Despite Rising Student Debt Defaults, a Dramatic Increase in Spending

February 5, 2015 Updated: February 5, 2015

Americans owe the federal government a total of $1.1 trillion in student loans, and despite more generous repayment terms, the nation is seeing an uptick in loan defaults.

The Obama administration’s recent budget proposal revises upward by 2.5 percent its expectation for student loan defaults. A full 25.3 percent of unsubsidized undergraduate student loans are expected to default at some point during the repayment period. That matches an expected 24.6 percent for subsidized loans.

To compare, the average delinquency rate on consumer loans at U.S. banks was just 2.21 percent in the third quarter of 2014, the most recent period for which data is available.

Based on these abysmal loan repayment expectations, a simple calculation predicts the government will lose approximately $275 billion of what it has already lent to students and their parents, and that number will grow as loans increase in the coming years to cover rising tuition costs.

According to the Department of Education and the National Center for Education Statistics, the average cost of a 4-year college degree at a public institution, including tuition and room and board, was $15,918 in the 2012-13 school year.

At private institutions the cost is much higher, at $32,617.

In a piece published Thursday, Politico’s Michael Grunwald pieced together bits and pieces of the president’s budget and found that last year the government revised by $21.8 billion its expected direct student loan repayments shortfall. This is the largest ever recorded revision for a government credit program.

He points out that the main cause of the shortfall is Obama’s efforts to provide relief to borrowers, where he has reduced payments to 10 percent of income and offered loan forgiveness after 20 years. These maneuvers did not require Congressional approvals.

“That’s a big quasi-bailout, increasing the deficit nearly 5 percent,” writes Grunwald.

Ramped Up Spending

The president’s budget, just days old, would add an additional $145 billion to the deficit over the next ten years, with new education spending mainly in three areas, most notably a new program to fund two years of free community college education in partnership with the states.

“It is time for two years of college to become as free and universal in America as high school is today,” a White House press release states.

It is time for two years of college to become as free and universal in America as high school is today.
— White House

That program, which would begin in 2016, would add $60 billion to the federal deficit over the next decade.

Preschool for All, an initiative that would also greatly expand over the next decade, will add $66 billion to the deficit over the next decade. This program aims to provide preschool to low income 4-year-olds, with incentives for states to support middle income children.

The remainder would fund a continued higher maximum award for pell grants, which benefit about 8 million low income students. The amount of Pell Grant scholarship funding has doubled since Obama took office, according to the White House.

Further spending would include a graduation bonus to encourage students to complete college, investments in community colleges, and a tripling of the largest college tax credit, the American Opportunity Tax Credit.