Student loan freeze cost federal government $197 billion, report finds

Federal watchdog group sounded the alarm that student loan payment suspensions could cost the Department of Education $197 billion.

Currently, $1.4 trillion in student loans is unpaid. But with new plans to forgive debt completely, the Department of Education stands to lose even more money.

The U.S Government Accountability Office (GAO) sounded an alarm that the Department of Education (DOEd) is expected to lose $197 billion in student loan income due to the suspension of student loan repayments during the pandemic, according to a July report.

The Direct Loan program, which launched in 1997, was expected to generate $144 billion in profit. However, expectations shifted as borrowers were alleviated from repaying loans during the Covid-19 pandemic. 

The report determined, however, that the department expected a nearly $200 billion loss. 

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Among several causes for the loss, inconsistent payment schedules were cited as a large reason the department’s income shifted from profit to loss. Additionally, the GAO predicts repayments will be paid at a slower rate in response to borrowers' income levels and inflation rates.

“[I]t’s important to keep in mind that the Department of Education originally expected the Direct Loans made in the last 25 years to generate billions in income for the government,” GAO Director Melissa Emrey-Arras told Campus Reform. “Yet, we found that Education’s current estimates show these loans will cost the government billions.”

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The DOEd Press Office referred Campus Reform to a response issued by Under Secretary James Kvall, in which he acknowledged the financial hardship perpetuated by the pandemic. 

Kvall insisted, however, that the student loan pause helped 42 million borrowers “avoid default and delinquency during the national emergency and ensured that they could focus on their health.”

The student loan payment freeze saved the “average borrower” $4,400 between Jan. 2021 and Aug. 2022, according to the Under Secretary.

“The Direct Loan (DL) program has provided millions of students the opportunity to enroll in education beyond high school and earn a credential that will help them to succeed,” he wrote. “The program has helped many low-income students to enroll in, persist through, and complete their education.”

The report's findings could inevitably mean nothing, however, as it prefaced the Biden administration's recent decision to cancel student loans for select borrowers, which forgives up to $20,000 of student loan debt for some borrowers.

Biden also paused loan repayment through the end of the year, which is now the fourth extension granted since the CARES Act passed in March 2020, which intended to alleviate debt holders during the Covid-19 pandemic.  

Currently, $1.4 trillion in student loans is unpaid. But with new plans to forgive debt completely, the Department of Education stands to lose even more money. The GAO has not made recommendations. 

Campus Reform contacted the Department of Education for comment. This article will be updated accordingly.

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