Are college students being overcharged on loans to pay for ‘Obamacare’?
“The Democrats, when they passed the health care law, took $50 billion from over-charging students and used it to reduce the debt, pay for Pell grants, and to pay for the health-care bill. And they’re still doing that.”
--Sen. Lamar Alexander (R-Tenn.), remarks to reporters, July 9, 2013
Note: The Pinocchio rating on this column has been changed since the column was first posted
We delved last week into the arcane accounting rules concerning federal student loans –in which tens of billions of dollars in “profits” can be turned into deficits depending on the method you use. Now let’s look at another claim regarding these loans—that students are being overcharged to pay for the Affordable Care Act, aka Obamacare.
When the health-care law was passed in 2010, Democrats slipped in massive changes to student-loan programs, essentially cutting banks out of the business. In the official score of the health-care bill by the Congressional Budget Office, ending federal guarantees for federal loans and replacing them with direct loans made by the Education Department would yield $58 billion between 2010 and 2019.
All federal money is fungible, but with such a large pot of money suddenly (theoretically) available, Congress wanted to spend it on other things. Here’s the breakdown of where the money went:
$36 billion on increases in Pell college grants for low-income students.
$10.3 billion for deficit reduction.
$8.7 billion to support the health care law.
$3 billion for historically black colleges and minority-serving institutions.
As you can see, a huge chunk of this money –almost 70 percent—went to support students and colleges. (To his credit, Alexander, a former Education Secretary, noted that some of the money went to Pell grants and deficit reduction.) So what does he mean by “overcharging”?
Alexander spokesman Jim Jeffries said the senator’s statement hinges on the $8.7 billion directed to the health care law.
“Alexander was trying to make a point, an apples-to-apples comparison at the time,” Jefferies said. “If the president and then-Democratic Congress were going to take over the student-loan system to eliminate profits to banks that were ‘overcharging’ students, then the government ought not overcharge students to pay for Obamacare; instead, Alexander argued, it ought to lower interest rates by roughly the $8.7 billion used to fund Obamacare.”
For the purposes of this discussion, we will assume this money is real. As we noted last week, CBO itself is not happy with the accounting method mandated by Congress for student loans and prefers a different method. In a letter to then-Sen. Judd Gregg (R-N.H.) in 2010, CBO Director Douglas W. Elmendorf wrote that under a fair-value approach, which he said was “a more comprehensive measure” of the cost of the loan program, there would be no “profits” at all—outlays would increase--but direct loans would reduce costs to the U.S. government.
But in any case, the money that was being saved under the plan was not on the backs of students, but from cutting out the banks. Until July 1, in fact, the interest paid on subsidized Stafford loans was 3.4 percent—which is a pretty good rate. (It has since doubled but lawmakers are trying to reach a deal to alter the formula.)
Let’s also not forget that the $8.7 billion figure is a 10-year number. The CBO year-by-year score shows that between 2010 and 2012, the student loan changes have actually increased the deficit. As of this year, the new loan program starts to decrease the deficit, but so far we talking about $1.9 billion being devoted to Obamacare. That’s chump change in the federal budget—and in the health law.
According to CBO’s estimates, it would cost $4 billion a year to keep interest rates at 3.4 percent. So, in a rough calculation, $9 billion over 10 years might yield a savings of only about ¾ of one percentage point—assuming, again, you think this money is real.
We apologize for all of the numbers. What’s really going on here? It’s about hatred of the health care law, and seizing any chance to undercut it.
“He’s a Republican who believes the heath care law was terrible policy in itself, and then you add in the takeover of the student- loan industry to pay for it,” Jeffries said of Alexander. “And now Democrats accuse Republicans of saving off the backs of students, so of course he’s going to point to exactly what they did in the health-care law in order to pay for the health care law -- off the backs of students. We didn’t need to spend the money on Pell, we didn’t need to spend the money on health care, and we didn’t need to devote the funds to the deficit. Democrats could have converted the program and then devoted all $50+ billion to reducing interest rates.”
The Pinocchio Test
Alexander’s opinion of the health law aside, his assertion that college students are being “overcharged” to pay for the health law doesn’t add up. The numbers involved are too small to warrant this rhetoric—and even then, you only have money to spend if you ignore CBO’s warnings about possible problems in the accounting method mandated by Congress.
UPDATE: We originally gave Alexander a rating of Two Pinocchios, which at the time we thought might have been a bit generous. In light of new information, we are changing this to Four Pinocchios.
Alexander is relying on the CBO score of the reconciliation bill, specifically Title II, which concerned provisions passed by the Health, Education, Labor and Pensions (HELP)Committee. But Title I contained provisions passed by the Senate Finance Committee. That section of the bill shows deficit reduction generated by the health-care law.
In other words, rather than net the health care costs against the student loan savings, the health care costs in Title II should be netted against the much larger health care savings in Title I . This is not entirely clear in the CBO report as written, but the net effects can be calculated by closely examining Table 7. In the bill, the health-care provisions all together reduce the deficit by $5.7 billion.
In other words, the entire frame of Alexander’s argument is bogus. The education provisions in effect were one bill; the health care provisions were another bill, designed to tweek the health care law for final passage. Some of the health care costs show up next to education savings simply because of a technical quirk--committee jurisdictional issues--not because the education monies have anything to do with health care. Given that Alexander is ranking member of the HELP Committee, he should know better.
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