Student loans have been the largest and fastest growing asset on the federal government’s balance sheet over the past decade. The federal government reported more than $1 trillion in federal direct student loans in 2019. Calls for the government to forgive these loans have grown increasingly vocal in recent years, particularly in recent months.
Late last year, then-Senate Minority Leader Sen. Charles Schumer (NY) called on President-elect Joe Biden to forgive up to $50,000 in student debt per borrower on his first day in office. Several days ago, President Biden directed the Department of Education to extend a freeze on federal student loan payments through at least October 2021, and student loan forgiveness remains a focus of interest among many in Congress.
The treatment of student loans as assets on the federal government’s balance sheet is curious for a few reasons. Back in 2014, I wrote an article for Truth in Accounting titled “A good investment? Or just buying their silence?” The article raised questions about federal government expectations for the long-run profitability of its lending programs, expectations which have since fallen sharply. And recent developments suggest significant write-downs in many billions of dollars are now possible.
Consider, however, what this means for the logic of treating student loans as assets, while not reporting the massive unfunded obligations for Social Security and Medicare as liabilities on the federal government’s balance sheet.
The Social Security “Trust Fund” doesn’t have cash, or gold bars. It holds unique, non-marketable securities issued by the U.S. Treasury. And the annual “Analytical Perspectives” section of the President’s budget regularly tells Americans that the securities issued to the Social Security trust fund represent obligations of one government account to another, not obligations to Social Security participants as individuals.
This is consistent with the federal government’s accounting treatment of the massive unfunded present value obligations in Social Security (and Medicare). Those obligations are not reported as debts on the federal government’s balance sheet. How does the government justify this? The reasoning is that the government controls the law (and the benefits), and can change the law at any time.
But the government controls the law governing how government provides loans to students, and it can change that law at any time, too.
That doesn’t appear to stop the government from reporting more than $1 trillion in student loan assets. Maybe it should start reporting tens of trillions of dollars in unfunded Social Security and Medicare obligations, too.