Story at a glance
- A new government watchdog report found federal student loans will cost the government $197 billion.
- That’s after the Education Department initially expected student loans to bring in a profit of $114 billion.
- The discrepancy stems from multiple changes in the federal student loan program over the past decade, including the current COVID-19 moratorium on loan payments.
When the federal government began directly lending to students that needed loans to finance higher education, they expected the venture would generate billions of dollars in income. However, more than 20 years later that estimate hasn’t come to fruition. Instead a new report shows federal student loans are expected to cost the government billions.
The Government Accountability Office (GAO) published a bleak report that found after programmatic changes, including the current moratorium on payments for all federal student loans, and economic factors were taken into account, federal direct student loans will cost the federal government $197 billion.
That’s a swing of $311 billion, since the Department of Education originally estimated federal direct loans made in the last 25 years to generate $114 billion in income — through loan payments, fees and accrued interest.
GAO found that at one point the Education Department estimated a profit from federal student loans because from 2009 to 2019 it was charging higher interest rates than it cost the government to borrow that loan money. However, after its analysis of loans dispersed from 1997 to 2021, GAO said it will actually cost the government $197 billion.
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The cost discrepancies vary because the federal direct loan program has drastically changed in the last decade, and the COVID-19 pandemic completely froze nearly all federal student loan payments for more than two years.
It started under former President Trump through the CARES Act, which included a moratorium on all federal student loan payments and prevented interest from accruing. It was later extended several times over the past two years under two different presidencies — and that cost the federal government $102 billion, from March 13, 2020, to April 30, 2022.
The Education Department has also made significant modifications to its income-based repayment (IDR) plan, which allows borrowers to make loan payments based on their current income and family size, typically offering lower monthly payments than a standard 10-year repayment plan. Any loan balances that aren’t repaid after 20 to 25 years of qualifying payments are 100 percent forgiven.
IDR plans have grown in popularity among borrowers, with GAO revealing the percentage of payments made as part of IDR plans has steadily grown since 2013, with 47 percent of total direct loan dollars in repayment coming from IDR plans in 2022 — compared to 53 percent coming from all other loan repayment plans.
Notably, IDR plans are sensitive to the current economic environment, like income growth and inflation. GAO found that when income grows at a slower rate, borrowers’ loan payments decrease — which in turn increases the government cost.
Inflation is something the U.S. has been struggling with since the beginning of the year, with June experiencing a 9.1 percent inflation rate annually, with everything from gas to food and energy prices rising to record highs.
The Education Department has also discharged around $16 billion in loans from more than 680,000 borrowers — with the federal government essentially eating the cost of those loans and forgoing potential profit.
President Biden might discharge even more, indicating he’s in favor of forgiving $10,000 in debt per borrower but has not issued a final decision yet. In the meantime, Democrats have been urging the president to once again extend the current pause on student loan payments — which are scheduled to resume on Sept. 1.
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