$1.7 Trillion in Student Loans, Who's Going to Manage Them?

In this episode of The Center for USA Lending's The Lending Brief, sponsored by Allocore, we're joined by Kyle Shohfi, an education policy analyst at the Congressional Research Service, for an inside look at the federal student loan portfolio and the seismic policy shifts reshaping it. From the four-year repayment pause to a surge in defaults, jumping from 3.7 million to 6 million borrowers in a single quarter, Kyle breaks down what the numbers really mean for American borrowers and taxpayers.

He also weighs in on the administration's plan to transfer student loan administration from the Department of Education to Treasury, the statutory hurdles standing in the way, and why the true cost of federal credit programs remains so poorly understood, even on Capitol Hill.

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Transcript

SPEAKER_00 0:04

The United States government is one of the largest providers of credit in the world.

SPEAKER_02 0:09

We're talking five trillion dollars larger than the GDP of most nations in loans and loan guarantees that are made through more than a hundred different programs.

SPEAKER_00 0:18

And with that huge portfolio comes fragmented systems, rising fraud risks, but a lot of well-intentioned people trying to hold it all together with digital duct tape.

SPEAKER_02 0:26

These programs are critically important to keep the nation's economy humming and to help Americans at critical junctures of their financial lives. Welcome to the lending brief. I'm Robert Shedd. And I'm Doug Chris Atello. We're going to talk with the people who actually know what's working, what needs to improve, and what will it take to bring federal lending into the 21st century.

SPEAKER_00 0:52

Doug, it's great to be back together.

SPEAKER_02 0:54

Wonderful to be here, Robert. We have a fantastic guest today.

SPEAKER_00 0:59

So I think if we if we hosted people who we've worked with, we could go on forever. I don't know what that says, but why don't you tee up our guest today?

SPEAKER_02 1:10

Today we have a longtime colleague, part of the good government community here in Washington, and particularly that community that's focused on federal lending programs. So um just so happy to have as our guest today, Kyle Schaufi from the Congressional Research Service. Um I can describe what you do at CRS, Kyle, but I'm going to turn it over to you in a minute to have you do that. Um I did want to uh let our uh viewers know that you and I are former colleagues up at MIT where we both worked at the Golub Center for Finance and Policy. Kyle was also a graduate student there. Um and uh but we continue to collaborate as part of uh the lending community. We've had a working group known as the Federal Credit Working Group over the last several years. Um, those activities have sort of morphed into um the uh the the activities of the Center for USA Lending, but Kyle remains very much engaged. So, Kyle, what do you tell us a little bit about anything further in your background that you want to add? But I'm really curious to hear about your role at CRS.

SPEAKER_01 2:34

Yeah, well, thanks so much, Doug and Robert, for having me on. Uh, really excited to be doing this with you guys. Um, so I'm an analyst in education policy at a congressional research service. So many people have heard of CRS, they've seen the reports on our website. Um, those are great, but the vast majority of my work here actually happens um behind the scenes. It's it's confidential in nature. So I spend most of my days giving briefings to congressional clients, by which I mean members of Congress and their staff, um, about issues related to education and labor policy. Um I seem to have kind of carved out a role specifically around student loans in particular and federal credit program budgeting issues uh in general. So that can take any number of forms, whether it's just providing a briefing on kind of the landscape of an issue area, um, talking, you know, what are the root causes? Why is college so expensive? Why is student loan debt so high? To what are some policy interventions that have been discussed before, tried before? What's going on in different spheres that might have some uh lessons to share with the education space when it comes to federal credit programs? And then when it's Congress decides that they're ready to legislate on a matter, uh we offer kind of full service consultative services through that, whether it's workshopping, a policy idea, uh getting more into the weeds with technical assistance and uh even kind of telling them what the magic words are to say, where you're which law you would amend. Um, and then finally uh thinking about estimated outcomes. Obviously, you can't predict how everything is gonna go, but we do our best to help Congress make you know informed policy, making using the best evidence available. And so that's a key part of the gig as well. So I'm I'm like this kind of work a lot. Happy to be here and uh excited to chat about student loans with you guys.

