"THE BIGGEST ACCOUNTING FRAUD IN HISTORY" By William J. Dodwell August 26, 2019 The Wall Street Journal published an editorial 8/21/19
headlined “The Great Student-Loan Scam”.
Briefly, it claimed income-based repayment plans, as well as loan deferment and
forbearance allowances, adopted during the Obama administration conceal the real cost to taxpayers. Thus,
the reported results of operations are grossly overstated. In fact, The
WSJ says, “This may be the biggest accounting fraud in history.”
Separately, the
editorial reports a mere 10% outright default rate in addition to the two repayment
categories mentioned. But in my 2015
white paper entitled “The Developing Federal Student Loan Debacle and the Real
Cost to Taxpayers” at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2653119
, I detail how the CBO methodology for default accounting severely understates
defaults, and thus further conceals the huge taxpayer cost of the student loan
program. (I sent a copy of my report to the WSJ Editor of the Editorial Page upon publication.) In other words, nonpayment is even worse than what the WSJ says. Until recently, the government reported the student
loan program as profitable since inception in 2010. Now, finally recognizing the drag from the
repayment concessions cited by the WSJ, the CBO reports a loss over the next 10 years. But it has not fully recognized economic reality
by changing its misleading default accounting method I disclosed in my paper.
Citing statistics of
the Federal Reserve Bank of New York, the WSJ reports that 30% of the $1.5
trillion loan portfolio is subject to income-based capped repayment plans, and
20% is in deferment or forbearance. Adding
the reported 10% default rate, this means that 60% of loans is non-performing
or heavily discounted. However, my 2015 study shows that according to CBO
accounting, defaults are effectively amortized over the remaining term of a
loan (up to 20 years or more), rather than entirely charged off in the period
incurred, as a bank would do according to Generally Accepted Accounting
Principles (GAAP). On this basis, the
default rate would be much higher than 10%.
The Trump administration
recently hired McKinsey & Co. to analyze the accounting for the student
loan portfolio, particularly with respect to a possible sale. Given a 60% effective non-performance rate,
the $1.5 trillion face value would decline to only a $600 billion valuation. This would result in an immediate $900 billion
write-off added to the already $1 trillion projected FY 2019 budget deficit. But considering
the greatly underestimated 10% default rate, that charge would be significantly
larger.
This massive portfolio
devaluation renders the loan forgiveness political argument almost moot. Heck, the government has forgiven most of the
loans already in the form of foregone repayments. But the public would not know this from CBO reporting. ©2019 William J. Dodwell |
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