WASHINGTON — For months, Senator Elizabeth Warren has railed against what she calls the tens of billions of dollars the federal government is making in “profits off the backs of our students” borrowing for college, labeling them “obscene.”
Those profits are key evidence in the Massachusetts Democrat’s push to reduce student loan burdens. But they are in fact the subject of fierce debate in Washington.
Many specialists assert that in most years the government is actually losing money on the loan program. And in the handful of years where it makes a profit, it is far smaller than the figures Warren cites, her critics say.
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It’s a partisan accounting dispute over billions of dollars. Yet it’s also a fight about how much college students should be subsidized, and the level of risk the government should accept on behalf of taxpayers when it loans money.
Political groups fight all the time over budget estimates in Washington. But college loan projections are particularly fraught because of results that swing wildly, depending on how the math is done. They are also a rare example where the government agency that issues the official estimates has suggested strongly that it disagrees with its own method for doing so.
To take one example, Warren cites an official estimate that the government will gain $185 billion in profits from the loan program over roughly the next decade. But the same federal agency that produced that estimate also said it’s just as likely, if not more so, that the government will lose $95 billion over that period.
“I have no idea whether Senator Warren doesn’t understand that distinction, or disagrees with it, or finds it politically convenient to point to profits being made by the government off student loans, even though they’re not real,” said Matthew Chingos, a Brookings Institution fellow.
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Warren insists she is using the correct figures as she hammers home the concept that the government is milking students for financial gain.
The interest rate for undergraduate Federal Stafford Loans — currently 3.86 percent — has been as high as 10 percent in some years. Warren’s latest proposal would allow students and former students to refinance old loans at current government-subsidized rates. She proposes paying for the losses to the government by levying bigger taxes on top earners.
“It’s billionaires or students. Where do we want to make our investment?” Warren asked a Washington audience recently.
When you look under the hood at what drives the debate, it’s all about risk.
When Congress sets interest rates to charge student borrowers, it builds in a safety buffer to protect taxpayers against the risk of inflation and defaults. Warren and other liberals want that safety buffer estimate to be small, so the government can pay for the program by charging lower interest rates. Critics contend that approach does not fully account for financial risk, increasing the odds that taxpayers will be on the hook for losses, including bad loans.
The disagreement is stoked further by a quirk of the Washington bureaucracy. A 1990 law requires that the Congressional Budget Office — the official government scorekeeper — issue estimates of government gains and losses using the more liberal risk standards that Warren prefers.
Those CBO numbers are what Warren uses to bludgeon government for reaping profits from students — even though the CBO has disparaged those estimates as not fully accounting for risk.
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Warren cites support from a former CBO director and the left-leaning Center for American Progress, which produced a report showing that the government method has been more accurate over time than alternatives.
“There aren’t any other government numbers,” Warren said in an interview. “Of course, the estimate of future government profits is an estimate. But that should not be used to deflect attention from a big and growing problem.”
Americans’ $1.2 trillion combined student debt burden now surpasses cumulative credit card debt and is second only to mortgage debt. The average debt for a recent college graduate who takes out a loan is about $26,000, according to several studies. The combined average for graduate students is now about $57,600.
And the rate of students defaulting within two years of leaving school has been creeping above 9 percent since the recession, though it is still well below the two-year rate in the early 1990s, when it surpassed 20 percent in some years. Over the lifetime of an undergraduate loan, close to 20 percent of students are predicted to default.
Even Warren’s critics concede that Congress’ history of setting loans has been messy and, at times, arbitrary. For example, both sides agreed the government was in fact making a profit on loans issued in 2011, 2012, and 2013, though they disagreed on the size of the profit. Under the official method, the profit is projected at more than $36 billion in 2013, compared with $5.5 billion under the method that accounts for more risk. That’s out of a total of $106 billion loaned out in 2013.
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The accounting spat underlying the policy has become highly partisan, given the struggle between liberals and conservatives over the role and cost of government programs.
House Republicans passed a bill in 2012, largely along party lines, to switch to a so-called fair value accounting method favored by many economists — the same method required for banks. But the bill died in the Democratic-run Senate.
Critics say they agree with Warren that the government should not be making a profit; they just disagree on how to define that.
“What [Warren and other progressives are] doing here is saying, ‘Hey CBO, tell me how much these loans cost. And by the way, when you do your estimate, make sure you do it this way,’ ” said Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, a nonpartisan think tank.
Warren acknowledged it will take decades to determine the actual impact of loans made in recent years, but insisted student debt is an urgent problem that is hampering economic growth and preventing young people from making investments in their futures.
Noah Bierman can be reached at nbierman@globe.com. Follow him on Twitter @noahbierman.