WASHINGTON – APRIL 20: A worker looks for defective bills in the sheets of newly printed twenty … [+]
The Congressional Budget Office (CBO) has updated its baseline estimates of how much the federal student loan program will cost taxpayers, and the numbers aren’t pretty. The latest official estimates show that taxpayers will spend $393 billion on the federal student loan program between 2024 and 2034, or around $3,100 per household.
Around $221 billion of that cost comes from expected losses on the $1.1 trillion in student loans that the federal government will issue between 2024 and 2034, according to the CBO’s official accounting procedures. Using more comprehensive fair-value accounting techniques, losses on those loans could reach $278 billion. Another $34 billion will be spent administering the student loan programs.
The remaining $140 billion is down to re-estimates of the losses that taxpayers will bear on outstanding loans, thanks to President Biden’s efforts to expand student loan cancellation programs using executive authority. These include a new income-driven repayment program which will allow borrowers with incomes as high as $70,000 to make $0 monthly payments on their loans, as well as a recently announced rule to cancel some borrowers’ debts outright.
For comparison, over the same time period CBO expects the federal government will spend $355 billion on the Pell Grant program, which provides free college aid to low- and middle-income students. Taxpayers have ended up in an odd situation, where they spend more making student loans (which are supposed to be repaid) than making grants (which are not).
The costs of running the student loan program have exploded in recent years, as past CBO projections show. In 2014, the agency projected that taxpayers would profit to the tune of 11 cents for every dollar of student loans the federal government issued in fiscal year 2024. But the most recent projections figure instead that taxpayers will lose 20 cents on the dollar for loans issued this fiscal year.
Expansions of income-driven repayment (IDR) plans—along with their increased utilization—are the primary driver of these losses. A borrower who repays her loans on a traditional fixed-term repayment plan will usually repay more than she borrowed to the federal government. But the typical borrower who uses an IDR plan will repay far less than she took out in the first place. CBO figures that taxpayers will lose between 30 and 48 cents for every dollar in federal student loans issued in fiscal year 2024 and repaid on an IDR plan.
Indeed, those projections might even be too rosy. The extreme generosity of IDR plans may entice colleges to foist more federal loans onto students, on the explicit promise that most of those students will never repay their loans in full. The dynamic impact of increased borrowing, not to mention additional loan-cancellation initiatives from the Biden administration, could drive government losses on student loans even higher over the coming years. Taxpayers should buckle up for a bumpy ride.
