Sticker Shock: Taxpayer on the Hook for $400 Billion in Bad Student Loans
A U.S. Department of Education analysis of student loan debt has found that taxpayers could stick taxpayers with the bill for $400 billion in bad loans.
According to the Wall Street Journal:
After decades of no-questions-asked lending, the government is realizing that it has a pile of toxic debt on its books. By comparison, private lenders lost $535 billion on subprime-mortgages during the 2008 financial crisis, according to Mark Zandi, chief economist at Moody’s Analytics.
The effect this time is different. The government, unlike private lenders, can borrow trillions of dollars at low rates to absorb the losses, without causing a panic. But taxpayers will end up paying a price because Congress will have to raise taxes, cut services or increase the deficit to cover the losses.
All that lending has done exactly what one might expect when Uncle Sam (and taxpayers) are fronting the money: college tuition has skyrocketed. That leads to a vicious cycle of more and bigger loans going to less creditworthy individuals…who can’t pay them back:
Between 2005 and 2016, nearly four in 10 student loans—most of them federal ones—went to borrowers with credit scores below the subprime threshold of 620, according to a Wall Street Journal analysis of data from the credit-rating firm Equifax Inc. That figure excludes borrowers who lacked credit histories. By comparison, subprime mortgages peaked at nearly 20% of all mortgage originations in 2006.
Democrats are urging the incoming Biden administration to forgive student loans, and Biden supports doing that for “$10,000 for each borrower with a federal student loan.”
While this does nothing to fix the federal loan program or address turion costs, it does increase the burden on taxpayers, who will still have to pay for the bad loans.
Image Credit: By Jericho [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons