The February 2nd WSJ article, “U.S. Student-Loan Program Losing Money as Borrowers Seek Debt Forgiveness” claims that the government will be losing money on the student loan program due to loans that will be canceled through the various forgiveness programs being administered by the Department of Education. While reporter Josh Mitchell diligently reports on this claim from an Inspector General Report, there are hard facts that strongly indicate that the Department has neither the desire nor the intention to forgive anyone’s student loan.
Nearly three years ago, the Chronicle of Higher Education reported that a whopping 57% of the people enrolled in the Income Based Repayment (IBR) program had been expelled for failing to verify their income- one of many ways borrowers can be disqualified from the program. Moreover, the few who do actually make it through will be hit with a tax penalty that could easily equal or exceed the amount they originally borrowed.
Furthermore, we now know that every year, the Department rejects about 30% of the employment forms that borrowers must successfully submit to get forgiveness under the Public Service Loan Forgiveness Program. This may not sound too harsh, but simple statistical analysis shows that a 30% annual rejection rate leads to only 2.8% of the borrowers in the program ultimately making it through.
Given this, it would be surprising if even 15% of the borrowers in either of these programs actually get the forgiveness they are trying for. The vast majority will be disqualified and left owing far more than when they entered.
In general, the notion that the government is not making money on the lending program- and a lot of it- is just not credible. Assuming an average interest rate of 6%, interest alone on the government’s $1.4 Trillion portfolio comes to $84 billion per year. Indeed, the government booked over $50 billion in profits in 2012, and the Obama administration even used student loan profits to pay for the Affordable Care Act.
What is particularly interesting: White House Budget data going back well over a decade show that the government recovers more than it pays out on defaulted student loans on average- a feature that no other lender for any other type of loan can claim. In the absence of bankruptcy rights, statutes of limitations, and other core consumer protections that were stripped uniquely from student loans, and the presence of an extremely harsh (and profitable) collection regime, our government has apparently found a way to get blood from a stone.
The media and Congress should be investigating the true performance of these forgiveness programs, rather than accepting as fact these alarmist and misleading claims from the Education Department, which has historically placed its institutional financial interests far above those of the borrowers. Headlines such as these provide camouflage for a predatory, hyper-inflationary, big-government lending system that is devastating tens of millions of citizens, including those who pay for their kid’s college education out-of-pocket.
Photo credit: StudenLoanJustice.org