Federal student loans cost government billions, report says – The Hill

The story at a glance

  • A new government monitoring report has revealed that federal student loans will cost the government $197 billion.

  • This is after the Department of Education initially expected student loans to earn a profit of $114 billion.

  • The discrepancy stems from multiple changes to the federal student loan program over the past decade, including the current COVID-19 moratorium on loan repayments.

When the federal government began lending directly to students who needed loans to fund their college education, they expected the company to generate billions of dollars in revenue. However, more than 20 years later, this estimate has not materialized. Instead, a new report shows federal student loans are set to cost the government billions.

The Government Accountability Office (GAO) published a grim report After program changes, including the current moratorium on all federal student loan payments, and taking into account economic factors, direct federal student loans will cost the federal government $197 billion.

This represents a change of $311 billion, since the Department of Education originally estimated that direct federal loans made over the past 25 years would generate $114 billion in revenue – through loan repayments, fees and accrued interest.

The GAO found that at one point the Department of Education estimated a profit on federal student loans because from 2009 to 2019 it charged higher interest rates than it cost the government. government to borrow that money. However, after its analysis of dispersed lending from 1997 to 2021, the GAO said it would actually cost the government $197 billion.

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Cost variances vary as the federal direct loan program has changed dramatically over the past decade and the COVID-19 pandemic has completely frozen nearly all federal student loan payments for more than two years.

It started under former President Trump through the CARES Act, which placed a moratorium on all federal student loan repayments and prevented interest from accumulating. It was then extended several times over the past two years under two different presidencies – and it cost the federal government $102 billion, from March 13, 2020 to April 30, 2022.

The Department of Education has also made significant changes to its Income-Based Repayment (IDR) plan, which allows borrowers to make loan repayments based on their current income and family size, typically offering lower monthly payments than a standard 10-year repayment plan. Any loan balance that is not repaid after 20-25 years of qualifying payments is 100% forgiven.

IDR plans have grown in popularity among borrowers, with GAO revealing that the percentage of payments made under IDR plans has risen steadily since 2013, with 47% of total direct loans in repayment coming from IDR plans in 2022 – up from 53% coming from all other loan repayment plans.

Notably, IDR plans are sensitive to the current economic environment, such as revenue growth and inflation. The GAO has found that when income grows at a slower rate, borrower loan repayments decrease, which in turn increases the cost to government.

Inflation is an issue the United States has struggled with since the start of the year, with June seeing an inflation rate of 9.1% per year, the prices of gasoline, food and fuel. energy reaching record levels.

The Department of Education also repaid about $16 billion in loans to more than 680,000 borrowers — with the federal government essentially absorbing the cost of those loans and foregoing potential profits.

President Biden could pay even more, indicating he favors canceling $10,000 of debt per borrower, but has yet to make a final decision. Meanwhile, Democrats have urged the president to again extend the current pause on student loan repayments — which are set to resume on September 1.

Posted on August 02, 2022

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