Student Debt and Default Explode While U.S. Department of Education Fiddles

A new report from the U.S. Department of Education’s Office of Inspector General (OIG) examined what steps it had taken from fiscal years 2011 through 2014 to improve student debt and loan repayment rates.

In a nutshell, a big fat nothing—and taxpayers will be stuck paying off tens of billions in bad loans as a result. According to the OIG:

The Department’s outstanding student loan debt portfolio more than doubled in the last 6 years, from $516 billion at the end of FY 2007 to $1.04 trillion at the end of FY 2013. Based on the most recent official cohort default rate information published by the Department, 1 in 10 borrowers who were required to begin repaying their loans in FY 2011 defaulted on their student loans within 2 years and about 1 in 7 borrowers defaulted within 3 years. (p. 1)

Here are some other troubling statistics:

As of June 30, 2014, nearly 40 million borrowers had outstanding student loans totaling about $1.1 trillion that were either held or guaranteed by the Department. (p. 4)

Based on information contained in the Department’s FY 2015 Budget Proposal, graduating seniors with student loans held an average of $29,384 in combined private [not federally subsidized] and Federal student loan debt in award year 2011-2012, 27 percent more than the average combined debt of $23,118 in award year 2007-2008. (p. 4)

Total private and Federal student loan debt is currently the second largest form of debt in the nation, behind only home mortgages. (p. 4)

Borrowers are defaulting on their Federal student loans at the highest rate since 1995. (p. 4)

We’ll recall that back in 2010 Education Secretary Arne Duncan was blasting heavily subsidized private lenders and insisting that federal “direct lending” through his department was a better plan. Nearly two years later, student debt continued to balloon. We also know that the “cohort” default rate used by ED underestimates the actual student loan default rate significantly—a fact the OIG admits in a footnote (p. 5, n. 8). Also buried in a footnote is this disturbing fact:

According to estimates contained in the Department’s FY 2015 Budget Proposal, the Federal government will not be able to recover between $0.04 – $0.13 of every loan dollar (calculated on a cash basis and excluding collection costs) that goes into default. (p. 5, n. 9)

Given that outstanding loan debt now tops $1.04 trillion, that works out to anywhere from more than $40 billion to over $135 billion each year, plus who knows how much more in unspecified collection costs.

Making matters worse (but hardly shocking as far as government bureaucracies go) the OIG found:

The Department does not have a comprehensive plan or strategy to prevent student loan defaults and thus cannot ensure that default prevention efforts conducted by various offices are coordinated and consistent. (p. 13)

[The Department] did not explicitly establish default prevention activities in the 2009 TIVAS [Title IV Additional Servicers] contracts or adequately monitor calls to delinquent borrowers. (p. 18)

The Department now has 30 days to come up with a corrective action plan. While we wait with bated breath for that one, we’ll be piling on all those billions of dollars in bad government-held student loan debt to our public debt. According to a 2012 Council on Foreign Relations report:

With a pair of new laws in 2008 and 2010 [the Ensuring Continued Access to Student Loans Act of 2008 and the Student Aid and Fiscal Responsibility Act of 2009, or SAFRA], Congress fundamentally changed the student loan market, making the U.S. government the sole supplier of Federal student loans, rather than just the ultimate guarantor. In itself, this does not affect the government’s net debt,” noted the CFR. “This new direct lending does, however, add to the gross debt held by the public. The $1.4 trillion in direct federal student loans that will be outstanding by 2020 will amount to roughly 7.7% of gross debt. This is 6.3 percentage points higher than it would have been had the scheme not been nationalized.”

The feds nationalized student loans under the guise of eliminating the middle man to keep college costs down (it hasn’t). Just days before SAFRA passed the House, Duncan took to the press, preaching:

We’re not asking the taxpayers for one single dollar. We’re simply making the choice to stop subsidizing banks, to invest our young people back here.

SAFRA sponsor Rep. George Miller (D-CA) was similarly breathless, and Democratic House Speaker Nancy Pelosi (D-CA) gushed that this federal lending takeover was a cornerstone of the Obama Administration’s overall “fiscally sound,” deficit-reducing 2010 budget.

So here we are today. Technically, Duncan was right: we’re not paying one single dollar. We’re paying tens of billions of them.