U.S. taxpayers will absorb a blow of about $ 435 billion from borrowers’ failure to repay student loans currently on the federal government’s book, the Wall Street Journal reported on Saturday (Nov. 21).
The number, which approximates the banks’ losses during the 2008 subprime mortgage crisis, came from an analysis by the U.S. Department of Education and two private consultants who helped the agency review the situation, the WSJ reported.
The bottom line of the analysis, according to the Journal, was that borrowers who owe a combined $ 1.37 trillion in principle plus interest will repay approximately $ 935 billion.
The analysis didn’t take into account the roughly $ 150 billion in loans held by private lenders but backed by the federal government, the WSJ reported.
Private lenders lost $ 535 billion to poor quality mortgages during the 2008 global financial crisis, Moody’s Analyzics’ Mark Zandi told the WSJ, according to Saturday’s article.
The WSJ cited experts like Constantine Yannelis of the University of Chicago as saying that a difference between the relative ease with which the government can bail out for bad loans – Congress just needs to raise taxes or cut spending, or both – the Legislator will make it less likely and policy makers will impose more discipline in the granting of student loans.
“There is no market discipline here,” the newspaper quoted Yannelis as saying.
Student borrowers whose loans are held by the federal government experienced a temporary hiatus when Congress passed the CARES bill in March 2020 to provide financial relief to individuals and organizations affected by COVID-19. These borrowers received six month suspension with no additional interest.
The CARES Act did not help borrowers whose loans were held by private lenders.
Even before COVID-19, experts warned that student loan defaults were increasing, although the total amount of all borrowers was falling. A pre-COVID-19 study by the Brookings Institution concluded that 40 percent of student loan borrowers would be in default by 2023.