GAO finds government underestimated cost of student loans

The Department of Education projected that student loans would 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.

The findings come from a Government Accountability Office report released today that belies the department’s narrative that the federal student loans program is generating revenue. The study, analyzing student loan data between 1994 and 2021, found that the Department for Education had grossly underestimated the impact of changes to loan programs and borrower behavior on loan balances. federal students.

Recent changes to the loan program since the start of 2022 that were not included in the study, such as the waiver of Public Service Loan Forgiveness (PSLF) and multiple group discharges of federal loan debt student, will increase the cost. Moreover, if President Biden decides to cancel some of the outstanding student debt, the cost would also increase.

The change, according to the report, is driven by changes to the federal student loans program, as well as faulty assumptions about borrower income, repayment rates and defaults.

While the GAO did not offer recommendations to the department to improve its budgeting methodology, the report highlights key factors to consider that contribute to massive differences in the actual cost of the student loan program to taxpayers.

In a letter to the GAO in response to the report, Education Undersecretary James Kvaal said, “In some cases, estimates are revised due to changes in the data available to the department and in the department’s methodology for estimate the costs.” He continued: “While the department always strives to obtain the best possible 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 strong reactions from Republicans in Congress, who were highly critical of the Biden administration’s changes to the student loan system (although the report covers years when Republicans were in charge). of the government as well as the Democrats). “However you look at it, the claim that the federal government is ‘taking advantage’ of student borrowers is false. Taxpayers have lost hundreds of billions of dollars on this program,” a group of Republican House and Senate lawmakers said.

What causes the difference?

Each year, the Department of Education submits an estimate of its costs for the purposes of developing the federal government’s annual budget. This includes estimates for any new lending program as well as loan performance, such as the number of borrowers expected to default or the amount of outstanding debt that will be repaid.

However, the department 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 pay off their debt, how many borrowers are expected to default, and how borrowers’ incomes might change in a given year. The report revealed that since 1994, not a single group of borrowers has fully repaid their debts.

As a result, Ministry of Education estimates are often far removed from what actually happens in any given year, according to the study. Inevitably, certain social and economic changes, such as a recession or a pandemic, cannot always be accurately predicted at the start of the year.

Changes to Federal Student Loan Programs

Since 1997, changes to the federal student loan program, including programs that put some borrowers on the path to forgiveness, new repayment methods, and the suspension of student loan repayments that was enacted at the start of the pandemic, resulted in a 33% increase in the cost of the student loan program, totaling $102 billion.

By far, the most significant change contributing to this increase was the pause in federal student loan payments and programmatic changes enacted throughout the pandemic and other pandemic-related loan forgiveness programs, indicates the report. In total, these changes resulted in an increase of more than $107 billion between the years 2020 and 2021.

Other changes included the Taxpayer and Teacher Protection Act of 2004, which increased the amount of loan forgiveness some teachers could be eligible for, resulting in a $48 million increase; the College Access and Cost Reduction Act of 2007, which reinstated the Income Contingent Reimbursement (IDR) and PSLF models, resulting in a $4 billion increase; and the Revised Pay as You Earn plan, a form of IDR, resulting in an increase of $9.9 billion. In total, these changes represented a 6% increase, totaling $20 billion.

Flaws in estimates of borrower behavior

The main driver of the rising cost of federal student loans to the government was a gap in available data, the report said. The limited data the department has to estimate how borrowers are repaying their loans, how much money borrowers are making, and how many borrowers will default has led to a $189 billion cost increase since 1997, the report said.

The department’s inability to access borrower income data through the Internal Revenue Service has been highlighted as a key factor in internal difficulties in administering income-based repayment programs, including the possibility of Biden canceling. $10,000 in debt per borrower for those earning less than $150,000. a year.

The assumptions about borrower repayment plan selection alone resulted in 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 if they have a change in their income. Nearly half of federal student loans, 47%, are repaid by IDR.

In addition, changes to estimated borrower revenue growth resulted in a $68 billion increase, and assumptions about the number of borrowers who will default resulted in a $23 billion increase.

Changes to the Ministry of Education Budget Model

The Department of Education is currently in the process of introducing a new budget model which will be implemented in FY2026. The current model is based on estimates of large groups of borrowers, while the new model , called the microsimulation model, will take into account data from the National Student Loans Data System.

According to information provided by the department detailed in the report, this new budget model will provide more accurate forecasts of cost-driving changes to the federal student loans program.

Representative Robert Scott, a Virginia Democrat and chairman of the House Education and Labor Committee, said in a statement: “Unfortunately, this GAO report shows that the spike in college costs, caused by decades of state divestment from higher education—and the declining value of the Pell grant—has forced students to borrow more money to earn a degree.Unlike previous generations, students are now taking out loans whose amounts make repayment difficult.

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