Submitted by Anonymous7 (not verified) on October 4, 2008 - 9:47am.
The cost of direct loans would possibly increase but the cost of guaranteed loans would increase more. For example, when Congress switched the lender payments from T-bill-based to commmercial-paper-based nearly a decade ago, CBO explicitly refused to score the basis risk. In other words, without any notice, the American taxpayer quietly assumed all the basis hedging costs that loan holders had traditionally borne. Is hedging basis risk a role that the U.S. Treasury is naturally good at? Nope. Yet taxpayers were asked to assume the risk that T-bill and commercial paper rates could occasionally become out of whack, and those market costs are missing from the guaranteed loan cost estimates.
The risks that loans won't get paid back or will be prepaid are already included. They arguably cannot be updated fast enough to keep up with all the changes in the programs that occur and are always a step or two behind. This is an issue that does not occur in say, car loans. The part which is sad not to get is that loan performance is actually a very minor factor in the net costs. The interest rate environment and loan volumes drive the vast majority of the net costs. The irony is that the profit incentive leads guaranteed lending to have a more attractive front end -- from the point of view of the schools for student and parent loans and from the point of borrowers for consolidation loans, yet direct loan is better on the boring back end. There is little economic incentive for those in the guaranteed loan sector to invest in the back end because it is not a selling point when marketing to new customers.
The goal of the net cost process is not to look at how a particular lender, or, even direct lending, is doing. The goal is to look at the net costs of the whole system from the point of view of the taxpayer. It boils down to: in direct lending the interest payments go back to the taxpayer while in guaranteed lending they go back to the party that owns the loan. In addition, all lenders concede that uncle sam has a lower cost of funds even on his worst day. There are those who believe that jobs are more important than taxpayer efficiency, and they would support guaranteed lending -- which as at least one Congressperson has mentioned provides jobs in at least three dozen states, while direct lending only has contractors in four or five states. Others in Congress want to count the taxes that federal subsidies to lenders and guarantors generate -- in other words the taxes paid by all of those who hold the jobs in all those states. They never seem to mention the taxes paid by the direct lending contractors.
Does this mean that all types of loans should be a federal program? Nope. In this case you've got two government welfare programs which provide almost identical loan products. Do you want to choose the one that provides more jobs or the one that provides lower costs? Does someone whose kids are fighting in the war overseas and not planning to go to college really want to subsidize a fancy front end for loan disbursement products? Probably not. They would want the bare bones, even if it means no choice for the financial aid officer.
If there is an accounting area where the government is sorely lacking it is the ability to assign administrative costs to programs. A series of administrations simply assigned most of the costs of administering the guaranteed program (from program reviews and oversight to data systems and payment processing) to direct lending for simplicity's sake and that a hundred million dollars in administration has little impact on net costs in a half-trillion dollar combined loan program.
Whose choice?
The cost of direct loans would possibly increase but the cost of guaranteed loans would increase more. For example, when Congress switched the lender payments from T-bill-based to commmercial-paper-based nearly a decade ago, CBO explicitly refused to score the basis risk. In other words, without any notice, the American taxpayer quietly assumed all the basis hedging costs that loan holders had traditionally borne. Is hedging basis risk a role that the U.S. Treasury is naturally good at? Nope. Yet taxpayers were asked to assume the risk that T-bill and commercial paper rates could occasionally become out of whack, and those market costs are missing from the guaranteed loan cost estimates.
The risks that loans won't get paid back or will be prepaid are already included. They arguably cannot be updated fast enough to keep up with all the changes in the programs that occur and are always a step or two behind. This is an issue that does not occur in say, car loans. The part which is sad not to get is that loan performance is actually a very minor factor in the net costs. The interest rate environment and loan volumes drive the vast majority of the net costs. The irony is that the profit incentive leads guaranteed lending to have a more attractive front end -- from the point of view of the schools for student and parent loans and from the point of borrowers for consolidation loans, yet direct loan is better on the boring back end. There is little economic incentive for those in the guaranteed loan sector to invest in the back end because it is not a selling point when marketing to new customers.
The goal of the net cost process is not to look at how a particular lender, or, even direct lending, is doing. The goal is to look at the net costs of the whole system from the point of view of the taxpayer. It boils down to: in direct lending the interest payments go back to the taxpayer while in guaranteed lending they go back to the party that owns the loan. In addition, all lenders concede that uncle sam has a lower cost of funds even on his worst day. There are those who believe that jobs are more important than taxpayer efficiency, and they would support guaranteed lending -- which as at least one Congressperson has mentioned provides jobs in at least three dozen states, while direct lending only has contractors in four or five states. Others in Congress want to count the taxes that federal subsidies to lenders and guarantors generate -- in other words the taxes paid by all of those who hold the jobs in all those states. They never seem to mention the taxes paid by the direct lending contractors.
Does this mean that all types of loans should be a federal program? Nope. In this case you've got two government welfare programs which provide almost identical loan products. Do you want to choose the one that provides more jobs or the one that provides lower costs? Does someone whose kids are fighting in the war overseas and not planning to go to college really want to subsidize a fancy front end for loan disbursement products? Probably not. They would want the bare bones, even if it means no choice for the financial aid officer.
If there is an accounting area where the government is sorely lacking it is the ability to assign administrative costs to programs. A series of administrations simply assigned most of the costs of administering the guaranteed program (from program reviews and oversight to data systems and payment processing) to direct lending for simplicity's sake and that a hundred million dollars in administration has little impact on net costs in a half-trillion dollar combined loan program.