hat sounded high to Mr. Courtney because in the private sector 20 cents would be more appropriate for defaulted consumer loans that aren’t backed by an asset.
He asked Education Department budget officials how they calculated that number. They told him that when borrowers default, the government often puts them into new loans. These pay off the old loans, and this is considered a recovery, even though in many cases the borrowers haven’t repaid anything and default on the new loans as well.
In reality, the government is likely to recover just 51% to 63% of defaulted amounts, according to Mr. Courtney’s forecast in a 144-page report of his findings, which was reviewed by The Wall Street Journal.
“If you accounted this way in the private sector, you wouldn’t be in business anymore,” Mrs. DeVos said in a December interview. “You’d probably be behind bars.”
Mr. Courtney’s calculation was one of several supporting the disclosure in a Journal article last fall that taxpayers could ultimately be on the hook for roughly a third of the $1.6 trillion federal student loan portfolio. This could amount to more than $500 billion, exceeding what taxpayers lost on the saving-and-loan crisis 30 years ago.
If Mr. Courtney is right, there are big implications for taxpayers and families alike. While defaulted student loans can’t cause the federal government to go bankrupt the way bad mortgage lending upended banks during the financial crisis, they expose a similar problem: Billions of dollars lent based on flawed assumptions about whether the money can be repaid.