Estimating the Value of Subsidies for Federal Loans and Loan Guarantees

The Federal Credit Reform Act of 1990 (FCRA) changed the budgetary accounting for federal direct and guaranteed loans from a cash basis to an accrual basis. That shift requires that the government’s expected losses from such loans—because of defaults and interest rate subsidies—be recognized in the budget when the credit is extended. The FCRA specifies that uncertain future cash flows associated with such loans be converted (discounted) to their present values using the interest rates on Treasury securities.

With credit-reform rules having been in effect for more than a decade, the Chairman of the House Budget Committee has asked the Congressional Budget Office (CBO) to reexamine the provisions of the FCRA with an eye toward identifying possible improvements in, and extensions of, that accrual basis of budgetary accounting. This study—which is one part of CBO’s response to that request—focuses on using commercial interest rates, which incorporate risk, instead of risk-free Treasury rates to measure the cost of federal credit programs.