Why Student Loan Cancellation Costs Taxpayers Nothing

– by Alan Collinge

Medium

The taxpayers have been repaid. A federally owned student loan, in fact, could be cancelled at little- or no actual cost to the taxpayers.

Over the past two years, beltway defenders of the federal student loan program have overwhelmed the mainstream media with articles and essays nearly shrieking that student loan cancellation will be a massive “cost” to the taxpayers. President Biden’s relatively modest $10,000, means-tested loan cancellation plan has created, for example, a cottage industry where “Sky is Falling” beltway experts claim a “cost” to the taxpayers of $500 billion to nearly $1 Trillion. Some even claim that this will result in a “tax burden” of $2,500 to the average taxpayer. All of these claims are utterly and completely false.

In fact, several decades worth of Department of Education and White House Budget data show that federally owned student loans- unlike all other federally owned or guaranteed loan programs- have been so massively profitable over many decades, that all federally owned student loans could be cancelled by executive order entirely- not just $10,000/per borrower- at little or no actual cost to the taxpayers.

First: the taxpayers funded these loans many years ago when the loans were originally made. The President (through the Secretary of Education) can cancel not just some, but all federally owned loans  without needing any money from the Treasury. This will also add absolutely nothing to the national debt.

This is in stark contrast to PPP loans, for example, which added nearly $1 Trillion to the national debt, and required the same amount to be drawn from Treasury and yet required no repayment from the borrowers.

Second: borrower payments to the Department of Education have nearly equaled the amount lent out. Even the most vociferous critics of cancellation (like Marc Goldwein from the Committee for a Responsible Federal Budget, for example)-have acknowledged the government was collecting around $85 billion/year on the federal student loan program prior to 2020. The government was lending out roughly $90–95 billion during these same years.

Given these cash flows, it is clear that the actual unrecouped monies the government has seen has been very small, perhaps only $100 billion over the past decade. The explosive growth in the size of the portfolio- particularly since 2010 is largely attributable to profit booked on the lending program, rather than actual taxpayer spending.

Third: decades of White House Budget data show that- unlike all other loans (in the U.S. if not the world)- the Department of Education has been making a profit – not a loss – on defaulted student loans. This is something that no other lender can claim. The unique removal of bankruptcy protections and statutes of limitations have enabled this, where the government can pursue borrowers for their entire lives, and there is no recourse. Since the lending program was federalized in 2010, the profitability of these defaulted loans, has skyrocketed since the government now pays so much less for the original loan, rather than the book-value of a defaulted loan at the time of default.

But this was true even before the program was federalized under Obama. As far back as 2004, Albert Lord, the CEO of Sallie Mae (The largest federal lender at the time) was bragging that the company was sending checks to the federal Treasury every year, not the other way around.

Incidentally, profiting on defaulted loans is a defining hallmark of a predatory lending system, and the real harm this has caused citizens and their families over many years is incalculable.

Fourth: loan cancellation critics often point to GAO reports like this, which find a huge cost to taxpayers associated with loan discharge through the various Income-Driven Repayment (IDR) programs. What they fail to mention, however, is that a vanishingly small percentage of borrowers are actually getting the loan cancellation that is promised. The vast majority never receive the advertised loan cancellation, but rather are expelled from the program, and typically left owing far more than had they never tried for the programs. Ironically, these programs certainly have had the effect of increasing the overall debt owed, rather than reducing indebtedness.

Bluntly speaking: This predatory student loan system has been a cash cow for “the taxpayer” (actually the Departments of Education and Treasury), to say nothing of the vast array of servicers, Government Sponsored Entities (GSE’s), and other contractors profiting wildly from it. The beltway critics (including the CBO and GAO) are claiming Biden’s paltry $10,000 cancellation will “cost” the taxpayer. In reality, they are using fantastic accounting, forecasting and tricky language that would make an Enron executive blush. They know full well that this lending system has been profitable like no other lending program in the history of the U.S. Government.

They also know that previous performance for the federal student loan program is absolutely no indicator of future results. Before the pandemic nearly 60%- close to two-thirds- of all borrowers had stopped making payments on their loans. After a three year pause on payments, the inflation now gouging the country, and a likely recession in the near future, the non-payment rate will surely increase, and probably dramatically. It would not be surprising if 85% of the borrowers will not be making payments on their loans when they attempt to turn on payments again. At this point, the system is catastrophically and terminally failing by all rational metrics.

Biden’s relatively tiny loan cancellation absolutely will not actually cost the taxpayers anything. This is in stark contrast to, say, the PPP Program, where the loans (which were never paid on at all) required $1 Trillion to be drawn from the Treasury, money “printed”, and $1 Trillion actually added to the national debt. Cancelling federally owned student loans- including total cancellation of all loans- would require $0 to be drawn from the Treasury, no money would be “printed”, and absolutely nothing would be added to the national debt.

It is very telling that the critics largely fell silent when it came to this massively expensive, national debt-ballooning, PPP giveaway, largely to the wealthiest 20% of citizens. Many, in fact (like Grover Norquist, for example) traded in their slings and arrows for pom-poms, and actively promoted the PPP program, and even took out loans for themselves.

A key point: The federal student loan program was originally intended to offer the loans free of interest. President Lyndon Johnson said as much when he signed the Higher Education Act into law in 1965.

Today, about $100 Billion in interest alone is added to the nation’s student loan balance in a typical year. Even Donald Trump decried the fact that the program was being used as a profit center for the federal government shortly before he announced his run for President in 2015.

The defenders of this viciously predatory, massively profitable, and now catastrophically failed loan program largely control the media. They can and surely will perform all manner of gymnastics to keep it alive, but it just is not going to happen.

Politicians from both political parties should inculcate this unavoidable, inescapable fact, and deal with this failed lending program as it is rather than believing the fantasy that its defenders are pushing into the zeitgeist.

Below is one example of the tens of millions of citizens who have been decimated by this shameless, government profiteering. They are willing to be interviewed.