The program is currently an exorbitant handout, but last year’s reforms promise some repayment to taxpayers.
The federal student-loan program looks more than ever like a handout, not a genuine extension of credit that is expected to be repaid. Allysia Finley writes for the Wall Street Journal that most Americans with outstanding student loans aren’t paying them back:
Start with student debt. Only 30% of the federal government’s $1.7 trillion student-loan portfolio is currently being repaid. Most borrowers are delinquent or their payments have been temporarily suspended while the Trump administration works to fix servicing problems caused by the Biden team’s quasi-forgiveness “SAVE” plan, which the courts blocked.
During the Biden payment pause, many borrowers upgraded their lifestyles and racked up more debt to pay for vacations, homes and cars. And why not? Joe Biden promised their loans would be forgiven.
Many borrowers took on additional debt from auto loans, credit cards, and mortgages during the payment pause, enabled by low interest rates and artificially boosted credit scores. This overextension has left them unable or unwilling to pay their debts to taxpayers.
As of this year, 25 percent of student-loan holders are delinquent, totaling hundreds of billions of dollars in outstanding balances, with an average debt of $34,000. The delinquency rate has tripled since 2019, before payments were paused during the pandemic. One in five borrowers, or 9 million individuals, have outright defaulted on their loans — the highest level ever. Legally, these borrowers are at risk of having their wages garnished by the federal government. But the Trump administration has delayed plans to restart garnishment as it sorts out the mess left by Biden-era forgiveness policies.
Recall that when the government assumed full control of student loans in 2010, it was sold as a way to save money by cutting out profits for private lenders. Even with a federal guarantee, those lenders still had an interest in borrowers’ repaying their loans. Politicians favored leniency and forgiveness to buy votes, giving away “free” college education to those who weren’t big enough suckers to make their monthly payments.
One of the fundamental fiscal problems with student loans has been “income-driven repayment” plans, which gave lower-income borrowers the option to pay a percentage of their discretionary income — around 10 percent for most of the 2010s — instead of a fixed monthly amount. After 20 to 25 years, any remaining balance would be forgiven. Higher-than-projected uptake of this option, expanded under both Obama and Biden, helped turn student loans from a projected profit-maker into a $200 billion budget hole.
Things are looking a bit brighter now. As a cost-saving measure to offset tax cuts, last year’s reconciliation bill eliminated income-driven repayment for all newly issued loans, replacing it with the less generous Repayment Assistance Plan. With that change, the Committee for a Responsible Budget notes, “The government now expects to get back almost as much as it lends out — a huge reversal from recent years, when student loans were projected to lose hundreds of billions of dollars over a decade.” The Congressional Budget Office estimates that student loans issued in 2026 will cost the federal government 4 cents per dollar lent, down from 18 cents per dollar in 2025. Those extra 14 cents in repayments are projected to save the government $315 billion over the next ten years.
Of course, those figures depend on politicians’ not loosening student-loan terms again, which can never be counted on. And the federal government should not be losing any money on student loans as it subsidizes those who go to college and don’t pay for it at the expense of people who don’t go to college or do pay for it. Ideally, there would be no form of loan forgiveness — as some Republican lawmakers have proposed — not just a stricter iteration of it.
Still, from rock bottom, progress is being made. We’ll have to see if it sticks.