Feds could lose $197 billion on student loans: watchdog

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The US Department of Education is expected to lose nearly $200 billion in federal student loans issued over the past 25 years, in part due to pandemic-era relief that has suspended borrower bills .

Originally, the Department of Education estimated that these loans would generate about $114 billion in revenue; however, they will actually cost the federal government $197 billion, according to the Government Accountability Office, a federal watchdog.

Much of the additional cost comes from the pandemic-era pause on most federal student loan payments first enacted under the Trump administration and then continued by President Joe Biden. As a result, most federal borrowers have not repaid their debt for more than two years and no interest has accrued on their balances in the meantime.

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Given that policy, said higher education expert Mark Kantrowitz, the GAO’s findings were hardly surprising.

“There have been several changes to the federal student loan programs, including the suspension of payments and the waiver of interest, which have increased the cost of the program from a profit to a loss,” said said Kantrowitz.

Other changes to the federal student loan system that are likely to increase costs include the suspension of collection activities, another pandemic-related relief measure and revised estimates of how much borrowers will repay their debts.

GAO analysis found that loans made between 1997 and 2021 are expected to cost the government nearly $9 for every $100 disbursed. This is a big departure from the government’s expectation that the loans would generate $6 for every $100 lent.

The Department of Education did not immediately respond to a request for comment.

The woes of the student loan system predate the pandemic

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Before the pandemic, when the U.S. economy was in one of its healthiest times, problems still plagued the federal student loan system.

More than 40 million Americans were in debt for their education, owing a cumulative amount of $1.7 trillion, a balance that far exceeds outstanding credit card or auto debt. Average graduation loan balances have tripled since 1980, from about $12,000 to more than $30,000 today.

A quarter of borrowers – more than 10 million people – were past due or in default. These grim numbers have led to comparisons to the mortgage crisis of 2008.

The Biden administration is currently considering canceling some student debt, and more recently it is reportedly leaning toward $10,000 in relief for most borrowers. The price of such a move would depend on the fine print, but could cost the government an additional $321 billion.

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