About 10% of the $1.5 trillion federal student-loan portfolio is 30 days or more past due. Another 20% is in deferment or forbearance, and about 30% is in income-based repayment plans that allow most borrowers to cap monthly payments at 10% of discretionary income and discharge the remaining balance after 20 years or 10 for folks in “public service.”
Congress created these nifty plans in 2012 for new borrowers, but then the Obama Administration expanded them retroactively to reduce defaults, buy off millennial voters and disguise the cost of its student-loan takeover. This may be the biggest accounting fraud in history.
Democrats in the 1990s created a public student-loan option to compete with subsidized private lenders. Then in 2010 they nationalized the market to help pay for Obama Care. The Congressional Budget Office at the time forecast that eliminating private lenders would save taxpayers $58 billion over 10 years. This estimate was pure fantasy, and now we’re seeing how much.
The government student-loan portfolio has since doubled while severely delinquent loans have spiked despite a good economy. Many borrowers in income-based repayment plans aren’t repaying principal, so their balances are growing as they accrue more interest. By 2012 a majority of new borrowers had bigger balances after two years of making payments.
Yet during the Obama years CBO scored student loans as a government profit center by underestimating the growth in income-based repayment plans. CBO has slowly scaled back its 10-year revenue projections for student loans to a $31.4 billion government cost in this year’s forecast from a $219 billion 10-year revenue gain in 2012.
The nearby chart tells the story. Using fair-market accounting that prevails in the private economy, CBO now projects a $306.7 billion cost to taxpayers over the next 10 years. The red ink will be far worse beyond that 10-year budget window.