The Biggest Bank You’ve Never Heard Of
Imagine a financial institution that loans out a trillion dollars to students and families across America, but regularly ignores government regulations and uses questionable accounting practices. On top of that, this institution is actually being run by the federal government. What you have isn’t just a terrible idea, it’s the largest “bank” in America that the public has never heard of, and it’s inside the U.S. Department of Education.
While this bank has no shareholders, its stakeholders include college students and their families, taxpayers and the United States Congress, and the tens of millions of consumers who must repay the student loans the agency issues. Many lawmakers seem concerned over the financial practices of private banks, but those lawmakers should also turn their attention to the government’s own practices. Those who supported the Dodd-Frank financial reform legislation described that law as an attempt to police “too big to fail” banks and rein in financial gimmicks by banks that may mislead shareholders or loan product consumers. But the Education Department’s big student loan bank is exempt from Dodd-Frank.
How did this bank get so big? Ironically, it was just a few months before the financial reform focused Dodd-Frank legislation was enacted, when Congress eliminated the role of private lenders from the federal student loan program. Since then, the agency’s portfolio of student loans financed directly by the U.S. Treasury (and America’s hardworking taxpayers) has more than quadrupled, from $231 billion to $1 trillion. This makes student loans the single largest asset on the government’s balance sheet.
In fact, the Department of Education’s portfolio would make it the fifth largest bank in the country. But the Department is exempt from oversight by federal regulatory agencies such as the Securities and Exchange Commission and the Internal Revenue Service.
Apparently the Department of Education can ignore regulations that the rest of the banking industry has to follow, and that is concerning. As the first accountant to lead a Congressional Budget Committee, I have been struck by the loose budgetary accounting practices engaged in by the federal government. The Department of Education is a perfect example. Just in the last year, multiple instances of questionable accounting practices have been uncovered.
Last November, a Government Accountability Office (GAO) report that I requested revealed that President Obama’s Administration underestimated the likely cost of the student loan programs by tens of billions of dollars. According to the report, the Education Department under the Obama Administration used implausible assumptions and flawed methodologies in compiling its student loan program budgetary cost estimates.
A lot of these concerns are over their calculations surrounding a specific type of loan repayment plan, known as income-dependent repayment plans. The cost of the plans are now double the agency’s original estimates, primarily because the agency repeatedly underestimated borrower enrollment in these plans, which are much more costly than standard loan repayment.
It is concerning that the agency issued these lowball estimates annually even as it acted aggressively to grow enrollment. During this period, the Obama Administration, without any Congressional approval, started expanding the pool of borrowers eligible for these income-dependent repayment plans, and increased the generosity of the plans.
Inexplicably, the agency’s budget estimates until recently didn’t assume that millions of graduate students would take advantage of the income-dependent repayment plans, even though they could clearly benefit them. The agency also continues to assume that borrowers already enrolled in traditional repayment plans will not switch into these new plans, even though millions have done just that in recent years.
No one, including Congress, knew about these questionable accounting practices prior to the GAO investigation. If the Securities and Exchange Commission or Federal Deposit Insurance Corporation had unearthed this sort of loan accounting from a large, publicly held bank, investigators would be combing through the books and records and there would be a justifiable outcry from shareholders and the public, and perhaps a call for a criminal investigation.
The least we can do as the federal student loan portfolio continues to swell is attempt to ensure that GAO’s work does not go to waste, and that its recommendations for improving budgetary cost estimates going forward are implemented.
I have asked newly confirmed Secretary of Education Betsy DeVos to ensure that the agency’s student loan data is thoroughly audited. This will help ensure the integrity of the budget numbers going forward.
It will also help prevent the agency from spreading misinformation to potential students. The Obama Administration reported on its way out the door in January that its on-line College Scorecard – a tool used by more than one million potential students to explore college options – had long featured erroneous data about the rate at which borrowers attending specific colleges paid down their loan debt.
The same erroneous data was also used by the former administration to justify a regulatory provision targeted exclusively at for-profit colleges – one of a series of Obama-era regulations justified on the basis of dubious data.
Finally, Congress needs to look at its own accounting practices. As part of a broader review of outdated budget concepts, Congress must reconsider the existing budgetary accounting rules we use to determine the cost of federal credit programs such as student loans. The Congressional Budget Office among others, has in recent years concluded that the cost of federal direct loans is currently understated. The Congressional Budget Office and many leading academics believe that a different approach that accounts for the risk inherent in consumer lending would better capture program costs.
For student loans, this would remove the existing incentive Congress has to raise federal loan limits regardless of the impact on tuition or student debt. Most importantly, it would allow policymakers to re-evaluate the appropriate mix of post-secondary loan availability versus grant aid.
Ultimately, I hope we tackle the Department of Education’s accounting practices and our own accounting procedures, to ensure we will never see a collapse or the need to bail out the biggest bank Americans have never heard of.
Mike Enzi is Wyoming’s senior United States senator.