Taxpayers on the Hook for $435 Billion in Student Loan Losses

US taxpayers are on the hook for a $435 billion loss on the $1.37 trillion in student loans that were on the government’s books at the beginning of this year, according to an internal study by the Department of Education recently reported by the Wall Street Journal.

That’s before any loan forgiveness program that might come down the pike under the Biden administration. And the massive number doesn’t account for any student loans issued going forward. It also does not include student loans issued by private lenders but still guaranteed by the federal government.

The $435 billion tab for American taxpayers is far higher than the $31 billion loss the CBO projected in a 2019 report.

These losses are effectively baked into the student loan program. According to the report, most of the losses will come from already established income-based repayment plans with built-in debt forgiveness at the end of their term.

The WSJ obtained the internal DoE report. According to their analysis, borrowers will pay back $935 billion in principal and interest on government-backed student loans, leaving $435 billion for taxpayers to absorb. The Department of Education report estimated that borrowers in income-driven repayment plans will repay just 51% of their loan balances on average. Borrowers in other repayment plans typically pay back about 80% of their balances.

Meanwhile, student loan debt continues to surge despite falling college enrollment. In Q3 2020, student loan balances rose by $23 billion from the second quarter, according to the most recent Federal Reserve data.

Forty-five million Americans now owe $1.7 trillion in student loan debt. Total outstanding student loan balances have surged by $54 billion year-on-year while college enrollment has dropped 10.8% since 2011.

More than 1 in 4 student loan borrowers are either in delinquency or default.

The big winner in all of this is what WolfStreet calls the “educational-financial-industrial complex.” These are “the entities that have lined up to clean out the taxpayer via these student loans.”

Billionaires have been printed in the process, enabled and encouraged by the government since 2009. Any solution to the student-loan crisis needs to include measures that shut down that money-transfer and return the government’s role in student loans to where it had been before 2009.”

WolfStreet is alluding to the fact that this was all facilitated by Uncle Sam and its scheme has increased the cost of a college education precipitously.

The federal government pushed the widespread availability of student loans. It was supposed to make it possible for everybody to go to college. But there was an unintended consequence. It made a university education unaffordable and ended up saddling millions of Americans with crushing levels of debt.  Studies have shown the influx of government-backed student loan money into the university system is directly linked to the surging cost of a college education.

As the Department of Education report reveals, the federal government is already absorbing a tremendous cost for this student loan glut and it may well take on even more of the burden. There is a lot of talk about a $10,000 forgiveness program. This would simply erase about one-third of student loan debt.

It’s important to remember that student loan forgiveness doesn’t mean Joe Biden just waves a magic wand and erases the debt. The federal government backs these loans, but private lenders actually made them. The lenders will get their money – courtesy of Uncle Sam. In effect, the federal government will have to borrow the trillions of dollars necessary for student loan forgiveness and add it to its $27 trillion debt. In other words, the debt will simply be transferred from the student-borrower to the American taxpayer.

The student loan crisis is an economic timebomb waiting to go off.

In a speech in late 2018, Education Secretary Betsy DeVos revealed just how significant the level of student debt has become, noting that it comes with “significant risk.” She admitted that the spiraling level of student debt has “very real implications for our economy and our future.”

The student loan program is not only burying students in debt; it is also burying taxpayers and it’s stealing from future generations.”