off the charts
BEYOND THE NUMBERS
BEYOND THE NUMBERS
Setting the Record Straight on Student Loan Costs
President Obama’s 2016 budget estimates that the outstanding portfolio of federal student loans will be $21.8 billion less profitable than previously thought over the loans’ lifetime. This reestimate doesn’t mean that the program “had a $21.8 billion shortfall last year,” as a Politico story stated. Nor does it justify adopting an alternative accounting method (so-called “fair-value accounting”) that would artificially inflate the program’s cost. The reestimate is, indeed, completely unrelated to the accounting method. Here, briefly, is what the reestimate does and doesn’t mean. Lending programs appear in the budget with up-front estimates of the net costs or profits to the government over the loans’ lifetime. In the case of student loans, the government makes a profit, even after accounting for defaults, which is why student loans are a good deal for both students and the government. If the government later concludes that its earlier estimates of lifetime costs were too high or low, it reestimates all outstanding loans. The reestimate is recorded in the year it’s made (in this case, 2015), not in the many past years in which the loans were issued. The recent $22 billion upward reestimate is the net result of three factors:
- The President’s decision to permit students who borrowed before 2008 to switch to the Pay-As-You-Earn (PAYE) repayment plan will raise future costs by an estimated $9 billion. PAYE caps monthly loan payments at 10 percent of borrowers’ incomes and forgives the remaining debt after 20 years of payments.
- More student borrowers than originally expected are switching to other repayment plans that tie payments to borrowers’ incomes, raising future costs by an estimated $15 billion.
- Expected defaults are down (that is, more borrowers are expected to repay their loans than previously estimated), lowering future costs by an estimated $2 billion.
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