Taxpayers On the Hook for Billions in Unpaid Student Loan Debt
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What is the main topic discussed in this episode?
Here's your money briefing from Monday, November 23rd. I'm J.R. Whelan for The Wall Street Journal.
How big is the U.S. federal student-loan problem and who pays for unpaid debt?
Americans currently hold about $1.5 trillion in federal student loan debt. A study conducted for the government projects that borrowers will only be able to pay back about $900 billion of it. That leaves taxpayers to pick up the rest.
You know, you have some people who are defaulting. You have other people who are current on their loans, but they're just not paying them down as much as Congress thought they would.
Josh Mitchell covers student debt and economics for The Wall Street Journal. Coming up, he'll explain why predictions for how much borrowers would be able to pay back were so off the mark, and how this factors into the push for student loan forgiveness. That's after the break.
Taxpayers could be on the hook for about half a trillion dollars in unpaid federal student loans. That's much more than what the government had in mind when it loosened its restrictions on higher ed loans. To get to the bottom of how this happened, let's bring in our economics reporter, Josh Mitchell. Josh, thanks for being with us.
Why did government projections overestimate borrower repayment rates?
Sure, thank you.
So the government didn't see these kinds of numbers coming?
No. So for years, Congress has assumed that this big program, this big lending program, is going to return taxpayers a profit. The problem is that the assumptions that Congress makes are based on very rosy assumptions about whether people are going to repay their student loans. And right now, the Trump administration is starting to learn that those assumptions have been very wrong and that actually instead of returning taxpayers a profit, it's actually going to be a very big cost – People are not paying their loans at nearly the level that Congress has for years thought they were going to do, and this is turning into a really big cost for taxpayers.
And it's not just students with big-ticket loans that are defaulting and can't pay it back, right?
Which borrower groups are defaulting or not paying down balances as expected?
Well, it's a mix of both. So, you know, you have people who may have dropped out of college, two-year college or for-profit college, and so they may only owe, you know, $8,000 because they lasted less than a year. A lot of those people haven't been able to get good jobs, and so they aren't making any payments at all. And so they have defaulted on their loans. That's one problem.
How does lack of underwriting in federal student lending contribute to rising defaults?
But then you have this other problem where it is actually people who have borrowed $20,000, $30,000, $50,000, sometimes $100,000 because they did go to all four years of college or they went to a graduate school or they went to law school, and so they ended up racking up a lot of debt. They come out. In a lot of cases, they have a good job, but the balance that they owe is still higher than what they're actually earning. And so their monthly payment is so high that they're essentially refinancing into these plans that forgive a portion of their debt. They call it income-based repayment. So you have some people who are defaulting. You have other people who are current on their loans, but they're just not paying them down as much as Congress thought they would.
Now, how has the way the government lends money contributed to where we are now?
Basically, there's no underwriting of these loans, and what I mean by underwriting is that when the education department gives a student a loan, it doesn't look at basic characteristics to determine how likely that person is going to repay their loans. This is something that a bank actually does. A bank, when you go to apply for a home loan, for example, they're going to look at your income. They're going to look at how much the house is that you're buying and how much it is compared to the debt you're taking on. For example, a mortgage lender is not going to give you a $400,000 loan for a house that's only valued at $200,000. Here, basically the education department is not doing that. It's basically saying, oh, if you want to borrow $50,000 for a degree that's not going to allow you to pay off that degree…
No, you know, sure, here, here's the check.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:05–0:10
2
How big is the U.S. federal student-loan problem and who pays for unpaid debt?
0:10–1:07
3
Why did government projections overestimate borrower repayment rates?
1:07–1:53
4
Which borrower groups are defaulting or not paying down balances as expected?
1:53–2:13
5
How does lack of underwriting in federal student lending contribute to rising defaults?
2:13–3:53
6
What parallels exist between student-loan lending and the 2008 mortgage crisis?
3:53–5:31
7
How does the federal loan approach differ from private student-lender practices?
5:31–7:57
8
How could loose federal lending influence arguments for broad student-loan forgiveness?
7:57–8:44
Speakers
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