Federal Student Loan Shortfall Makes Up $21.8 Billion of the National Deficit
Posted By Paul Southerland on March 18, 2015 at 9:00 am
A pressing issue on every taxpayer’s mind is the ever-increasing national debt. Whether it’s news reports, discussions over lunch, or blog posts online, it’s hard to go a day without hearing about how far in the red we are. Making things worse, recent reports show that the federal student loan program is now facing a $21.8 billion shortfall this year – in addition to the government’s existing $478 billion deficit.
What led to the shortfall
The total amount of student loan debt in the U.S. today is more than $1.2 trillion, spread out among 40 million Americans. The average balance per borrower is now close to $30,000. When just a small percentage of these students fail to pay back their loans, it doesn’t take long for deficits to accumulate.
The current deficit, however, isn’t due to a small percentage of defaulted loans – it’s due to a default rate that is currently hovering around 20%. The shortfall is also compounded by the current income-based repayment plan , which allows students to make payments that are 10% of their monthly incomes, and forgives outstanding balances after 20 years. For graduates with government or nonprofit jobs, loans are eligible to be forgiven after only ten years, resulting in a large balance of unpaid loans.
The impact on the national deficit
Forgiven and defaulted student loans simply get added to the overall national deficit. However, calculating the impact of these uncollected funds is not an easy task.
First, it’s impossible to know which of the students taking out loans today will be unable to repay their loans in full, either through default or by forgiveness. Another complicating factor is that interest rates for student loans vary greatly, and calculating the long-term income the government will make (or lose) from student loan interest requires complicated speculation.
Although it’s clear that these numbers will have ramifications for the overall deficit, the actual impact of the current shortfall will not be known for a few decades, when income-based repayment plans start to expire.
Are students in over their heads?
The simple answer is: yes. More than two-thirds of all public college graduates are carrying student loans. That number jumps to 75% for graduates of private colleges, and 88% for graduates of for-profit colleges. Moreover, 20% of student debt comes from private – and often more expensive – loans that are not included in federal student loan figures. The bottom line is that many students, who are being encouraged to pursue a college education as a means to a secure future, are borrowing far more than they can realistically pay off.
Looking to the future
Part of the issue lies in the fact that the cost of a college education has jumped 1,225% over the last 36 years. Over the same period, the cost of medical care has only risen by half that amount, in spite of enormous advancements in care.
It’s clear that a two-part solution is necessary to solve the student loan debt problem. First, the cost of a college degree needs to be substantially lower. This will significantly reduce the amount that students need to borrow and, therefore, make it easier for them to repay their loans in full. The second part of the solution lies with the borrower. Students need to have a better understanding of the responsibilities they are taking on when they sign loan documents – and possibly turn to other forms of financial aid, like scholarships and grants.