The federal government makes $300 billion in student loan accounting errors — and it’s not for the benefit of taxpayers – WANE | Vette Leader

If your budget is in trillions of dollars, maybe $300 billion is a rounding error. But for the American taxpayer footing the bill, losing $300 billion is a really big deal.

A new study released by the Government Accountability Office (GAO) revealed a shocking discrepancy between what the federal government is predicting and what actually happened.

GAO said in its report, “Although the Department of Education originally estimated that direct federal loans made over the past 25 years would bring billions in revenue to the federal government, its current estimates show that these loans will cost the government billions.”

Projected gains turn into huge losses

The report goes on to say that the Department of Education originally estimated that the federal student loan program would generate $114 billion in additional revenue for the government, and therefore taxpayers. But in reality, GAO estimates that the program will end up costing the federal government $197 billion.

That’s a $311 billion discrepancy and has cost taxpayers about $10 billion annually since 1997. In fact, the original estimates projected a gain in all but four years between 1997 and 2021. But the reality is that every year has resulted in a loss save for a small gain in 2012.

In simpler terms, the GAO report notes that based on original estimates, the federal loan program was planned to generate $6 in revenue for every $100 disbursed. Instead, following the projections for fiscal 2021, the reality is that these loans are expected to lose $9 for every $100 paid out.

Imagine a bank that borrowed money but lost 9% on each loan. They wouldn’t be in business very long. So what happened? How could the Department of Education be so wrong?

To be fair, the government is not a bank and the goal is not always to make a profit. But an accounting error of this magnitude should perhaps have been more closely scrutinized by Congress and the public.

What is the direct loan program?

The federal direct loan program is a collection of federally subsidized and unsubsidized loans provided to students and their parents to provide financial support for higher education. As of 2021, there was $1.4 trillion in outstanding direct lending and $1.8 trillion issued since 1997.

The Department of Education makes several types of loans, including subsidized Stafford loans for undergraduate students who meet means-tested criteria, unsubsidized Stafford loans for all undergraduate and graduate students, PLUS loans for graduate students and parents of undergraduate and consolidation students Loans that combine multiple federal loans.

What explains the $300 billion discrepancy?

GAO has evaluated the Department of Education’s cost estimates over the years and found that two main areas contribute to the massive deficit.

Sixty-one percent, or $189 billion, is due to incorrect assumptions about borrowers’ economic health, underestimating the percentage of borrowers who would default on their loans, and underestimating the number of borrowers who would apply for a loan Income-Related Repayment (IDR) plans. In other words, they misjudged people’s ability to repay their debts.

Specifically, nearly half (47%) of all borrowers make payments through an IDR plan, which caps monthly loan payments based on income. For those with lower salaries, this cap results in part of the loan being forgiven after the 20 to 25 year repayment period.

The other 39 percent of the projected shortfall is due to programmatic changes, which include legislative or administrative changes that fundamentally alter the lending program.

Perhaps the most significant programmatic change resulted from the COVID-19 emergency assistance provided to borrowers under the CARES Act, which resulted in all interest accrual and payments due being suspended beginning in 2020 and currently expiring in 2022. This change alone has resulted in a $102 billion cost increase.

What does the future hold?

Even with a looming recession, college tuition continues to rise at an average rate of 8% per year, far outpacing inflation and wage growth. If the trend continues, college students will enter the job market with greater debt burdens and reduced ability to pay them back, further putting pressure on the assumptions supporting the direct lending program.

While relief could be on the horizon for borrowers if Joe Biden’s $10,000 student loan forgiveness proposal gains traction, it could come at an additional $321 billion in costs to taxpayers. Whether that’s a miscalculation or a price worth paying is for voters to decide.

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This article was produced by Wealthy Nickel and syndicated by Wealth of Geeks.

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