Obama: "Our National Mission Is Not to Profit on Student Loans."

This week President Obama added some new details to his plan to reshape federal higher education policy. He also added that “[o]ur national mission is not to profit off student loans,” referring to a talking point that loomed large in the now-concluded debate over how the government should set interest rates on student loans. That sure sounds good, but it contradicts the president’s policies.

The president has never proposed to wring what he calls “profits” from the federal student loan program. Worse yet, the Obama administration asked Congress to let more students from low-income families access supplemental federal loans. The extra loans would be restricted to schools that meet certain, unspecified performance standards, as a way of replacing the Perkins loan program.

One of the reasons that the White House likes that proposal is that it adds to the government’s apparent profit in the loan program because students overall take out larger loans – there is a net increase in federal loan volume. According to the president’s budget, the additional profits would total $14.3 billion over 10 years. The Obama administration would “spend” those profits on other higher education policies, but leave a little still to reduce the budget deficit (i.e. a net reduction in spending).

To be sure, we and others, including the Congressional Budget Office, have argued that those profits are an accounting illusion. The president's Perkins loan proposal would in fact cost about $6 billion according to a fair-value estimate from the CBO. Lending at favorable terms and rates does impose a cost on taxpayers – though the benefits of the program far outweigh that cost. Fair-value accounting reveals those costs and helps policy makers make more informed decisions. Yet the White House rejects our arguments and insists (see page 393 here) that the loans do in fact make a profit.

Much of what the president outlined in his speech this week was good policy. But the Obama administration needs to get its story straight on those student loan profits. If the president believes the profits are really there, then he must propose a policy to eliminate them, not increase them. Alternatively, he could start saying that our national mission is to profit on student loans.

Another option would be to support fair-value accounting. If the administration understands that the loan profits aren’t real, then the White House policies and statements all make sense together. In the meantime, the Obama administration is trapped in a web of its own contradictions that goes like this:

“The government profits on student loans. We have no plan to eliminate the profits. We propose to increase those profits. It is not our mission to profit on student loans.”