OPINION | The great student loan writedown

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IF banks reported their liabilities using the same fictitious accounting that the federal government does for student loans, they’d be charged with fraud. Behold the Congressional Budget Office’s latest restatement of the cost for income-based repayment plans.

The Obama Administration promoted these plans as a way to reduce student loan defaults. Borrowers who couldn’t afford their monthly payments could refinance their loans for free. They merely had to agree to pay 10 percent of their discretionary income for 20 years — 10 years for those who work in “public service”— after which their balance would be forgiven.

The number of borrowers who have enrolled in these plans has blown away forecasts. From 2010 to 2017, the share of all borrowers repaying direct loans through these plans increased to 27 percent from 10 percent. The plans have especially caught on with graduate students with large balances. About 56 percent of debt disbursed to graduate students is being repaid through these plans.

CBO estimates that the government will wind up forgiving $167 billion of graduate debt in these plans over the next decade. The write-down for undergraduate loans is less — $40 billion — but the budget gnomes have repeatedly underestimated loan costs only to revise them upward later.

In 2012 the agency forecast that student loans would turn a $219 billion profit for the government over 10 years. Now it projects they will cost the government $11 billion through 2029 — using the government’s fictitious accounting that doesn’t consider borrower risk. Under fair-value accounting standards that businesses use, loans are forecast to cost taxpayers $263 billion.

Perhaps this seems like a bargain as Bernie Sanders promises to cancel all $1.6 trillion in outstanding student debt. The scary thing, as the Obama Administration showed by refinancing hundreds of billions of dollars in loans, is that a President Sanders might not even need Congress to do it.

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