What is 300 billion dollars between friends?
A new report from the Government Accountability Office details a staggering gap between what the federal government claimed the student loan program would generate and what it actually costs taxpayers. As the GAO explains:
“Although the Department of Education initially estimated that direct federal loans made over the past 25 years would generate billions of dollars in revenue for the federal government, its current estimates show that these loans will cost the government billions.
That’s right, instead of “earning” $114 billion for taxpayers as the Department of Education originally claimed, the federal student loan program costs taxpayers $10 billion a year, costing $197 billion since 1997, a gap of $311 billion.
To put a finer point on this, GAO found that federal student loans were “initially estimated to generate $6 in income for every $100 disbursed.” Instead, they are expected to “cost the government nearly $9 for every $100 spent.” Whoops.
How did the Ministry of Education get it wrong? How come they can claim that student loans would bring in over $100 billion in revenue to the federal government, when in reality they cost taxpayers close to $200 billion?
What explains this huge accounting error?
The GAO reviewed Department of Education budgets over the years and found that there were hundreds of billions of dollars in arrears largely due to poor assumptions. The GAO estimates that 61% of bad accounting is due to these faulty assumptions. These poor assumptions included incorrect estimates regarding the economic status of borrowers, underestimating the likelihood of borrower default, and underestimating the percentage of borrowers who would enter income-contingent repayment (IDR) plans.
The Student Direct Loans program (the largest federal student loan program) accounts for nearly $1.4 trillion of the $1.7 trillion in outstanding student loans. About half of all loans issued under the direct lending program are currently repaid through IDR plans, which cap monthly loan repayments based on income. As the Congressional Budget Office reported in February 2020, “Borrowers who enroll in IDR plans tend to borrow more and earn less than borrowers in fixed-payment plans.”
The remaining 39% of the miscalculation is due to programmatic changes such as ongoing repayment pauses, participation in civil service loan forgiveness, interest relief, and new focused repayment plans. on income. Many of these policies were put in place ostensibly because of the pandemic, despite the fact that university graduates were less likely to be unemployed and more likely to be able to work from home during the COVID-19 pandemic.
Additionally, the Department of Education will continue to use these inaccurate accounting measures for the next three years, meaning the agency’s budget will be in error until at least 2026.
To make matters worse, none of this misaccounting includes any recent or upcoming actions by the Biden administration on student loans.
The administration recently issued a notice of proposed rulemaking largely relating to the existing borrower defense rule against repayment. Biden’s proposed changes would expand access to total and permanent disability loan forgiveness, expand the criteria by which borrowers can claim they have been defrauded by an institution and therefore deserve a loan discharge, and make the program more generous public loan forgiveness by allowing borrowers to obtain credit towards PSLF for the months they were in deferment and forbearance.
It would also count late payments for this purpose. Notably, the Department of Education proposes to “simplify” the application process for public service loan forgiveness by sharing data with other agencies in order to automatically grant PSLF to federal employees. These changes would cost taxpayers tens of billions more in the short term.
But the administration’s future plans are what are sure to break the bank. It’s no secret that the Biden administration is considering overall student loan forgiveness of at least $10,000 per borrower. Such a surge is likely to intensify as the pause in student loan repayments comes to an end on August 31. The Federal Reserve Bank of New York estimates that a discount of $10,000 per borrower could cost at least $321 billion.
But moral hazard is where the real costs are. Canceling student loans would likely encourage colleges to increase tuition even further, especially if graduates expect student loans to be forgiven again in the future. Indeed, if current student loan balances are forgiven, why wouldn’t today’s students borrow the maximum amount allowed to attend the most expensive school possible, in the hope that their debt will also be canceled in the future?
The Department of Education’s massive understatement of the cost of the federal student loan program is yet another reason why Washington should not provide college loans. It used to be the domain of the private sector, and it should be the private sector. Instead, the Biden administration wants to increase Washington’s role and increase taxpayer exposure by forgiving more and more of the outstanding student loan portfolio.
GAO’s best-selling new report is a case study of why this bad accounting — and access to easy money through federal student loans — can’t continue.
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