Is the U.S. Student Loan Program Facing a $500 Billion Hole? One Banker Thinks So. | #Education



In 2018,

  Betsy DeVos,



  then U.S. education secretary, called










        JPMorgan


  Chase & Co. Chief Executive










  Jamie Dimon



  for help.

Repayments on federal student loans had come in persistently below projections. Did Mr. Dimon know someone who could sort through the finances to determine just how much trouble borrowers were in?

Months later,

  Jeff Courtney,



  a former JPMorgan executive, arrived in Washington. And that’s when the trouble started.</p><div>













  <p>According to a report he later produced, over three decades, Congress, various administrations and federal watchdogs had systematically made the student loan program look profitable when in fact defaults were becoming more likely.













  The result, he found, was a growing gap between what the books said and what the loans were actually worth, requiring cash infusions from the Treasury to the Education Department long after budgets had been approved and fiscal years had ended, and potentially hundreds of billions in losses.






  The federal budget assumes the government will recover 96 cents of every dollar borrowers default on. That sounded high to Mr. Courtney because in the private sector 20 cents would be more appropriate for defaulted consumer loans that aren’t backed by an asset.






  He asked Education Department budget officials how they calculated that number. They told him that when borrowers default, the government often puts them into new loans. These pay off the old loans, and this is considered a recovery, even though in many cases the borrowers haven’t repaid anything and default on the new loans as well.






  In reality, the government is likely to recover just 51% to 63% of defaulted amounts, according to Mr. Courtney’s forecast in a 144-page report of his findings, which was reviewed by The Wall Street Journal. 






  “If you accounted this way in the private sector, you wouldn’t be in business anymore,” Mrs. DeVos said in a December interview. “You’d probably be behind bars.”







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    <img   src="https://parentsecurityonline.com/wp-content/uploads/2021/05/Is-the-US-Student-Loan-Program-Facing-a-500-Billion.5.jpeg" data-enlarge="https://images.wsj.net/im-330596?width=1260&size=1.5" alt="" title="Former Secretary of Education Betsy DeVos commissioned an outside analysis of the student loan program’s..."/></div>


  <figcaption class="wsj-article-caption article__inset__image__caption" itemprop="caption"><h4 class="wsj-article-caption-content">Former Secretary of Education Betsy DeVos commissioned an outside analysis of the student loan program’s finances.</h4>
  <span class="wsj-article-credit article__inset__image__caption__credit" itemprop="creator">
        <span class="wsj-article-credit-tag">
          Photo: 
        </span>
    Tom Williams/CQ Roll Call/Zuma Press
      </span>
  Mr. Courtney’s calculation was one of several supporting the disclosure in a Journal article last fall that taxpayers could ultimately be on the hook for roughly a third of the $1.6 trillion federal student loan portfolio. This could amount to more than $500 billion, exceeding what taxpayers lost on the saving-and-loan crisis 30 years ago.






  If Mr. Courtney is right, there are big implications for taxpayers and families alike. While defaulted student loans can’t cause the federal government to go bankrupt the way bad mortgage lending upended banks during the financial crisis, they expose a similar problem: Billions of dollars lent based on flawed assumptions about whether the money can be repaid.






  Were his model to be adopted, watchdogs such as the Congressional Budget Office could force the federal government to recognize the losses, deepening deficits and adding hundreds of billions of dollars to the national debt. That would put pressure on the government to take action to narrow the losses. Some government officials and advocates of student loans fear it would create pressure to curtail the program.






  The assumptions in Mr. Courtney’s model faced challenge by some career officials at the White House Office of Management and Budget during the Trump administration, according to










  Diane Auer Jones,



  who was deputy under-secretary of education. The Education Department under President Biden killed Mr. Courtney’s project in late February, meaning that his model won’t be used to value the student loan portfolio. 






  A memo announcing the decision, reviewed by the Journal, cited criticism by OMB asserting that the “analysis used incomplete, inaccurate data and suffered from significant methodological shortcomings, including a dubious method for predicting borrowers’ future income.”







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Student Loans, Profit and Loss

In most years, the government projected it would make profits on the annual student loan program, but projections have often proved too rosy as borrowers failed to repay as expected.

Original repayment revenue

Original repayment revenue

Original repayment revenue

2000-19 total, in billions

Original

repayment

revenue