SPEAKER_00 4:34

So I I I feel like groping for a pit in the pendulum metaphor uh because the swings in policy around this issue have been dramatic over the last you know 48 months. Um so talk about uh how how you can can you forecast those uh different those policy changes, or are you scrambling to catch up?

SPEAKER_01 5:01

It's a good question. Um it's a great question. And and I'm gonna before I dive into that.

SPEAKER_00 5:06

We love guests who suck up to the oh just FYI I'll do uh we'll have you back on. We'll have you back on.

SPEAKER_01 5:11

Wonderful. So let me just get the uh the mandatory disclaimer out of the way that I'm speaking to you guys in my personal capacity, and my views do not represent those of the Congressional Research Service or the Library of Congress in which we are housed. Um, okay, so when it comes to forecasting policy changes, thank you. Um you have an idea, I think. You know, the certainly presidential candidates uh are not shy about sharing their views with respect to federal student loans of all topics. Um and even thinking more broadly about the Department of Education and whether it should exist. Um, as you know, a lot has been done uh during these uh last couple of years with respect to the department, but none of this really came as a surprise. Um perhaps how it's been rolled out has been surprising, but you know, big picture thematically, you could kind of see uh what the tea leaves had to say. Um so I don't think it catches us by surprise. If we kind of rewind the clock a few more years, I'll say that during the COVID years, uh it felt like we were flying by the seat of our pants a lot of the time, and we didn't really know what was going to happen next or how long it was going to happen for. You know, thinking all the way back to March 2020 when President Trump in his first term uh paused the payment period for federal student loans, that seemed like, you know, that seemed like a moment to me and people I work with in terms of wow, this is a real national emergency. Um, I wonder how long this will last. Like, is he gonna do this next month too? You know? Yeah. Uh and then when the CARES Act was enacted, uh Congress, you know, effectuated the same thing via legislation. It's okay, now we have it, you know, on the books. There's a payment pause in place as long as the national emergency lasts. And then, of course, you know, the calendar flips over, White House flips over to the Biden administration, and then that payment pause just kind of kept getting extended for a few more months at a time, bit by bit. And it got to a point where we just really didn't know how how long this thing is gonna last until, you know, eventually kind of reached its epic conclusion. Um, so there was definitely uncertainty there. But, you know, for the last couple of years, uh leading up to the enactment of the 2025 budget reconciliation law, it did seem like Congress was going to reassert itself in terms of this is our vision for federal student loans moving forward. And uh and we saw some significant changes in that law.

SPEAKER_02 7:54

You reminded me of something an old timer in the loan servicing world once told me um I was trying to build uh loan performance models for various federal lending programs, and I needed to I needed to predict repayment by borrowers. And um, she told me that the most important predictor of loan repayment this month, whether someone pays this month, did they pay last month? Yeah, right. So the repayment pauses that you're talking about through not necessarily through you know any um negative action on the part of borrowers, this this uh payment pause lasted for, I think effectively four years, really. When all was said and done, it was about three years, then it essentially extended for another year. Um that's a long time to go without being in the habit of making a monthly payment. So, what are your thoughts about sort of how uh as folks are now required to repay? Do you have thoughts on what that means for the health of the portfolio and cost of tax fares?

SPEAKER_01 9:16

Well, so it's uh let me just tell you what the numbers say. So uh, as you said, the the repayment pause was kind of um, you could think about it as effectively four years, beginning in in March 2020 and having effects um all the way.

SPEAKER_02 9:33

Just to interrupt you for a moment, just so that the audience knows, could you just tell us how many loans are outstanding to size? It's like 40 million, it's about 40 million.

SPEAKER_00 9:46

It's like a it's a test.

