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Why Is the Debt Rising Faster Than the Deficit?

Friday January 30th, 2015   •   Posted by Craig Eyermann at 5:12am PST   •  

12082739_S Following a recent story that noted that the federal government’s budget deficit in its 2014 fiscal year was the smallest since 2007, the Wall Street Journal had some questions posed to them by their readers, the answers to which will already be long familiar to MyGovCost’s readers! Excerpting part of the article:

You Ask, We Answer: Why Is the Debt Rising Faster Than the Deficit?

What about the change over all of calendar year 2014? The Treasury reported deficits of $488 billion but borrowed $668 billion. What happened with the other $180 billion? Again, cash explains part of it. Cash rose from $162 billion to $223 billion. That’s $61 billion accounted for and $119 billion unexplained.

What else does the government do in addition to spending and accumulating cash? It issues loans. The government’s loan financing climbed by $118 billion over the course of 2014. With lending programs, the government borrows from the public and turns around and lends out that money. (Most direct lending from the government is for student loans, but the departments of transportation, agriculture and energy, the Small Business Administration and the Export-Import bank all have significant lending programs too.)

Lending is not spending. If the government spends $1 million the money is gone. If the government makes $1 million in loans to lots of different borrowers, the odds are that most of the loans will be paid back. To be sure, these programs carry credit risk and can cost the taxpayer money when loans aren’t repaid. The solar-energy company Solyndra famously defaulted on a $535 million loan from the Energy Department, for example. But even Solyndra was part of a much bigger energy lending program that has an overall loss ratio of about 2%.

Previously, we found that student loans account for nearly $1 out of every $10 of the dollars borrowed by the U.S. government since President Obama was sworn into office. The chart below shows the total amount of money borrowed for the purpose of issuing student loans since 2004:


Student loans are the single largest contributor to the U.S. federal government’s hidden budget deficit. And speaking of loss ratios, in 2014, 13.7% of all the student loans issued by the federal government were found to be in default, which is actually down from the 14.7% figure recorded a year earlier.

The high rate of student loan defaults is the primary reason why the U.S. government increased the interest rates on student loans in 2013, setting them to be equal to the interest rate it pays for money it borrows whenever it issues 10-Year Treasury bonds plus a fixed margin of 2.05% for college undergradutates. It’s an attempt to ensure the government will realize a profit margin on the scheme.

But even with that margin, it’s not clear that the federal government’s student loan programs are capable of operating in the black. Estimates based on the federal government’s current accounting methods suggest that it may earn a profit of $135 billion over the next 10 years, while better estimates based on the fair value accounting standards used by well-established lending institutions indicate that the government is actually on track to lose $88 billion over that time.

Which is to say that simply being in the business of making student loans will only add to the government’s hidden budget deficit and increase the national debt, while also swelling the ranks of regular Americans in perpetual debt servitude or outright peonage, since student debt is extremely difficult to discharge in bankruptcy proceedings.

No matter what, that’s one sure way to get to end of the road to serfdom.

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January 2015