the nation’s federal student loan assets nearly triple in the last 10 years. While there is ongoing debate about the accounting methods used to calculate the exact amount of costs and savings in the federal student loan programs, the basic fact remains that the more federal loans students and parents take out, the more money the loan programs generate.

But this also means that when lawmakers decrease the total amount students and parents can borrow, as the Prosper Act would, the Congressional Budget Office calculates it as a “cost” to taxpayers. Put another way, the Prosper Act would result in fewer aid dollars for students and families, at a “cost” of nearly $9.2 billion over 10 years to taxpayers. But unlike costs in other federal programs, these costs do not represent any new investment in the student aid programs. Taken as a whole, the Prosper Act would not maintain the same level of available dollars in grants and loans currently available to parents and students.

To be sure, mounting personal debt in the form of student loans is a great national concern, and limiting the amount of debt students and parents can incur is a concept worthy of exploration. The financial aid community has supported more constraints on borrowing in limited circumstances. But we must acknowledge that an across-the-board decrease in the availability of loans for parents and graduate students will also mean fewer dollars to pay for college. Compared to other forms of debt, federal student loans stand out for their built-in consumer protections that guard against disability, job loss and other unforeseen life events, which are safeguards that generally do not exist in the private sector.

Determining the right amount of debt for students and parents will be an ongoing debate. But what isn’t debatable is the fact that curtailing federal student loan borrowing will have a negative effect on at least some students and their ability to pay for college, and student advocates are right to point out that the Prosper Act would represent a real cut in the availability of dollars to students and parents. As with any federal program, the Prosper Act’s value to taxpayers cannot be calculated simply based on whether the bill costs or saves taxpayers money, but rather on the investments it makes on keeping college accessible.

Justin Draeger is president of the National Association of Student Financial Aid Administrators, a nonprofit organization of financial administrators working at 3,000 colleges and universities in the United States.

The views expressed by contributors are their own and not the views of The Hill