The Department of Education has projected that student loans will generate $114 billion in revenue over the past 25 years. However, a new report shows that federal student loans actually cost the government $197 billion, a difference of $311 billion.
Conclusions come from a A report by the Government Accountability Office was published today which undermines the department’s narrative that the federal student loan program is profitable. A study analyzing student loan data from 1994 to 2021 found that the Department of Education grossly underestimated how changes in loan programs and borrower behavior affected federal student loan balances.
Recent changes to the loan program beginning in 2022 that were not included in the study, such as the waiver of Public Service Loan Forgiveness (PSLF) and several group discharges for federal student loan debt, will increase the cost. Also, if President Biden cancels outstanding student debt, the cost will also increase.
The shift, according to the report, is due to changes in the federal student loan program, as well as faulty assumptions about borrowers’ incomes, repayment rates and defaults.
While the GAO did not offer recommendations for the department to improve its budgeting method, the report highlights key factors to consider that contribute to the huge disparity in how much the student loan program actually costs taxpayers.
In a letter to GAO in response to the report, Under Secretary of Education James Quall said, “In some cases, estimates are being revised because of changes in both the data available to the department and the department’s methodology for estimating costs.” He continued, “While the department always strives for best estimates, there is some inherent uncertainty in the department’s cost estimates, which the department publicly discloses in its agency financial report and the president’s budget.”
The report’s findings drew a fierce 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 Republicans ran the government as well as Democrats). “Any way you look at it, the claim that the federal government is ‘making money’ from student loan borrowers is false. Taxpayers have lost hundreds of billions of dollars on this program,” a group of Republican lawmakers from the House and Senate said in a statement.
What is the reason for the difference?
Each year, the Department of Education submits an estimate of its expenditures to develop the federal government’s annual budget. This includes estimates for any new loan programs, as well as loan outcomes, such as how many borrowers are expected to default or how much outstanding debt will be paid off.
The Department, however, 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 debt, how many borrowers are expected to default, and how borrowers’ incomes may change in a given year. The report shows that since 1994, no group of borrowers has fully settled their debt.
As a result, Department of Education estimates are often far from what actually happens in a given year, research shows. Inevitably, certain social and economic changes, such as recessions or pandemics, cannot always be accurately predicted at the beginning of a financial year.
Changes to 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 student loan payment freezes that were put in place at the start of the pandemic, have led to a 33 percent increase in the cost of the program student loans totaling $102 billion.
By far the biggest change contributing to this increase was the pause in federal student loan payments and program changes implemented throughout the pandemic and other pandemic-related loan forgiveness programs, the report shows. In total, these changes led to more than $107 billion in growth between 2020 and 2021.
Other changes included the Taxpayer and Teacher Protection Act of 2004, which increased the amount of loan forgiveness that certain teachers could qualify for, resulting in an increase of $48 million; The College Cost Reduction and Access Act of 2007, which restored the income-driven repayment (IDR) and PSLF models, resulting in a $4 billion increase; and a revised Pay As You Earn plan, a form of IDR, resulting in a $9.9 billion increase. Overall, these changes resulted in a 6 percent increase, amounting to $20 billion.
Mistakes in assessments of borrowers’ behavior
The biggest driver of the increase in federal student loan costs to the government was a gap in available data, the report said. The limited data available to the department to gauge how borrowers are repaying their loans, how many borrowers are making money and how many borrowers will not default has increased by $189 billion since 1997, according to the report.
The Department cannot access borrower income data through the Internal Revenue Service highlighted as a key factor in the internal difficulties in administering income-based repayment programsincluding the possibility that Biden would eliminate $10,000 in debt per borrower for those making less than $150,000 a year.
Speculation about borrowers’ repayment plan choices alone led to a $70 billion increase. One of the most common repayment plans, the IDR, is particularly difficult to estimate because the amount a borrower is required to pay each month changes as their income changes. Nearly half of federal student loans, 47 percent, are repaid through IDRs.
In addition, changes in borrowers’ estimated income growth led to a $68 billion increase, and assumptions about how many borrowers would default led to a $23 billion increase.
Changes to the Department of Education budget model
The Department of Education is currently in the process of implementing a new budget model that will be implemented in fiscal year 2026. The current model is based on assessments of large groups of borrowers, and the new model, called a microsimulation model, will take into account data from the National Student Loan Data System.
According to information provided by the department detailed in the report, this new budget model will provide more accurate projections of changes in the cost of the federal student loan program.
Rep. Robert Scott, D-Virginia and chairman of the House Education and Labor Committee, said in a statement: “Unfortunately, this GAO report shows that the skyrocketing cost of college is driven by decades of state disinvestment in higher education and the shrinking value of the Pell Grant. – forced students to borrow more money for their degree. Unlike previous generations, students now take out loans in amounts that make repayment difficult.”