The inflated cost of student loans for taxpayers

Basic banking is a fairly simple way to earn money. You lend money at a higher interest rate than you pay. After accounting for costs, the difference between the amount you charge and the amount you pay is your profit.

The US government is a kind of bank, especially in the student loan market. It lends money to students and their families, issues Treasury securities to generate the funds, and charges an interest rate plus a fee to cover its own cost of borrowing. Nothing compels the government to make a profit on student loans, but the Department of Education has mostly projected modest profits when estimating the net effect of student loans on the federal budget.

However, these profits have been elusive, leading to much higher costs to taxpayers for student loans than the government had anticipated. And those costs have skyrocketed since Congress suspended student loan repayments in 2020, as a form of COVID pandemic assistance. A new Government Accounting Office study finds that the Department of Education has projected a net profit on its student loan program for 19 of the past 25 years, but only made a profit for one of those years. Since 1997, the Department of Education had expected student loans to generate $114 billion in federal revenue, when in reality these loans would likely cost the government $197 billion. That’s a $311 billion difference. The most significant factor driving up the cost of the student loan program for taxpayers has been COVID relief.

That’s not to say the student loan program is a failure. But it complicates the case for canceling student loan debt, as many Democrats want President Biden to do before this year’s midterm elections in November. Until the Great Recession of 2008 and 2009, the federal student loan program was virtually in balance, with minimal negative effect on the federal budget that was uncontroversial. This cost began to rise in 2010 as borrowing increased, graduates found it increasingly difficult to repay their loans, and the government took on a greater share of student debt. When the COVID pandemic hit in 2020, the government suspended student debt payments and set interest rates at zero, a decision that is still in effect. This postponement helped millions of borrowers weather the COVID downturn, but it also left the program a considerable loser.

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Prominent Democrats such as Senators Bernie Sanders and Elizabeth Warren want Biden to take executive action to forgive up to $50,000 in student debt per borrower. It’s a big question. Biden favors debt forgiveness of up to $10,000, but he wants Congress to do so by passing legislation instead of executive action that may not survive the courts. Democrats don’t have the votes for that, so the decision is up to Biden.

Younger Americans, unsurprisingly, are in favor of canceling student debt, unlike older people. A recent poll found 55% support for Biden’s preferred route, a modest rebate of up to $10,000 and lower support levels for higher rebate amounts. Those with student debt favor forgiveness; those without student debt do not. Political analysts tend to think that canceling student debt is a misuse of federal funds, since it targets people who are more educated and generally better off than people without a university education. There are also major equity issues, as people paying off their debt in full or working to pay for college would not benefit from debt forgiveness.

The GAO data puts a new emphasis on the cost of debt cancellation, in terms of federal priorities. The CARES Act, which Congress passed as the first tranche of COVID relief in March 2020, suspended most federal student loan payments and interest accrual for five months. Trump and Biden have extended that deadline five times, with payments set to resume on September 1. But Biden seems very likely to extend the deadline again — possibly until the end of the year — so voting borrowers can take advantage of the moratorium. by the midterm elections.

Student loan holders participate in a protest outside the White House staff entrance to demand that President Biden forgive student loan debt by August on July 27, 2022 at the Executive Offices in Washington, DC. (Photo by Jemal Countess/Getty Images for We The 45 Million)

This moratorium has already cost the government more than $100 billion in lost revenue from interest payments, according to GAO analysis of Department of Education data. Virtually none of the 40 million federal student loan borrowers, who owe the government $1.4 trillionhave been making payments since 2020. Student loans are moving from a self-funded college aid vehicle to a de facto entitlement program.

This may suit liberal Democrats who favor maximum debt forgiveness and free college. But it could also turn student loans into another political issue that divides moderate and independent voters, and gives conservatives another “government documentcross against. In the warped world of Washington budgets, the $100 billion in lost student loan interest revenue since 2020 isn’t a ton of money, but when politicians have to find that kind of money for new programs , this can generate huge fights.

Democrats, for example, are now trying to pass the “Cutting Inflation Act,” which would involve $450 billion in new green energy and other spending over the next decade, or $45 billion a year. year. That’s roughly the same amount of federal revenue lost to student loan deferral since 2020. Republicans are uniformly opposed to the IRA, and Democrats will have to fight for unanimity within their ranks to do so. adopt. Whether this is good or bad for the economy will be a message battle in the weeks leading up to the midterms. Yet student loan costs are rising at a similar rate with barely any attention.

If Biden is able to enact the IRA, it will mark a major political victory for him and perhaps reduce the need for him to prove he can do something by canceling some of the student debt through a government action. the executive. Perhaps student loan repayments will resume in early 2023, with programming returning to something like before. But everyone in Washington knows that once you give voters something, it’s hard to take it back. It is also possible that the nature of student loans will change for good.

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Garland K. Long