Student Loan Disaster: Federal Government Makes $300 Billion Accounting Error

Story by Andrew Herrig, Wealthy Nickel, 1/30/23

SOURCE: https://www.msn.com/en-us/money/personalfinance/student-loan-disaster-federal-government-makes-300-billion-accounting-error/ar-AA16RW17?ocid=msedgntp&cvid=c89a3dc93b744a95847275440a7f3be4

When your budget is in the trillions of dollars, perhaps $300 billion is a rounding error. But to the American taxpayer footing the bill, losing $300 billion is a big deal.

A new study published by the Government Accountability Office (GAO) revealed a shocking gap between what the federal government projected the student loan program would generate in revenue and what actually happened.

The GAO said in their report that “although the Department of Education originally estimated federal Direct Loans made in the last 25 years would generate billions in income for the federal government, its current estimates show these loans will cost the government billions.”

Projected Gains Turn into Huge Losses

The report goes on to say that the Department of Education initially estimated that the federal student loan program would generate $114 billion in extra income for the government and, thereby, taxpayers. But in reality, the GAO projects that the program will end up costing the federal government $197 billion.

That is a $311 billion discrepancy and has cost taxpayers around $10 billion annually since 1997. In fact, the original estimates forecast a profit in all but four years between 1997 and 2021. But the reality is that every year has resulted in a loss, except for a small gain in 2012.

In simpler terms, the GAO report notes that based on the original estimates, the federal loan program planned to generate $6 in income for every $100 disbursed. As of the fiscal year 2021 projections, those loans are now expected to lose $9 for every $100 disbursed.

Imagine a bank that loaned money and lost 9% on every loan. They wouldn’t be in business very long. So what happened? How did the Department of Education get it so wrong?

To be fair, the government is not a bank, and the goal is not always to make a profit. But an accounting error of this magnitude perhaps should have received more scrutiny from Congress and the public.