The Federal Student Loans Program is often critical as a source of revenue for the federal government. But one new report from the Government Accountability Office (GAO) shows that the current situation could not be further from the truth.
When the federal student direct loan program was launched in 1994, the Department of Education valued that it would generate $114 billion in revenue for the federal government. Almost 30 years later, the program is valued cost the government $197 billion, a staggering difference of over $300 billion. The federal student loan program has failed, and the cost of its failures will be borne by the American public.
The main contributor to the increased cost of the direct loan program is the continued pause in student loan payments initiated during the COVID-19 pandemic. According at GAO, previous forms of government spending only increased the cost of the program by about $14 billion. The COVID-19 relief, on the other hand, has cost the government nearly $108 billion in revenue. Even more concerning, the cost of the COVID-19 student loan pause is likely even higher, as the GAO did not include 2022 data in its estimates.
The other sources of the massive cost of the program are more complicated. The GAO notes that the direct lending program has undergone a series of programmatic changes over the years, including the creation of the Civil Service Loan Relief Program and the income-based repayment plan. Although these programs have added billions to the cost of the direct lending program, 61 percent of the increase in the estimated cost of the program stems from complicated changes in the economy and borrower behavior.
Income-Based Reimbursement plans, such as 2007 Income Based Reimbursement Plan and 2015 Pay-As-You-Go Plan, were created to allow students in low-paying jobs to get an indefinite reduction on their student loans. These programs limit the monthly loan payment to an “affordable amount,” which is 10% or 15% of the borrower’s discretionary income, depending on the date of enrollment in the program.
47 percent of all borrowers are registered with an Income-Driven Refund Plan, a percentage that has steadily increased over time. These borrowers tend to earn less and borrow more than other students, highlighting a fundamental flaw in the direct loan program: while student borrowers received a good return on their investment when they took out student loans, many of them would not earn as much. little money that they can only afford to pay small amounts each month.
This particular failure highlights how the Direct Lending Program has failed to deliver on its promise of accessible college education and the middle-class quality of life that comes with it. Instead of helping more students get college education, the direct loan program has prompted schools to dramatically raise tuition, making the prospect of an affordable education even more out of reach for American students.
Rather than providing students with the skills to get high-paying jobs — jobs that make it fairly easy to pay off a modest student loan balance — students are increasingly borrowing sky-high amounts of money to earn degrees that help them barely getting gainful employment. The exorbitant cost of the direct lending program is another reason to withdraw it. While the program’s contribution to the dramatic increase in tuition prices should be enough to cause concern, the fact that the program is hundreds of billions of dollars over budget is even more alarming.