The ballooning cost of student loans to taxpayers

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

The U.S. government is a bank of sorts, especially in the market for student loans. It lends money to college students and their families, issues Treasury securities to generate the funds, and charges an interest rate plus fees to cover its own cost of borrowing. There’s no requirement that the government turn a profit on student loans, but the Education Department has mostly forecast modest profits when estimating the net effect of student lending on the federal budget.

Those profits have been elusive, however, leading to much higher taxpayer costs for student loans than the government has predicted. And those costs have soared since Congress paused student-loan repayments in 2020, as a form of COVID-pandemic assistance. A new study by the Government Accounting Office finds that the Education Department has forecast a net profit on its student loan program for 19 of the last 25 years, yet only turned a profit in one of those years. Since 1997, the Education Department expected student loans to generate $114 billion in federal income, when in reality those loans are likely to cost the government $197 billion. That’s a difference of $311 billion. The single biggest factor pushing up the cost of the student loan program to taxpayers was COVID relief.

That doesn’t mean the student loan program is a failure. But it complicates the case for forgiving student loan debt, as many Democrats want President Biden to do before this year’s midterm elections in November. Until the Great Recession in 2008 and 2009, the federal student loan program basically broke even, with a tiny negative effect on the federal budget that was not controversial. That cost began to rise in 2010 as borrowing increased, graduates increasingly struggled to pay back their loans and the government took on a greater share of student debt. When the COVID pandemic struck in 2020, the government suspended student debt payments and set interest rates at zero, a move that is still in effect. That deferral helped millions of borrowers weather the COVID downturn, but it also made the program a sizable money-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. That’s a big ask. Biden favors debt forgiveness of up to $10,000, but he wants Congress to do it by passing a law instead of taking executive action that might not survive in court. Democrats don’t have the votes for that, so the decision rests with Biden.

Young Americans, not surprisingly, favor student debt forgiveness, while older folks don’t. One recent poll found 55% support for Biden’s preferred route, modest forgiveness of up to $10,000, and lower levels of support for higher amounts of forgiveness. Those with student debt favor forgiveness; those without student debt don’t. Policy analysts tend to think student debt forgiveness is a poor use of federal funds, since it targets people who are more educated and generally better off than people with no college education. There are also major fairness questions, since people who pay off their debt in full or who work to pay their way through college would get no benefit from debt cancellation.

The GAO data puts new emphasis on the cost of debt forgiveness, 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 now set to resume Sept. 1. But Biden seems very likely to extend the deadline again—possibly through the end of the year—so that borrowers who happen to vote can enjoy the moratorium through the midterm elections.

That moratorium has already cost the government more than $100 billion in foregone revenue from interest payments, according to the GAO’s analysis of Education Department data. Hardly any of the 40 million federal student loan borrowers, who owe the government $1.4 trillion, have been making payments since 2020. Students loans are morphing from a self-funding college assistance vehicle into a de facto entitlement program.

This may be fine with liberal Democrats who favor maximum debt forgiveness and free college. But it could also turn student loans into another divisive political issue that makes moderate and independent voters uncomfortable, and gives conservatives another “government handout” to crusade against. In the distorted world of Washington budgets, the $100 billion in foregone 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, it can generate huge fights.

Democrats, for instance, are now trying to pass the “Inflation Reduction Act,” which would involve $450 billion in new spending on green energy and other things during the next decade, or $45 billion per year. That’s roughly the same amount of federal revenue lost to student loan deferment since 2020. Republicans are uniformly opposed to the IRA, and Democrats will have to fight for unanimity in their ranks to get it passed. Whether it’s good or bad for the economy will be a messaging battle in the weeks leading up the midterms. Yet student loan costs are mounting at a similar pace with barely any attention.

If Biden is able to sign the IRA into law, it will mark a major political win for him, and perhaps reduce the need for him to prove he can get something done by writing off some amount of student debt through executive action. Maybe student loan payments will resume by the beginning of 2023, with the programming returning to something like it used to be. But everybody in Washington knows that once you give something to voters, it’s hard to take it back. It’s also possible the nature of student loans is changing for good.

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