SPEAKER_01 9:49

I've got the numbers right here, don't you worry. Um, yeah, so currently, right now, in terms of uh dollars outstanding, um, the whole federal loan portfolio is 1.7 trillion. Um, the direct loan portfolio, the direct loan program is the main port uh program in the uh portfolio at this point is one and a half trillion dollars. Uh so let's see here. We have across various yep, 43 million uh borrowers right now. So that's uh that's a lot of people, it's a lot of Americans being touched by this program. 43 million have some type of federal student loan. And while we're on the topic of numbers of individuals, um, let's talk a little bit about the number of people in default, because that's kind of a big ticket item right now. And uh I'm gonna try to link it back to what you were just saying, Doug. So this payment pause um really spanned from like March 2020 and had effects really through um late 2024. Uh the payment pause officially kind of went through October 2023, and then the Biden administration rolled out this uh uh on-ramp to repayment program for a year. And so during the on-ramp to repayment period, borrowers were required to make payments, but basically nothing bad would happen if they didn't. Um, if they missed payments during that period, they would be retroactively placed into what the department labeled a retroactive administrative forbearance. So didn't really hurt them. So what that meant is that they couldn't really do anything or not do something in the case of missing a payment that would kind of set them on the path to default until October 2020. Uh now, under this program, uh default is defined as being a delinquent for 360 days. So if the clock is starting in October 2024, that means that roughly a year later, you're gonna have a whole bunch of people uh able to default who basically could not default because of the policies in place before. And what we saw was a significant jump in defaults between the last quarter of fiscal year 25 and the first quarter of fiscal year 26. Um, let me just see what the numbers here are. It jumped from between those two quarters, uh$83 billion in default to$141 billion in default. It jumped from 3.7 million borrowers to 6 million borrowers. You know, these are huge increases, 70%, 60%. Um, so yeah, this is a big issue that's affecting uh quite a few Americans at this point in time.

SPEAKER_00 12:45

So while this is all going on, the administration looks like it's transferring administration of that portfolio from the Department of Education to the Department of the Treasury.

SPEAKER_02 12:55

Yeah, the defaulted loans, at least the default court.

SPEAKER_00 12:59

Yeah, there's there's three phases.

SPEAKER_01 13:00

Uh phase one is defaulted loans. Yep.

SPEAKER_00 13:03

Okay. But but but but they they've at least telegraphed that the whole thing will be going over eventually, right? So what's the capacity of the department of the treasury to handle that? And what's the level of curiosity among your clients about the complexity of that migration?

SPEAKER_01 13:23

Yeah, um, great questions. So I know because of the you know, issue portfolio that I cover, I am a lot more familiar with ed than I am with Treasury. Um I have a lot of questions about Treasury's capacity to handle that because of these numbers that we're talking about, you know, like 42, 43 million borrowers uh with direct loans from the U.S. government. I don't think there's anything else like that that Treasury um is currently in charge of right now. Uh, as you two know better than anyone, the US government has a broad array of federal credit programs that it operates, and Treasury touches all of them. But, you know, in terms of uh a direct government to consumer loan operation, I'm having a hard time drawing many other good parallels, uh, at least at this scale. So I think that remains to be seen how that would work. Now, I will say, mitigating that concern a bit, is that a lot of the uh customer service operation happens with third-party uh servicers. These are companies that the Department of Education contracts with to do the day-to-day servicing of the loans. Presumably, Treasury could hire the same people. So maybe not much would change from the borrower's perspective, um, at least till there's a problem, right? Or there's like some administrative change behind the scenes that might cause a problem. So maybe that would uh uh temper the shock to the system of that kind of reorganization. Um, I think Congress also has a lot of questions about how this would go. Um as you said, Robert, uh the administration is um kind of telegraphed that this is their intent, but yet no one really ever knows how exactly a plan or idea is going to be operationalized. And so, you know, as many questions as I might receive about what's going to happen, uh the answer, unfortunately, is unfortunately is we don't know yet.

