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The Apocalyptic Student Loan Program May Actually Get Worse

The administration’s unilateral revisions to student loan programs could result in U.S. taxpayers being hit with surprise bills in the tens or even hundreds of billions of dollars, according to a new paper from the American Action Forum.

Three weeks ago, the release of the Obama’s administration’s 2015 budget proposal revealed an unexpected, massive revision to the balance sheet of the Department of Education’s $740 billion portfolio of student loans. The government’s earnings off of student loans were found to have come in a full $21.8 billion below expectations. (RELATED: $20 Billion Black Hole: Obama Bailout of College Students Costs Taxpayers)

The cause of the huge shortfall lies in administration policy designed to ease the burden of those with student loans. Programs like Pay As You Earn (PAYE) allow borrowers to cap payments at 10 percent of their post-tax income, and have their debt balance forgiven if they have made payments for 20 years (10 years if they work in public service).

Originally available to only some borrowers, recent Obama executive orders have worked to expand eligibility to millions of new borrowers. Heavy use of the programs, combined with higher-than-anticipated default rates, have caused the Department of Education to collect less on its debt than anticipated.

That Americans are essentially being put on the hook for a $22 billion shortfall is bad enough, but the full truth is even worse, AFF argues. In order to handle its debt shortfall and finance new student loans, the Department of Education has to borrow extensively from the U.S. Treasury.

“Each year the FDLP returns less in principal and interest earnings than expected,” the paper says. “Since the [Education Department] is short on its IOU to Treasury, it has to come up with the money somewhere, and that somewhere is another IOU from the taxpayer in the form of additional Treasury debt. Outside of Washington, this process would seem comical, as it looks a lot like asking a bank for a second loan to pay off an initial loan.”

Comical or not, the costs are high: $88.9 billion in additional deficit spending, by AAF’s estimate, more than four times the 2015 budget revision. The trouble doesn’t stop there, either, because Treasury loans aren’t interest free.

“When the ED comes up short, the Treasury still has to pay interest on the unpaid debt,” the AAF report says. “That’s also true for the new debt, which means a double whammy for taxpayers who are propping up Treasury’s borrowing with their tax dollars.” In the end, the $22 billion flub could end up costing taxpayers hundreds of millions or even billions more over the long haul.

The group also warns that there is no reason to believe the 2015 shortfall was a one-off event. Out of 21 annual cohorts of loans issued by the Department, they note, 18 cohorts have ended up costing more than expected, a negative error rate of 85 percent. As long as the government continues to finance a huge number of student loans while failing to properly calibrate loan risks, the $22 billion surprise could be just the beginning.

“Taxpayers should be concerned about the $21.8 billion shortfall, but they should be even more troubled by the nonchalance with which billions of dollars in additional debt are being swept under the rug by the direct loan program and its administrators,” the paper says.

AAF president Douglas Holtz-Eakin, who was president of the Congressional Budget Office under President George W. Bush, told The Daily Caller News Foundation that there is no clear upper limit to how large the revisions could be in the future.

“What we’re finding out now is, as has nearly always been the case, the government underestimates the risk when it makes a loan,” he said, adding that, in theory, a revision of more than $100 billion isn’t impossible, especially if the economy were to enter another recession and greatly constrain the power of young borrowers to pay their debts.

“We’re living the catastrophe,” he said.

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