Future Retirement Success
  • Politics
  • Business
  • Investing
  • Stocks
  • Politics
  • Business
  • Investing
  • Stocks

Future Retirement Success

Investing

Republicans Have a Rare Opportunity to Replace Government Student Loans with Private Lending

by January 21, 2025
January 21, 2025
Republicans Have a Rare Opportunity to Replace Government Student Loans with Private Lending

Andrew Gillen

For the first time in decades, there is a promising window of opportunity to get the government out of the student loan business. A new briefing paper provides more background and explanation of the opportunity, but the case rests on four key points.

Private lending for student loans would be better

While we currently use a government-as-lender system, utilizing private lenders would be better. There are five main advantages of private lending compared to our government-as-lender system.

First, private lenders would finance less malinvestment. The government makes many loans that should not be made, including to students who are unprepared for college to attend substandard colleges. Since these loans are unlikely to be repaid, private lenders would lose money on them and cease making such loans, whereas the government continues to make similar loans year after year.

Second, private lending would hold colleges accountable. Colleges have little to lose from enrolling students, even if it leaves the students and government worse off because they get paid upfront and get to keep that money even if the student fails to repay the government. This lack of accountability encourages colleges to game the system. But to avoid losing money, private lenders would hold colleges accountable for outcomes.

Third, private lending would provide better incentives for students. While the government charges all students the same interest rate, for private lenders, students who study hard would present less risk and would be rewarded with better loans with lower interest rates.

Fourth, private lending would provide better incentives for colleges. Colleges that improve would benefit from their students’ higher repayment rates, which lenders would reward by offering lower interest rates.

Fifth, private lending would facilitate more informed decision-making. Government loans come with the same interest rate regardless of the quality of the college or the labor market for the field of study. However, private lenders would offer lower interest rates for better colleges and fields with plentiful jobs available. This would provide students with valuable information about the riskiness of different educational choices.

Flawed government accounting historically prevented the switch to private lending

But even though private lending would be better, we were stuck with government lending due to flawed accounting. Government lending has historically been forecast to generate profits. For example, in 2019, the Congressional Budget Office estimated a profit of five cents for every dollar lent.

This accounting was flawed for two reasons. First, it used the wrong discount rate, which overestimated the value of future loan repayments. For example, if the government charged an interest rate of 5 percent but used a 3 percent discount rate, government lending looks very profitable. Second, it failed to account for economic (e.g., recessions) and political risks (e.g., loan forgiveness initiatives). Indeed, a recent Government Accountability Office study documented that the cost of student loans has been dramatically underestimated. While lending was estimated to generate a profit of six cents for every dollar lent, the government ended up losing eight cents for every dollar lent.

Unfortunately, government accounting focuses on unreliable initial estimates (which project profits) rather than the after-the-fact reality, which entails losses. This means that even though transitioning to private lending would save the government money in reality, on paper, it would entail forgoing profits, which in turn means that politicians would need to raise taxes, cut other spending, or increase the deficit. These unappealing options have stymied efforts to transition to private lending.

But government lending is now losing money

The Biden administration repeatedly tried to enact mass student loan forgiveness. Some of its plans were stymied by the courts. But others were enacted or are still being litigated, and those affect government estimates for student loans going forward. This means that as a result of the Biden administration’s overreach, even flawed government accounting indicates that the government loses money on student loans now. The latest estimates indicate that the government will lose 19 cents for every dollar lent over the next decade.

Transitioning to private lending is now politically feasible

The fact that the government is losing money on student loans means that transitioning from government lending to private lending is now much more politically feasible. Instead of having to forgo “profits,” transitioning would now save the government around $212 billion over the next ten years, savings that could be used to cut taxes or finance other spending. But Congress needs to act quickly. If courts throw out the rest of the Biden administration’s changes to student loans, or if the Trump administration rescinds them, much of the savings will disappear, and the best chance to get the government out of the student loan business in decades will be lost. 

For more details, see our new briefing paper. 

0
FacebookTwitterGoogle +Pinterest
previous post
Trump Issues Executive Order Dealing Blow to OECD Global Tax Cartel
next post
Trump revokes John Bolton’s Secret Service detail amid Iranian death threats: former national security advisor

You may also like

Not Just Any Fiscal Commission Will Resolve America’s...

October 17, 2023

Universal School Choice in Arizona: Not a Giveaway...

August 8, 2024

Taking Stock of Restrictive Financial Policies and Expansionary...

March 21, 2024

A Link Tax Won’t Save the Newspaper Industry...

August 14, 2023

The New Deal and Recovery, Part 19: War,...

July 29, 2022

Join Us in Person or Online, Sept. 12...

September 6, 2024

Leland B. Yeager on the Case for Free...

April 14, 2025

Rebel Ridge Is an Effective Fantasy but the...

October 14, 2024

White House Extends Ukraine’s Steel Tariff Exemption; Sad...

June 5, 2023

Trump’s Tariff Threats a Reminder of the Need...

September 25, 2024

    Get free access to all of the retirement secrets and income strategies from our experts! or Join The Exclusive Subscription Today And Get the Premium Articles Acess for Free

    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Rand Paul says he would support ‘big, beautiful bill’ if debt ceiling hike removed

      June 1, 2025
    • Kevin Hassett ‘very, very confident’ courts will back Trump’s tariffs amid legal setback

      June 1, 2025
    • Senate Republicans eye changes to Trump’s megabill after House win

      June 1, 2025
    • Trump shares post saying Biden was executed, replaced with clones

      June 1, 2025
    • House Dems’ campaign chair says her party’s ‘on offense’ in 2026 battle to win back majority from GOP

      June 1, 2025
    • Trump warns Rand Paul he’s playing into ‘hands of the Democrats’ with ‘Big, Beautiful Bill’ opposition

      June 1, 2025

    Categories

    • Business (8,105)
    • Investing (2,000)
    • Politics (15,458)
    • Stocks (3,119)
    • About us
    • Privacy Policy
    • Terms & Conditions

    Disclaimer: futureretirementsuccess.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2025 futureretirementsuccess.com | All Rights Reserved