SPEAKER_02 15:20

Kyle, is there any legislation pending uh that would effectuate this transfer? Um there are some sticky statutory issues about the Office of Federal Student Aid administering the portfolio, they're required by law to do that.

SPEAKER_01 15:40

Uh yeah. So with the caveat that I'm not a lawyer, um, I will say that uh in the Department of Education's um public statements about not just this partnership with Treasury, but with all of the interagency agreements that have been uh uh rolled out over the last several months, they have always used language indicating that Ed will retain um primary responsibility for you know their statutorily uh required um activities, and that they're really just you know partnering with these other agencies to um make operations more efficient or to optimize things or language like that. So there does seem to be some recognition, even among the executive branch, that there are limits to what can be done without an act of Congress. Um yeah, so to the question about whether there is legislation out there that would effectuate this. Um, this is an evolving issue. So I haven't checked Congress.gov today to see if there's a bill that would specifically codify um the Treasury ed interagency agreement. But yeah, like bigger picture, there have been bills out there um suggesting at least this kind of thing, at least if not kind of the specifics for quite some time. I know Senator Rounds had um a bill both, I think, in the last Congress and I believe in this one as well, um, along the lines of uh returning education to our states act or something like that, um, which would largely uh either eliminate Department of Education programs and or transfer them to other agencies for the purpose of the department uh being abolished at the end of the day.

SPEAKER_00 17:25

So, Kyle, this occurs to me we could do like five podcasts. We're we're running out of time now. Um what what didn't we ask you? What what uh what are you working on? Anything you want to leave our uh viewers, listeners with um in the in the credit area real sure.

SPEAKER_01 17:44

Well, you know, uh this is something that certainly Doug, you and I have talked a lot about before, and that's um budgeting and accounting issues related to federal credit programs. And you know, I work with congressional clients a lot who are very outcomes-minded. They want to know are these programs doing what we want them to do? Are they you know sending um students through school? Are are students getting degrees? And if so, are those degrees useful, you know, both to themselves and to the broader economy? Or is there a good public purpose uh for this? Um that could be considered, you know, the the benefit side. And then of course they're also concerned with the cost side. What does this actually cost us? What does this cost to taxpayers to to uh achieve these benefits, if there are any? And that can be a tricky question. Um, I think overall, costs for federal credit programs are not well understood. And I try to um spread that knowledge as as broadly as I can, both through my um briefings with clients and also through a written report that I have in the hopper. And so uh that's that's a key goal for me, is just trying to strengthen kind of institutional understanding about how these things work. Secondly, though, even if Congress has a perfect understanding of how this all works, there's the sticky issue of, you know, by the very nature of credit programs, uh, where loans remain outstanding for a period of many years, everything is uncertain until a loan is retired. And that is just an uncomfortable reality for people used to making these cost-benefit analyses. They want to know what the cost absolutely will be of some policy action. And we just can't deliver that kind of certainty. Um, you know, whether it's due to economic changes in the future, policy changes, uh, or if we just simply, you know, kind of miss the mark with our original uh subsidy estimate. So that degree of uncertainty just kind of it kind of gums up the decision making for this whole cost-benefit analysis thing.

SPEAKER_02 19:54

That's fantastic, Kyle. It's so uh uh refreshing to talk to someone that has that uh dispassionate perspective, um, but also uh someone that's engaged with you know uh folks on Capitol Hill that are making key decisions on this front. So just wonderful hearing your insights here.

SPEAKER_00 20:19

Thanks, thanks for what you're doing, Kyle, and thanks for being with us. Thank you so much for having me. Always great to talk with you guys.

SPEAKER_02 20:26

Look forward to having you again.

SPEAKER_01 20:28

All right, thank you.

SPEAKER_02 20:30

Take care.

SPEAKER_01 20:31

Bye.