Federal Student Loan Debt Will More Than Double by 2021; GDP, Not So Much

A few weeks ago I painstakingly projected where the federal government’s Direct Loan Program was going, and for the last several months I’ve been tracking growth in government holdings of nonrevolving debt as a proxy for the government’s Direct Loans balance to prove that. Here’s what I projected:

Then a reader directed me to the Office of Budget and Management’s (OMB) Mid-Session Review (MSR), which has been doing this all along. The following data come from the 2012, 2011, and 2010 MSRs. The 2009 MSR doesn’t have Direct Loan balances (but amusingly, it fails to predict the recession, which doesn’t bode well for OMB’s credibility).

What’s neat is that my projections were largely accurate. The Direct Loan Program will cause student debt to grow from 1% to 8% of GDP yet never crest it. The loan balance is growing linearly, thankfully. However, there are two potential flaws. One, the GDP growth the government is projecting may not come to pass. Sure, recovery will eventually come, but refusal on Congress’s part to increase spending and the Fed’s inaction suggest that we are taking the slowest, most painful path to recovery. Slow growth implies a higher debt-to-GDP ratio of Direct Loans.

Two, here’s a table of the numeric growth in Direct Loans:

2009 293
2010 179
2011 110
2012 126
2013 173
2014 148
2015 138
2016 123
2017 107
2018 101
2019 96
2020 94
2021 96

The numeric growth includes a combination of newly originated loans less defaulted and repaid loans. Notice how the numeric growth declines below $100 billion per year by the end of the decade. Assumedly, this decline is due to loans originated now being repaid. Although, there’s good reason to suggest they won’t be. The government uses “accrual accounting” to determine the value of the loans, which excludes the actual market risk caused by a poor economy. If the economy is depressed, the government will receive a lower return on its loans due to defaults and Income-Based Repayment (IBR), which is effectively a twenty-five (and soon twenty)-year Chapter 13 bankruptcy plan. Student loans are the only type of consumer debt increasing in this depressed economy, and their nondischargeability reduces debtors’ purchasing power, which further hampers economic growth.

By contrast, we know that when we apply fair-value accounting rules to Direct Loans, the government loses money. Meanwhile, we don’t know if the government is taking tuition increases into account. There’s zero evidence that higher education will cost less in the future, so as tuition increases, so will debt loads, and by extension the amount the government is willing to give to ED to loan out.

Doubling the amount of debt on the government’s books makes sense if the gains materialize, i.e. the graduates’ educations transform them into more productive workers than had they not gone. This would be signaled—not proven—by significant growth in wages for college graduates, which we haven’t seen for many, many years. Whether college degrees alone actually transform students into better workers has not been established, and I believe it to be false.

Loaning a trillion dollars over a decade for higher education when the returns are doubtful is not something the private sector would do without loan guarantees. Thus, ending the guaranteed loan program in 2010 was a good idea as it was costly to the government, but doing so gave the federal government a pyrrhic victory because it’s now essentially guaranteeing the loans to itself. Ultimately, we will have to choose between letting the private sector finance higher education with some combination of fully dischargeable student loans and human capital contracts, or the government will have to pick up the tab and assume the risk of buying educations for people who may not use them productively.


  1. The debt cannot be magically written off. Someone has to pay the piper. Removing the FFELP program was good because it released an un-necessary middle man, but the Gov’t is still on the hook for all the loan guarantees it made on all the loans. ALL OF THEM!!!

    One thing for sure, this is not sustainable by the Gov’t.

    An interesting statement these days has been that the USA is “Privatizing gains while socializing the loses” Well, here is an example.

    If the federal direct loans entity were a business, it would be a dog, Not because of its mission to provide affordable financing to students, not because of the quality of the character found in each worker there, but because the entire model is broken. We cannot guarantee all of these loans to all of these people and expect all of these economic problems we are facing to just go away.

    We live in a diverse nation of many different people, pursuing many different goals and dreams for many reasons, and under very varied economic circumstances and expectations. Why does everyone get the same interest rate on their federal loan then? Furthermore, If I have amazingly good credit, why can’t I qualify for a rate lower than say the current 6.8% on an unsubsidized Stafford loan?

    The answer is that the current Gov’t based loan model is incapable of handling the volume of work that would go into creating an improved system, and have no incentive to do so.

    They are able to calculate cohort default rates on a school, and if a school goes beyond a certain amount of defaults all federal funding for that school is canceled. But they have not yet found a way to pro-rate interest rates to reflect average salaries and the default rates of graduates, so they just give the same rate to everybody everywhere. It’s like throwing crap against the wall hoping some sticks, we can’t do this anymore.

    Marginal book-learnin’ students, please do your nation a favor and learn plumbing, carpentry, heating/air-conditioning, insulation and solar installation. Being a marginal student does not mean you cannot be excellent at actually DOING something productive, and you can make a good living for yourself.

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