Education Department Study Projects $435 Billion in Student Loan Losses

Students walk through Sproul Plaza on the University of California–Berkeley campus on April 23, 2012. (Justin Sullivan/Getty Images)

The federal government is set to lose nearly half a trillion in taxpayer dollars as a result of student loans that won't be repaid, according to an internal analysis conducted for the U.S. Department of Education.

The Education Department, which has surpassed Bank of America and JPMorgan Chase to become the nation's largest consumer lender, hired FI Consulting to examine the $1.37 trillion student loan portfolio held by the federal government at the beginning of this year.

The accounting firm projected that borrowers could pay back $935 billion in principal and interest, according to The Wall Street Journal, which reviewed the documents.

That leaves a $435 billion loss, which is far larger than any estimates released previously, including the Congressional Budget Office's estimate in May 2019 of a loss of $31 billion, including administrative costs. It is almost as much as the $535 billion that private lenders lost from subprime mortgages in the 2008 financial crisis.

According to the Wall Street Journal, the projected losses are largely driven by defaults and income-based federal student loan forgiveness programs. The existing income-based repayment plan caps monthly payments at 15 percent of the borrower's monthly discretionary income, where discretionary income is the difference between adjusted gross income and 150 percent of the federal poverty line that corresponds to the borrower's family size and state of residence.

The maximum repayment period is 25 years, meaning that any remaining debt will be discharged after that period.

The estimate reportedly doesn't include about $150 billion in loans from private lenders backed by the U.S. government, which isn't eligible for federal student loan forgiveness, but are at risk of default.

The analysis comes as Democrats call for easing some, if not completely eliminating, student loan debt. Democratic presidential nominee Joe Biden said last week that he would immediately forgive $10,000 of student loans.

"Legislation passed by the Democratic House calls for immediate $10,000 forgiveness of student loans," Biden said during a press conference in Delaware. "It's holding people up. They're in real trouble. They're having to make choices between paying their student loan and paying the rent, those kinds of decisions."

Earlier this month, Senate Minority Leader Chuck Schumer (D-N.Y.) said that if Biden wins the election, he should in his first 100 days erase $50,000 of student debt for each person, pointing to a proposal he put forth with Sen. Elizabeth Warren (D-Mass.).

"I have a proposal with Elizabeth Warren that the first $50,000 of debt be vanquished, and we believe that Joe Biden can do that with the pen as opposed to legislation," Schumer told MSNBC analyst Anand Giridharadas.