Wednesday, January 27, 2010

Ask and ye shall receive

by Andrew Gillen

Tim Ranzetta wades through the new CBO Budget and Economic Outlook and finds some confusing statements:
Over the 2011–2020 period, CBO projects, interest rates will rise, driving up the cost of the student loan programs…


In CBO’s updated economic forecast, projections of lower interest rates reduce expected outlays in the federal student loan program…

Anyone confused yet? Love to have a CBOologist provide some clarification…
While I’m not a CBOologist, I happened to be looking into a similar issue and think I can explain what’s going on.

Keep in mind that the CBO uses existing laws (meaning that interest rates that they charge students are fixed), and reports net present value figures, discounted by the Treasury’s cost of borrowing. What this means is that if everything else stays exactly the same, changes in the Treasury’s cost of borrowing can have big impacts on the cost (or savings) estimates of the student loan programs.

The first quote above is essentially referring to how the CBO thinks the Treasury rate will change over time. If you go to the bottom 3 lines of Summary Table 2 here (enter 17 into your pdf viewer), you’ll see that they are projecting interest rates to increase over time. This will raise the cost/lower the savings of the student loan program over time.

The second quote is referring to changes in the Treasury rate relative to CBO’s previous forecast. I think they’re referring to the August baseline, but I happened to have the March one handy, so I’ll use that to illustrate. If you go to the very bottom of Table 8 here (enter 9 into your pdf viewer), and compare the numbers to those on the other link, you’ll see that the CBO is projecting lower interest rates relative to their previous projections. This will reduce the cost of the student loan programs, relative to their previous estimates.

Readers who’ve made it through this far might also want to check out this blog post, or this op-ed for more discussion of these types of issues.

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