The Federal Government’s Big Bet on Student Loans Goes Bad


Monday February 6th, 2017   •   Posted by Craig Eyermann at 6:36am PDT   •  

bored_student_ML With the flurry of executive actions that President Trump has taken since coming into office on January 20, 2016 that has dominated the nation’s news coverage, surprisingly little attention has been paid to the deteriorating condition of the U.S. government’s student loan portfolio under President Obama’s administration, which became news in the days just before the inauguration. The Wall Street Journal reports on the Education Department’s student loan reporting scandal:

Many more students have defaulted on or failed to pay back their college loans than the U.S. government previously believed.

Last Friday, the Education Department released a memo saying that it had overstated student loan repayment rates at most colleges and trade schools and provided updated numbers.

When The Wall Street Journal analyzed the new numbers, the data revealed that the Department previously had inflated the repayment rates for 99.8% of all colleges and trade schools in the country.

The new analysis shows that at more than 1,000 colleges and trade schools, or about a quarter of the total, at least half the students had defaulted or failed to pay down at least $1 on their debt within seven years.

Worse, the WSJ‘s editors have suggested that rather than having been the result of a computer coding error, the previous numbers on student loan defaults at thousands of colleges and trade schools may have been cooked to support President Obama’s political agenda. The National Association of Student Financial Aid Adminstrators excerpts the following portions of the WSJ‘s editorial analysis:

In early January the department disclosed that it had discovered a ‘coding error’ that incorrectly computed College Scorecard repayment rates—that is, the percentage of borrowers who haven’t defaulted and have repaid at least one dollar of their loan principal. The department says the error ‘led to the undercounting of some borrowers who had not reduced their loan balances by at least one dollar.’

The department played down the mistake, but the new average three-year repayment rate has declined by 20 percentage points to 46%. This is huge. It means that fewer than half of undergraduate borrowers at the average college are paying down their debt.

... The other scandal is that the Obama Administration used the inflated Scorecard repayment data as a pretext to single out for-profit colleges for punitive regulation. The punishment was tucked into a rule finalized in October allowing borrowers who claim their college defrauded them to discharge their debt. It requires for-profits in which 50% or fewer borrowers are paying down their principal to post the equivalent of a surgeon general’s warning in all promotional materials.

... This combination of cynicism and incompetence is what made the Obama Administration’s regulatory machine so destructive. One of the biggest messes it leaves behind is the government takeover of student loans that is likely to saddle taxpayers with hundreds of billions in losses. The Trump Administration now has to begin the cleanup job.

The Education Department’s corrected numbers confirm that the problem of student loan defaults and delinquencies is not confined to for-profit institutions, but also exists at similar levels among both non-profit and public institutions.

But the problems don’t stop there. Since President Obama greatly increased the role of the federal government in directly issuing student loans, borrowing nearly one trillion dollars to loan out to students at colleges and trade schools over the last 8 years, that 54% of student loan borrowers are now either defaulting or are delinquent in making payments on their loans means that the U.S. government isn’t getting anywhere near the revenue that it needs to sustain this portion of the national debt.

cumulative_total_borrowed_by_us_government_to_fund_federal_direct_student_loans_jan1998_nov2016

The options that the U.S. government has to deal with the increasingly negative outcomes from this situation are limited. With such inadequate revenues from student loan payments coming in to cover the cost of servicing their portion of the national debt, the U.S. government must either cut spending, increase taxes, or borrow even more money than it was planning to roll over the debt and compensate for that unrealized revenue.

Getting the U.S. government into the student loan business in such a big way was supposed to improve its fiscal situation, eliminating the need for politicians to risk their seats in Washington D.C. by having to make such potentially unpopular choices. Sadly, President Obama’s student loan fiasco would appear to have only made the need to make those hard choices more unavoidable.




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