The U.S. government has spent three decades making the student loan program look more profitable despite an increase in defaults, leaving taxpayers on the hook for a $500 billion hole in the student loan portfolio, former JPMorgan executive Jeff Courtney concluded in a report reviewed by The Wall Street Journal.
Trump administration officials had been assessing “the potential impact of impairment to the collectability of outstanding balances” in the student loan portfolio, according to Politico. Then-Education Secretary Betsy DeVos noted in 2018 that repayments on federal students were consistently below projections.
Courtney found a growing gap between what the federal government valued student loans at and what they were actually worth, further noticing Treasury Department cash infusions into the student loan program long after Congress had approved budgets and fiscal years had ended, according to the WSJ.
In 2018, Betsy DeVos called Jamie Dimon for help. The student loan program was in a shambles. Months later, a banker scrutinized the books–and discovered what could be a $500 billion hole in the program. My latest: https://t.co/ugWz2tvXLp via @WSJ
— Josh Mitchell (@JMitchellWSJ) April 29, 2021
The federal budget assumes the government will recover 96 cents for every dollar that borrowers default on, and Education Department budget officials told Courtney that the government puts borrowers who default into new loans, according to the WSJ. This pays off old loans and is considered a recovery, even though borrowers are also more likely to default on the new loans.
Based on his experience at JPMorgan, Courtney said it was typical to recover 20 cents for every dollar in the private sector. His report concluded the government was more likely to recover 51 to 63 cents for every dollar in defaulted student loan debt.
The Education Department concluded in November 2020 that taxpayers would shoulder $435 billion in student loan debt repayments after decades of virtually unlimited lending led to more borrowers forced to default on their loans. The number was far higher than a Congressional Budget Office estimate in May 2019 of $31.5 billion in incurred costs to taxpayers.
But Courtney’s calculation would mean taxpayers could be responsible for more than $500 billion in incurred costs. The number highlights how the federal government loaned hundreds of billions of dollars without any assurances that borrowers could repay the money, according to the WSJ.
Eye-opening report by @JMitchellWSJ: A former banker found $500 billion of likely losses in the $1.6 trillion federal student loan portfolio. The reason: decisions expanded lending, worsened repayments, and made losses look like profits. https://t.co/tyTUSGHye9 pic.twitter.com/FopD2KuY4E
— Greg Ip (@greg_ip) April 29, 2021
The latest statistics show that 45 million borrowers collectively owe more than $1.6 trillion in student loan debt, according to Education Department data.
President Joe Biden proposed eliminating $10,000 in student loan debt per borrower, and his student debt relief platform included expanding federal aid and cutting tuition for eligible Americans at public colleges and universities. Some Democrats called on him to go even further by eliminating $50,000 in debt per borrower. (RELATED: 17 Democratic Attorneys General Band Together Asking Congress, Biden To Cancel Student Debt)
But the Education Department under Biden dismissed Courtney’s report. A memo obtained by the WSJ in late February claimed the analysis “used incomplete, inaccurate data and suffered from significant methodological shortcomings.”
An Education Department spokeswoman reiterated to the WSJ that his analysis was based on incomplete data, though other officials suggested the department dismissed his report for political reasons.