Due in part to relief provided to borrowers during the epidemic era when debts were put on hold, the U.S. Department of Education is anticipated to lose approximately to $200 billion from federal student loans made during the previous 25 years.
Initially, the Education Department projected that these loans would bring in around $114 billion in revenue; however, the Government Accountability Office, a federal watchdog, has determined that they will actually cost the federal government $197 billion.
The Covid pandemic-era halt on the majority of federal student loan payments was initially implemented under the Trump administration and then maintained by President Joe Biden, and it accounts for a sizable portion of the additional expenditures. The majority of people with federal student loans haven’t made a payment in over two years as a result, therefore interest hasn’t accumulated on their amounts during that time.
According to Mark Kantrowitz, an expert on higher education, the GAO’s results were not at all unexpected given that strategy.
“There have been several changes to the federal student loan programs, including the payment pause and interest waiver, that have increased the cost of the program, swinging it from a profit to a loss,” Kantrowitz said.
The suspension of collection activities, another pandemic-related relief provision, and updated projections of how much borrowers will pay off their debts are further modifications to the federal student loan system that are anticipated to raise costs.
According to the GAO report, for every $100 released in loans issued between 1997 and 2021, the government can expect to pay about $9 in interest. That represents a significant deviation from the government’s forecast that the loans would earn $6 for every $100 lent.
An inquiry for comments was not immediately answered by the Education Department.
Systemic issues with student loans predate the pandemic
The federal student loan system was still plagued by issues prior to the epidemic, when the American economy was going through one of its strongest times.
More than 40 million Americans had student loan debt, totaling $1.7 trillion, considerably exceeding their balances on credit cards or auto loans. Since 1980, the average debt balance upon graduation has increased by almost thrice, rising from around $12,000 to more than $30,000 today.
More than 10 million borrowers, or 25% of all borrowers, were delinquent or in default. A connection to the mortgage crisis of 2008 has been made as a result of these grim numbers.
The Biden administration is now debating whether to forgive a portion of student loans; most recently, it was said that the administration was leaning toward a $10,000 relief for most debtors. The cost of such an action would depend on the fine print, but it might run the government an additional $321 billion.