Student Loans: Education has increased federal direct loan cost estimates by billions due to programmatic and other changes

What the GAO found

Although the Department of Education originally estimated that direct federal loans made over the past 25 years would generate billions in revenue for the federal government, its current estimates show that these loans will cost the government billions. Education initially estimated that these loans would generate $114 billion in revenue for the government. Although the actual costs cannot be known until the loan terms end, beginning in fiscal year 2021, these loans are expected to cost the federal government $197 billion. This $311 billion variation was driven by both programmatic changes and re-estimates using revised assumptions (e.g., economic factors and loan performance) as additional data became available (see figure) .

Original and current (fiscal year 2021) estimated cost or income of direct loans made during fiscal years 1997-2021

The largest estimated cost increases — $102 billion in total — stem from emergency relief provided to most federal borrowers under the CARES Act and related administrative measures in response to the COVID-19 pandemic. This relief included the suspension of (1) all payments due, (2) accrued interest, and (3) involuntary collections for defaulted loans. The suspensions, which are programmatic changes dating back to March 13, 2020, are currently set to expire on August 31, 2022. Re-estimates based on updated data and assumptions about borrowers in income-contingent repayment plans have also increased significantly the estimated costs.

Among the factors that make it difficult to estimate the cost of direct loans are the lack of historical data when new programmatic changes are introduced and the assumptions education must make about borrower behavior during the life of the loan. For example, the monthly payment amount for borrowers in income-contingent repayment plans may change depending on their economic circumstances. Using a hypothetical group of borrowers, GAO found that borrower income growth and inflation, which are difficult to predict, affect borrower payments. For example, the GAO has found that when income grows at a slower rate, borrower payments to government decline, which increases government costs.

Why GAO Did This Study

Over the past three decades, the direct lending program has grown in size and complexity, with nearly $1.4 trillion in federal student loans outstanding. The Direct Loans Program provides financial assistance to students and their parents to help pay for their post-secondary education. GAO was asked to examine changes in education cost estimates and contributing factors.

This report examines how and why cost estimates for direct education loans have changed over time. GAO reviewed budget documents and data covering direct loans issued from fiscal years 1997 through 2021. GAO also conducted model-based analysis on a hypothetical group of borrowers beginning repayment to demonstrate how changing assumptions Economics can affect both repayment plan selection and estimated loan payments. In addition, GAO interviewed education budget officials about their process for estimating student loan costs and how these estimates are calculated and documented.

A forthcoming report will examine government and private sector estimation methods and the education approach to estimating direct lending costs.

The Ministry of Education provided written comments with additional context on some of the factors that contribute to its revised estimates. The GAO does not make recommendations.

For more information, contact Melissa Emrey-Arras at (617) 788-0534 or [email protected], Cheryl E. Clark at (202) 512-9377 or [email protected], or Lawrance L. Evans, Jr at (202) 512-4802 or [email protected]

About Judith J. George

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