Most of the losses come from income-based repayment programs that include debt forgiveness at the end. No one has ever put a number on it until now.
By Wolf Richter for WOLF STREET.
In 2009, the U.S. government got into the business of reckless lending, whatever, to college students, even older students with risky credit scores and dubious for-profit college students with dodgy programs. ‘questionable studies. And then tuition fees soared, and student housing became a global asset class with its own Commercial Mortgage Backed Securities (CMBS) now experiencing record delinquency rates. And Apple and the textbook publishers and everyone started to feed themselves deep in, the students being just the conduit for the money. Student loan balances in the government’s financial statements have skyrocketed from $ 147 billion in 2009 to $ 1.37 trillion in early 2020, despite an 11% drop in student enrollments since 2011.
Taxpayers face a loss of $ 435 billion on the $ 1.37 trillion in student loans shown in the government’s financial statements at the start of this year, although no further loans are made in the future, according to an internal Department of Education study, reported by the Wall Street Journal which reviewed the documents. Most of the losses would come from already established income-based repayment programs and debt forgiveness at the end of their term.
The expected loss of $ 435 billion is well above optimistic estimates released previously, including the Congressional Budget Office’s estimate in May 2019 of a loss of $ 31 billion, including administrative costs.
The student loan balances in the table above do not include student loans from private lenders that are guaranteed by the U.S. government and will result in additional losses for taxpayers.
The Education Department, concerned that government staff had underestimated student loan losses, hired FI Consulting to build a computer model for much more detailed analysis. And that caused Deloitte to revisit the model.
The study found that most of the losses are already built into the cake thanks to the income-based repayment and loan cancellation plans, which ensure that many loans are not paid off in full before the rest. be canceled.
Only a small number of borrowers owe a gigantic chunk of student loans: 7% of all federal student loan borrowers, mostly those with higher education, have accumulated $ 500 billion in student loans, which means these 7% of borrowers owe 37%. of federal student debt, according to a Moody’s report dated January 2020. Each of them owes more than $ 100,000.
But the majority of borrowers don’t owe that much: At the end of 2017, the “median” amount owed by the 45 million federal student loan borrowers was around $ 17,500, according to the Moody’s report. “Median” means that half owe more and the other half owe less. That means there were 22.5 million borrowers who owed less than $ 17,500, roughly the price of the cheapest new car available in the United States.
And that 50% of borrowers combined owed just $ 200 billion of total federal student loan debt.
Student loans are a very big deal, with the vast majority of borrowers facing manageable amounts and a small number of borrowers, mostly with graduate degrees, having very large amounts. This distribution skews the “average” student debt (total debt divided by the total number of borrowers) which is often cited in the media as being over $ 30,000, compared to the median student debt of $ 17,500, half of the total. borrowers owing less than $ 17,500.
But forgiveness of student loans is already the rule thanks to income-based repayment plans, which allow borrowers to make monthly payments of just 10% of a special income measure made up of gross income minus 150% of the threshold. federal poverty. And the remaining balances are then canceled after 10, 20 or 25 years, depending on the program.
Borrowers from income-based repayment programs will repay an average of only 51% of their balances, while borrowers from other plans will repay 80% of their balances, according to the Department of Education analysis.
The idea – especially for heavily indebted borrowers, like former graduate students – is to delay repayment as long as possible, slow it down as much as possible, pay as little as possible, and then be forgiven for the rest. Students with smaller balances also use this strategy to avoid defaults and minimize payments.
This is in part responsible for the surge in student loan balances, according to Moody’s; as new loans are added, old loans just don’t get paid off.
And these income-based repayment programs and accompanying debt cancellation are a major component of the projected $ 435 billion loss to taxpayers on the $ 1.37 trillion loan balance, according to the analysis by the Ministry of Education.
At this point, federal student loans are not easily canceled by the bankruptcy court, but they are canceled at the end of income-based repayment programs. And this is already baked in the cake. And taxpayers are responsible for these losses.
The fact that student loans started to increase only a few years ago means that this tsunami of losses resulting from loan write-offs at the end of income-tested repayment programs is still in the future, but can be estimated. .
But who ultimately got the money, since the students were just the conduit? The educational-financial-industrial complex, of course, the entities that have aligned themselves to clean up the taxpayer through these student loans. Billionaires have been imprinted in the process, authorized and encouraged by the government since 2009. Any solution to the student loan crisis must include measures that end this transfer of money and reduce the role of government in student loans to what it was before. 2009.
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