Low Interest Student Loans 2016 - Democratic politicians often claim that the federal government is making a profit on student loans. However, the latest version from the Congressional Budget Office (CBO) suggests that the truth of that claim depends on how you slice the numbers. The government is losing money on student loans using fair value calculations, which include the enormous risks taxpayers take when granting student loans. And this is no small loss. Over the next decade, the federal student loan program will cost $170 billion.
It is difficult to estimate the costs of government programs. For example, a dollar earned in the future is worth less than a dollar spent today, so we have interest on debt. That dollar earned in the future is worth even less when we're not sure we'll actually earn it—for example, if that dollar comes from a student loan program with a high default rate.
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Therefore, accountants apply discount rates to future cash flows, which tells us how much we expect that dollar to be worth in the future. For a safe investment, such as a US Treasury bill, discount rates are relatively low. For risky investments, such as student loans, discount rates should be much higher. The latest release of data from the Department of Education showed that 46% of federal direct student loans are in default.
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CBO produces two estimates of the cost of the student loan program: the standard estimate, with low discount rates, and the other with "fair value" discount rates that reflect market risk. In the low discount rate scenario, the government would gain $37 billion from the student loan program between 2017 and 2026. However, according to the most accurate price estimate, Uncle Sam would lose $170 billion.
The $170 billion loss includes about $130 billion in losses on the loans themselves, plus another $40 billion in administrative costs. Even more impressive is the size of total student loan repayments: $1.1 trillion over the next ten years, nearly as much as the current level of outstanding student debt.
According to the CBO's standard calculation, the government benefits from four out of five federal student loan programs (excluding student loans). However, based on the fair value calculation, the government suffers a loss on four out of five programmes.
This time, the exception is Parent PLUS loans. CBO expects this program to provide taxpayers with $19 billion over the next ten years. However, there are reasons to think this number may be too optimistic. Parent PLUS loans, which allow parents of students to borrow the cost of their children's tuition (determined by the school), previously accounted for a small portion of student loans. However, as the cost of college increased, PLUS loans grew rapidly in both size and scope. While default rates are relatively low, they are likely to rise as parents go into more debt to pay for their children's education.
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If the government really takes advantage of student loans, there will be room for private lenders to step in and offer students lower interest rates. However, over 90% of student loans are provided by the federal government, indicating that the interest rates offered do not adequately compensate taxpayers for the adequate cost of the loans.
What to do? The central problem is that students borrow too much to go to college. Since 2000, tuition and fees have increased 46% at private four-year colleges and 94% at public four-year colleges, after adjusting for inflation. Federal student aid itself is responsible for this, as universities receive taxpayer money through the federal loan program and have no incentive to reduce costs and tuition.
To control rising student debt levels (and reduce costs for taxpayers), policymakers need to start at the source: controlling the cost of higher education. This means limiting the grants universities can receive from the federal government, keeping underperforming schools, and encouraging less expensive alternative forms of education.
The high levels of student debt reflect two costs. The first is the cost to taxpayers, set at $170 billion over the next decade. The second cost falls on the students themselves: Carrying heavy debt will cause students to delay buying homes or starting families, which slows economic growth for others. Fortunately, these costs cannot be avoided with the right mix of innovation and smart policy. While every recession is different, the Great Recession of 2008 and the pandemic-induced recession of 2020 were very attractive to student loan borrowers. Part of this difference is caused by changes in law and order, such as the current federal freeze on student loans, but it is also caused by the expansion of student loan borrowers.
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Compared to 2008, student loan borrowers today are older, have more debt on average, are more likely to have middle or higher incomes, and benefit from more flexible student loan repayment policies. More than ever, federal student loan borrowers are not monolithic, and this has implications for how public policy is structured for borrowers.
In recent work, we found that first-time mortgage lending rates were on average higher among student borrowers than non-borrowers during the pandemic. This finding contrasts with evidence from 2008 which suggested that home buying among borrowers was slowing down. People who were paying off student loans before the pandemic appeared to be more likely to get a first-time mortgage. Distressed borrowers — those who defaulted on student loan debt — were less likely than their similarly situated peers to get a new home loan.
The total number of federal student loan borrowers increased 43% between 2008 and 2020, and the average debt per borrower increased 83%, from $19,300 to $35,400. the 2008 recession and the introduction of the PLUS graduate loan in 2006, which replaced most specific graduate student loans.
One notable trend is the increasing age of student loan borrowers. The percentage of people aged 35-44 who have student loan debt has nearly doubled, from 15% in 2007 to 34% in 2019. This may be due to the increase in the percentage of borrowers who are graduate students, with some exceptions. Lenders taking out loans for long periods of time (PDF). And more and more parents are borrowing for their children's education, with the amount of parent PLUS debt at public universities doubling between 2009 and 2019.
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The composition of student loan borrowers as a group also varies in other ways. Although the share of the U.S. population with student debt has increased regardless of race or ethnicity, the average amount of student loan debt has increased the most for black borrowers, from $11,360 in 2007 (nearly $5,000 less than the average for white borrowers) in 2019 at $30,000 ($7,000
Unlike in the pre-recession 2008 school year, freshmen from middle- and upper-income families borrowed about the same rate (PDF) as their low-income peers in 2015-16. This trend continues even after students leave higher education. When we look at the share of households that have student loan debt in 2019, middle- and upper-income households (between the 40th and 90th income percentiles) are about 8-9 points more likely to be in debt than those at lower or lower income. higher income counterparts, trend less visible in 2007 (4-6 percentage points).
In addition to taking into account changes in the demographic composition of borrowers, the new policy must consider how payment options have changed. Generous Income Based Reimbursement (IDR) policies were introduced in the years during and after the 2008 recession, such as Income Based Reimbursement (2008, modified in 2010 for less payment sharing) and Pay As You Earn (2012) . Borrowers are increasingly using IDR plans. The share of college borrowers in IDR plans increased from 11% to 24% from 2010 to 2017. During the same period, graduate borrowers in IDR increased from 6% to 39%.
This policy change not only increases the amount of time borrowers have to repay their loans, it also increases the percentage of borrowers (over 75 percent, in a 2012 Congressional Budget Office survey) in amortization. This way, the amount that borrowers repay does not accrue interest, and student loan balances grow rather than shrink, even as borrowers move toward forgiveness.
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Student loan lenders are increasingly diverse, especially when it comes to financial needs. A significant portion of student loan borrowers are on low incomes who find it difficult to repay their loans. And student loans can hinder the acquisition of wealth, especially for black borrowers, in a way that contributes significantly to the widening racial gap in household wealth. But student loan borrowers are now more diverse in age and income than they were during the 2008 recession.
When planning for the next recession, policy makers may want to consider the different situations of borrowers and focus their efforts on helping those who are particularly at risk. For example, policy makers may focus on those already involved or unable to commit crimes or stake money to meet economic needs.
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