Bombshell Report Reveals Student Loans Cost More Than Anyone Thought

In most cases, determining the cost of a government program is simple: add up what the Treasury spends and subtract any revenues the program generate. Not so with federal student loans. Figuring the cost of the student loan program requires comparing what the government lent out to the total amount it expects borrowers to repay in the future. That in turn requires making assumptions about what borrowers will repay—and what the government will forgive.

In the past, the Education Department (ED) has estimated that student loans issued between 1997 and 2021 would net the government more than $100 billion. The impression that the government profits off student loans led to reforms that beefed up loan cancelation programs and fueled calls to forgive $10,000 per borrower or more. But a new analysis by the Government Accountability Office (GAO) suggests that ED’s estimates were off by hundreds of billions of dollars. Instead of earning a $100 billion profit, student loans will actually cost taxpayers nearly $200 billion.

Why ED’s estimates were off by $300 billion

According to GAO, there are two main reasons that ED’s student loan cost estimates were so wrong. First, policymakers—including Congress and ED itself—have made several changes to the loan program over the past two decades, all of which either reduced payments or created new loan forgiveness opportunities. Second, in modeling borrowers’ projected payments, ED made several erroneous assumptions that led to an overly rosy financial picture of the loan program.

The costliest policy change was the moratorium on student loan payments that began in March 2020. GAO estimates the moratorium cost taxpayers $102 billion between March 2020 and April 2022 (the latest extension of the pause, from May to August 2022, has not yet been modeled).

Another major source of increased costs was the creation of new loan-cancelation schemes such as Public Service Loan Forgiveness, which ED originally estimated would cost $4 billion. The expansion of income-driven repayment options under the Obama administration also contributed, with an originally-estimated cost of $10 billion. Obama’s actions cut monthly payments and reduced the amount of time borrowers had to spend in repayment before receiving loan forgiveness. This made income-driven repayment plans more generous for current enrollees, but also increased their attractiveness for potential ones.

All in all, policy changes added an estimated $122 billion to the cost of the loan program. That $122 billion error may not fall entirely on ED’s shoulders, as the Covid-19 pandemic and the associated loan moratorium was not foreseeable (though no one forced ED to extend the moratorium on five separate occasions). But the second major category of errors in the cost estimates are quite clearly ED’s fault.

Bad assumptions concealed the true cost of student loans

Since the Direct Loan program came into being in the 1990s, both Congress and ED have created new benefits for borrowers such as income-driven repayment (IDR). IDR plans allow borrowers to link their loan payments to their incomes and have any remaining balances forgiven after 20 or 25 years, depending on the plan. Forecasting the cost of IDR requires ED to estimate how many borrowers will use the program and what their incomes will be. Originally, ED anticipated that IDR would be a niche program, utilized only by borrowers having serious trouble managing their loans.

But as it turns out, nearly half of outstanding Direct Loans have ended up in an IDR plan. Borrowers enrolled in IDR in far greater numbers than ED expected. Graduate borrowers especially made use of the program. Since graduate students can borrow effectively unlimited amounts from the federal government, they accumulate much larger balances and stand to gain much more from IDR’s loan forgiveness benefits. According to the Congressional Budget Office, graduate borrowers will receive 80% of over $200 billion in loan forgiveness under IDR over the coming decade. ED failed to foresee how much graduate borrowers would take advantage of this bonanza.

According to GAO, ED also made faulty assumptions about what IDR borrowers would earn after leaving school and entering repayment. ED appears to have assumed that higher education would be a lucrative investment for most people, especially those who pursued graduate degrees. But recent years have seen an explosion in master’s degrees with questionable financial returns (according to my own research, 40% of master’s degrees do not increase their students’ earnings enough to justify the cost of tuition).

The explosion in master’s degrees, itself fueled by the federal government’s easy-money student loan policies, has devalued these credentials and led to lower incomes for borrowers than anticipated. While most people with master’s degrees are not poor, many do not earn enough money to justify the enormous cost of graduate education. Income-driven repayment plans allow them to pass much of that cost on to taxpayers via loan forgiveness.

Altogether, GAO figures that bad assumptions will add $189 billion to the estimated cost of the federal student loan program.

GAO’s estimates still undercount the true cost of student loans

In total, GAO estimates that ED has underestimated the costs of federal Direct Loan program by a whopping $311 billion. And yet the true figure is likely to be even higher.

GAO did not include the costs of the fifth extension of the student loan payment moratorium, which suspended loan payments between May and August 2022. If past patterns hold, the cost of this extension could exceed $15 billion. Moreover, GAO did not include a likely sixth extension of the pause through the end of the year.

Also excluded were further programmatic changes that the Biden administration intends to make to the student loan program. Most recently, the administration proposed $85 billion in new spending through expanded loan forgiveness opportunities. ED also plans to waive many of the requirements for borrowers seeking loan cancelations under IDR and Public Service Loan Forgiveness. The cost of the waivers is uncertain, but independent estimates suggest the cost could exceed $100 billion.

As if that weren’t enough, ED also has a slate of yet-to-be-announced policies that will add to the costs o student loans. The administration is expected to roll out a more generous version of IDR that would cut monthly payments in half for many borrowers. The costs of IDR could potentially balloon, particularly if graduate borrowers are allowed to participate. Then, there’s the blue whale in the room: Biden’s potential plan to forgive $10,000 in loans per borrower, at a cost of $230 billion. While GAO hasn’t added all these additional costs to its $311 billion estimate, it’s reasonable to think that official figures could understate the true cost of federal student loans by over half a trillion dollars.

Bad estimates lead to bad policy

With inflation at 9.1% and the national debt over $30 trillion, America has little fiscal space to spend more on its national student loan program. The era of free money is over: instead of piling more and more subsidies onto student loans, we need to have an frank conversation about the best way to allocate scarce federal resources in order to help borrowers most in need. That conversation must start with an honest accounting of the loan program’s existing costs.

Consider income-driven repayment. The ability to tie student loan payments to earnings is an important component of the safety net for low-income borrowers. But IDR is structured in such a way that it offers enormous benefits to graduate borrowers with large balances, while the community college dropouts who need help the most get crumbs.

If ED’s original accounting had been accurate, the designers of IDR would have understood just how excessively generous the program is. That in turn could have prompted changes to better target IDR towards distressed borrowers—for instance, by including an income cap on IDR eligibility or limiting enrollment to undergraduate borrowers. Instead, ED opened the floodgates. Now, there is far less fiscal latitude to help the borrowers who most need it.

Bad accounting also perverts the politics of student loans. For years, ED created the false impression that student loans are a profit center for the government. Resentment built up among borrowers. Left-wing politicians capitalized on this, calling for a payment moratorium and a mass loan jubilee. Even though GAO has set the record straight, it is unlikely to derail the Biden administration’s plans for new loan forgiveness.

The time for student loan reform is now

Honest accounting is a necessary condition for the competent operation of any government program, let alone a $1.6 trillion student loan portfolio. Because of programmatic changes and erroneous assumptions, ED’s original estimates of the cost of student loans proved to be off by over $300 billion. And yet, the final estimates do not include new policy changes that could add even more to this figure. The GAO report reveals the urgency of student loan reform. Congress should intervene to eliminate federal graduate loans, which subsidize low-quality master’s degrees and add billions to the cost of safety net programs like income-driven repayment. Federal funding should also end for poorly-performing programs at the undergraduate level. Colleges which leave borrowers unable to repay their loans should not get more money from taxpayers. The silver lining of the GAO report is that it may prompt Congress to focus on fixing the student loan fiasco. ED’s bad accounting allowed policymakers to think they could sweep these problems under the rug. No longer.