Direct Student Loans Cost US Government Billions of Dollars – Federal News Network | Vette Leader

The best listening experience is on Chrome, Firefox or Safari. Subscribe to Federal Drive’s daily audio interviews on Apple Podcasts or PodcastOne.

Back in the mid-1990s, when the Department of Education launched its current direct loan program for college students, the program was expected to bring a profit to the US Treasury. The first estimates were that it would bring in $114 billion over the next quarter century. Well, that were here, that estimate turns out to be…

CONTINUE READING

The best listening experience is on Chrome, Firefox or Safari. Subscribe to Federal Drive’s daily audio interviews at Apple Podcasts or PodcastOne.

Back in the mid-1990s, when the Department of Education launched its current direct loan program for college students, the program was expected to bring a profit to the US Treasury. The first estimates were that it would bring in $114 billion over the next quarter century. Now that we’ve been here, that estimate turns out to be wrong…completely wrong. The Government Accountability Office found that the program actually cost the government $197 billion. The reasons for this huge difference are quite complex, so Jared Serbu, Associate Editor of Federal Drive, spoke to the lead author of a GAO report examining the direct lending program: Melissa Emrey-Arras, GAO director of education, labor and income security Federal Drive with Tom Temin.

Interview protocol:

Jared Serbu: Melissa, thanks for doing this. And I think the way I want to set the stage before we delve deeper into your findings is, who exactly would this be a surprise to? I assume the education system re-estimated these numbers each year and had a good sense of where things were in any given year. But was this followed by Congress or publicly? Who are surprised by these numbers?

Melissa Emrey-Arras: That’s a great question Jared. I think this will surprise a lot of people in the student loan world. Until a few years ago, many thought that the student loan portfolio would bring in money to the federal government. So I think this report showing that the student loan portfolio is now expected to cost the government close to $200 billion will come as a surprise to them.

Jared Serbu: Can you talk a little about why the process of estimating the cost or revenue from these loans is so difficult to begin with? And I think it’s gotten harder over time, right?

Melissa Emrey-Arras: It’s a very challenging process. And it’s very difficult to do. One of the problems is that the Department of Education has to estimate the cost of loans before they even issue those loans. So it has to be estimated in advance how many people will borrow, how much they will borrow, and also what the income of those borrowers will be. And that is very difficult to predict.

Jared Serbu: And as you dug deep into the budget data at GAO here, what did you discover were the root causes of the huge difference between the original 25-year cost estimate and the current estimate?

Melissa Emrey-Arras: We found that two factors drove the change in cost. One is what we call programmatic factors. So these are changes in the program, the student loan program, so any new legislation affecting the program, any new administrative measures affecting the program that would affect the cost. For example, we have the student loan payment pause, which is currently expected to expire at the end of the month. And we found that the cost of that alone was about $100 billion through April of this year. So these were significant costs caused by the pandemic. In addition, we also found changes in costs due to data improvements. As you mentioned, the Department of Education re-estimates the cost of the student loan program annually. And with these re-estimates, it develops new data and new assumptions. With better data and better assumptions about the student loan portfolio, it is able to make better estimates of costs. And these changes in assumptions and data have also increased the cost of the portfolio.

Jared Serbu: Regarding the recent COVID payment pause, once we sort of get past that stage, that $100 billion and the change will roll back and go back into the program once people start making payments again, that’s just kind of temporary flash?

Melissa Emrey-Arras: So the cost of the student loan program would be re-estimated annually. And we can see what happens in the coming years based on what the status of the break is and what the status of the other conditions is.

Jared Serbu: Does this have any specific impact on the loan program? I guess misjudged for lack of a better term? Is it just the budget deficit? Or does it affect the program’s ability to generate new loans, or does it have other consequences?

Melissa Emrey-Arras: I think it’s more about people understanding what the real costs are so they can take that into account when making policy decisions.

Jared Serbu: And to come back to the complexity of making these estimates in the first place. I think one factor you found is income-based paybacks, which can change over time. Can you unpack that a bit for us and why this was such a topic here?

Melissa Emrey-Arras: You’re welcome, thanks for the question Jared. Income-controlled repayment is when people make their repayments based on their income and family size. Therefore, the amount they pay each month depends on their current income and family size. At this point, the number of income-tested repayment loans accounts for about half of the student loan portfolio. This wasn’t always the case, the student loan portfolio has changed over time. But now about half of those have loans included in these income-based repayment plans. And that means in terms of costs, the Department of Education now needs to estimate borrowers’ incomes over time to estimate how much they’ll pay on their loans. So that means the department has to estimate the cost of student loans before even making any loans. And then it has to estimate those borrowers’ incomes and family sizes for decades to come. Which is a very challenging task.

Jared Serbu: Yes, have you addressed some of the reasons why more of the program has gone into income-controlled paybacks? Is it related to the increased cost of college at all?

Melissa Emrey-Arras: Income-controlled repayment can help reduce borrowers’ monthly expenses, which can make them more affordable for many people. In addition, individuals working for the federal government or non-profit organizations may benefit from income-based repayment in connection with government loan forgiveness. For example, people participating in income-based repayment plans can pay less each month and then have their balances fully forgiven after a 10-year period of public service.

Jared Serbu: I’m glad you brought up this program. Because if I’m not mistaken, this is another example where this loan forgiveness program didn’t even exist when the federal student loan program was created. So it would have been impossible to estimate the cost of that.

Melissa Emrey-Arras: Right. So that’s one of the programmatic changes that took place when government loan forgiveness came into existence. And there have even been changes within the government loan forgiveness program, there’s a temporarily expanded government loan forgiveness program, there’s a waiver of government loan forgiveness. And all of this is newer and didn’t exist when some of these loans were originally made.

Jared Serbu: And what other economic factors are at play to change the cost of the program over those 25 years?

Melissa Emrey-Arras: Both income and inflation can affect costs. We did some modeling in our report and found that higher inflation could result in higher government costs in the student loan portfolio. Similarly, we found that when people earn less, slower income growth could also push up the cost of the student loan portfolio. This tells us that there are several factors at play when estimating the cost of student loans. And it’s very difficult to predict the future on all of these fronts before lending is made.

Jared Serbu: And I think just one example of this, if I understand the report correctly, is that education has to set the interest rates on the loans it’s going to make before the school year even starts. But it doesn’t know what its cost of borrowing from the Treasury will be until much later, and those costs may have increased over that period. And often I’ve thought, right?

Melissa Emrey-Arras: That’s right. So borrower interest, what the borrower pays, is fixed in advance. But the cost to the Ministry of Education, the cost to the government, isn’t fixed until 18 months later. So there is up to a year and a half difference between when the interest rate is charged to the borrower and when the interest rate is charged to the government. And during this time, interest rates may change. And if costs rise, it can increase costs for the federal government.

Leave a Comment