Obama student loan push behind $22 billion write-down

The use of income-based repayment plans promoted by Obama soared in 2014, with the number of student borrowers in the programs doubling from 1.1 million to 2.2 million between the end of 2013 to the end of 2014. In total, the programs have $115 billion in student loan balances.

The programs created a controversy after Politico reported last week that the administration’s budget proposal for the Department of Education included an estimated $22 billion write-down on its student loan portfolio, meaning that the total current value of what student borrowers owe the government was marked down by that amount.

“We are taking a broad range of steps to ensure that it isn’t something that continues going forward,” Office of Management and Budget Director Shaun Donovan told reporters Thursday.

In the context of Uncle Sam’s total $1.1 trillion student loan portfolio, the credit loss is not major, even though it is the largest for a government credit program, according to Politico.

The loss was attributable to faster-than-expected enrollment in income-based repayment programs, which reduce repayments by capping borrowers’ payments and ultimately forgiving them in some cases.

Obama expanded the programs by executive order in 2013 and 2014, creating a new, more generous option known as Pay As You Earn and then retroactively applying it to people with existing loans.

The $22 billion write-down shows that the programs are working well — perhaps too well.

While he said that the administration was aiming to limit credit losses, Donovan noted that one of the administration’s goals, in addition to expanding access to college, is to ensure that student debt “isn’t a millstone around the neck of students going to college for years to come.” Income-based repayment and Pay As You Earn are a major part of that push.

With income-based repayment and Pay As You Earn, depending on when students take out debt and their personal circumstances, borrowers may be able to cap their federal student loan payments at 10 percent or 15 percent of their incomes. Then, after 10, 20, or 25 years, depending on their particulars, they may be eligible to have the remaining balance of the loan forgiven. That translates into a lot of relief for some borrowers who end up repaying less to the government.

The OMB clarified Friday that the $22 billion write-down was due to higher-than-anticipated use of those programs and the Obama administration’s action to make Pay As You Earn available to people who began repaying loans before 2007.

The spike in enrollment means that the administration’s efforts to promote the plans have been a success. But the flipside is an unknown cost to the budget, as it’s not clear how many more borrowers might use the plans.

“The administration has embarked on this tremendous campaign to increase enrollment, and it’s been rather successful. What you’re seeing in that budget adjustment or revision is the success of the Pay As You Earn campaign,” said Progressive Policy Institute economist Diana Gehlhaus Carew. “I would be actually surprised if it were the only adjustment that’s going to happen,” Carew said.

How many such unfavorable budget updates could happen would depend on how many students decided to enter the program and how indebted each one was.

A number of 2011-2013 graduates soon will begin repaying their loans and will be eligible for the programs. “Once these students start hitting the repayment period I think you’re going to start seeing the true cost of the program. And we just don’t know right now,” Carew said.

What that could mean for taxpayers as well as students is difficult to determine, partly because of government accounting conventions.

The government’s student loan programs make a “profit” for taxpayers on paper. Under the Federal Credit Reform Act of 1990, future repayments of federal student loans are discounted using interest rates on Treasury securities. Using that method of accounting, the government’s student loan programs would generate $135 billion over 10 years, according to the Congressional Budget Office’s most recent estimates.

The CBO and some outside experts, however, favor “fair-value” accounting that uses discount rates based on private-sector securities that reflect risks the federal government doesn’t have. Using that method, the student loan programs would be projected to cost $88 billion.

Under either method, the loan program becomes more costly with adjustments like the one made in the budget. The question is whether it means less “profit” for taxpayers or even greater subsidies.

Sen. Debbie Fischer, R-Neb., introduced legislation Thursday following the news of the adjustment to mandate fair-value accounting. “The White House has revealed that there is a $21.8 billion shortfall stemming from their student loan program. This loss places further strains on our obligations and leaves the American taxpayer to cover the costs. My legislation will prevent wasteful mistakes like these from happening,” Fischer said.

Another concern is whether the added costs are being spent on the right group of people.

Jason Delisle, the director of the Federal Education Budget Project at the New America Foundation, favors income-based repayment, and his think tank has suggested making it the default for borrowers. But “the problem is that the program helps many more people than you and I — and most people — would think need help.”

The sweetened terms offered by the Obama administration, he says, “tips the scales so far in favor of you not paying the loan that I’m not sure it’s a great thing that there’s a lot of enrollment in it.”

Many of the benefits, Delisle noted, would go to grad students and economically secure people, providing them with a “windfall.”

The Obama administration “remains committed to the responsible administration of the student loan program,” an OMB official said, noting that the budget includes a proposal to target Pay As You Earn “to people who need it most,” saving $14 billion over 10 years.