The Department of Education predicted that student loans would generate $114 billion in revenue over the past 25 years. However, a new report shows that federal student loans have actually cost the government $197 billion, a $311 billion difference.
The findings come from a Government Accountability Office report released today that undermines a department’s account that the federal student loan program generates revenue. The study, which analyzed data on student loans between 1994 and 2021, found that the Department of Education had grossly underestimated how changes to loan programs and borrower behavior impacted the federal budget for student loans.
Recent loan program changes since early 2022 that are not included in the study, such as the public service loan (PSLF) waiver and several group reductions in federal debt for student loans, will drive up costs. Additionally, if President Biden attempts to forgive some outstanding student debt, the costs would also increase.
The shift is being driven by changes to the federal student loan program, as well as flawed assumptions about borrowers’ income, repayment rates and defaults, according to the report.
Although GAO made no recommendations for the department to improve its budgeting methodology, the report highlights key factors for review that contribute to massive disparities in the actual cost of the student loan program to taxpayers.
In a letter to GAO in response to the report, Undersecretary for Education James Kvaal said, “In some cases, the estimates are being revised due to changes in both the data available to the Department and the Department’s methodology for estimating costs.” continued, “While the department always strives for the best possible estimates, there is some uncertainty in the department’s cost estimates, which the department discloses publicly in its agency financial report and the President’s budget.”
The report’s findings have caused a harsh backlash from Republicans in Congress, who have been highly critical of the Biden administration’s changes to the student loan system (although the report covers years when both Republicans and Democrats were in government). “Any way you look at it, the claim that the federal government ‘profits’ from student loan loans is incorrect. Taxpayers have lost hundreds of billions of dollars on this program,” said a statement from a group of Republican lawmakers in the House and Senate.
What makes the difference?
The Ministry of Education submits an annual cost estimate for the preparation of the annual budget of the federal government. This includes estimates for new loan programs as well as loan performance, e.g. B. how many borrowers are expected to default or how much outstanding debt will be repaid.
However, the department cannot fully realize the true cost of the federal student loan program until the loans are fully repaid. Therefore, it must estimate how quickly borrowers will repay their debts, how many borrowers are likely to default, and how borrowers’ incomes might change in any given year. The report found that since 1994 not a single group of borrowers has fully paid off their debt.
As a result, Department of Education estimates are often a far cry from what actually happens in any given year, the study finds. Certain social and economic changes, such as a recession or a pandemic, cannot always be accurately predicted at the beginning of a financial year.
Changes in federal student loan programs
Since 1997, changes to the federal student loan program, including programs that put certain borrowers on the path to forgiveness, new repayment methods, and the student loan payment pause enacted at the beginning of the pandemic, have resulted in a 33 percent increase in the cost of the student loan program, totaling 102 billion dollars.
By far the largest change that contributed to this increase was the suspension of federal student loan payments and programmatic changes enacted during the pandemic and other pandemic-related loan forgiveness programs, the report shows. Collectively, these changes resulted in an increase of over $107 billion between 2020 and 2021.
Other changes included the Taxpayer-Teacher Protection Act of 2004, which increased the amount of loan forgiveness certain teachers could be entitled to, resulting in a $48 million increase; the College Cost Reduction and Access Act of 2007, which reinstated income-related reimbursement (IDR) and PSLF schemes, resulting in a $4 billion increase; and the revised pay-as-you-earn plan, a form of IDR, which resulted in a $9.9 billion increase. Overall, these changes have resulted in a 6 percent increase to a total of $20 billion.
Errors in estimates of borrower behavior
The biggest driver of the increase in federal student loan costs for the government was a gap in available data, the report said. Limited data available to the department to estimate how borrowers are repaying their loans, how much money borrowers will make and how many borrowers will default has resulted in a $189 billion increase in costs since 1997, according to the report.
The department’s inability to access borrower income data through the Internal Revenue Service has been highlighted as a key reason for internal difficulties in administering income-based repayment programs, including the possibility of Biden forgiving $10,000 per borrower in debt for those who earning less than $150,000 a year.
The assumptions used to select the borrower’s repayment schedule alone resulted in an increase of $70 billion. One of the most common repayment schedules, IDR, is particularly difficult to estimate because the amount a borrower must pay each month changes as their income changes. Almost half of government student loans, 47 percent, are repaid through IDR.
Additionally, changes in estimated borrower income growth led to a $68 billion increase, and assumptions about how many borrowers will default led to a $23 billion increase.
Changes to the budget model of the Department of Education
The Department of Education is in the process of rolling out a new budget model, which is expected to be implemented in FY2026. The current model is based on estimates from large groups of borrowers, while the new model, called the microsimulation model, will incorporate data from the National Student Loan Data System.
According to information from the department listed in the report, this new budget model will provide more accurate predictions of changes that will increase the cost of the federal student loan program.
Rep. Robert Scott, a Virginia Democrat and chairman of the House Education and Labor Committee, said in a statement, “Unfortunately, this GAO report shows that the rising cost of college — caused by decades of state divestment in higher education and the decline in the value of the Pell Scholarship – has forced students to borrow more money to earn a degree. Unlike previous generations, students are now taking out loans that make it harder to repay.”