Report: Taxpayers Face $400B Hit On Bad Student Loans

U.S. taxpayers stand to absorb a hit of about $435 billion from borrowers’ failure to repay student loans currently on the federal government’s book, the Wall Street Journal reported Saturday (Nov. 21).

The figure, which approaches banks’ losses during the 2008 sub prime mortgage crisis, resulted from an analysis performed by the U.S. Department of Education and two private consultants that helped the agency review the situation, the WSJ reported.

The analysis’s bottom line, according to the Journal, was that borrowers who owe a combined $1.37 trillion in principle and interest will repay about $935 billion.

The analysis did not factor in the roughly $150 billion in loans that are held by private lenders but backed by the federal government, the WSJ reported.

Private lenders lost $535 billion on low-quality mortgages during the 2008 Global Financial Crisis, Mark Zandi of Moody’s Analysics told the WSJ, according to Saturday’s article.

The WSJ quoted experts including Constantine Yannelis of the University of Chicago saying a difference between the relative ease with which the government can bail itself out for having made bad loans — Congress only has to raise taxes or cut spending or both — makes it less likely lawmakers and policy-makers will impose more discipline in making student loans.

“There’s no market discipline here,” the paper quotes Yannelis as having said.

Student borrowers whose loans are held by the federal government caught a temporary break when Congress passed the CARES Act in March 2020 to provide financial relief for individuals and organizations affected by COVID-19. Those borrowers got six-month suspensions of payments with no added interest.

The CARES Act didn’t help borrowers whose loans were held by private lenders.

Even before COVID-19, experts were warning that student loan defaults were rising even as the total amount owed by all borrowers declined. A pre-COVID-19 Brookings Institution study concluded that 40 percent of student loan borrowers would be in default by 2023.