Collection efforts against borrowers who are behind on their student loans are starting up again after a several-year moratorium, according to the Department of Education, but it may not benefit the federal government much -- the latest studies show the loans are actually losing money because the risks were improperly estimated going back decades.
“Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment — both for the sake of their own financial health and our nation’s economic outlook,” Education Secretary Linda McMahon said.
May 5th is the day collections will begin again, she said, after the Biden Administration "misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear."
But the most overlooked aspect of these student loans is that the federal government did a poor job in originally estimating the returns on them, and the latest reports show the feds aren't making money off the loans as originally intended -- they're losing money.
"A lot of these loans have become much more expensive over time than the government originally anticipated," OpenTheBooks.com Investigative Journalist Jeremy Portnoy says. "And that's because of bad assumptions and bad math that the government has been doing since the 1990s.
"There was a report that just came out from the Government Accountability Office, turned out the government was expecting a profit of $6 for every $100 they loaned out on student loans, but in the end they're going to lose $9 for every $100 they're loaning out, and that's because of the way federal loans were estimated based on the rules that were in place in the 1990s."
In fact, even though the federal budget claims that Washington will lose "only" $2.4 billion in lending money next year, the truth (that is, the "most comprehensive estimate") is that the real cost will probably be 27 times higher than originally thought.
According to a Real Clear Investigations report last year, the "Congressional Budget Office projects the federal government will offer $1.9 trillion of credit assistance in 2025: $228 billion lent directly to Americans, and $1.6 trillion in guarantees to help Americans pay back private loans if they default
Portnoy says there have been a number of representatives who have tried to change that formula over the years, "but so far none of the plans have ever gotten much traction."
There were efforts to try to make lending estimates "more like a private business would have estimated it, but they haven't" seen much progress.