NCPA - National Center for Policy Analysis

Government Loans Cost Taxpayers More Than Expected

May 29, 2014

The estimated cost of government loan programs largely depends on the accounting method used by the Congressional Budget Office (CBO), according to the Washington Examiner.

When analyzing the costs of government credit programs, the Congressional Budget Office utilizes an accrual accounting system, estimating the lifetime costs of a government loan or a loan guarantee at the time that the loan is made. In practice, this method of accounting makes government programs appear less expensive. Because the accrual system uses the interest rate on Treasury securities as the applicable discount rate, it yields cost estimates that do not fully incorporate risks.

On the other hand, a "fair-value" accounting approach -- which does include the full cost of risks -- produces quite different results. The more comprehensive fair-value analysis uses interest rates on comparable private securities, thereby accounting for market risk. When a fair value approach is used, government programs appear much more expensive. 

The differences that result from these two accounting methods are staggering:

  • The Education Department's four largest student loan programs are actually estimated to save the government approximately $135 billion from 2015 to 2024 under current accounting methods. But under fair-value budgeting? The programs will cost taxpayers a whopping $88 billion.
  • Similarly, the standard analysis projects $14 billion in savings from the six largest programs of the Export-Import Bank. But according to a fair-value analysis, the programs will cost taxpayers $2 billion.
  • A fair-value analysis of the Federal Housing Administration's single-family mortgage guarantee program for low-income families costs $30 billion. Current accounting methods, however, project a budgetary savings of $63 billion.

Some budget analysts, including the Government Accountability Office, are in favor of the current accounting procedures. The agency believes that using Treasury rates instead of market interest rates makes sense, because the government is not risk-averse in the way that private-sector investors are.

The CBO, however, is in favor of fair-value analysis, and the approach has gained support from analysts on both sides of the political aisle.

Source: Joseph Lawler, "CBO: Many Government Loan Programs are More Expensive than Shown in Budget," Washington Examiner, May 26, 2014. 


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