New research shows the federal government vastly underestimated the cost of student loans
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CounterCurrent:
A 645 Billion Dollar Hole in Taxpayers’ Pockets
New research shows the federal government vastly underestimated the cost of student loans
CounterCurrent is the National Association of Scholars’ weekly newsletter, bringing you the biggest issues in academia and our responses to them.
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Category: Student Loans/Debt; Reading Time: ~2 minutes
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** Featured Article - "Student Loans Cost Taxpayers $645 Billion More Than We Were Told" by Andrew Gillen ([link removed])
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Get ready, CounterCurrent readers—it’s time for Budgeting 101! We’re going back to the basics today, since it seems that principles such as “don’t spend more than you make” and “losing money is bad, actually,” are harder to grasp than they once were.
If you’re wondering what inspired this impromptu finance lesson, allow me to direct your attention to our old friend, the Department of Education (ED). For decades, the ED has been handing out nearly limitless amounts of student loan money based on flawed assumptions about the rate and nature of expected repayment. Last month, the Government Accountability Office (GAO) tallied the receipts ([link removed]) and discovered that, over the past 25 years, the ED had underestimated the amount it would receive by a whopping $311 billion. That’s over three hundred billion taxpayer dollars that have been lost thanks to the federal government’s careless calculations.
But wait, it gets worse. According to research by Andrew Gillen ([link removed]) , Senior Policy Analyst at the Texas Public Policy Foundation, the actual discrepancy is more than double that amount. The GAO report only included the discrepancy that resulted from the ED’s flawed projections about student repayment. When you add in the separate but related problems with the ED’s formula for determining the actual cost of loans, the number of lost taxpayer dollars rises to $645 billion.
About $100 billion of that amount is due to the 30-month pause ([link removed]) in student loan payments, which began as part of President Trump’s response to COVID and has been repeatedly renewed by President Biden. The remaining discrepancy, however, is due to a whole host of calculation errors on the part of the ED, which Gillen outlines in this week’s featured article ([link removed]) .
These errors fall into two main categories that, while not exhaustive, showcase the fatal flaws in the ED’s reasoning: 1) errors in the method of determining the lifetime cost of loans, and 2) errors in the method of forecasting repayment. (Trigger warning: The following paragraphs contain a large amount of technical language and alarming descriptions of government stupidity.)
Let’s start with the first type of error. To ensure that federal loan programs break even, the government assesses the cost of granting and extending loans based on what is known as a “discount rate,” which is used to determine the present value of future payments. For decades, the ED has determined the discount rate for student loans using a formula from the Federal Credit Reform Act (FCRA), which is based on federal interest rates, rather than following the fair-value discount rate, which is based on market projections. In other words, the ED relies on starry-eyed government forecasts to determine the cost of loans and ignores the realities of the market.
According to estimates from the Congressional Budget Office ([link removed]) , fair-value calculations show 16% greater future costs for present expenditures than FCRA calculations. This is no small sum when working with billions, and it has led the ED to overlook $334 billion ([link removed]) in the cost of student loans over 25 years.
The second type of error is a bit simpler. When calculating the overall cost of student loans, the ED guesses how many borrowers will choose each type of repayment plan and how much debt they will repay under those plans. Twenty-five years ago, the range of repayment plans was both more narrow and less generous; today, the options include debt forgiveness after as few as ten years of minimal payments. Unsurprisingly, these more generous plans have proven to be much more popular than the traditional repayment plans (another basic principle the ED has forgotten: everyone loves free money). This somehow came as a surprise to the ED, whose miscalculations about borrowers’ preferences cost taxpayers $138 billion ([link removed]) .
Although the calculations are complicated, the takeaway is simple: a $645 billion loss is a big problem, and it’s time for the ED to do something about it. It doesn’t take a financial genius to figure that one out.
Until next week.
Marina Ziemnick
Communications Associate
National Association of Scholars
Read More ([link removed])
For more on federal loans and the student debt crisis:
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April 12, 2022
** Death, Taxes, and Student Loan Forgiveness ([link removed])
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Marina Ziemnick
Indefinitely suspending student loan payments and forgiving massive amounts of student loans leaves the root causes of the student debt crisis untouched.
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September 15, 2021
** The Student Debt Relief Band-Aid ([link removed])
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Teresa R. Manning
Student debt forgiveness doesn't resolve the problem of skyrocketing tuition.
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July 13, 2021
** $300,000 for an M.F.A. in Film—Why Not? ([link removed])
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David Acevedo
A Wall Street Journal article exposes America’s broken student debt system—what can be done?
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February 25, 2021
** Priced Out: What College Costs America ([link removed])
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Neetu Arnold
This report details the spending habits of 50 universities across America and provides perspective from students, parents, and college administrators.
** About the NAS
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