Student Debt and the Federal Budget: How Student Loans Impact the U.S. Fiscal Outlook

Federal student loan debt in the United States has ballooned since the Great Recession, growing by 144%. As borrowers continue to take on more debt, repayment has faltered: Prior to the suspension of payments during the COVID-19 pandemic, nearly one in five student loan borrowers were in default, launching policy debates over how to provide relief. One component of the student debt issue, however, is often overlooked: what impact does the swelling federal student loan portfolio have on the federal budget?

Current estimates of the fiscal impact are modest, as the portfolio is projected to produce savings for the government under official budgetary scoring. But these projections have consistently underestimated the portfolio’s true costs—often by tens of billions of dollars—and alternative methods show that the portfolio could produce significant costs in the years to come. Uncertainty about the portfolio’s true footprint on the federal balance sheet hinders policymakers from crafting informed and effective decisions to address the rapid growth of student debt, even though reforms are needed.

This paper presents an in-depth examination of federal student loans and their impacts on borrowers and the federal budget. It explores the rapid growth of outstanding debt in recent years and provides an overview of the current portfolio’s composition and repayment trends. It then explains several of the key drivers of the rapid increase in student loan debt including students’ rising out-of-pocket costs, unrestrained PLUS Loan borrowing, the increasing generosity of repayment and forgiveness programs, and a lack of institutional accountability. It concludes with a discussion of current policy proposals aimed at addressing these drivers to curb the unsustainable growth of student debt and improve borrower outcomes.