Student Loans Cost $340 Billion More than Expected

The federal cost of student loan programs has exploded over the last decade, transforming the program from a money-maker under typical scoring rules to a significant money-loser, based on current estimates.

Based in part on new data from the Congressional Budget Office, this piece shows:

• The estimated federal cost of student loans issued between 2015 and 2024 has increased by $340 billion – from a projected gain of $135 billion in the 2014 baseline to an expected loss of $205 billion in the 2024 baseline (even this cost is now likely an underestimate due to new pending rules affecting student loans).
• Much of the cost increase can be explained by the expansion and increased enrollment in income-driven repayment (IDR).
• In forward projections, graduate school loans are now nearly as subsidized as undergraduate loans and make up half of the cost of newly issued student loans.
• Reforming graduate loans to be cost-neutral would generate over $100 billion in deficit reduction over the next decade.

Student Loan Costs Have Exploded 

A decade ago, student loans offered between 2015 and 2024 were projected to collect more in repayments and interest than they provided in loans, on a present value basis.¹ In 2014, CBO estimated that loans issued between FY 2015 and FY 2024 would ultimately generate $135 billion in net savings and receipts for the federal government. Just over $100 billion of this was projected to come from graduate student loans, which both carried higher interest rates and were more likely to be repaid, as compared to undergraduate loans. By 2024, this group of loans issued between 2015 and 2024 are now estimated to cost $205 billion. 

2014 was one of the first years that new borrowers were eligible for a new, more generous form of Income-Driven Repayment (IDR), and since then estimated costs have exploded.²  Since loans are repaid over an extended period of time (usually from 10 to 30 years), any changes in estimate methodology or in policy that affect previous loan cohorts also affect their cost. A large part of the $340 billion increase in cost was due to the pandemic era pause in federal student loans in which borrowers were not expected to pay and interest was forgiven each month, which eliminated many years of payments from this cohort of borrowers. However, the reality from forward projections by CBO on new loans (and thus not affected by the payment pause) demonstrates that almost all types of student loans for new cohorts are expected to incur costs as well.

A Reversal of Fortune 

Prior to 2006, graduate loans were capped at $20,500 per year for almost everyone in the form of the Graduate Stafford loan program. In 2006, the GradPLUS loan program was created to offer unlimited additional loan dollars to graduate school students up to the cost of attendance, which is set by the graduate school itself. With its higher interest rate and no attractive IDR programs for graduate students, this new program was projected to generate more than it cost the government. Yet as IDR programs become increasingly generous, the Public Service Loan Forgiveness Program came online, eligibility changes and leniency made it easier to count payments towards forgiveness, and take-up rates in both programs were higher than expected, those savings turned into costs. CBO now estimates that 85 percent of GradPLUS loans will be in IDR. 

In 2014, CBO projected each dollar of GradPLUS loans issued that year would generate 41 cents of net savings per dollar issued; in the 2024 baseline, the agency estimated that loans issued in FY 2024 will cost an average of 25 cents for each dollar.

Similarly, Graduate Stafford loans saw a shift from a 29-cent gain to a 21-cent loss. Meanwhile, unsubsidized undergraduate Stafford loans, which are available to all undergraduate students, earned 9 cents for loans issued the year of the 2014 estimates but are now estimated for loans issued this year to be a 27-cent loss per dollar. Even subsidized undergraduate Stafford loans, which are available only to students from low- to middle-income families and forgive interest while a student is enrolled, were projected in 2014 to nearly break even at a one-cent loss; today they are projected to lose 35 cents per dollar.

This is significant because many have long argued that the government should not “make money” off of undergraduate students, but this is definitely no longer the case, which was likely turbocharged by changes to undergraduate loan repayment in the SAVE plan along with new data revealing the extent to which loans in existing IDR plans are not being repaid. A general shift in the average borrower and mix of institutions and programs available also likely increased the costs.

Cost Growth is Driven by Income-Driven Repayment Programs

New data released by CBO this year reveals that while loans in all repayment plans appear to be estimated as more expensive than previously thought, the primary driver of the cost is from IDR. While loans in fixed-term plans still generate net savings, that is far outweighed by the cost of loans enrolled in IDR plans. 

This primarily explains the swing from a student loan program that was expected to earn money into one that is now expected to lose hundreds of billions of dollars issuing loans over a ten-year period. As changes kept being made to IDR programs and enrollment patterns and income trends became clearer, the costs slowly increased. The Biden Administration’s recent rules making loans more generous, especially with the new IDR plan, appear to have significantly changed the estimates.³ CBO estimates that over 70 percent of undergraduate loans and nearly 80 percent of graduate loans will be in IDR plans. CBO also now assumes that future administrations could make other changes to the loan program through executive action that could cost $30 billion over the next decade. An increase in interest rates also increases costs for the government because it reduces real cash flows, especially for loans that go through periods of low or nonpayment.

CBO has also recently analyzed student loan data from 2009 through 2019 that demonstrates low repayment rates across the student loan program. In the first six years of repayment, loans were in repayment only about half the time, and a payment of more than $10 was only made in 38 percent of the months for an average loan. More than half of loans had higher balances after six years of leaving school. Sixteen percent of borrowers defaulted within the first six years of payment, with defaults concentrated among those who didn’t complete programs, and attended two-year programs and/or for-profit schools. Consistent with CBO’s analysis, Adam Looney and Constantine Yannelis have also shown that loosening institutional eligibility for loans and the growth of for-profit degree programs contributed to higher default and non-repayment over time.

Costs Suggest the Need and Opportunity for Reform 

The steady changes of the generosity of the IDR program over time, combined with the growing realization of substantial enrollment of borrowers with persistently low incomes into these repayment programs, has led student loan costs to spiral. Moreover, the majority of the IDR subsidy now goes to those with graduate student loans, who tend to ultimately have high lifetime income and go on to be in some of the wealthiest households in the country.

Graduate loans in IDR are projected to cost the federal government about $120 billion over the next decade, with all graduate loans projected to cost roughly $100 billion (graduate loans in fixed-term plans generate $20 billion in revenue). This suggests opportunity for significant deficit reduction from capping loans, improving accountability standards, modifying the IDR program (especially for graduate students), and enacting additional reforms to rationalize higher education finance and reduce overall costs.